DONGBU STEEL CO., LTD Separate Financial...

DONGBU STEEL CO., LTD. Separate Financial Statements December 31, 2013 and 2012 (With Independent Auditors’ Report Thereon)

Contents

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Independent Auditors’ Report 1 Separate Statements of Financial Position 3 Separate Statements of Comprehensive Loss 5 Separate Statements of Changes in Equity 6 Separate Statements of Cash Flows 7 Notes to the Separate Financial Statements 8 Internal Accounting Control System Review Report 71 Report on the Effectiveness of the Internal Control over Financial Reporting 72

Independent Auditors’ Report

Based on a report originally issued in Korean The Board of Directors and Shareholders Dongbu Steel Co., Ltd.: We have audited the accompanying separate statements of financial position of Dongbu Steel Co., Ltd. (the “Company”) as of December 31, 2013 and 2012 and the related separate statements of comprehensive loss, changes in equity and cash flows for the years then ended. Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with Korean International Financial Reporting Standards. Our responsibility is to express an opinion on these separate financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the separate financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the separate financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. In our opinion, the separate financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012 and its financial performance and its cash flows for the year then ended, in accordance with Korean International Financial Reporting Standards.

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Without qualifying our opinion, we draw attention to the following: The procedures and practices utilized in the Republic of Korea to audit such separate financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying separate financial statements are for use by those knowledgeable about Korean auditing standards and their application in practice. (a) The financial structures improvement plan As described in note 31, plans, including the disposal of assets to secure liquidity and improve the financial structures, are under discussion with Korea Development Bank and others, the main creditor banks of the Company. (b) Subsequent events As described in note 36, the spin-off of a factory located in Incheon, which belongs to an operating segment of the rolled steel sheet, was authorized by the Board of Directors at a meeting held on March 12, 2014, after the reporting period.

Seoul, Korea March 12, 2014 This report is effective as of March 12, 2014, 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 the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

Dongbu Steel Co., Ltd. Separate Statements of Financial Position

As of December 31, 2013 and 2012

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(In millions of Korean won) Note 2013 2012

(Restated)

Assets Property, plant and equipment 5,7,35 W 3,120,467 3,475,873 Intangible assets 6,7,8,32 44,322 47,194 Investments in subsidiaries 7,8,35 443,978 191,919 Investments in associates 7,9 13,556 13,556 Available-for-sale financial assets 7,10,27,32 52,272 92,059 Accounts and notes receivable – trade 11,27,32 4,666 3,250 Other receivables 12,27 17,280 14,571 Other financial assets 13,16,27 1,062 761 Total non-current assets 3,697,603 3,839,183

Inventories 7,14 469,167 476,403 Advance payments 720 678 Prepaid expenses 32 9,652 10,343 Available-for-sale financial assets 7,10,27 5,822 4,197 Accounts and notes receivable – trade 11,27,32 597,269 550,444 Other receivables 12,27,32 16,746 13,086 Prepaid income tax 29 549 738 Other financial assets 7,13,16,27 7,293 7,345 Cash and cash equivalents 15,16,27 37,037 52,255 Total current assets 1,144,255 1,115,489

Total assets W 4,841,858 4,954,672

See accompanying notes to the separate financial statements.

Dongbu Steel Co., Ltd. Separate Statements of Financial Position, Continued

As of December 31, 2013 and 2012

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(In millions of Korean won) Note 2013 2012

(Restated)

Equity Share capital 1,17 W 321,074 321,074 Share premium 17 104,398 104,398 Accumulated other comprehensive loss 17 (8,681) (11,304) Retained earnings 18 903,007 1,044,636 Other 17 (21,581) (21,581) Total equity 1,298,217 1,437,223

Liabilities Long-term borrowings, net 7,11,21,27 805,855 1,145,449 Debentures, net 20,27 171,402 373,055 Defined benefit liabilities 23,32 35,796 29,372 Other financial liabilities 27 1,932 93 Deferred tax liabilities 29 113,654 126,423 Total non-current liabilities 1,128,639 1,674,392

Current portion of long-term borrowings,

net 7,21,27 341,754 56,183 Current portion of debentures, net 20,27 459,476 314,838 Short-term borrowings 7,11,21,27,32 529,552 339,423 Advance receipts 6,692 5,130 Accounts and notes payable – trade 27,32 1,028,676 1,081,228 Accounts and notes payable – other 27 6,592 5,507 Accrued expenses 27 39,773 38,217 Other current liabilities 22 2,487 2,531 Total current liabilities 2,415,002 1,843,057

Total liabilities 3,543,641 3,517,449

Total equity and liabilities W 4,841,858 4,954,672


Dongbu Steel Co., Ltd. Separate Statements of Comprehensive Loss For the years ended December 31, 2013 and 2012

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(In millions of Korean won, except earnings per share) Note 2013 2012

(Restated)

Loss for the year Sales 32 W 3,332,943 3,565,730 Cost of sales 6,23,24,32

(3,123,653) (3,355,989)

Gross profit 209,290 209,741 Selling, general and administrative expenses 6,23,24,25,32 (187,825) (198,610) Profit from operations

21,465 11,131

Finance income 26,27

62,915 69,738 Finance costs 5,26,27,32

(237,455) (228,517)

Other non-operating income 28

2,147 3,269 Other non-operating expenses 28

(4,550) (1,602)

Profit related to investments in subsidiaries and associates 32 - 70,000

Loss before income tax

(155,478) (75,981)

Income tax benefit 29

(13,665) (27,136) Loss for the year (141,813) (48,845)

Other comprehensive income (loss) Items that will not be reclassified to profit or

loss: Remeasurements of defined benefit liability

(asset), net of tax 23 184 (410) Items that will be reclassified subsequently

to profit or loss: Net changes in unrealized fair value of available-

for-sale financial assets, net of tax 10,27 2,553 (4,051) Adjustments of reclassification, net of tax 10,27

- 11,978

Net changes in unrealized financial derivatives, net of tax 27 70 (5)

Other comprehensive income for the year, net of tax 2,807 7,512

Total comprehensive loss for the year W (139,006) (41,333)

Loss per share Basic and diluted loss per share (in won) 19 W (2,907) (1,001)


Dongbu Steel Co., Ltd. Separate Statements of Changes in Equity For the years ended December 31, 2013 and 2012

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(In millions of Korean won) Share capital

Share premium

Accumulated other

comprehensive income (loss)

Retained earnings Other

Total equity

Balance at January 1, 2012 W 321,056 104,388 (19,226) 1,093,891 (21,581) 1,478,528 Total comprehensive income (loss)

for the year: Loss for the year - - - (48,845) - (48,845) Net changes in unrealized fair value of

available-for-sale financial assets, net of tax - - (4,051) - - (4,051)

Adjustments of reclassification, net of tax - - 11,978 - - 11,978

Remeasurements of defined benefit liability (asset), net of tax - - - (410) - (410)

Net changes in unrealized fair value of financial derivatives, net of tax - - (5) - - (5)

Total comprehensive income (loss) for the year - - 7,922 (49,255) - (41,333)

Transactions with owners and

other, recorded directly in equity: Exercise of stock purchase warrants 18 10 - - - 28 Balance at December 31, 2013 W 321,074 104,398 (11,304) 1,044,636 (21,581) 1,437,223 Balance at January 1, 2013 W 321,074 104,398 (11,304) 1,044,636 (21,581) 1,437,223 Total comprehensive income (loss)

for the year: Loss for the year - - - (141,813) - (141,813) Net changes in unrealized fair value of

available-for-sale financial assets, net of tax - - 2,553 - - 2,553

Remeasurements of defined benefit liability (asset), net of tax - - - 184 - 184

Net changes in unrealized fair value of financial derivatives, net of tax - - 70 - - 70

Total comprehensive income (loss) for the year - - 2,623 (141,629) - (139,006)

Balance at December 31, 2013 W 321,074 104,398 (8,681) 903,007 (21,581) 1,298,217


Dongbu Steel Co., Ltd. Separate Statements of Cash Flows For the years ended December 31, 2013 and 2012

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(In millions of Korean won) 2013 2012 Cash flows from operating activities Loss for the year W (141,813) (48,845) Adjustments 347,613 258,777 Change in assets and liabilities (77,203) 127,923 Cash generated from operating activities (note 30) 128,597 337,855 Interest received 2,441 4,014 Dividends received 866 70,177 Income tax refund received (income tax paid) 189 (4,234) Net cash provided by operating activities 132,093 407,812 Cash flows from investing activities Proceeds from sale of property, plant and equipment 57 551 Proceeds from sale of intangible assets 182 - Proceeds from sale of available-for-sale financial assets 41,721 2,531 Acquisition of property, plant and equipment (62,150) (80,213) Acquisition of intangible assets (1,018) (2,044) Acquisition of available-for-sale financial assets (2,631) (541) Acquisition of other current financial assets - (7,345) Other, net (4,511) 861 Net cash used in investing activities (28,350) (86,200) Cash flows from financing activities Proceeds from issuance of debentures 250,361 237,903 Proceeds from exercise of bonds with stock purchase warrants - 25 Proceeds from long-term borrowings 21,774 197,722 Proceeds from short-term borrowings 191,231 - Repayment of current portion of debentures (including advanced

redemption) (315,552) (376,578) Repayment of current portion of long-term borrowings (including

advanced redemption) (77,089) (65,545) Repayment of short-term borrowings - (108,235) Interest paid (189,686) (195,926) Net cash used in financing activities (118,961) (310,634) Net changes in cash and cash equivalents (15,218) 10,978 Cash and cash equivalents at the beginning of the year 52,255 41,277 Cash and cash equivalents at the end of the year W 37,037 52,255


Dongbu Steel Co., Ltd. Notes to the Separate Financial Statements For the years ended December 31, 2013 and 2012

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1. Description of the Company Dongbu Steel Co., Ltd. (the “Company”) was established on October 27, 1982 and is engaged in the manufacture of iron and steel products. On February 3, 1986, the Company was listed on the Korea Stock Exchange. The Company’s headquarters are located at 432, Taeheran-ro, Gangnam-gu, Seoul. The Company produces its products in factories located in Dangjin and Incheon. As of December 31, 2013, the Company’s share capital, common shares and preferred shares amounts to W321,074 million, W253,247 million and W67,827 million, respectively. As of December 31, 2013, the Company’s shareholders are summarized as follows:

Company Number of shares Percentage of ownership Dongbu CNI Co., Ltd. 7,100,785 13.83% Mr. Kim, Jun Ki 2,552,071 4.97% Other related parties 13,622,320 26.53% Others 28,070,682 54.67% 51,345,858 100.0%

2. Basis of Preparation

2.1 Statement of Compliance The separate financial statements have been prepared in accordance with Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Corporations in the Republic of Korea. These financial statements are separate financial statements prepared in accordance with K-IFRS No.1027, ‘Consolidated and Separate Financial Statements’ presented by a parent, an investor in an associate or a venture in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees. The separate financial statements were authorized for issue by the Board of Directors on March 12, 2014, which will be submitted for approval to the shareholders’ meeting to be held on March 28, 2014.

2.2 Basis of Measurement

The separate financial statements have been prepared on the historical cost basis, except for the following material items in the statement of financial position: - derivative financial instruments are measured at fair value - available-for-sale financial assets are measured at fair value - liabilities for defined benefit plans are recognized at the net of the total present value of defined

benefit obligations less the fair value of plan assets and unrecognized past service costs


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2. Basis of Preparation, Continued

2.3 Functional and Presentation Currency

These separate financial statements are presented in Korean won, the Company’s functional currency, which is the currency of the primary economic environment in which the Company operates.

2.4 Use of Estimates and Judgments

The preparation of the separate financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. (1) Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 23 – measurement of defined benefit obligations Note 29 – measurement of deferred tax assets Note 31 – contingencies (2) Fair value measurement A number of the Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Company has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values, and reports directly to the CFO. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is use to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of K-IFRS, including the level in the fair value hierarchy in which such valuations should be classified. Significant valuation issues are reported to The Company Audit Committee. When measuring the fair value of an asset or a liability, The Company uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.　 Level 2: inputs other than quoted prices included within Level 1 that are observable for t　 he asset or

liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable 　

inputs).


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2. Basis of Preparation, Continued

2.4 Use of Estimates and Judgments, Continued (2) Fair value measurement, continued If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring far values is included in the following note 34.

3. Changes in Accounting Policies

Except as described below, the accounting policies applied by the Company in these financial statements are the same as those applied by the Company in its financial statements as of and for the years ended December 31, 2013 and 2012. - K-IFRS No. 1113, ‘Fair Value Measurement’ - K-IFRS No. 1019, ‘Employee Benefits’ - K-IFRS No. 1001, ‘Presentation of Financial Statements’ - K-IFRS No. 1107, ‘Financial Instruments: Disclosures’

The nature of the change in accounting policies is as follows and the comparative prior year financial statements and related footnotes have been restated to reflect the change in accounting policy.

3.1 Fair Value Measurement

The Company adopted K-IFRS No. 1113, ‘Fair Value Measurement’ since January 1, 2013. The standard defines fair value and a single framework for fair value, and requires disclosures about fair value measurements. It unifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It replaces and expands the disclosure requirements about fair value measurements in other K-IFRSs, including K-IFRS No. 1107. In accordance with the transitional provisions of K-IFRS No. 1113, the Company has applied the new fair value measurement guidance prospectively and has not provided any comparative information for new disclosure. Notwithstanding the above, the change had no significant impact on the measurements of the Company’s assets and liabilities.


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3. Changes in Accounting Policies

3.2 Employee Benefits The Company has applied the amendments to K-IFRS No. 1019, ‘Employee Benefits’ since January 1, 2013. Under this amendment, the Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Consequently, the net interest on the net defined benefit liability (asset) now comprises; interest cost on the defined benefit obligation, interest income on plan assets, and interest on the effect on the asset ceiling. Previously, the Company determined interest income on plan assets based on their long-term rate of expected return. The changes were not significant to the Company’s separate statement of financial position or comprehensive income, therefore the Company did not retrospectively restate the prior year’s financial statements. The financial effect from the amendment to K-IFRS No. 1019 is as follows: (In millions of Korean won) 2012 Decrease in cost of sales and selling, general and administrative cost W (100) Increase from remeasurement of defined benefit liability (asset) 100

3.3 Presentation of Other Comprehensive Income

The Company has applied the amendments to K-IFRS No. 1001, ‘Presentation of Financial Statements’ since January 1, 2013. The amendments require presenting in other comprehensive income on the basis of whether they are potentially re-classifiable to profit or loss subsequently. (reclassification adjustments)

3.4 Offsetting of Financial Assets and Financial Liabilities As a result of the amendments to K-IFRS No. 1107, the Company has expanded its disclosures about the offsetting of financial assets and financial liabilities.


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4. Significant Accounting Policies

The significant accounting policies applied by the Company in preparation of its separate financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these separate financial statements except for the changes in accounting policies as explained in Note 3.

4.1 Subsidiaries and Associates in the Separate Financial Statements

These separate financial statements are prepared and presented in accordance with K-IFRS No. 1027, ‘Separate Financial Statements’. The Company applied the cost method to investments in subsidiaries and associates in accordance with K-IFRS No. 1027. Dividends from a subsidiary or associate are recognized in profit or loss when the right to receive the dividend is established.

4.2 Cash and Cash Equivalents

Cash and cash equivalents comprise cash balances and call deposits that are subject to an insignificant risk of changes in their fair value, and are used by the Company in the management of its short-term commitments

4.3 Inventories

The cost of inventories is based on the monthly total average method (materials-in-transit: specific identification method), and includes expenditures for acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Inventories are measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.

4.4 Non-derivative Financial Assets

The Company recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Company recognizes financial assets in the separate statement of financial position when the Company becomes a party to the contractual provisions of the instrument. Upon initial recognition, non-derivative financial assets are measured at their 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 asset’s acquisition or issuance.


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4. Significant Accounting Policies, Continued

4.4 Non-derivative Financial Assets, Continued

Financial assets at fair value through profit or loss A financial asset is classified as financial assets are classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Held-to-maturity financial assets A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Company has the positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method except for loans and receivables of which the effect of discounting is immaterial. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost. When a financial asset is derecognized or impairment losses are recognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Dividends on an available-for-sale equity instrument are recognized in profit or loss when the Company’s right to receive payment is established. De-recognition of financial assets The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability. If the Company retains substantially all the risks and rewards of ownership of the transferred financial assets, the Company continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received. Offsetting between financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount is presented in the separate statement of financial position only when the Company currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.


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4.5 Derivative Financial Instruments, Including Hedge Accounting

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Hedge accounting The Company holds forward exchange contracts and interest rate swaps to manage exchange rate risk and interest rate risk. The Company designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge). On initial designation of the hedge, the Company formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. Fair value hedge Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the separate statement of comprehensive income. The Company discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting is discontinued. Cash flow hedge When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss. Separable embedded derivatives Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met:

(a) the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract;

(b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(c) the hybrid instrument is not measured at fair value with changes in fair value recognized in profit or loss.

Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss. Other derivative financial instruments Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.


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4.6 Impairment of Financial Assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the holder of the asset about the following loss events: (a) significant financial difficulty of the issuer or obligor; (b) a breach of contract, such as a default or delinquency in interest or principal payments; (c) the lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to

the borrower a concession that the lender would not otherwise consider; (d) it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; (e) the disappearance of an active market for that financial asset because of financial difficulties; (f) observable data indicating that there is a measurable decrease in the estimated future cash flows

from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group;

(g) in case of an investment in an equity security, a significant or consistent decline of fair value below its cost is deemed to be the objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized. Financial assets measured at amortized cost An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Company can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account. Financial assets carried at cost If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be reversed.


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4.6 Impairment of Financial Assets, Continued

Available-for-sale financial assets When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss. The Company recognizes impairment loss on available-for-sale financial assets when the fair value of available-for-sale financial assets is either continuously lower than the acquisition cost over a year or decreases by more than 50% of the acquisition cost.

4.7 Property, Plant and Equipment Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Subsequent to initial recognition, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Subsequent costs are recognized in the carrying amount of property, plant and equipment at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred. Property, plant and equipment, except for land, are depreciated on a straight-line basis over estimated useful lives that appropriately reflect the pattern in which the asset’s future economic benefits are expected to be consumed. A component that is significant compared to the total cost of property, plant and equipment is depreciated over its separate useful life. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized in other income or expenses.


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4.7 Property, Plant and Equipment, Continued The estimated useful lives of the Company’s property, plant and equipment are as follows:

Useful lives (years) Buildings 30 ~ 60 Structures 20 ~ 60 Machinery and equipment 20 Vehicles 5 ~ 7 Tools 5 ~ 7 Furniture and fixtures 5 ~ 7

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

4.8 Intangible Assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses. Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having indefinite useful lives and not amortized. The estimated useful lives of the Company’s intangible assets are as follows:

Useful lives (years)

Industrial property rights 5 ~ 10 Harbor facility usage rights 50, 84 Other usage rights 10 ~ 20 Software 5 Development costs 5

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates. Research and development Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.


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4.8 Intangible Assets, Continued Subsequent expenditure Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

4.9 Borrowing Costs

The Company capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets. To the extent that the Company borrows funds specifically for the purpose of obtaining a qualifying asset, the Company determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. The Company immediately recognizes other borrowing costs as an expense. To the extent that the Company borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Company shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Company that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Company capitalizes during a period shall not exceed the amount of borrowing costs incurred during that period.

4.10 Investments in Subsidiaries and Reduction of Share Capital by Payments in Cash Since the return of capital from the investee as shareholders not disposal of investments in subsidiaries to the third party, such as reduction in share capital is deemed to be the same as the receipt of dividends, the related cash inflows was recognized as dividends income. The Investments in subsidiaries are tested for impairment annually due to cash outflow by dividends.


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4.11 Impairment of Non-Financial Assets

The carrying amounts of the Company’s non-financial assets, other than assets arising from employee benefits, inventories and deferred tax assets, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Intangible assets that have indefinite useful lives, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount. The Company estimates the recoverable amount of an individual asset. If it is impossible to measure the individual recoverable amount of an asset, then the Company estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a pre-tax discount rate that reflect current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU. An impairment loss is recognized in profit or loss if the carrying amount of an asset or a CGU exceeds its recoverable amount. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.


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4.12 Non-derivative Financial Liabilities

The Company classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Company recognizes financial liabilities in the separate statement of financial position when the Company becomes a party to the contractual provisions of the financial liability. Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred. Other financial liabilities Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. The Company derecognizes a financial liability from the separate statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

4.13 Employee Benefits

Short-term employee benefits Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render the related service. When an employee has rendered service to the Company during an accounting period, the Company recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service. Other long-term employee benefits Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods, less the fair value of any related assets. The present value is determined by discounting the expected future cash flows using the interest rate of high-quality corporate bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise. Retirement benefits: defined contribution plans When an employee has rendered service to the Company during a period, the Company recognizes the contribution payable to a defined contribution plan in exchange for that service as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Company recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.


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4.13 Employee Benefits, Continued Retirement benefits: defined benefit plans The Company’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligations is performed annually by qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Company, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailments is recognized immediately in profit or loss. The Company recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. Termination benefits Termination benefits are recognized as an expense when the Company is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

4.14 Provisions

Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows. Where some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed. A provision shall be used only for expenditures for which the provision was originally recognized.


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4. Significant Accounting Policies, Continued 4.15 Convertible Bonds and Bond with Stock Purchase Warrants

The compound financial instrument issued by the Company is classified as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument. The liability component of convertible bonds and bond with stock purchase warrants shall be recognized as the fair value of a similar liability on initial recognition and be measured in amortized cost by the effective interest method until it is extinguished. The equity component is determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole on initial recognition. The tax effect shall be reflected and the financial instrument is not remeasured afterward. Transaction costs that relate to the issuance of a compound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds.

4.16 Foreign Currencies

Transactions in foreign currencies are translated to the respective functional currencies of the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency using the reporting date’s exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognized in profit or loss (finance income or finance costs), except for differences arising on the retranslation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

4.17 Equity Capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects. Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the Company’s shareholders. Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in profit or loss as accrued. When the Company repurchases its share capital, the amount of the consideration paid is recognized as a deduction from equity and classified as treasury shares. The profits or losses from the purchase, disposal, reissue, or retirement of treasury shares are not recognized as current profit or loss. If the Company acquires and retains treasury shares, the consideration paid or received is directly recognized in equity.


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4.18 Revenue

Revenue from the sale of goods, rendering of services or use of the Company assets is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates, and are recognized as a reduction of revenue. Goods sold Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. Construction contracts Contract revenue includes the initial amount agreed in the contract plus any variations in contract work, claims and incentive payments, to the extent that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a construction contract can be estimated reliably, contract revenue is recognized in profit or loss in proportion to the stage of completion of the contract. Contract expenses are recognized as incurred unless they create an asset related to future contract activity. The stage of completion is assessed by reference to surveys of work performed. 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. An expected loss on a contract is recognized immediately in profit or loss.

4.19 Finance Income and Finance Costs

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, changes in the fair value of financial assets at fair value through profit or loss, and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Dividend income is recognized in profit or loss on the date that the Company’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date. Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognized on financial assets, and losses on hedging instruments that are recognized in profit or loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.


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4. Significant Accounting Policies, Continued 4.20 Income Taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, and non-taxable or non-deductible items from the accounting profit.

Deferred tax Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax liability is recognized for all taxable temporary differences. A deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized. However, deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting profit or loss nor taxable income. The Company recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, 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. The Company recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries and associates, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized. The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset the related current tax liabilities and assets, and they relate to income taxes levied by the same tax authority and they intend to settle current tax liabilities and assets on a net basis. Additional income tax expense by dividend payment is recognized at the time the dividend payable is recognized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.


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4.21 Earnings per Share

The Company presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares.

4.22 Spin-off

Gain or loss is not recognized in relation to the spin-off as the Company’s assets and liabilities are transferred to a company established by the spin-off in their carrying amount. The investments held are recorded using the carrying amount of the assets and liabilities transferred.

4.23 Operating Segment

The Company had disclosed items of disclosures related to operating segment in the consolidated financial statements in accordance with K-IFRS No.1108, ‘Operating Segment’.

4.24 New Standards and Interpretations Not Yet Adopted

The following new standards, interpretations and amendments to existing standards have been published and are mandatory for the Company for annual periods beginning after January 1, 2014, and the Company has not early adopted them. Management believes the impact of the amendments on the Company’s separate financial statements is not significant. Amendments to K-IFRS No.1032, ‘Financial Instruments: Presentation’ The standard defines offsetting financial assets and financial liabilities. The amendment is mandatorily effective for annual periods beginning on or after January 1, 2014.


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5. Property, Plant and Equipment (a) Property, plant and equipment as of December 31, 2013 and 2012 are summarized as follows:

2013 2012 (In millions of

Korean won) Acquisition

cost Accumulated depreciation

Book value

Acquisition cost

Accumulated depreciation

Book value

Land W 1,004,764 - 1,004,764 1,004,764 - 1,004,764 Buildings 402,882 (115,714) 287,168 402,433 (103,032) 299,401 Structures 185,428 (54,061) 131,367 214,805 (52,720) 162,085 Machinery and

equipment 2,838,810 (1,201,880) 1,636,930 2,786,400 (1,054,751) 1,731,649 Vehicles 2,323 (2,021) 302 2,302 (2,009) 293 Tools 69,771 (60,008) 9,763 69,623 (56,320) 13,303 Furniture and

fixtures 8,906 (7,962) 944 8,785 (7,645) 1,140 Construction-in-

progress 49,229 - 49,229 263,238 - 263,238

W 4,562,113 (1,441,646) 3,120,467 4,752,350 (1,276,477) 3,475,873

(b) Changes in property, plant and equipment for the year ended December 31, 2013 are summarized as

follows:

(In millions of Korean won)

Beginning balance Acquisition Disposal(*1) Depreciation Spin-off(*2) Others(*2)

Ending balance

Land W 1,004,764 - - - (148,629) 148,629 1,004,764 Buildings 299,401 - - (12,682) - 449 287,168 Structures 162,085 - - (7,823) (103,430) 80,535 131,367 Machinery and

equipment 1,731,649 - (682) (147,463) - 53,426 1,636,930 Vehicles 293 - - (125) - 134 302 Tools 13,303 - - (3,905) - 365 9,763 Furniture and

fixtures 1,140 - - (317) - 121 944 Construction-

in-progress 263,238 69,219 - - - (283,228) 49,229

W 3,475,873 69,219 (682) (172,315) (252,059) 431 3,120,467

(*1) Property, plant and equipment with a carrying amount of W682 million (2012: W392 million) were

disposed of during the year ended December 31, 2013. Consequently, gain on disposal of property, plant and equipment of W35 million (2012: W160 million) and loss on disposal of property, plant and equipment of W660 million (2012: W1 million) were recognized and recorded under other non-operating income and expenses.

(*2) In 2013, as a result of the acquisition of a harbor and land in relation to dock development project in Kodae area of Asan nation industrial complex, transferred amount from the construction-in-progress to the lands and structures are W148,629 million and W79,934 million, respectively. Dongbu Dangjin Port Terminal Co., Ltd. is newly established by the spin-off of lands and structures which are amounting to W148,629 million and W103,430 million, respectively.


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5. Property, Plant and Equipment, Continued (c) Changes in property, plant and equipment for the year ended December 31, 2012 are summarized as

follows:


Beginning balance Acquisition Disposal Depreciation Others

Ending balance

Land W 994,642 - - - 10,122 1,004,764 Buildings 305,816 - (180) (12,545) 6,310 299,401 Structures 168,681 - - (7,023) 427 162,085 Machinery and

equipment 1,799,676 - (196) (143,483) 75,652 1,731,649 Vehicles 398 - (16) (189) 100 293 Tools 16,052 - - (4,348) 1,599 13,303 Furniture and

fixtures 1,183 - - (375) 332 1,140 Construction-in-

progress 262,891 96,022 - - (95,675) 263,238

W 3,549,339 96,022 (392) (167,963) (1,133) 3,475,873 (d) Borrowing costs capitalized and capitalization rate for the years ended December 31, 2013 and 2012

are summarized as follows:

(In millions of Korean won, except for capitalization rate) 2013 2012 Borrowing costs capitalized W 7,068 15,809 Capitalization rate 7.43% 7.83%

6. Intangible Assets (a) Intangible assets as of December 31, 2013 and 2012 are summarized as follows:

2013 2012

(In millions of Korean won) Acquisition

cost Accumulated depreciation

Book value

Acquisition cost

Accumulated depreciation

Book value

Industrial property

rights W 194 (118) 76 194 (107) 87 Development costs 6,996 (3,953) 3,043 6,996 (2,554) 4,442 Software 26,756 (23,012) 3,744 25,733 (21,408) 4,325 Harbor facility usage

rights 14,086 (11,759) 2,327 14,086 (9,987) 4,099 Membership(*) 35,132 - 35,132 34,241 - 34,241 Other intangible

assets 115 (115) - 142 (142) -

W 83,279 (38,957) 44,322 81,392 (34,198) 47,194

(*) The Company performs an impairment test for memberships with infinite useful lives at the end of

the reporting period or when any indictors of impairment are identified. The recoverable amounts of the memberships are estimated as market price which is traded in active market, deducting disposal cost. For the years ended in December 31, 2013 and 2012 there were no impairment loss recognized.


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6. Intangible Assets, Continued (b) Changes in intangible assets for the year ended December 31, 2013 are summarized as follows:

(In millions of Korean won) Beginning

balance Acquisition Disposal(*2) Amortization Others Ending

balance

Industrial property

rights W 87 - - (11) - 76 Development costs 4,442 - - (1,399) - 3,043 Software 4,325 - - (1,614) 1,033 3,744 Harbor facility

usage rights(*1) 4,099 - - (308) (1,464) 2,327 Membership 34,241 1,018 (127) - - 35,132 Other intangible

assets - - - - - -

W 47,194 1,018 (127) (3,332) (431) 44,322

(*1) W1,464 million of harbor facility usage rights was transferred to construction-in-progress. (*2) W127 million of membership was disposed and gain on disposal of W55 million was recognized as

other non-operating income. (c) Changes in Intangible assets for the year ended December 31, 2012 are summarized as follows:

(In millions of Korean won) Beginning

balance Acquisition Amortization Others Ending balance

Industrial property rights W 92 - (9) 4 87 Development costs 5,842 - (1,400) - 4,442 Software 4,725 - (1,874) 1,474 4,325 Harbor facility usage

rights(*) 4,970 - (525) (346) 4,099 Membership 32,197 2,044 - - 34,241 Other intangible assets 5 - (5) - -

W 47,831 2,044 (3,813) 1,132 47,194

(*) W346 million of harbor facility usage rights was transferred to construction-in-progress. (d) Development costs and expenditures (ordinary research and development expense) for the years

ended December 31, 2013 and 2012 are summarized as follows:

(In millions of Korean won) 2013 2012 Selling, general and administrative expenses W 3,001 2,721 Cost of sales 493 808

W 3,494 3,529


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7. Assets Pledged as Collateral

Assets pledged as collateral for the Company’s borrowings as of December 31, 2013 are summarized as follows:


Asset Lender

Borrowing amounts

Book value of assets

collateralized Collateralized

amounts Land, buildings, available-for-sale

financial assets and others Korea Development

Bank and others W 1,758,673 3,155,940 2,909,962 Inventories

The Export-import Bank of Korea 176,007 286,366 284,502

Available-for-sale financial assets AJU SAVING BANK and others 5,000 18,343 10,230

Investments in subsidiary (Dongbu Special Steel Co., Ltd.)(*)

The Military Mutual Aid Association and others - 105,414 62,000

W 1,939,680 3,566,063 3,266,694

(*) It is the redeemable convertible preferred stock (non-controlling interest holders) issued by subsidiary (Dongbu Special Steel Co., Ltd.) of the Company, which was provided to investors such as the Military Mutual Aid Association, KT Capital and Hana Daetoo Securities Co., Ltd. as collateral to ensure the payment by the Company when either the stock option is exercised or the preferred stock is notified to be redeemed to investors.

Assets provided as collateral listed above do not include collaterals in relation to account receivables (see note 11).

8. Investments in Subsidiaries

(a) Details of investments in subsidiaries as of December 31, 2013 and 2012 are summarized as follows:


Company Location Business Percentage of

ownership 2013 2012 Dongbu Special Steel Co.,

Ltd.(*1) Korea Sales &

Manufacture 72.00% W 122,416 122,416 Dongbu Dangjin Port

Terminal Co., Ltd.(*2) Korea Manage port

facilities

100.00% 252,059 - Dongbu Capital Corp.(*3) Korea Loan finance

and lease 49.98% 31,445 31,445 Dongbu USA Inc. USA Sales 100.00% 5,773 5,773 Dongbu Singapore Pte, Ltd. Singapore Sales 100.00% 24,706 24,706 Thai Dongbu Steel Co., Ltd.

Thai Sales &

Manufacture 60.00% 7,579 7,579 W 443,978 191,919

(*1) Dongbu Special Steel Co., Ltd. issued redeemable convertible preferred stock with voting rights (non-controlling interests). Except for matters requiring special resolutions based on the Articles of Incorporation, the voting rights of the preferred stock are delegated to the Company.

(*2) The Company newly established Dongbu Dangjin Port Terminal Co., Ltd. through a spin-off in the current year and acquired 5 million shares (percentage of ownership : 100%) for W252,059 million.

(*3) The Company owns less than 50% of the voting rights of Dongbu Capital Corp., but in accordance with K-IFRS 1110, ‘Consolidated financial statements’, the Company is considered to have de facto control over the subsidiary, because Dongchul Packaging Co., Ltd., one of the parent company’s cooperative firms, also has 0.04% of ownership, so that it is classified as a subsidiary as of December 31, 2013 and 2012.


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8. Investments in Subsidiaries, Continued (b) Summarized financial information of investments in subsidiaries as of and for the year ended

December 31, 2013 are as follows: (In millions of Korean won)

Company Total assets

Total liabilities Sales

Operating income (loss)

Net income (loss)

Dongbu Special Steel Co.,

Ltd. W 371,450 242,775 406,382 19,604 7,190 Dongbu Dangjin Port

Terminal Co., Ltd. 253,760 1,631 1,631 70 70 Dongbu Capital Corp. 112,065 65,792 10,223 (10,463) 1,829 Dongbu USA Inc. 127,867 119,637 269,557 1,244 563 Dongbu Singapore Pte, Ltd. 24,972 2,724 2,818 (226) 164 Thai Dongbu Steel Co., Ltd. 46,215 42,398 30,243 (4,503) (6,512) Financial statements of subsidiaries used to prepare financial information are for the years ended December 31, 2013.

9. Investments in Associates (a) Details of investments in associates as of December 31, 2013 and 2012 are summarized as follows: (In millions of Korean won)

Company Location Business Percentage of

ownership 2013 2012 Dongbu Inc. Korea Advertising and

steel installation 42.86% W 11,317 11,317 Dongbu Japan Inc.(*) Japan Sales 82.02% 2,030 2,030 Dongbu India Co.,

Ltd.(*) India Marketing

99.99% 209 209 Dongbu World Co.,

Ltd. Korea Golf courses and

tourist recreation 23.27% - - W 13,556 13,556

(*) Dongbu Japan Inc. and Dongbu India Co., Ltd. are excluded from the subsidiaries and classified as

investments in associates as the subsidiaries, both alone and in aggregate, are immaterial to the consolidated financial statements.

(b) Summarized financial information of investments in significant associates and joint ventures as of and

for the year ended December 31, 2013 are summarized as follows: (In millions of Korean won)

Company Total assets

Total liabilities Sales

Operating income (loss)

Net income (loss)

Dongbu Inc. W 71,933 32,824 34,820 2,173 1,709 Dongbu Japan Inc. 8,910 6,813 14,131 (127) 87 Dongbu India Co., Ltd. 199 38 389 35 43 Dongbu World Co., Ltd. 194,746 297,547 12,683 (1,571) (2,119) Financial statements of subsidiaries used to prepare financial information are for the years ended December 31, 2013.


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10. Available-for-Sale Financial Assets (a) Available-for-sale financial assets as of December 31, 2013 and 2012 are summarized as follows:

2013 2012


Percentage of ownership

Acquisition cost

Book value

Book value

Marketable equity securities:

Dongbu HiTek Co., Ltd.

8.10% W 37,564 27,068 22,755 Dongbu Securities Co., Ltd.(*) 8.13% 28,267 11,515 12,465 Ssangyong Motor Co., Ltd.

0.01% 19 13 9

Non-marketable equity securities:

Dongbu Life Insurance Co., Ltd.

- - - 43,658

POS-HiMETAL Co., Ltd.

15.00% 11,565 11,565 11,565 SY tech Co., Ltd.

4.97% 1,000 1,000 1,000

Dongbu Metal Co., Ltd.

0.09% 608 608 257 Korea Specialty Contractor

Financial Cooperative 0.46% 158 158 158 Capital Goods Financial

Cooperative - 100 100 100 KMA Consultants Inc.

0.50% 20 20 20

The Korea Metal Journal Co., Ltd.

2.67% 20 20 20 SHINSUNG Engineering &

Construction Co., Ltd. - - - 4 MIJU Steel MFG Co., Ltd.

3.55% 157 157 -

79,478 52,224 92,011

Debt securities: Housing bond - 2,913 2,913 3,564 Corporate bonds (Korea Credit

Guarantee Fund SPC) - 2,880 2,880 600 Corporate bonds (LIG Engineering

& Construction Co., Ltd.) - 49 49 49 Government bond

- 28 28 32

5,870 5,870 4,245

Total available-for-sale financial assets 85,348 58,094 96,256

Less: current portion of available-for-sale financial assets (5,822) (5,822) (4,197)

W 79,526 52,272 92,059 (*) In 2013, the Company sold all the shares of Dongbu Life Insurance Co., Ltd. to a related party,

Dongbu Insurance Co., Ltd. for W41,256 million.


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10. Available-for-Sale Financial Assets, Continued (b) Changes in fair value of available-for-sale financial assets for the years ended December 31, 2013

and 2012 are summarized as follows:

(In millions of Korean won) 2013 2012

Beginning balance W (11,233) (19,160) Valuation 3,367 (5,344) Adjustments of reclassification(*) - 15,802 Effect of income taxes (815) (2,531)

W (8,681) (11,233)

(*) As an impairment loss has been recognized for Dongbu Securities Co., Ltd. in 2012, realized loss

was reclassified from other comprehensive loss to current net loss for the year.

11. Accounts and Notes Receivable – Trade (a) Trade receivables are presented as net of allowances for impairment. The gross amount of trade

receivables and related allowances for impairment as of December 31, 2013 and 2012 are as follows:

2013 2012


Gross

amount

Allowances for

impairment Carrying amount

Gross amount

Allowances for

impairment Carrying amount

Accounts and notes

receivable – trade W 597,689 (420) 597,269 551,282 (838) 550,444 Accounts and notes

receivable – trade (non-current) 8,063 (3,397) 4,666 7,262 (4,012) 3,250

W 605,752 (3,817) 601,935 558,544 (4,850) 553,694

(b) Receivables which do not satisfy the de-recognition requirements of financial assets as of December

31, 2013 and 2012 are as follows:

(In millions of Korean won) Account 2013 2012

Accounts and notes receivable – trade related to asset-backed securities(*1)

Accounts and notes receivable – trade W 135,000 135,000

Long-term borrowing 135,000 135,000

Accounts receivable – trade related to export(*2)

Accounts and notes receivable – trade 127,009 90,256

Short-term borrowing 127,009 90,256

(*1) The Company is responsible to secure certain portion of the asset-backed securities in certain

cases (i.e., loss of eligibility, etc.). In relation to this, W136,936 million and W151,176 million of accounts and notes receivable – trade and others are provided as collateral as of December 31, 2013 and 2012, respectively.

(*2) Discounted amounts of a document against acceptance (D/A) and outstanding amounts of

export letters of credit.


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12. Other Receivables Other receivables as of December 31, 2013 and 2012 are summarized as follows:

2013 2012 (In millions of Korean won) Current Non-current Current

Non-current

Loans W 4,298 6,742 2,770 6,742 Non-trade receivables 2,823 - 4,802 - Accrued income 515 - 467 - Prepaid value added tax 9,070 - 5,034 - Deposits provided for business 40 10,538 13 7,829

W 16,746 17,280 13,086 14,571

13. Other Financial Assets Other financial assets as of December 31, 2013 and 2012 are summarized as follows:

2013 2012 (In millions of Korean won) Current Non-current Current Non-current

Long-term financial instruments W - 1,062 - 761 Short-term financial instruments 7,293 - 7,345 -

W 7,293 1,062 7,345 761

14. Inventories

Inventories as of December 31, 2013 and 2012 are summarized as follows: (In millions of Korean won) 2013 2012 Finished products W 123,540 143,309 Merchandise 1,451 1,261 By-products 4,452 1,398 Semi-finished products 83,839 102,507 Work-in-process 128 317 Raw materials 94,066 106,684 Supplies 102,841 96,138 Materials in transit 58,850 24,789

W 469,167 476,403


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15. Cash and Cash Equivalents Cash and cash equivalents as of December 31, 2013 and 2012 are summarized as follows: (In millions of Korean won) 2013 2012 Checking accounts and ordinary deposit W 16,209 17,814 Financial instruments cash equivalents 20,828 34,441

W 37,037 52,255

16. Restricted Financial Instruments

Restricted financial instruments as of December 31, 2013 and 2012 are summarized as follows: (In millions of Korean won) 2013 2012 Restricted reason Cash and cash equivalents W 6,738 5,155 Asset-backed securities Short-term financial instruments 2,000 5,000 Establishment of a pledge right Long-term financial instruments 21 21 Checking accounts

W 8,759 10,176

17. Equity (a) Share capital as of December 31, 2013 and 2012 are summarized as follows:

(In millions of Korean won,

except share data and par value)

2013 2012 Common

shares Preferred

share Common

shares Preferred

share

Number of shares in issue 120,000,000 30,000,000 120,000,000 30,000,000 Par value per share W 5,000 5,000 5,000 5,000 Number of shares issued 50,649,364 2,565,350 50,649,352 2,565,350 Share capital W 253,247 67,827 253,247 67,827 The ending balance of share capital (preferred shares) is different from the par value of issued stock due to the retirement of callable preferred stock in 2003 and 2005.


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17. Equity, Continued (b) Changes in the number of shares issued for the years ended December 31, 2013 and 2012 are as

follows:

2013 2012

(In shares)

Number of shares issued

Treasury stock

Outstanding stock

Number of shares issued

Treasury stock

Outstanding stock

Beginning balance 50,649,352 (1,868,856) 48,780,496 50,645,789 (1,868,856) 48,776,933 Exercise of stock purchase

warrants 12 - 12 3,563 - 3,563

50,649,364 (1,868,856) 48,780,508 50,649,352 (1,868,856) 48,780,496 (c) Share premium as of December 31, 2013 and 2012 are summarized as follows:

(In millions of Korean won) 2013 2012 Premium on share capital W 98,239 98,23

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