Hyundai Card 2011 review report(eng)

HYUNDAI CARD CO., LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011, 2010 AND JANUARY 1, 2010

AND FOR THE YEARS ENDED

DECEMBER 31, 2011 AND 2010

AND INDEPENDENT AUDITOR‟S REPORT

Deloitte Anjin LLC 9Fl., One IFC, 23, Yoido-dong, Youngdeungpo-gu, Seoul 150-876, Korea

Tel: +82 (2) 6676 1000

Fax: +82 (2) 6674 2114

www.deloitteanjin.co.kr

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/kr/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Member of Deloitte Touche Tohmatsu Limited

Independent Auditor’s Report

English Translation of a Report Originally Issued in Korean

To the Shareholders and Board of Directors of

Hyundai Card Co., Ltd. and its subsidiaries:

We have audited the accompanying consolidated statements of Hyundai Card Co., Ltd. and its subsidiaries (the

“Company”). The financial statements consist of the consolidated statements of financial position as of December

31, 2011, December 31, 2010 and January 1, 2010, respectively, and the related consolidated statements of

comprehensive income, consolidated statements of changes in stockholders‟ equity and consolidated statements of

cash flows, all expressed in Korean won, the years ended December 31, 2011 and 2010, respectively. The

Company‟s management is responsible for the preparation and fair presentation of the consolidated financial

statements and our responsibility is to express an opinion on these consolidated financial statements based on our

audits.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those

standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the

amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used

and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position

of the Company as of December 31, 2011, December 31, 2010 and January 1, 2010, respectively, and the results of

its operations and its cash flows for the years ended December 31, 2011 and 2010, respectively in conformity with

Korean International Financial Reporting Standards (“K-IFRS”).

In addition to the comparative consolidated financial statements as of December 31, 2010 included in the

accompanying consolidated financial statements, the Company‟s management prepared the consolidated statements

of financial position of the Company as of December 31, 2010 and the related consolidated statements of income,

consolidated statements of appropriations of retained earnings (or disposition of deficit), consolidated statements of

changes in stockholders‟ equity and consolidated statements of cash flows for the year then ended in accordance

with previous generally accepted accounting principles in the Republic of Korea (“previous K-GAAP”). We

conducted audits on these financial statements and an unqualified opinion was expressed on its‟ independent

auditor‟s report dated as of March 8, 2011.

February 27, 2012

Notice to Readers

This report is effective as of February 27, 2012, the auditor‟s report date. Certain subsequent events or

circumstances may have occurred between the auditor‟s report date and the time the auditor‟s report is read. Such

events or circumstances could significantly affect the accompanying consolidated financial statements and may

result in modifications to the auditor‟s report.


(the “Company”)

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011, 2010 AND JANUARY 1, 2010

AND FOR THE YEARS ENDED

DECEMBER 31, 2011 AND 2010

The accompanying financial statements including all footnote disclosures were prepared by and

are the responsibility of the Company.

Chung, Tae Young

CEO


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2011, DECEMBER 31, 2010, AND JANUARY 1, 2010

December 31, 2011 December 31, 2010 January 1, 2010

(Korean won in millions)

ASSETS

CASH AND BANK DEPOSITS (Notes 6, 32,

33 and 34):

Cash and cash equivalents ￦ 830,023 ￦ 797,048 ￦ 487,515

Bank deposits 33,031 23,131 54

Total cash and bank deposits 863,054 820,179 487,569

INVESTMENT FINANCIAL ASSETS (Notes

7, 33 and 34):

Financial assets held-for-trading - - 14,834

Financial assets available-for-sale (AFS) 1,767 1,776 82,577

Financial assets held-to-maturity - - 27

Total investment financial assets 1,767 1,776 97,438

CARD ASSETS (Notes 8, 9, 30, 33 and 34):

Card receivables, net of present value

discounts, deferred origination fees and

allowance for doubtful accounts 6,432,351 5,961,380 5,240,163

Cash advances, net of allowance for

doubtful accounts 978,118 1,115,700 740,816

Card loans, net of present value discounts,

deferred loan origination fees and

allowance for doubtful accounts 1,963,798 1,928,689 1,034,393

Total card assets 9,374,267 9,005,769 7,015,372

LOANS (Notes 8, 9, 33 and 34)

Other loans, net of allowance for doubtful

accounts 470 992 -

PROPERTY AND EQUIPMENT (Notes 10, 12,

15 and 30):

Land 83,995 80,414 67,819

Buildings, net of accumulated depreciation 42,187 34,494 32,054

Vehicles, net of accumulated depreciation 270 293 300

Fixtures and equipment, net of

accumulated depreciation 57,974 36,617 34,334

Capital lease assets 2,500 - -

Assets under construction 472 698 912

Total property and equipment 187,398 152,516 135,419

OTHER FINANCIAL ASSETS (Notes 9,

19, 30, 33 and 34):

Other accounts receivable, net of

allowance for doubtful accounts 44,940 15,054 8,481

Accrued revenue, net of allowance for

doubtful accounts 43,753 47,638 28,653

Guarantee deposits 52,759 48,129 34,498

Derivative assets 2,555 13,748 89,508

Total other financial assets 144,007 124,569 161,140



OTHER NON-FINANCIAL ASSETS (Notes 6,

9, 11, 26 and 30):

Advanced payments, net of allowance for

doubtful accounts 25,223 76,319 20,567

Prepaid expenses 48,549 53,974 55,415

Intangible assets 72,976 70,450 50,399

Deferred income tax assets 112,403 112,262 79,331

Others 21,820 27,308 16,683

Total other non-financial assets 280,971 340,313 222,395

Total Assets ￦ 10,851,934 ￦ 10,446,114 ￦ 8,119,333

(Continued)


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED)

AS OF DECEMBER 31, 2011 AND DECEMBER 31, 2010


LIABILITIES AND

SHAREHOLDERS‟ EQUITY (Korean won in millions)

BORROWINGS :

Borrowings (Notes 13, 33 and 34) ￦ 590,000 ￦ 1,581,766 ￦ 1,071,006

Bonds payable, net (Notes 14, 29, 33

and 34) 6,481,760 5,594,406 4,187,011

Total borrowings 7,071,760 7,176,172 5,258,017

RETIREMENT BENEFIT (Note 16)

Retirement benefit obligation 17,775 9,608 5,312

Total retirement benefit 17,775 9,608 5,312

OTHER FINANCIAL LIABILITIES

(Notes 15, 19, 28, 30, 33 and 34):

Accounts payable 1,066,706 795,721 629,617

Withholdings 64,312 68,811 54,228

Accrued expenses 140,922 123,112 111,517

Finance lease liabilities 2,548 - -

Derivatives liabilities 5,326 35,086 14,397

Guarantee deposit received 11,685 10,463 9,052

Total other financial liabilities 1,291,499 1,033,193 818,811

OTHER NON-FINANCIAL LIABILIT

IES :

Withholdings 5,650 4,761 2,835

Unearned revenue 347,865 287,441 246,201

Provisions (Notes 18 and 28) 80,233 81,426 56,948

Income tax payable(Notes 26) 40,469 86,864 65,554

Total other non-financial liabilities 474,217 460,492 371,538

SHAREHOLDERS‟ EQUITY :

Share capital (Note 20) 802,326 802,326 802,326

Capital surplus (Note 21) 57,704 57,704 57,704

Retained earnings (Notes 22 and 24) 1,148,397 909,749 768,082

Reserves (Notes 19, 23 and 31) (11,764) (3,150) 37,523

Non-controlling interest 20 20 20

Total shareholders‟ equity 1,996,683 1,766,649 1,665,655

Total Liabilities and Shareholders‟

Equity ￦ 10,851,934 ￦ 10,446,114 ￦ 8,119,333

See accompanying notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

For the year ended

December 31, 2011

For the year ended

December 31, 2010

(Korean won in millions,

except for per share amount) OPERATING REVENUE:

Card income (Notes 30 and 36) ￦ 2,318,410 ￦ 2,114,807

Interest income (Note 35) 26,006 15,812

Gain on fair value change of financial assets at FVTPL (Note 37) - -

Gain on disposal of financial assets AFS (Note 37) 7,650 101,145

Reversal of impairment loss on financial assets AFS (Note 37) 806 2,616

Dividends income 591 724

Reversal of provision for unused credit limits - -

Other operating revenue (Notes 30, 38 and 39) 55,916 101,746

Total operating revenue 2,409,379 2,336,850

OPERATING EXPENSES:

Card expenses (Notes 30 and 36) 923,942 863,117

Interest expenses (Note 35) 357,374 318,512

General and administrative expenses (Notes 16, 17, 25 and 30) 538,384 484,132

Securitization expenses 337 901

Bad debt expense and loss on disposal of loans 200,062 184,710

Transfer to provision for unused credit limits (Note 18) 1,094 14,093

Loss on fair value change of financial assets at FVTPL (Note 37) - -

Impairment loss on financial assets AFS (Note 37) 8 -

Other operating expenses (Notes 30, 38 and 39) 64,560 100,543

Total operating expenses 2,085,761 1,966,009

OPERATING INCOME 323,618 370,841

(Continued)


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)


For the year ended

December 31, 2011

For the year ended

December 31, 2010

(Korean won in millions,

except for per share amount)

INCOME BEFORE INCOME TAX ￦ 323,618 ￦ 370,841

INCOME TAX EXPENSE (Note 26) 84,970 92,779

INCOME FOR THE PERIOD 238,648 278,062

OTHER COMPREHENSIVE INCOME FOR THE PERIOD (Note

31)

Gain on fair value of financial assets AFS - (53,801)

Effective portion of changes in fair value of cash flow hedges (8,614) 13,128

TOTAL COMPREHENSIVE INCOME FOR THE PERIOD ￦ 230,034 ￦ 237,389

Net income attributable to:

Owners of the Company 238,648 278,062

Non-controlling interests - -

Total comprehensive income attributable to:

Owners of the Company 230,034 237,389

Non-controlling interests - -

Earnings per share (In won per share) (Note 27)

Basic earnings per share ￦ 1,487 ￦ 1,733

Diluted earnings per share ￦ 1,487 ￦ 1,733



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS‟ EQUITY


Share

capital

Capital surplus Reserves

Attributable to owners of the

Company

Non-controlling

interests Total

Share

premium

Other capital

surplus

Treasury

shares

Retained

earnings

Net change in fair value of financial

assets AFS

Cash flow hedging

reserve


Balance at January 1, 2010 ￦ 802,326 ￦ 45,399 ￦ 12,305 - ￦ 768,082 ￦ 53,801 ￦ (16,278) ￦ 1,665,635 ￦ 20 ￦ 1,665,655

Dividends paid - - - - (104,302) - - (104,302) - (104,302)

Interim dividends - - - - (32,093) - - (32,093) - (32,093)

Comprehensive income - - - - - - - - - -

Net income - - - - 278,062 - - 278,062 - 278,062

Reissuance of treasury

stock - - - - - - - - - -

Other comprehensive

income - - - - - (53,801) 13,128 (40,673)(45,028) - (40,673)

Balance at December 31,

2010 802,326 45,399 12,305 - 909,749 - (3,150) 1,766,629 20 1,766,649

Balance at January 1, 2011 802,326 45,399 12,305 - 909,749 - (3,150) 1,766,629 20 1,766,649

Comprehensive income - - - - - - - - - -

Net income - - - - 238,648 - - 238,648 - 238,648

Other comprehensive

income - - - - - - (8,614) (8,614) - (8,614)

Balance at December 31.

31, 2011 ￦ 802,326 ￦ 45,399 ￦ 12,305 ￦ - ￦1,148,397 - ￦ (11,764) ￦ 1,996,663 ￦ 20 ￦ 1,996,683



CONSOLIDATED STATEMENTS OF CASH FLOWS


For the year ended December 31,

2011 2010


CASH FLOWS FROM OPERATING ACTIVITIES:

Income for the period ￦ 238,648 ￦ 278,062

Income tax expense 84,970 92,779

Interest income (26,006) (15,812)

Interest expense 357,374 318,512

Dividend received (591) (724)

Bad debt expense and loss on disposal of receivables 200,062 184,710

Retirement benefits 12,808 9,797

Depreciation 21,209 15,684

Amortization 11,355 8,067

Loss on foreign currency translation 16,397 10,897

Loss on valuation of trading derivatives 5,878 63,129

Increase in provision for unused credit limit 1,094 14,093

Loss from sale of property, plant and equipment 5 10

Impairment loss of financial assets AFS 8 -

Other operating losses 1,657 32

Gain on disposals of financial assets AFS (8,456) (103,761)

Gain on valuation of investment financial assets - -

Gain on foreign currency translation (161) (36,753)

Gain on valuation and trading of derivatives (24,008) (15,300)

Amortization of present value discounts of card asset (27,320) (5,087)

Amortization of deferred origination fees (22,513) 53,903

Gain from sale of property, plant and equipment (6) -

Changes in working capital:

Decrease in financial assets - 121,690

Increase in card assets (521,185) (2,114,875)

Decrease in loans 500 -

Increase in other financial assets (21,811) (19,810)

Decrease (Increase) in other non-financial assets 54,854 (55,839)

Decrease in derivative assets 8,190 81,481

Increase in provisions 1,764 10,386

Decrease in retirement benefit obligations (4,334) (25,676)

Decrease (Increase) in plan asset (307) 20,175

Decrease in derivative liabilities (19,862) (2,948)

Increase in capital lease liabilities 2,548 -

Increase in other financial liabilities 278,290 216,921

Increase in other non-financial liabilities 60,426 41,239

Cash generated from operating activities

Interest received 23,576 7,772

Interest paid (339,416) (316,001)

Dividend received 591 724

Income tax paid (128,884) (127,663)

Net cash provided by (used in) operating activities 237,344 (1,397,992)

(Continued)


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


For the year ended December 31,

2011 2010


CASH FLOWS FROM INVESTING ACTIVITIES:

Disposal of investment financial assets ￦ 4,406 ￦ -

Disposal of property and equipment 111 -

Disposal of intangible assets - 1,450

Net increase in bank deposit (9,901) (23,077)

Net increase in guarantee deposit (3,902) (13,944)

Acquisition of property and equipment (51,875) (32,380)

Acquisition of intangible assets (18,207) (30,010)

Net cash used in investing activities (79,368) (97,961)

CASH FLOWS FROM FINANCING ACTIVITIES:

Increase in borrowings 5,734,000 499,927

Proceeds from issue of bonds payable 3,790,757 2,957,984

Repayment of borrowings (6,725,767) -

Repayment of bonds payable (2,923,991) (1,516,030)

Payment of dividend - (136,395)

Net cash provided by (used in) financing activities (125,001) 1,805,486

NET INCREASE IN CASH AND CASH EQUIVALENTS 32,975 309,533

CASH AND CASH EQUIVALENTS, BEGINNING OF

THE PERIOD 797,048 487,515

CASH AND CASH EQUIVALENTS, END OF THE

PERIOD ￦ 830,023 ￦ 797,048



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. GENERAL:

Hyundai Card Co., LTD (the “Parent”) is engaged in the credit card business under the Specialized Credit

Financial Business Law of Korea. On June 15, 1995, the Parent acquired the credit card business of Korea

Credit Circulation Co., Ltd. and on June 16, 1995, the Korean government granted permission to the Parent to

engage in the credit card business.

As of December 31, 2011, the Parent has approximately 9.24 million card members, 1.95 million registered

merchants, and 179 marketing centers, branches and posts. Its head office is located in Yoido, Seoul.

As of December 31, 2011, the total common stock of the Parent is ￦802,326 million. The shareholders of the

Parent and their respective ownerships as of December 31, 2011, December 31, 2010 and January 1, 2010 are

as follows:

Shareholder


Number of

shares % of ownership

Number of


Number of


Hyundai Motor

Co., Ltd. 50,572,187 31.52 50,572,187 31.52 50,572,187 31.52

Kia Motors Co.,

Ltd. 18,422,142 11.48 18,422,142 11.48 18,422,142 11.48

Hyundai Steel

Co., Ltd. 8,729,750 5.44 8,729,750 5.44 8,729,750 5.44

GE Capital Int'l

Holdings 69,000,073 43.00 69,000,073 43.00 69,000,073 43.00

Hyundai

Commercial

Inc. 8,889,622 5.54 8,889,622 5.54 8,889,622 5.54

Others 4,851,512 3.02 4,851,512 3.02 4,851,512 3.02

Totals 160,465,286 100.00 160,465,286 100.00 160,465,286 100.00

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The Company maintains its official accounting records in the Republic of Korean won (“Won”) and prepares

consolidated financial statements in conformity with Korean statutory requirements and Korean International

Reporting Standards (“K-IFRS”), in the Korean language (Hangul). Accordingly, these consolidated financial

statements are intended for use by those who are informed about K-IFRS and Korean practices. The

accompanying consolidated financial statements have been condensed, restructured and translated into English

with certain expanded descriptions from the Korean language financial statements. Certain information

included in the Korean language financial statements, but not required for a fair presentation of the Company‟s

financial position, operating results, changes in shareholders‟ equity or cash flows, is not presented in the

accompanying consolidated financial statements.

(1) Basis of Preparation

The Company has adopted the Korean International Financial Reporting Standards (“K-IFRS”) for the annual

period beginning on January 1, 2011. In accordance with K-IFRS 1101 First-time adoption of International

Financial Reporting Standards, the transition date to K-IFRS is January 1, 2010. Transition adjustments from

previous GAAP-Korean GAAP (“K-GAAP”), to K-IFRSs are summarized in Note 4.

Currently, enactments and amendments of the K-IFRSs are in progress, and the financial information presented

in the consolidated financial statements may change accordingly in the future. The Company has not applied

the following new and revised K-IFRSs that have been issued but are not yet effective:

K-IFRS 1107 Financial Instruments: Disclosures – Transfers of Financial Assets

The amendments to K-IFRS 1107 increase the disclosure requirements for transactions involving transfers of

financial assets. These amendments are intended to provide greater transparency around risk exposures when a

financial asset is transferred but the transferor retains some level of continuing exposure in the asset. The

amendments also require disclosures where transfers of financial assets are not evenly distributed throughout

the period. K-IFRS 1107 is effective for annual periods beginning on or after July 1, 2011.

Amendments to K-FIRS 1012 Deferred Tax – Recovery of Underlying Assets

The amendments to K-IFRS 1012 provide an exception to the general principles in K-IFRS 1012 that the

measurement of deferred tax assets and deferred tax liabilities should reflect the tax consequences that would

follow from the manner in which the entity expect to recover the carrying amount of an asset. Investment

property measured using the revaluation model under K-IFRS 1040 Investment Property or a non-depreciable

asset measured using the revaluation model in K-IFRS 1016 Property, Plant, and Equipment, are presumed to

be recovered through sale for the purposes of measuring deferred taxes, unless the presumption is rebutted in

certain circumstances. The amendments to K-IFRS 1012 are effective for annual periods beginning on or after

January 1, 2012.

K-IFRS 1019 (as revised in 2011) Employee Benefits

The amendments to K-IFRS 1019 change the accounting for defined benefit plans and termination benefits.

The most significant change relates to the accounting for changes in defined benefit obligations and plan assets.

The amendments require the recognition of changes in defined benefit obligations and in fair value of plan

assets when they occur, and hence eliminate the „corridor approach‟ permitted under the previous version of K-

IFRS 1019 and accelerate the recognition of past service cots. The amendments to K-IFRS 1019 are effective

for annual periods beginning on or after January 1, 2013 and require retrospective application with certain

exceptions.

K-IFRS 1113 Fair Value Measurement

K-IFRS 1113 establishes a single source of guidance for fair value measurements and disclosures about fair

value measurements. The standard defines fair value, establishes a framework for measuring fair value, and

requires disclosures about fair value measurements. K-IFRS 1113 is effective for annual periods beginning on

or after January 1, 2013, with earlier application permitted.

The Company does not anticipate that these amendments referred above will have a significant effect on the

Company‟s consolidated financial statements and disclosures.

Major accounting policies used for the preparation of the consolidated financial statements are stated below.

Unless stated otherwise, these accounting policies have been applied consistently to the consolidated financial

statements for the current period and accompanying comparative period.

The consolidated financial statements have been prepared on the historical cost basis except for certain

properties and financial instruments that are measured at revalued amounts or fair values, as explained in the

accounting policies below. Historical cost is generally based on the fair value of the consideration given in

exchange for assets.

The accompanying consolidated financial statements were approved by the board of directors on January 31,

2012

(2) Significant Accounting Policies

1) Basis of Consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities

(including special purpose entities) controlled by the Company (and its subsidiaries). Control is achieved where

the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits

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from its activities.

Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated

statement of comprehensive income from the effective date of acquisition and up to the effective date of

disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of the

Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit

balance.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting

policies into line with those used by the Company.

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

Changes in the Company‟s ownership interests in subsidiaries that do not result in the Company losing control

over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Company‟s interests

and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries.

Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the

consideration paid or received is recognized directly in equity and attributed to owners of the Company

When the Company loses control of a subsidiary, the profit or loss on disposal is calculated as the difference

between (i) the aggregate of the fair value of the consideration received and the fair value of any retained

interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary

and any non-controlling interests. When assets of the subsidiary are carried at revalued amounts or fair values

and the related cumulative gain or loss has been recognized in other comprehensive income and accumulated in

equity, the amounts previously recognized in other comprehensive income and accumulated in equity are

accounted for as if the Company had directly disposed of the relevant assets (i.e. reclassified to profit or loss or

transferred directly to retained earnings). The fair value of any investment retained in the former subsidiary at

the date when control is lost is recognized as the fair value on initial recognition for subsequent accounting

under K-IFRS 1039 Financial Instruments: Recognition and Measurement or, when applicable, the cost on

initial recognition of an investment in an associate or a jointly controlled entity.

2) Card assets

Card assets are amounts due from customers for services performed in the ordinary course of business. Card

assets are initially measured at a fair value including direct transaction cost; thereafter it is measured at

amortized cost using the effective interest rate method except for the financial assets classified as at fair value

through profit or loss (FVTPL).

① Card Receivables

The Company records card receivables when its cardholders make purchases from domestic and foreign card

merchants, and when card members of MasterCard International, Visa International and Diners Club

International make purchases from domestic card merchants. Advanced merchant commission payments; and

commission from cardholders for installment payments and cash advances are recognized as revenue on an

accrual basis.

② Card Loans

The Company extends the card loans to its cardholders in accordance with the Specialized Credit Financial

Business Law. A constant commission rate is recognized as revenue on an accrual basis.

③ Cash advances

Cash advances are provided to card members up to certain amounts depending on card members‟ credit rating

in accordance with the Specialized Credit Financial Business Law. Cash advances are collected from card

members on the payment date with specific percent service charges, and recognized as revenue on an accrual

basis.

- 4 -

3) Financial assets

All financial assets are recognized and derecognized on trade date where the purchase or sale of a financial

asset is under a contract whose terms require delivery of the financial asset within the timeframe established by

the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial

assets classified as at fair value through profit or loss, which are initially measured at fair value.

Financial assets are classified into the following specified categories: financial assets at „fair value through

profit or loss‟ (FVTPL), „held-to-maturity‟, „available-for-sale‟ and „loans and receivables‟. The classification

depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

① Effective interest rate method

The effective interest rate method is a method of calculating the amortized cost of a debt instrument and of

allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts

estimated future cash receipts (including all fees and points paid or received that form an integral part of the

effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt

instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Income is recognized on an effective interest rate method for debt instruments other than those financial assets

classified as at FVTPL.

② Financial assets at fair value through profit or loss (FVTPL)

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated

as at FVTPL.

A financial asset is classified as held for trading if:

• it has been acquired principally for the purpose of selling it in the near term; or

• on initial recognition it is part of a portfolio of identified financial instruments that the Company manages

together and has a recent actual pattern of short-term profit-taking; or

• it is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial

recognition if:

• such designation eliminates or significantly reduces a measurement or recognition inconsistency that would

otherwise arise; or

• the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed

and its performance is evaluated on a fair value basis, in accordance with the Company's documented risk

management or investment strategy, and information about the grouping is provided internally on that

basis; or

• it forms part of a contract containing one or more embedded derivatives, and K-IFRS 1039 Financial

Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be

designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, and any gains or losses arising on remeasurement are

recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or

interest earned on the financial asset and is included in the „other revenue or expenses‟ line item in the

consolidated statement of comprehensive income. And transaction cost from acquisition of them is recognized

in loss immediately when it arises.

③ Held-to-maturity investments

Non-derivatives financial assets with fixed or determinable payments and fixed maturity dates that the

Company has the positive intent and ability to hold to maturity are classified as held-to-maturity investments.

Held-to-maturity investments are measured at amortized cost using the effective interest rate method less any

impairment, with revenue recognized on an effective interest rate method basis.

- 5 -

④ Available-for-sale financial assets (ABS)

Non-derivatives financial assets that are not classified as at held-to-maturity, held-for-trading, designated as at

fair value through profit or loss, or loans and receivables are classified as at financial assets AFS. Financial

assets AFS are initially recognized at fair value plus directly related transaction costs. They are subsequently

measured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carried

at cost. Gains and losses arising from changes in fair value are recognized and accumulated in other

comprehensive income, with the exception of impairment losses, interest calculated using the effective interest

method, and foreign exchange gains and losses on monetary assets, which are recognized in profit or loss.

Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously

accumulated in the other comprehensive income is reclassified to profit or loss. Dividends on AFS equity

instruments are recognized in profit or loss when the Company‟s right to receive the dividends is established.

The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency

and translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that are

recognized in profit or loss are determined based on the amortized cost of the monetary asset. Other foreign

exchange gains and losses are recognized in other comprehensive income.

⑤ Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in

an active market are classified as „loans and receivables‟. Loans and receivables are measured at amortized cost

using the effective interest rate method, less any impairment. Interest income is recognized by applying the

effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

⑥ Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each

reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a

result of one or more events that occurred after the initial recognition of the financial asset, the estimated future

cash flows of the investment have been affected.

For listed and unlisted equity investments classified as AFS, a significant or prolonged decline in the fair value

of the security below its cost is considered to be objective evidence of impairment.

For all financial assets classified as AFS, objective evidence of impairment could include:

• significant financial difficulty of the issuer or counterparty; or

• default or delinquency in interest or principal payments; or

• it becoming probable that the borrower will enter bankruptcy or financial re-organization.

• an active market for financial assets closes due to financial difficulties

For certain categories of financial asset, such as card receivables, assets that are assessed not to be impaired

individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment

for a portfolio of receivables could include the Company‟s past experience of collecting payments, an increase

in the number of delayed payments in the portfolio exceeding the average credit period, as well as observable

changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference

between the asset‟s carrying amount and the present value of estimated future cash flows, discounted at the

financial asset‟s original effective interest rate.

For financial assets measured at cost, the amount of the impairment is recognized as the difference between the

carrying amount of the asset and current value of estimated future cash flows discounted by similar to the

current market rate. The impairment is not reversed in subsequent periods.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets

with the exception of card receivables, where the carrying amount is reduced through the use of an allowance

- 6 -

account. When a card receivable is considered uncollectible, it is written off against the allowance account.

Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes

in the carrying amount of the allowance account are recognized in profit or loss.

When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized in

other comprehensive income are reclassified to profit or loss in the period.

With the exception of AFS equity instruments, 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,

the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying

amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would

have been had the impairment not been recognized.

In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversed

through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other

comprehensive income.

⑦ Derecognition of financial assets

The Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset

expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the

asset to another entity. If the Company neither transfers nor retains substantially all the risks and rewards of

ownership and continues to control the transferred asset, the Company recognizes its retained interest in the

asset and an associated liability for amounts it may have to pay. If the Company retains substantially all the

risks and rewards of ownership of a transferred financial asset, the Company continues to recognize the

financial asset and also recognizes a collateralized borrowing for the proceeds received.

If the Company derecognizes the entire financial asset, the difference between total received amount plus the

sum of cumulative income recognized in other comprehensive income and the book value of the asset is

recognized in profit or loss.

If the Company does not derecognize the entire financial asset, (for example, the Company holds either an

option to repurchase a certain portion of the asset or remaining shares, which does not allow the Company to

hold the most of the risks and benefits from the financial asset and the Company controls assets) the Company

divides the book value of financial assets into a recognized part and a unrecognized part in accordance with

relative fair value of each portion. The difference between total received amount for derecognized portion of

the asset plus the sum of cumulative income recognized in other comprehensive income and the book value of

the asset is recognized in profit or loss. Cumulative income recognized in other comprehensive income is

divided into a recognized part and a unrecognized part in accordance with relative fair value of each portion.

4) Property, Plant and Equipment

Property, plant and equipment are stated at cost less subsequent accumulated depreciation and accumulated

impairment losses. The cost of an item of property, plant and equipment is directly attributable to their

purchase or construction, which includes 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. It also includes

the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is

located.

Subsequent costs are recognized in carrying amount of an asset or as a separate asset if it is probable that future

economic benefits associated with the assets will flow into the Company and the cost of an asset can be

measured reliably. Routine maintenance and repairs are expensed as incurred.

The Company does not depreciate land. Depreciation expense is computed using the straight-line method based

on the estimated useful lives of the assets as follows:

Estimated useful lives

Building 40 years

Fixtures and equipment 4 years

Vehicles 4 years

- 7 -

Each part of property and equipment with a cost that is significant in relation to the total cost are depreciated

separately.

The Company reviews the depreciation method, the estimated useful lives and residual values of property, plant

and equipment at the end of each annual reporting period. If expectations differ from previous estimates, the

changes are accounted for as a change in an accounting estimate.

When future economic benefits aren‟t expected through the use or disposition of property, plant and equipment,

the Company removes the book value of the assets from consolidated statements of financial position. Income

incurred from disposal of property, plant and equipment is the net amount of the trading and the book value and

is recognized when the asset is removed.

5) Lease

A lease is classified as a finance lease whenever the terms of the lease transfer substantially all the risks and

rewards of ownership to the lessee. All other leases are classified as operating leases.

The Company recognizes the lesser of the current value of minimum lease payment and the fair value of lease

assets as capital lease assets and capital lease liabilities.

Lease expenses are allocated to two parts, interest expense and lease payment, to maintain a constant periodic

rate on each period‟s debt balance. Financial cost except such certain qualifying assets, in accordance with the

Company‟s accounting policies, is recognized immediately as an expense in the period. Any adjustments to

lease payment are recognized as cost during the period it occurred.

6) Intangible assets

① Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated

amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their

estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each

reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated

impairment losses.

② Internally-generated intangible assets - research and development expenditure

Expenditure on research activities is recognized as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from development (or from the development phase of an

internal project) is recognized if, and only if, all of the following have been demonstrated:

• the technical feasibility of completing the intangible asset so that it will be available for use or sale;

• the intention to complete the intangible asset and use or sell it;

• the ability to use or sell the intangible asset;

• how the intangible asset will generate probable future economic benefits;

• the availability of adequate technical, financial and other resources to complete the development and to use

or sell the intangible asset; and

• the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognized for internally-generated intangible assets is the sum of the expenditure incurred

from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-

generated intangible asset can be recognized, development expenditure is recognized in profit or loss in the

period in which it is incurred.

Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated

amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired

- 8 -

separately.

③ Intangible assets acquired in a business combination

Intangible assets that are acquired in a business combination are recognized separately from goodwill and are

initially recognized at their fair value at the acquisition date (which is regarded as their cost).

Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less

accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are

acquired separately.

④ Disposal of intangible assets

If future economic benefits are not expected through the use or disposition of the intangible assets, the

Company removes the book value of the assets from the consolidated financial statements. Income incurred

from the disposal of intangible assets is the net amount of the trading and book value, and is recognized when

the asset is removed.

7) Impairment of tangible and intangible assets other than goodwill

At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible

assets to determine whether there is any indication that those assets have suffered an impairment loss. If any

such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the

impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the

Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a

reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual

cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a

reasonable and consistent allocation basis can be identified.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for

impairment at least annually, and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the

estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects

current market assessments of the time value of money and the risks specific to the asset for which the

estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or a cash-generating unit) is estimated to be less than its carrying amount,

the carrying amount of the asset (or the cash-generating unit) is reduced to its recoverable amount. An

impairment loss is recognized immediately in profit or loss.

If impairment recognized in prior periods is reversed, the book value of the individual assets (or cash-

generating unit) is the smaller of the carrying amount of the recoverable amount and the book value that the

impairment would not have recognized in prior periods and the reversal of impairment loss is recognized

immediately in profit or loss at the time.

8) Provisions

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a

past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can

be made of the amount of the obligation.

The amount recognized as a provision is the best estimate of the consideration required to settle the present

obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the

obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its

carrying amount is the present value of those cash flows (where the effect of the time value of money is

material).

When some or all of the economic benefits required to settle a provision are expected to be recovered from a

third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received

and the amount of the receivable can be measured reliably.

- 9 -

At the end of each reporting period, the remaining provision balance is reviewed and assessed to determine if

the current best estimate is being recognized. If the existence of an obligation to transfer economic benefit is no

longer probable, the related provision is reversed during the period.

9) Financial liabilities and equity instruments

① Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or equity in accordance with the

substance of the contractual arrangement.

② Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting

all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of

direct issue costs.

Treasury shares transactions are deducted directly from equity. Income arising from purchases and sales,

issuances, and incinerations of treasury shares are not recognized in profits or losses.

③ Compound instruments

The component parts of compound instruments issued by the Company are classified separately as financial

liabilities and equity in accordance with the definition of the financial asset and liability. Convertible option

which can be settled by exchanging financial asset such as fixed amount of cash for the fixed number of

treasury shares is equity instruments.

At the date of issue, the fair value of the liability component is estimated using the prevailing market interest

rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortized cost basis

using the effective interest rate method until extinguished upon conversion or at the instrument‟s maturity date.

The equity component is determined by deducting the amount of the liability component from the fair value of

the compound instrument as a whole. This is recognized and included in equity, net of income tax effects, and

is not subsequently remeasured.

④ Financial liabilities

Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities.

⑤ Other financial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs.

Other financial liabilities are subsequently measured at amortized cost using the effective interest rate method,

with interest expense recognized on an effective interest rate method.

The effective interest rate method is a method of calculating the amortized cost of a financial liability and of

allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts

estimated future cash payments through the expected life of the financial liability, or (where appropriate) a

shorter period, to the net carrying amount on initial recognition.

⑥ Derecognition of financial liabilities

The Company derecognizes financial liabilities when, and only when, the Company‟s obligations are

discharged, cancelled or they expire.

10) Derivative instruments

The Company enters into a variety of derivative financial instruments to manage its exposure to interest rate

and foreign exchange rate risk, including interest rate swaps and cross currency swaps.

- 10 -

Derivatives are initially recognized at fair value at the date the derivative contract is entered into and are

subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is

recognized in profit or loss immediately unless the derivative is designated and effective as a hedging

instrument, in such case the timing of the recognition in profit or loss depends on the nature of the hedge

relationship.

A derivative with a positive fair value is recognized as a financial asset; a derivative with a negative fair value

is recognized as a financial liability.

① Embedded derivatives

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives

when their risks and characteristics are not closely related to those of the host contracts and the host contracts

are not measured at FVTPL.

② Hedge accounting

The Company designates certain derivative instruments as cash flow hedges.

At the inception of the hedge relationship, the Company documents the relationship between the hedging

instrument and the hedged item, along with its risk management objectives and its strategy for undertaking

various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Company

documents whether the hedging instrument is highly effective in offsetting changes in cash flows of the hedged

item.

③ Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow

hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is

recognized immediately in profit or loss, and is included in the „other operating revenue or expenses‟ line item.

Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to

profit or loss in the periods when the hedged item is recognized in profit or loss, in the same line of the

consolidated statement of comprehensive income as the recognized hedged item.

Hedge accounting is discontinued when the Company revokes the hedging relationship, when the hedging

instrument expires or is sold, terminated, or exercised, or it no longer qualifies for hedge accounting. Any gain

or loss accumulated in equity at that time remains in equity and is recognized when the forecast transaction is

ultimately recognized in profit or loss. When a forecast transaction is no longer expected to occur, the gain or

loss accumulated in equity is recognized immediately in profit or loss.

11) Share capital

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction,

net of tax, from the proceeds.

Where the Parent or its subsidiary purchases the Parent‟s share capital, the consideration paid is deducted from

shareholders‟ equity as treasury shares until they are cancelled. Where such shares are subsequently sold or

reissued, any consideration received is included in shareholders‟ equity.

12) Commission revenue

① Fees that are a part of the financial instruments‟ effective interest rate

Fees that are a part of the effective interest rate of a financial instrument are treated as an adjustment to the

effective interest rate. Such fees include compensation for activities such as evaluating the borrower's financial

condition, evaluating and recording guarantees, collateral, and other security arrangements, negotiating the

terms of the instrument, preparing and processing documents and closing the transaction as well as origination

- 11 -

fees received on issuing financial liabilities measured at amortized cost. These fees are deferred and recognized

as an adjustment to the effective interest rate. However, in case the financial instrument is classified as a

financial asset at fair value through profit or loss, the relevant fee is recognized as revenue when the instrument

is initially recognized.

② Commission from rendering of services

Commission revenue from rendering of services is recognized as the services are provided. When it is not

probable that specific loan agreement is contracted and agreed commission is not applied to K-IFRS 1039,

relating those services will be recognized on a straight-line basis as the work performs.

③ Commission from significant act performed

The recognition of revenue is postponed until the significant act is executed.

13) Interest income and expense

Using the effective interest rate method, the Company recognizes interest income and expense in consolidated

statements of comprehensive income. Effective interest rate method calculates the amortized cost of financial

assets or liabilities and allocates interest income or expense over the relevant period. The effective interest rate

discounts the expected future cash in and out through the expected life of financial instruments or, if

appropriate, through shorter period, to net carrying amount of financial assets or liabilities. When calculating

the effective interest rate, the Company estimates future cash flows considering all contractual financial

instruments except the loss on future credit risk. Also, effective interest rate calculation include redemption

costs, points (part of the effective interest rate) that are paid or earned between contracting parties, transaction

costs, and other premiums and discounts.

14) Net trading profit or loss

Net trading profit or loss is comprised of held for trading assets (liabilities) related to gain and loss, and

includes changes of realized (unrealized) fair value, interest, dividend, gain or loss on foreign currency

translation.

15) Dividend revenue

Dividend income from investments is recognized when the shareholder‟s right to receive payment has been

established (provided that it is probable that the economic benefits will flow to the Company and the amount of

income can be measured reliably).

16) Foreign currencies

The individual financial statements of the Company are presented in the currency of the primary economic

environment in which the entity operates (its functional currency). For the purpose of the consolidated financial

statements, the results and financial position of each entity are expressed in Korean Won, which is the

functional currency of the Company and the presentation currency for the consolidated financial statements.

In preparing the financial statements of the individual entities, transactions in currencies other than the entity‟s

functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the

transactions. At the end of each reporting period, monetary items denominated in foreign currencies are

retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in

foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-

monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences are recognized in profit or loss in the period in which they arise except for exchange

differences on transactions entered into in order to hedge certain foreign currency risks. See Note 2 (10) above

for hedging accounting policies.

- 12 -

17) Retirement benefit costs

Contributions to defined retirement contribution plans are recognized as an expense when employees have

rendered service entitling them to the contributions.

For defined retirement benefit plans, the cost of providing benefits is determined using the Projected Unit

Credit Method, with actuarial valuations being carried out at the end of each reporting period. The present

value of the Company‟s defined benefit obligation and the fair value of plan assets as at the end of each

reporting period are amortized over the expected average remaining working lives of the participating

employees. Past service cost is recognized immediately to the extent that the benefits are already vested, and

otherwise is amortized on a straight-line basis over the average period until the benefits become vested.

The retirement benefit obligation recognized in the consolidated statements of financial position represents the

present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses and

unrecognized past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this

calculation is limited to unrecognized actuarial losses and past service cost, plus the present value of available

refunds and reductions in future contributions to the plan.

18) Taxation

Income tax consists of current tax and deferred tax.

① Current tax

The tax currently payable is based on taxable profit for the period. Taxable profit differs from profit as reported

in the consolidated statement of comprehensive income because of items of income or expense that are taxable

or deductible in other periods. The Company‟s liability for current tax is calculated using tax rates that have

been enacted or substantively enacted by the end of the reporting period

② Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in

the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit.

Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred income tax

assets are generally recognized for all deductible temporary differences to the extent that it is probable that

taxable profits will be available against which those deductible temporary differences can be utilized. Such

deferred income tax assets and liabilities are not recognized if the temporary difference arises from goodwill or

from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction

that affects neither the taxable profit nor the accounting profit.

Deferred income tax liabilities are recognized for taxable temporary differences associated with investments in

subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the

reversal of the temporary difference and it is probable that the temporary difference will not reverse in the

foreseeable future. Deferred income tax assets arising from deductible temporary differences associated with

such investments and interests are only recognized to the extent that it is probable that there will be sufficient

taxable profits against which to utilize the benefits of the temporary differences and they are expected to

reverse in the foreseeable future.

The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reduced

to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of

the asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the period

in which the liability is settled or the asset realized, 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 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.

- 13 -

③ Current and deferred tax for the year

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in

other comprehensive income or directly in equity, in which case, the current and deferred tax are also

recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax

arises from the initial accounting for a business combination, the tax effect is included in the accounting for the

business combination.

19) Earnings per share

Basic earnings per share is calculated by dividing net profit from the period available to common shareholders

by the weighted-average number of common shares outstanding during the year. Diluted earnings per share is

calculated using the weighted-average number of common shares outstanding adjusted to include the

potentially dilutive effect of common equivalent shares outstanding. The weighted-average number of shares in

current year includes convertible bond and stock option.

- 14 -

3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Company‟s accounting policies, which are described in Note 2, management is

required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that

are not readily apparent from other sources. The estimates and associated assumptions are based on historical

experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates

are recognized in the period in which the estimate is revised if the revision affects only that period, or in the

period of the revision and future periods if the revision affects both current and future periods.

1) Allowance for Doubtful Accounts

The Company determines and recognizes allowances for losses through impairment testing on credit card assets

and other assets, such as other account receivable, advance payments and accrued income.. The Company also

recognizes provisions for unused commitments. The accuracy of provisions of credit losses is determined by

the risk assessment methodology and assumptions used for estimating expected cash flows of the borrower for

allowances on individual loans and collectively assessing allowances for groups of loans and provisions for

unused commitments.

2) Unearned revenue from point programs

The Company provides its customers with incentives to buy goods or services by providing awards (called

“customer loyalty programs”) and allocates the fair value of the consideration received or receivable between

the award credits granted (“points”) and the other components of the revenue transaction. The Company

supplies the awards such as discounted payments or free gifts. The consideration allocated to the award credits

is measured by reference to their fair value, i.e. the amount for which the award credits could be sold separately.

The fair value of the consideration allocated to the award credits is estimated by taking into account expected

redemption rates, etc. and recognized as deferred revenue until the Company fulfills its obligations to deliver

awards to customers. The amount of revenue recognized is to be based on the number of award credits that

have been redeemed in exchange for awards, relative to the total number expected to be redeemed.

3) Post-Employment Benefits: Defined Benefit Plans

The Company operates a defined benefit pension plan (“plan”). The amount recognized as a defined benefit

liability is the present value of the defined benefit obligation less the fair value of plan assets at the end of the

reporting period. The present value of defined benefit obligation is calculated annually by using actuarial

assumptions such as future increases in salaries, expected returns on plan assets, discount rate and others. The

plan has the uncertainty due to the nature of long-term plan. The defined benefit obligation as of December 31,

2011, December 31, 2010 and January 1, 2010 are ￦17,775 million, ￦9,608 million and ￦5,312 million,

respectively.

4) Fair Value Measurement of Financial Instruments

As disclosed in Note 34, the fair value of financial instruments classified as certain level are measured using

valuation techniques where significant inputs are not based on observable market data. The Note 34 provides

details of the key assumptions used for the measurement of the fair value and sensitivity analysis of the key

assumptions. The Company believes that valuation methods and assumptions used for measuring the fair value

of financial instruments are reasonable and that the fair value recognized in the statements of financial position

is appropriate.

- 15 -

4. TRANSITION TO K-IFRSs

Transition adjustments from previous GAAP-Korean GAAP (“K-GAAP”), to K-IFRSs that affected the

Company‟s financial position, financial performance and cash flows are as follows.

(1) Explanation of transition to K-IFRSs

Significant differences between the accounting policies chosen by the Company under K-IFRS and under K-

GAAP are as follows:

1) Changes of the scope of consolidation

As of transition date, the change of the scope of consolidation as a result of adoption of K-IFRS is as follows:

Changes Details Company Name

Included Under K-GAAP, in accordance with the Articles of

External audit of Stock Companies, 30% ownership

and being the largest shareholder constitute control in

determining the consolidating scope. Under K-IFRS,

exceeding 50% of the voting power, having decision

making capability and holding benefits and risks

constitute control in determining the consolidation

scope.

WORK&JOY SPC

PRIVIA 1st SPC

(*) The Company‟s subsidiaries as of December 31, 2011 and 2010 are PRIVIA 1st SPC and PRIVIA 2

nd SPC,

and WORK&JOY SPC and PRIVIA 1st SPC, respectively. (See Note 5)

2) Impairment of financial assets (allowance for doubtful accounts)

Under K-GAAP, the Company provided an allowance for doubtful accounts for card assets. The amount of

allowance was the higher of allowance calculated based on the expected loss or calculated in accordance to the

guidelines provided in the Regulation on Supervision of Credit-Specialized Financial Business. According to

K-IFRS, card assets are assessed for impairment individually and also assessed on a collective basis by

grouping assets with similar characteristics. Assets that are individually assessed for impairment and for which

an impairment loss exist or continues to be recognized are not included in a collective assessment of

impairment

3) Provision for unused credit limits

Under K-GAAP, the Company estimated the unused commitment based on the asset quality classifications

offered to card accounts and applied a credit conversion ratio as dictated by the Supervision of Banking

Business Regulation, and more than minimum required reserve rate in Regulation of Specialized Credit

Financial Business for the provision for unused credit limits. However under K-IFRS, the Company recognizes

loss provision for expected future use of unused portions in accordance with K-IFRS 1037 Provision,

Contingent Liabilities and Asset.

4) Expansion of the scope for accrued income adjustment

Under K-GAAP, the Company recognized accrued income only for card assets not past due. However, under

K-IFRS, the Company recognizes accrued income of all card assets, as long as they are not impaired; along

with an allowance for accrued income.

- 16 -

5) Financial instruments carried at amortized cost

Financial instruments including loan and receivable were accounted for at the nominal amount under K-GAAP.

According to K-IFRS, it is measured at fair value at initial recognition and subsequent at amortized cost.

6) Deferred annual membership income

Annual membership income was recognized when it was acquired at one time under K-GAAP. However

according to K-IFRS, It is deferred and recognized during the membership period.

7) Unearned revenue from points program

Under K-GAAP, the Company recognized a provision for granted points amounting to the expected expense in

the future. However, according to K-IFRS, the Company defers the revenue amounting to the fair value of the

points when the points related to the revenue are granted, and then recognizes the revenue when the points are

used. However, the Company reserves a provision for the granted points unrelated to the revenue, for the

expected expense in the future.

8) Review of useful lives of intangible assets

Under K-GAAP, intangible assets were amortized during 4~5 years of its estimated useful life. However, under

K-IFRS, the Company reviews the useful life of intangible assets at the end of each reporting period and

reflects appropriately changes accordingly.

9) Retirement benefit obligation (Accrued severance liability)

According to K-GAAP, at the end of a reporting period a retirement benefit obligation is calculated and

recognized, based on an assumption that all employees who have worked over a year were to retire as of the

reporting period end. However, according to K-IFRS, retirement benefit obligation is estimated by actuarial

assessment using the projected unit credit method.

10) Tax effect

The tax effects which related to the aforementioned K-IFRS transition adjustments have also reflected.

11) Other accounts reclassified

• Reclassification of membership & deposit account

Memberships which were accounted for as other non-current assets in accordance with previous GAAP, are

classified as intangible assets with indefinite useful live in under K-IFRS.

• Classification of financial assets and financial liabilities

Accounts classified as other assets and other liabilities under previous GAAP, are classified as either financial

or non-financial assets and liabilities under K-IFRS.

- 17 -

(2) Effects in equity due to transition to K-IFRS

1) Effects in equity as of January 1, 2010, K-IFRS transition date, is as follows (Unit: Won in millions):

January 1, 2010

K-GAAP Conversion Effect K-IFRS

ASSETS

CASH AND BANK DEPOSITS :

Cash and cash equivalents (Note 1) ￦ 479,500 ￦ 8,015 ￦ 487,515

Bank deposits (Note 1) 51 3 54


INVESTMENT FINANCIAL ASSETS :

Financial assets held-for-trading 14,834 - 14,834

Financial assets available-for-sale (Note 1) 82,877 (300) 82,577

Financial assets held for trading 27 - 27

Total investment financial assets 97,738 (300) 97,438

CARD ASSETS :


discounts and allowance for doubtful

accounts (Notes 1, 2 and 3) 4,061,086 1,179,077 5,240,163


doubtful accounts (Notes 1 and 2) 535,785 205,031 740,816

Card loans, net of deferred loan

origination fees and allowance for

doubtful accounts (Notes 1, 2 and 3) 814,509 219,884 1,034,393

Assets in trust, net of allowance for

doubtful accounts (Notes 1) 837,372 (837,372) -

Total card assets 6,248,752 766,620 7,015,372

PROPERTY AND EQUIPMENT :

Land 67,819 - 67,819

Buildings, net of accumulated

depreciation 32,054 - 32,054


accumulated depreciation 34,334 - 34,334

Vehicles, net of accumulated

depreciation 300 - 300

Assets under construction 912 - 912

Total property and equipment 135,419 - 135,419

OTHER ASSETS:


allowance for doubtful accounts

(Notes 1 and 2) 9,809 (1,328) 8,481


doubtful accounts (Note 2 and 4) 41,621 (12,968) 28,653

Advanced payments, net of allowance

for doubtful accounts (Note 1) 27,189 (6,622) 20,567

Prepaid expenses (Note 1) 50,226 5,189 55,415

Guarantee deposits (Note 3) 36,017 (1,519) 34,498


Deferred income tax assets (Note 5) 42,750 36,581 79,331

Derivative assets (Note 1) 88,391 1,117 89,508

Memberships 22,933 (22,933) -

Others 16,683 - 16,683

Total other assets 363,085 20,450 383,535

Total Assets ￦ 7,324,545 ￦ 794,788 ￦ 8,119,333

- 18 -

January 1, 2010


(Continued)

LIABILITIES AND SHAREHOLDERS‟

EQUITY

BORROWINGS :

Borrowings (Note 1) ￦ 671,006 ￦ 400,000 ￦ 1,071,006

Bonds payable, net (Note 1) 3,853,140 333,871 4,187,011

Total borrowings 4,524,146 733,871 5,258,017

OTHER LIABILITIES:

Accounts payable (Note 6) 628,103 1,514 629,617

Withholdings (Note 1) 67,331 (10,268) 57,063

Accrued expenses (Note 1) 175,115 1,955 177,070

Unearned revenue (Note 6) 4,665 241,537 246,202

Retirement benefit obligation (Note 7) 5,164 148 5,312

Provisions (Note 8) 387,819 (330,871) 56,948

Derivatives liabilities (Note 1) 6,363 8,034 14,397

Other liabilities (Note 3) 9,287 (235) 9,052

Total Liabilities 5,807,993 645,685 6,453,678

SHAREHOLDERS‟ EQUITY:

Share capital 802,326 - 802,326

Capital surplus 57,704 - 57,704

Retained earnings (Note 9) 609,636 158,446 768,082

Reserves (Note 1) 46,886 (9,363) 37,523

Non-controlling interest (Note 1) - 20 20

Total shareholders‟ equity 1,516,552 149,103 1,665,655

Total Liabilities and Shareholders‟

Equity ￦ 7,324,545 ￦ 794,788 ￦ 8,119,333

1) Effect from the changes in the scope of consolidation as a result of the adoption of K-IFRS

2) Effect of the allowance of doubtful accounts on an incurred loss model

3) Fair value effect due to the effective interest rate method

4) Effect from change in scope for accrued income adjustment

5) Temporary differences, arising from changes in capital of subsidiaries and resulting in changes of deferred tax

assets (liabilities), and offsetting of deferred tax assets and liabilities

6) Effect from change in points program accounting treatment

7) Actuarial valuations of defined benefit liabilities and valuation of long-term employee benefits

8) Changes in estimation of provision for unused credit limits

9) Adjustment of retained earnings as follows;

January 1, 2010

Adjustment in allowance for doubtful accounts ￦ 47,543

Adjustment in provision for unused credit limits 151,259

Adjustment in accrued income 532

Fair value effect due to effective interest rate (6,249)

Deferred annual membership income (37,571)

Unearned revenue from the points program (31,479)

Adjustment of retirement benefit liabilities (148)

Tax reconciliation 33,840

Consolidation effect 719

Total ￦ 158,446

- 19 -

2) Effects in equity as of December 31, 2010, the end of the final fiscal period described in annual consolidated

financial statements in accordance with K-GAAP, are as follows (Unit: Won in millions):

December 31, 2010


ASSETS

CASH AND BANK DEPOSITS :

Cash and cash equivalents (Note 1) ￦ 719,544 ￦ 77,504 ￦ 797,048

Bank deposits (Note 1) 23,128 3 23,131


INVESTMENT FINANCIAL ASSETS :

Financial assets available-for-sale (Note 1) 2,143 (367) 1,776

Total investment financial assets 2,143 (367) 1,776

CARD ASSETS :


discounts and allowance for doubtful

accounts (Notes 1, 2 and 3) 4,859,801 1,101,579 5,961,380


doubtful accounts (Notes 1 and 2) 893,897 221,803 1,115,700

Card loans, net of deferred loan origination

fees and allowance for doubtful

accounts (Notes 1, 2 and 3) 1,638,017 290,672 1,928,689

Assets in trust, net of allowance for

doubtful accounts (Note 1) 1,081,585 (1,081,585) -

Total card assets 8,473,300 532,469 9,005,769

LOANS 985 7 992

Other loans, net of allowance for doubtful

accounts (Note 2) 985 7 992

PROPERTY AND EQUIPMENT :

Land 80,414 - 80,414

Buildings, net of accumulated depreciation 34,494 - 34,494


accumulated depreciation 36,617 - 36,617

Vehicles, net of accumulated depreciation 293 - 293

Assets under construction 698 - 698

Total property and equipment 152,516 - 152,516

OTHER ASSETS:


allowance for doubtful accounts (Notes

1 and 2) 15,859 (805) 15,054


doubtful accounts (Notes 2 and 4) 60,034 (12,396) 47,638

Advanced payments, net of allowance for

doubtful accounts (Note 1) 152,933 (76,614) 76,319

Prepaid expenses (Note 1) 50,161 3,813 53,974

Guarantee deposits (Note 3) 49,961 (1,832) 48,129


Deferred income tax assets (Note 5) 134,344 (22,082) 112,262

Derivative assets (Note 1) 13,748 - 13,748

Memberships 21,484 (21,484) -

Others 27,308 - 27,308

Total other assets 573,691 (108,809) 464,882

Total Assets ￦ 9,945,307 ￦ 500,807 ￦ 10,446,114

(Continued)

- 20 -

December 31, 2010


LIABILITIES AND SHAREHOLDERS‟

EQUITY

BORROWINGS :

Borrowings (Note 1) ￦ 1,391,766 ￦ 190,000 ￦ 1,581,766

Bonds payable, net (Note 1) 5,292,077 302,329 5,594,406

Total borrowings 6,683,843 492,329 7,176,172

OTHER LIABILITIES:

Accounts payable (Note 6) 792,925 2,796 795,721

Withholdings (Note 1) 85,105 (11,533) 73,572

Accrued expenses (Note 1) 207,816 2,160 209,976

Unearned revenue (Note 6) 5,237 282,204 287,441

Retirement benefit obligation (Note 7) 7,251 2,357 9,608

Provisions (Note 8) 466,218 (384,792) 81,426

Derivatives liabilities (Note 1) 4,789 30,297 35,086

Other liabilities (Note 3) 10,496 (33) 10,463

Total Liabilities 8,263,680 415,785 8,679,465

SHAREHOLDERS‟ EQUITY:

Share capital 802,326 - 802,326

Capital surplus 57,704 - 57,704

Retained earnings (Note 9) 822,345 87,404 909,749

Reserves (Note 1) (748) (2,402) (3,150)

Non-controlling interest (Note 1) - 20 20

Total shareholders‟ equity 1,681,627 85,022 1,766,649

Total Liabilities and Shareholders‟ Equity ￦ 9,945,307 ￦ 500,807 ￦ 10,446,114



3) Fair value effect due to the effective interest rate method


5) Temporary differences, arising from changes in capital of subsidiaries and resulting in changes of deferred tax

assets (liabilities), and offsetting of deferred tax assets and liabilities




9) Adjustment of retained earnings as follows;

December 31, 2010

Adjustment in allowance for doubtful accounts ￦ (25,849)

Adjustment in provision for unused credit limits 17,701

Adjustment in accrued income 452

Fair value effect due to effective interest rate 2,222

Deferred annual membership income (10,123)

Unearned revenue from the points program 6,159

Adjustment of retirement benefit liabilities 1,107

Tax reconciliation 855

Consolidation effect 94,880

Total ￦ 87,404

- 21 -

3) Effects in comprehensive income for the year ended December 31, 2010 are as follows (Unit: Won in millions,

except for per share amounts):

Year ended December 31, 2010


OPERATING REVENUE:

Card income (Notes 4 and 6) ￦ 2,012,965 ￦ 101,842 ￦ 2,114,807

Interest income (Note 1) 13,364 2,448 15,812

Gain on asset securitization (Note 1) 90,704 (90,704) -

Gain on disposal of financial assets available-for-sale 101,146 (1) 101,145

Reversal of impairment loss on financial assets available-for-

sale 2,616 - 2,616

Dividends income 724 - 724

Other operating revenue (Note 1) 54,223 47,523 101,746

Total operating revenue 2,275,742 61,108 2,336,850

OPERATING EXPENSES:

Card expenses (Note 6) 891,441 (28,324) 863,117

Interest expenses (Note 1) 279,358 39,154 318,512

Bad debt expense and loss on disposal of loans (Notes 2 and 4) 158,861 25,849 184,710

General and administrative expenses (Notes 7 and 9) 481,588 2,545 484,133

Securitization expenses - 901 901

Transfer to provision for unused credit limits (Note 8) 31,794 (17,701) 14,093

Other operating expenses 43,514 57,092 100,543

Total operating expenses 1,886,556 79,453 1,966,009

OPERATING INCOME 389,186 (18,345) 370,841

NON-OPERATING INCOME:

Rental revenue (Note 10) 825 (825) -

Miscellaneous gains (Note 3) 20,261 (20,261) -

21,086 (21,086) -

NON-OPERATING EXPENSES:

Donations (Note 10) 1,969 (1,969) -

Miscellaneous losses 19,219 (19,219) -

21,188 (21,188) -

INCOME BEFORE INCOME TAX 389,084 (18,243) 370,841

INCOME TAX EXPENSE (Note 5) 36,214 56,565 92,779

NET INCOME 352,870 (74,808) 278,062

OTHER COMPREHENSIVE INCOME (Notes 1 and 7) : (47,635) 6,962 (40,673)

Gain (loss) on fair value of financial assets available-for-sale (53,751) (50) (53,801)

Effective portion of changes in fair value of cash flow hedges 6,116 7,012 13,128

TOTAL COMPREHENSIVE INCOME ￦ 305,235 ￦ (67,846) ￦ 237,389

- 22 -



3) Fair value effect by effective interest rate method


5) Temporary differences, arising from changes in capital of subsidiaries and resulting in changes of deferred

tax assets (liabilities), and offsetting of deferred tax assets and liabilities




9) Change in useful life of intangible assets

10) Effect from the reclassification from non-operating income/expense to operating income/expense as a result

of the adoption of K-IFRS

4) Explanation of material adjustments to the statement of cash flows

According to K-IFRS, dividends received, interest received, interest paid and income tax paid which were not

presented separately under K-GAAP are now presented separately in the statement of cash flows.

Interest paid, interest received and dividends received were classified as operating cash flows in accordance with K-

GAAP. But, in accordance with K-IFRS, interest paid are reclassified as financing cash flows, and interest received

and dividends received are reclassified as investing cash flows. The effect of exchange rate changes on cash and

cash equivalents held or due in a foreign currency is presented separately from cash flows from operating, investing

and financing activities.

Except for the aforementioned items, there are no significant differences between the consolidated statements of

cash flow prepared according to K-IFRS and K-GAAP.

- 23 -

5. SUBSIDIARY:

(1) Details of the Company‟s subsidiaries as of December 31, 2011, December 31, 2010 and January 1, 2010 are

as follows:

Place of

incorporation and

operation

Voting share (%)

Companies Major operation December 31, 2011 December 31, 2010 January 1, 2010

WORK&JOY SPC Asset securitization Korea - 0.9 0.9

PRIVIA 1st SPC Asset securitization Korea 0.9 0.9 0.9

PRIVIA 2nd

SPC Asset securitization Korea 0.9 - -

(2) Summary of financial information for subsidiaries as of December 31, 2011, December 31, 2010 and January

1, 2010 are as follows (Unit: Won in millions)

December 31, 2011

Total assets Total liabilities Shareholders‟ equity Net income

PRIVIA 1st SPC 10 - 17,854 391

PRIVIA 2nd

SPC 448,139 463,317 29,895 -

December 31, 2010


WORK&JOY SPC 191,788 192,418 22,105 19

PRIVIA 1st SPC 329,904 332,828 48,587 (391)

January 1, 2010


WORK&JOY SPC 403,504 409,250 - -

PRIVIA 1st SPC 329,904 337,682 - -

(3) The changes in subsidiaries for the year ended December 31, 2011 are as follows (Unit: Won in millions):


WORK&JOY SPC Liquidation from ABS maturity

PRIVIA 2nd

SPC Establishment from newly issuing ABS

6. CASH AND DEPOSITS:

(1) Details of cash and cash equivalents as of December 31, 2011, December 31, 2010 and January 1, 2010 are as

follows (Unit: Won in millions):


Annual

Interest

rate(%) Amount

Annual

interest

rate(%) Amount

Annual

interest

rate(%) Amount

Cash on hand

- ￦ 4 - ￦ 4 - ￦ 8

Current deposits

- 8,749 - 44 - 1,420

Pass-book

deposits

- 72,770 - 142,500 - 90,087

Other cash

equivalents

3.20~3.60 300,000 3.20~3.40 210,000 1.95~2.20 200,000

Time deposits

2.90~3.70 25,500 2.90 14,500 2.50 5,000

Restricted cash

& deposits

3.00~4.25 423,000 3.23~3.60 430,000 2.10~2.65 191,000

￦ 830,023 ￦ 797,048 ￦ 487,515

(2) Restricted deposits as of December 31, 2011 and December 31, 2010 are as follows (Unit: Won in millions):

- 24 -

Type Entity

December 31, 2011 December 31, 2010 January 1, 2010 Restriction

Due from

financial

institutions

Financial

instruments

KB and others

￦ 18

￦ 31

￦ 31 Guarantee deposits

for overdraft

Financial

instruments Shinhan Bank 23 Pledged deposit

Financial

instruments

Shinhan Bank

and others 33,000 23,100 - Secured deposits

Financial

instruments

Mirae Asset

Securities 13 - -

Social enterprise

fund

Others Other dues Korea Asset

Management

Corporation 18,610 21,738 12,336

Escrow account

￦ 51,641 ￦ 44,869 ￦ 12,390

7. INVESTMENT FINANCIAL ASSETS:

Investment financial assets as of December 31, 2011, December 31, 2010 and January 1, 2010 are as follows

(Unit: Won in millions):


Financial assets HFT

Derivative instrument HFT ￦ - ￦ - ￦ 14,834

Financial assets AFS

Unlisted shares 1,767 1,775 1,775

Investments - 1 1

Listed shares - - 80,801

1,767 1,776 82,577

Financial assets HTM

Unlisted shares - - 27

￦ 1,767 1,767 ￦ 1,776 1,776 ￦ 97,438

- 25 -

8. CARD ASSETS AND LOANS

Card assets and loans by customer as of December 31, 2011, December 31, 2010 and January 1, 2010 are as



Households Business Total Households Business Total Households Business Total CARD

ASSETS :

Card receivables

(*) ￦6,039,571 ￦ 461,552 ￦6,501,123 ￦5,592,380 ￦ 428,316 ￦6,020,696 ￦4,982,553 ￦ 300,419 ￦5,282,972

Cash advances 1,016,028 - 1,016,028 1,158,832 - 1,158,832 765,398 - 765,398 Card loans (*) 2,030,869 - - 2,030,869 1,992,216 - - 1,992,216 1,060,453 - - 1,060,453

Sub total 9,086,468 461,552 9,548,020 8,743,428 428,316 9,171,744 6,808,404 300,419 7,108,823

LOANS Loans to

corporate - - 500 500 - - 1,000 1,000 - - - - - -

Total 9,086,468 462,052 9,548,520 8,743,428 429,316 9,172,744 6,808,404 300,419 7,108,823 Allowance for

doubtful

accounts (165,480) (8,304) (173,784) (161,546) (4,437) (165,983) (91,321) (2,130) (93,451)

Book value ￦8,920,988 ￦ 453,748 ￦9,374,736 ￦8,581,882 ￦ 424,879 ￦9,006,761 ￦6,717,083 ￦ 298,289 ￦7,015,372

Composition

rate 95.16% 4.84% 100.00% 95.28% 4.72% 100.00% 95.75% 4.25% 100.00%

(*) Excluding deferred origination fees and present value discounts

9. ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Changes in the allowance for doubtful accounts for the years ended December 31, 2011 and 2010 are as follows



Card

receivables

Cash

advances Card loans Loans Other assets Total

Balance at January 1,

2011 ￦ 59,315 ￦ 43,132 ￦ 63,527 ￦ 8 ￦ 4,059 ￦ 170,041

Bad debt expenses (7,032) (6,836) (5,013) - - (18,881)

Bad debt recovered 494 799 264 - - 1,557

Disposition &

repurchase (22,465) (16,458) (22,948) - - (61,871)

Provision of

(Reversal of)

allowance for

doubtful accounts 38,461 17,273 31,241 22 (1,753) 85,244

Balance at December

31, 2011 ￦ 68,773 ￦ 37,910 ￦ 67,071 ￦ 30 ￦ 2,306 ￦ 176,090


Card

receivables

Cash

advances Card loans Loans Other assets Total

Balance at January 1,

2010 ￦ 42,809 ￦ 24,582 ￦ 26,060 ￦ - ￦ 1,825 ￦ 95,276

Bad debt expenses (3,962) (4,213) (2,167) - - (10,342)

Bad debt recovered 356 403 197 - - 956

Disposition &

repurchase (12,079) (7,296) (10,687) - - (30,062)

Provision of

(Reversal of)

allowance for

doubtful accounts 32,191 29,656 50,124 8 2,234 114,213

Balance at December

31, 2010 ￦ 59,315 ￦ 43,132 ￦ 63,527 ￦ 8 ￦ 4,059 ￦ 170,041

- 26 -

10. PROPERTY AND EQUIPMENT:

(1) Property and equipment as of December 31, 2011, December 31, 2010 and January 1, 2010 are as follows



Acquisition cost

Accumulated depreciation

Book value

Acquisition cost


Book value

Acquisition cost


Book value

Land ￦ 83,995 ￦ - ￦ 83,995 ￦ 80,414 ￦ - ￦ 80,414 ￦ 67,819 ￦ - ￦ 67,819

Buildings 45,436 (3,249) 42,187 36,663 (2,169) 34,494 33,341 (1,287) 32,054

Vehicles

502 (232) 270 458 (165) 293 366 (66) 300

Fixtures and equipment 127,465 (69,491) 57,974 86,974 (50,357) 36,617 77,128 (42,794) 34,334

Finance lease assets 3,334 (834) 2,500 - - - - - - Assets under

construction 472 - 472 698 - 698 912 - 912

Total ￦ 261,204 ￦ (73,806) ￦ 187,398 ￦ 205,207 ￦ (52,691) ￦ 152,516 ￦ 179,566 ￦ (44,147) ￦ 135,419

The appraised value of the land and the buildings as of December 31, 2011 is as follow (Unit: Won in millions):

Lot

Appraised value at

December 31, 2011

Land

Yoido 2nd land ￦ 14,601

Hannamdong site 4,702

Youngdeungpo building site 5,962

Ulsan building site 806

Suwon building site 1,440

Gwangju building site 960

28,471

Building

Yoido 2nd building 13,816

Hannamdong site 2,323

Ulsan building 1,419

Suwon building 2,629

Gwangju building 1,875

22,062

50.533

(2) The changes in book value of property and equipment for the years ended December 31, 2011 and 2010 are

as follows (Unit: Won in millions):


Beginning

balance Acquisition Reclassification(*) Disposal Depreciation

Ending

balance

Land ￦ 80,414 ￦ 3,581 ￦ - ￦ - ￦ - ￦ 83,995

Buildings 34,494 8,773 - - (1,080) 42,187

Vehicles 293 233 - (110) (146) 270

Fixtures and equipment 36,617 35,803 4,703 - (19,149) 57,974

Finance lease assets - 3,334 - - (834) 2,500

Assets under

construction 698 151 (377) - - 472

Total ￦ 152,516 ￦ 51,875 ￦ 4,326 ￦ (110) ￦ (21,209) ￦ 187,398

(*) ￦4,326 million of fixtures and equipment is reclassified from construction in progress intangible assets (see

Note 11).

- 27 -


Beginning

balance Acquisition Reclassification(*) Disposal Depreciation

Ending

balance

Land ￦ 67,819 ￦ 12,595 ￦ - ￦ - ￦ - ￦ 80,414

Buildings 32,054 3,323 - - (883) 34,494

Vehicles 300 93 - - (100) 293

Fixtures and equipment 34,334 15,589 1,405 (10) (14,701) 36,617

Assets under

construction 912 780 (994) - - 698

Total ￦ 135,419 ￦ 32,380 ￦ 411 ￦ (10) ￦ (15,684) ￦ 152,516

(*) ￦411 million of fixtures and equipment is reclassified from construction in progress intangible assets (see

Note 11).

11. INTANGIBLE ASSETS:

(1) Intangible assets as of December 31, 2011, December 31, 2010 and January 1, 2010 are as follows (Unit:

Won in millions):

December 31, 2011

Acquisition cost

Accumulated

amortization Book value

Development cost ￦ 50,499 ￦ (13,843) ￦ 36,656

Industrial property rights 195 (79) 116

Others 16,869 (5,500) 11,369

Construction in progress 2,101 - 2,101

Membership 22,734 - 22,734

Total ￦ 92,398 ￦ (19,422) ￦ 72,976

December 31, 2010

Acquisition cost

Accumulated


Development cost ￦ 27,598 ￦ (5,797) ￦ 21,801

Industrial property rights 195 (40) 155

Others 11,987 (2,230) 9,757


Membership 21,484 - 21,484

Total ￦ 78,517 ￦ (8,067) ￦ 70,450

January 1, 2010

Acquisition cost

Accumulated


Development cost ￦ 9,715 ￦ - ￦ 9,715

Industrial property rights 195 - 195

Others 7,577 - 7,577


Membership 22,933 - 22,933

Total ￦ 50,400 ￦ - ￦ 50,400

(2) The changes in intangible assets for the years ended December 31, 2011 and 2010 are as follows (Unit: Won

in millions):


Beginning

balance Acquisition

Reclassification

(*) Amortization

Ending

balance

- 28 -

(*) ￦4,326 million of construction in progress is reclassified to fixtures and equipment (see Note 10).


Beginning

balance Acquisition Reclassification(*) Disposal Amortization

Ending

balance

Development cost ￦ 9,715 ￦ 8,791 ￦ 9,092 ￦ - ￦ (5,797) ￦ 21,801

Industrial property

rights 195 - - - (40) 155

Others 7,577 4,329 81 - (2,230) 9,757

Construction in

progress 9,980 16,857 (9,584) - - 17,253

Membership 22,933 33 - (1,482) - 21,484

Total ￦ 50,400 ￦ 30,010 ￦ (411) ￦ (1,482) ￦ (8,067) ￦ 70,450

(*) ￦411 million of construction in progress is reclassified to fixtures and equipment (see Note 10).

12. ASSETS PLEDGED AS COLLATERAL:

Land and buildings amounting to￦802 million are provided as collateral for leasehold deposit received as of

December 31, 2011.

13. BORROWINGS:

Borrowings as of December 31, 2011, December 31, 2010 and January 1, 2010 are as follows (Unit: Won in

millions): Annual interest

rates (%) Maturity

Borrowed from December 31, 2011 December 31, 2010 January 1, 2010

Commercial papers

SK Security

and others 3.57 ~ 3.74

2012.1.6 ~

2012.3.20 ￦ 490,000 ￦ 850,000 ￦ 969,980

Borrowings

Jeonbuk Bank

and others 4.69 ~ 5.55

2012.3.15 ~

2014.7.19 100,000 620,000 -

Borrowings

in foreign currency

- 111,766 101,026

￦ 590,000 ￦ 1,581,766 ￦ 1,071,006

14. BONDS PAYABLE:

(1) Bonds payable issued by the Company and outstanding as of December 31, 2011, December 31, 2010 and

January 1, 2010 are as follows (Unit: Won in millions):

Annual

interest rates (%)

Maturity

December 31,

2011

December 31,

2010

January 1,

2010

Short-term debentures

3.92 ~ 4.95

2012.3.29 ~

2012.12.08

￦ 130,000

￦ 350,000

￦ 65,000

Current portion of debentures

3.47~8.33

2012.1.05 ~

2012.12.29 1,333,797 1,275,887 1,446,517

Long-term debentures 3.76 ~ 6.94,

1M USD Libor+0.724%

2013.1.14 ~

2018.12.08 5,027,320 3,972,640 2,678,884

Discounts on debentures (9,357) (4,121) (3,390)

￦ 6,481,760 ￦ 5,594,406 ￦ 4,187,011

Development cost ￦ 21,801 ￦ 7,561 ￦ 15,340 ￦ (8,046) ￦ 36,656

Industrial property rights 155 - - (39) 116

Others 9,757 4,807 75 (3,270) 11,369

Construction in progress 17,253 4,589 (19,741) - 2,101

Membership 21,484 1,250 - - 22,734

Total ￦ 70,450 ￦ 18,207 ￦ (4,326) ￦ (11,355) 72,976

- 29 -

The outstanding bonds payable are non-guaranteed corporate bonds, with their principals to be redeemed at

maturity. Bond issuance costs are recorded as discounts on bonds payable and amortized using the effective

interest rate method.

(2) The redemption schedule for the bonds payable is as follows (Unit: Won in millions):

Period

Amount to be redeemed

as of December 31, 2011

2012.1.1~2012.12.31 ￦ 1,463,797

2013.1.1~2013.12.31 1,537,300

2014.1.1~2014.12.31 1,791,320

2015.1.1~2015.12.31 870,000

2016.1.1 ~ 828,700

￦ 6,491,117

Period


as of December 31, 2010

2011.1.1 ~ 2011.12.31 ￦ 1,625,887

2012.1.1 ~ 2012.12.31 1,225,556

2013.1.1 ~ 2013.12.31 827,084

2014.1.1 ~ 2014.12.31 1,050,000

2015.1.1 ~ 870,000

￦ 5,598,527

Period


as of January 1, 2010

2010.1.1 ~ 2010.12.31 ￦ 1,511,517

2011.1.1 ~ 2011.12.31 1,148,884

2012.1.1 ~ 2012.12.31 480,000

2013.1.1 ~ 2013.12.31 270,000

2014.1.1 ~ 780,000

￦ 4,190,401

15. FINANCE LEASE LIABILITIES:

(1) Lease contract

The Company has a 3 year finance lease for electronic equipment. The Company has a bargain purchase option

at expiration date of lease contract. The lessor has the legal ownership of the finance lease, whose book value

amounts to ￦3,334 million and is set as collateral for finance lease obligation.

(2) Finance lease liabilities of December 31, 2011, December 31, 2010 and January 1, 2010 are as follows



Minimum lease

payments

Present value of

minimum lease

payments

Minimum lease

payments

Present value of

minimum lease

payments

Minimum lease

payments

Present value of

minimum lease

payments

Less than 1 year ￦ 1,202 ￦ 1,169 ￦ - ￦ - ￦ - ￦ -

1-5 years 1,503 1,379 - - - -

Present value

discounts (157) - -

Present value ￦ 2,548 ￦ - ￦ -

- 30 -

16. RETIREMENT BENEFIT PLAN:

(1) Defined Contribution Plan

The Company operates a defined contribution plan for the participating employees. The Company pays fixed

contributions into a separate fund, and the plan assets are managed by a trustee as a separate fund from the

Company‟s assets. Plan forfeitures are generated when a terminated participant who is not fully vested receives a

plan distribution of his or her account balance, which will reduce the Company‟s contribution to pay. The Company

is required to contribute a specified percentage of employee‟s earnings to the plan fund. . The only obligation that

the Company has with respect to the plans is to make the specified contributions.

The expense related to post-employment benefit plans under defined contribution plans during the twelve-month

period ended December 31, 2011 and 2010 are and ￦0, respectively, which represents contribution payable to

these plans based on the rate￦1 million s specified in the plans.. The amount is subject to be transferred to other

account operated for the defined contribution plan participants.

The expense recognized in the consolidation statements of comprehensive income related to post-employment

benefit plan under defined contribution plans for the twelve month period ended December 31, 2011 and 2010 are as


December 31, 2011 December 31, 2010

Defined contribution plan

￦ 1 ￦ -

Total

￦ 1 ￦ -

(2) Defined benefit plan

The Company operates a defined benefit plan. Actuarial evaluation of plan assets and defined benefit obligation

was performed by HMC Investment Securities Co., Ltd. as of December 31, 2011. Present value of the defined

benefit obligation, current service cost and past service cost is calculated using the projected unit credit method.

1) Details of defined benefit plan are as follows (Unit: Won in millions):

As of December 31, 2011, December 31, 2010 and January 1, 2010, the amounts recognized in the consolidation

statements of financial position related to retirement benefit obligation are as follows (Unit: Won in millions):


Present value of defined benefit obligation

￦ 37,007 ￦ 27,790 ￦ 24,616

Fair value of plan assets

(19,195) (18,143) (19,259)

Transferred to national pension fund

(37) (39) (45)

Retirement benefit obligation

￦ 17,775 ￦ 9,608 ￦ 5,312

2) Changes in present values of defined benefit obligation for the years ended December 31, 2011 and 2010 are



Beginning balance

￦ 27,790 ￦ 24,616

Current service cost

7,466 6,136

Interest cost

1,334 1,303

Transfer of employees between the

Company and the related companies

1,740 1,412

Actuarial gains

4,751 3,243

Benefits paid

(6,074) (8,920)

Ending balance

￦ 37,007 ￦ 27,790

- 31 -

3) Changes in fair values of plan assets for the years ended December 31, 2011 and 2010 are as follows (Unit:

Won in millions):


Beginning balance

￦ 18,143 ￦ 19,259

Contributions from the employer

1,500 -

Expected return on plan assets

703 911

Actuarial gains (losses)

40 (26)

Transfer of employees between the

Company and the related companies

609

8

54

Benefits paid

(1,800) (2,855)

Ending balance

￦ 19,195 ￦ 18,143

4) Details of pension expenses are as follows (Unit: Won in millions):


Current service cost ￦ 7,466 ￦ 6,136

Interest cost 1,334 1,303

Expected return on plan assets (703) (911)

Actuarial gains 4,711 3,269

Total ￦ 12,808 ￦ 9,797

Return on plan assets ￦ 743 ￦ 885

5) Details of fair values of plan assets as of December 31, 2011, December 31, 2010 and January 1, 2010 are



Amount Ratio Amount Ratio Amount Ratio

Deposits ￦ 19,195 100% ￦ 18,143 100% ￦ 19,259 100%

6) Actuarial assumption as of December 31, 2011 and December 31, 2010 are as follows:


Discount rate (%) 4.23 4.90 5.90

Expected return on plan assets (%) 4.08 4.20 4.73

Expected rate of salary increase (%) 5.60 5.43 5.31

- 32 -

17. EMPLOYEE BENEFITS:

Details of employee benefits for the years ended December 31, 2011 and 2010 are as follows (Unit: Won in

millions):


Short-term employee benefits ￦ 133,436 ￦ 119,429

Pension expenses 12,809 9,797

￦ 146,245 ￦ 129,226

18. PROVISION:

(1) Details of provision as of December 31, 2011, December 31, 2010 and January 1, 2010 are as follows (Unit:

Won in millions):


Provision for unused credit limits ￦ 47,167 ￦ 46,073 ￦ 31,980

Provision for mileage points 11,240 14,437 15,949

Other provisions 21,826 20,916 9,019

￦ 80,233 ￦ 81,426 ￦ 56,948

(2) Provision for unused credit limits

The Company recognizes loss provision for expected future use of unused portions of credit limits. The changes

in loss provision are as follows (Unit: Won in millions):


Beginning ￦ 46,073 ￦ 31,980

Increase 1,094 14,093

Ending ￦ 47,167 ￦ 46,073

(3) Provision for mileage points

The Company records provisions for projected expenses considering the past rewards history and experience.

The changes in provision for mileage points are as follows (Unit: Won in millions):


Point Customer loyalty Point Customer loyalty

Beginning ￦ 2,368 ￦ 12,069 ￦ 2,869 ￦ 13,080

Increase (decrease) 1,317 (4,514) (501) (1,011)

Ending ￦ 3,685 ￦ 7,555 ￦ 2,368 ￦ 12,069

(4) Other provisions


Beginning ￦ 20,916 ￦ 9,019

Increase(Decrease) 910 11,897

Ending ￦ 21,826 ￦ 20,916

Above amounts include provision for deposits in escrow account of ￦14,058 million and provision for pending

litigations of ￦5,489 million and provision for the relief for voice phishing of ￦2,279 million.

- 33 -

19. DERIVATIVES AND HEDGE ACCOUNTING:

(1) Detail of derivative instruments held for trading as of December 31, 2011, December 31, 2010 and January 1,

2010 are as follows (Won in millions):


Contract

amount Asset Liabilities

Contract


Contract


Currency

related

Swap - - - - - - 79,047 14,834 -

Derivative instruments held for trading relates to the Company‟s hedging activities. However, hedge

accounting is not applied to the derivative instruments because they do not meet the specified criteria for

hedge accounting. As the derivative instruments are not part of a transaction qualifying as a hedge, the

adjustment to fair value is reflected in current operations.

For transactions between local currencies and foreign currencies, the unsettled amount of transaction is

presented using the basic foreign exchange rate on the contract amount in foreign currencies. For transaction

between foreign currencies and other foreign currencies, the unsettled amount is presented using the basic

foreign exchange rate on the contract amount in foreign currencies purchased.

(2) Cash flow hedge

A cash flow hedge is a hedge of the exposure to variability in expected future cash flows of an asset or a

liability or a forecasted transaction that is attributable to a particular risk and could affect current operations

The effective portion of changes in the fair value of derivatives that are designated and qualify as a cash

flow hedge is recorded in other comprehensive income. The gain or loss relating to the ineffective portion is

recognized immediately in profit or loss, and is included in the „other gains and losses‟ line item. The

effective portion of gain or loss recorded as other comprehensive income (loss) is reclassified to current

earnings in the same period during which the hedged transaction affects earnings. If the hedged transaction

results in the acquisition of an asset or the incurrence of a liability, the gain or loss in other comprehensive

income (loss) is added to or deducted from the asset or the liability.

Cash flow hedge accounting is discontinued prospectively in the following circumstances:

- The hedged transaction is no longer probable of occurring or the hedging relationship no longer meets the

effectiveness tests

- The derivative expires or is sold, terminated or exercised

- The Company removes the designation of the hedge

When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is

recognized immediately in profit or loss.

The Company removes the volatility risk of future cash flow of a hedged item, such as borrowing or bond,

caused by changes in market interest rates or in foreign currency rates using the derivatives instruments such

as an interest swap or currency swap.

1) Fair value of cash flow hedge as of December 31, 2011, December 31, 2010 and January 1, 2010 are as

follows (Won in millions):

December 31, 2011

Contract

Amount Asset

Liabilities

Interest rate swap ￦ 280,000 ￦ 643 ￦ 931

Cross currency swap 582,573 1,912 4,395

Total ￦ 862,573 ￦ 2,555 ￦ 5,326

- 34 -

December 31, 2010

Contract

Amount Asset

Liabilities

Interest rate swap ￦ 560,000 ￦ 458 ￦ 974


Total ￦ 1,071,293 ￦ 13,748 ￦ 35,086

January 1, 2010

Contract

Amount Asset

Liabilities

Interest rate swap ￦ 600,000 ￦ - ￦ 8,395


Total ￦ 1,498,426 ￦ 89,508 ￦ 14,397

For transactions between local currencies and foreign currencies, the unsettled amount of transaction is

presented using the basic foreign exchange rate on the contract amount in foreign currencies. For transaction

between foreign currencies and other foreign currencies, the unsettled amount is presented using the basic

foreign exchange rate on the contract amount in foreign currencies purchased.

2) Expected cash flow for cash flow hedge

The maximum period, of which the Company is exposed to future cash flows fluctuations arising from

currency swaps are as follows (Won in millions):


Less than 1month ￦ (1,228) ￦ (2,443) ￦ (1,854)

1-3 months (398) (7,278) (8,728)

3-12 months (10,805) (35,820) 67,274

1-5 years 367 (11,262) 4,005

￦ (12,064) ￦ (56,803) ￦ 60,697

20. SHARE CAPITAL:

(1) The Parent‟s authorized shares are 600,000,000 (￦5,000 per shares), and 160,465,286 shares of common

stocks (￦802,326 million) are issued as of December 31, 2011.

(2) There are no changes in shares of the Parent for the year ended December 31, 2011

(3) 50,572,187 shares (￦252,861 million) of common stock issued by the Parent are owned by Hyundai Motors

Company as of December 31, 2011.

21. CAPITAL SURPLUS:

Details of capital surplus as of December 31, 2011, December 31, 2010 and January 1, 2010 are as follows (Unit:

Won in millions):


Share premium ￦ 45,399 ￦ 45,399 ￦ 45,399

Other capital surplus 12,305 12,305 12,305

￦ 57,704 ￦ 57,704 ￦ 57,704

- 35 -

22. RETAINED EARNINGS:

(1) Details of retained earnings as of December 31, 2011, December 31, 2010 and January 1, 2010 are as



Legal reserve (*) ￦ 20,143 ￦ 16,934 ￦ 6,503

Reserve for bad loans 439,031 - -

On appropriated retained earnings 689,223 892,815 761,579

￦ 1,148,397 ￦ 909,749 ￦ 768,082

(*) The Korean Commercial Code requires a company to appropriate at least 10 percent of dividends paid

as legal reserve for each fiscal period, until the reserve equals 50 percent of paid-in capital. This

reserve is not available for payment of cash dividends; however, it can be used to reduce deficit or be

transferred to capital.

(2) Changes in retained earnings for the years ended December 31, 2011 and 2010 are as follows (Unit: Won in

millions):

Year ended December 31,

2011 2010

Beginning ￦ 909,749 ￦ 768,082

Net income attributable to the owners of the Company 238,648 278,062

Total dividends - (136,395)

Ending ￦ 1,148,397 ￦ 909,749 23. RESERVES:

(1) Reserves as of December 31, 2011, December 31, 2010 and January 1, 2010 are as follows (Unit: Won in

millions):


Cash flow hedging reserve ￦ (11,764) ￦ (3,150) ￦ (16,278)

Unrealized gain on

available-for-sale securities - - 53,801

(2) Cash flow hedging reserve

Details of cash flow hedging reserve for the years ended December 31, 2011 and 2010 are as follows (Unit:

Won in millions):

Year ended December 31.

2011 2010

Beginning ￦ (3,150) ￦ (16,278)

Cash flow hedging reserve gains (losses)

Interest rate swap 229 7,880

Cross currency swap (11,073) 8,944

Tax effect related to other comprehensive income 2,621 (4,087)

Amount reclassified to current income

Cross currency swap (391) 391

Tax effect related to reclassified amounts to current income - -

Ending ￦ (11,764) ￦ (3,150)

Cash flow hedging reserve represents the cumulative gain or loss of hedging instruments considered effective

portion in hedge accounting. The cumulative deferred gains or losses of hedging instruments is reclassified to

profits or losses only when the hedged item is reflected in profits or loss, or by which initial book value of non-

financial hedged item is adjusted in accordance with relevant accounting policy.

- 36 -

24. RESERVE FOR BAD LOANS:

Reserve for bad loans is calculated and disclosed according to Article 11, Supervisory Regulation of Specialized

Credit Financial Business.

(1) Reserve for bad loans reflected in retained earnings as of December 31, 2011, December 31, 2010 and

January 1, 2010 are as follows (Unit: Won in millions):


Accumulated reserve for bad loans ￦ 192,810 ￦ - ￦ -

Expected reserve for bad loans 246,221 - -

Reserve for bad loans ￦ 439,031 ￦ - ￦ -

(2) The transfer of reserve for bad loans (“Transfer amount”) and adjusted income net of reserve for bad loans

for the years ended of December 31, 2011 and 2010 are as follows (Unit: Won in millions):


2011 2010

Transfer amount (*1,2) ￦ 246,221 ￦ -

Adjusted income, net of reserve for bad loans (*1) (7,573) 278,062

Adjusted EPS, net of reserve for bad loans(Unit: won) (47) 1,733

(*1) Transfer amount and adjustment income are calculated as if reserve for bad loans were implemented from

2010.

(*2) Transfer amount = reserve for bad loans as of December 31, 2011 – reserve for bad loans as of December 31,

2010.

25. GENERAL AND ADMINISTRATIVE EXPENSES:

Details of general and administrative expenses for the year ended December 31, 2011 and 2010 are as follows



2011 2010

PAYROLL

Salaries wages ￦ 115,653 ￦ 103,277

Pension expenses 12,809 9,797

Employee benefits 24,909 23,128

153,371 136,202

OTHER EXPENSES

Travel expenses ￦ 2,243 ￦ 1,948

Communication expenses 21,224 18,235

Posts expense 11,840 10,923

Rental expenses 21,630 20,498

Taxes dues 19,187 14,729

Repair and maintenance expenses 759 755

Insurance premiums 228 175

Entertainment expenses 825 1,332

Advertising expenses 60,729 69,263

Supply expenses 2,126 2,023

Vehicle maintenance expenses 17 14

Periodicals expenses 95 109

Publication expenses 12,295 7,603

Training expenses 4,287 3,846

Electronic data processing expense 28,419 26,620

Expense for temporary staff 32,981 33,578

Professional expenses 100,136 82,937

Delivery commission 2,828 2,315

Commission expense 22,068 20,292

- 37 -

Business activities expense 4,358 4,135

Depreciation expense 21,209 15,684

Amortization expense 11,355 8,067

Event expense 1,204 671

Conference expense 418 422

Building administrative expense 2,551 1,757

385,012 347,931

￦ 538,383 ￦ 480,864

26. INCOME TAX OF CONTINUED OPERATION

(1) Income tax expense for the years ended December 31, 2011 and 2010 are summarized as follows (Unit: Won

in millions):


2011 2010

Income tax currently payable ￦ 82,490 ￦ 125,421

Changes in deferred tax assets (liabilities) by temporary differences (*) (141) (32,931)

Total 82,349 92,490

Changes in income tax expense reflected directly in shareholders‟

equity 2,621 289

Income tax expense ￦ 84,970 ￦ 92,779

(*) Net deferred tax assets due to temporary differences ￦ 112,403 ￦ 112,262

Net deferred tax liabilities due to temporary differences 112,262 79,331

Changes in net deferred tax assets (liabilities) due to temporary

differences ￦ (141) ￦ (32,931)

(2) Income tax expenses reflected directly in shareholders‟ equity for the year ended December 31, 2011 are as


January 1, 2011 December 31, 2011 Increase (Decrease)

Loss on valuation of derivatives ￦ 1,110 ￦ 3,731 ￦ 2,621

(3) A reconciliation between income before income tax and income tax expense for the years ended December

31, 2011 and 2010 are as follows (Unit: Won in millions):

Ended December 31,

2011 2010 Income before income tax ￦ 323,617 ￦ 370,842

Income tax payable by the statutory income tax rate of 24.2% 78,289 89,717 Tax reconciliations:

Non-taxable income - (20) Non-deductible expenses 178 139 Deferred tax expense relating to changes in tax rates 522 - Revision of beginning deferred taxes(*1) (6,941) - Others 12,892 2,943

Income tax from continued operation ￦ 84,970 ￦ 92,779

(*1) Differences between the amount disclosed in prior year‟s audit report and the actual tax return amount

(4) Details of changes in accumulated temporary differences for the years ended December 31, 2011 and 2010

are as follows (Unit: Won in millions):


Descriptions

Beginning

Balance (*)

Decrease

Increase

Ending

balance

Deferred

tax asset (liab.)

Temporary differences to be deducted:

Escrow deposit ￦ 18,116 ￦ 18,116 ￦ 14,058 ￦ 14,058 ￦ 3,385

Present value discount 804 8,644 17,551 9,711 2,339

Provision for unused commitments 215,032 46,073 47,167 216,126 52,047

Accrued expenses 57,894 59,541 64,418 62,771 15,116

- 38 -


Descriptions

Beginning

Balance (*)

Decrease

Increase

Ending

balance

Deferred

tax asset (liab.)

Point allowance provisions 233,069 14,437 79,006 297,638 71,676

Debt-for-equity swap 7,450 - - 7,450 1,794

Loss on impairment of financial assets

available-for-sale 16,262 8,015

8 8,255 1,988

Foreign currency translation losses 20,419 20,419 - - -

Retirement benefit obligation 21,278 - - 21,278 5,124

Loss on fair value of currency swaps 42,597 - 13,646 56,243 13,544

Gains or losses on fair value of currency

swaps 1,203 1,203 - - -

Gain on fair value of interest rate swaps (169) - 15,665 15,496 3,732

633,955 176,448 251,519 709,026 170,745

Temporary differences to be added:

Retirement insurance premium (20,998) - - (20,998) (5,056)

Allowance for doubtful accounts 12,754 12,754 - - -

Prepaid expenses - 533 (2,397) (2,930) (705)

Accrued income (291) (291) - - -

Foreign currency translation gains (10,373) -

6,721 (3,652) (879)

Other loss provision (litigation) - 2,800 (158,391) (161,191) (38,818)

Gain on fair value of currency swaps (52,590) - - (52,590) (12,665)

Gains or losses on valuation of investment

in securities (67) -

67 - -

Amortization of intangible assets - - (909) (909) (219)

Others (Transition to K-IFRS) (107,893) (107,893) - - - - - -

(179,468) 92,097 (154,909) (242,270) (58,342)

Deferred income tax assets ￦ 112,403

(*1) Differences between the amount disclosed in prior year‟s audit report and the actual tax return amount of

￦(7,156) million is reflected in the beginning balances.


Descriptions

Beginning

balance

Decrease

Increase

Ending

balance

Deferred

tax asset (liab.)

Temporary differences to be deducted:

Escrow deposit ￦ 9,019 ￦ - ￦ 9,097 ￦ 18,116 ￦ 3,986

Present value discount 6,845 6,041 - 804 239

Provision for unused commitments 183,238 183,238 211,374 211,374 46,502

Accrued expenses 83,079 83,079 89,999 89,999 21,780

Provision for mileage points 195,561 195,561 233,069 233,069 52,954

Debt-for-equity swap 9,478 2,394 366 7,450 1,803

Loss on impairment of financial assets

available-for-sale 17,993 868 - 17,125 3,771

Foreign currency translation losses 126,532 116,917 10,804 20,419 4,941

Retirement pension liability 17,083 - 682 17,765 3,908

Loss on valuation of currency swap 42,597 42,597 42,597 42,597 10,308

Gain on valuation of currency swap 6,147 6,147 1,203 1,203 273

Gain on valuation of interest rate swap 2,976 2,976 (169) (169) (37)

700,548 639,818 599,022 659,752 150,428

Temporary differences to be added:

Retirement insurance premium (17,082) - (682) (17,764) (3,908)

Allowance for bad debt 12,024 12,024 12,716 12,716 3,077

Gain on valuation of foreign currency

translation (38,783) (32,934) (4,517) (10,366) (2,509)

Gain on valuation of currency swap (148,582) (102,220) (6,228) (52,590) (12,727)

Gain/loss on investment securities (70,978) (70,978) (67) (67) (16)

Others (Transition to K-IFRS) (94,754) (94,754) (107,893) (107,893) (22,083)

- 39 -


Descriptions

Beginning

balance

Decrease

Increase

Ending

balance

Deferred

tax asset (liab.)

(358,155) (288,862) (106,671) (175,964) (38,166)

Deferred income tax assets ￦ 112,262

27. EARNINGS PER SHARE:

(1) Earnings per share for the years ended December 31, 2011and 2010 is as follows.


Net income ￦ 238,647,581,983 ￦ 278,062,722,961

Weighted average number of shares 160,465,286 160,465,286

Net income per share ￦ 1,487 ￦ 1,733

(2) Diluted earnings per share

As the Company has not issued any diluted securities, diluted earnings per share is the same as basic

earnings per share for the year ended December 31, 2011.

28. CONTINGENCIES AND COMMITMENTS:

(1) Credit line agreement

a. The following are credit line agreement as of December 31, 2011, December 31, 2010 and January 1, 2010


Type Financial instruments December 31, 2011 December 31, 2010 January 1, 2010 Overdraft limit SC First Bank ￦ 50,000 ￦ 50,000 ￦ 50,000

Intraday overdraft limit Shinhan Bank and others 250,000 250,000 250,000

General credit limit KB - 60,000 -

b. Credit Facility Agreement

The Company entered into a Credit Facility Agreement with GE Capital Corporation (“GECC”) on August 4,

2010. The Credit Facility limit is Euro equivalent of USD200 million. The Company will pay 28bp of

commitment fee for the amount and the maturity is renewable every 364 days, up to 3 years.

With regard to the Credit Facility Agreement, the Company, GECC, Hyundai Motor Company and Kia

Motors Corp. entered into a Support Agreement and the contract date of Support Agreement is the same as

that of Credit Facility Agreement. In accordance with the Support Agreement, GECC has the right of debt-

for-equity swap for the unredeemed amount in case that the Company is not able to repay after a year from

the first withdrawal of Credit Facility. Additionally, GECC has a put option to sell 41% of convertible stock

to Hyundai Motor Company and 15% of convertible stock to Kia Motors Corp. at the time of debt-for-equity

swap. Hyundai Motor Company and Kia Motors Corp. have call options to buy stocks from GECC on the

same condition of put option in case that GECC does not exercise a put option. The Company will pay 15bp

of commitment fee on the amount equivalent to 41% and 15% of settled amount of Credit Facility to

Hyundai Motor Company and Kia Motors Corp., respectively.

- 40 -

c. Revolving Credit Facility

The Company has a revolving credit facility agreement with many financial institutions for credit line for the

period ended December 31, 2011 as follows (Unit: Won in millions):

Financial instruments Credit line Term

Kookmin Bank ￦ 100,000 2011-01-28 ~ 2012-01-28

Kookmin Bank 30,000 2011-05-28 ~ 2012-05-28

Kookmin Bank 30,000 2011-10-24 ~ 2012-10-22

Nong Hyup 100,000 2011-03-29 ~ 2012-03-29

Citibank, Seoul 50,000 2011-12-24 ~ 2012-12-23

Woori Bank 200,000 2011-06-30 ~ 2012-06-30

Shinhan Bank 50,000 2011-04-28 ~ 2012-04-28

Shinhan Bank 50,000 2011-05-31 ~ 2012-05-31

(2) Alliance

The Company has separate agency agreements regarding its credit card business with SC First Bank,

Woori Bank, Korea Exchange Bank, Shinhan Bank, Citibank, Hana Bank, Gwangju Bank, Jeonbuk Bank,

Cheju Bank, Postal Office, Korea Computer Co., Ltd. and others.

(3) License Agreement and Franchise Agreement

The Company entered into Member Issuance and Franchise Agreements with Master Card International,

Visa International and Diners Club International for credit card issuance, and pays each a fee based on a

fixed rate for each credit card issued.

(4) Overseas Travel Insurance Agreement

The Company has a travel insurance agreement with Hyundai Marine & Fire Insurance Co., Ltd. to cover

the risks and damages that may occur during credit cardholders‟ travel. As of December 31, 2011, the

maximum amount of insurance claim is ￦1.2 billion per cardholder.

(5) Directors and Officers Liability Insurance

The Company has insurance for its directors and officers covering indemnity with the limit of ￦20 billion

and financial accident liability with the limit of ￦1 billion.

(6) Pending Lawsuits

As of December 31, 2011, the following are the pending lawsuits, whose outcomes cannot be ascertained as

of the report date (Unit: Won in millions):

Type Plaintiff Defendant Amount Status

Claim for loss

compensation

Hankook Cardnet and 6

others

The Company and 16

defendants ￦ 2,742 Ongoing

Claim for loss

compensation

Jeong, Seong Hwa and 70

others

The Company and 16

defendants 5,971 Ongoing

Claim for loss

compensation Lee, Bok Ki and 113 others

The Company and 16

defendants 153 Ongoing

Claim for loss

compensation

Shin, Gwang Sik and 5

others

The Company and 16


Claim for loss

compensation

HanKook Card System and

18 others

The Company and 16


Unfair profits Jung, So Yeon and 26

others

The Company and 5


Claim for loss

compensation

Jang, Won Sik and 124

others

The Company and 11


Claim for loss

compensation

Ko, Sung Bong and 108

others

The Company and 16


- 41 -

Type Plaintiff Defendant Amount Status

Claim for loss

compensation

Yoon, Yong Seob and 30

others

The Company and 16


Claim for loss

compensation

Lee, Kyoung Hee and 3

others

The Company and 16


Claim for loss

compensation

Kang, Kyoung Hee and 53

others

The Company and 16


Claim for loss

compensation Shin, Dong Wook

The Company and 16


Claim for loss

compensation Yoo, Jae Won and 5 others

The Company and 16


Claim for loss

compensation

Special Communication

& Company

The Company and 16


Claim for loss

compensation Kim, Myung The Company 7 Ongoing

Cancellation of tax

charge The Company

Yeongdeungpo District

Tax Office 56 Ongoing

Cancellation of tax

charge The Company

Yeongdeungpo District

Tax Office 69 Ongoing

Void obligations

(adjustment)

Kim, Jin Soon and 5

others The Company 102 Ongoing

Void obligations

(adjustment)

Park, Sung Chan and 16

others The Company 244 Ongoing

Void obligations

(adjustment) Ha, Young Hee The Company 10 Ongoing

Claim for loss

compensation Kumho Industrial Co.,Ltd

and 5 others

KAMCO,

The Company and 5


Claim for unjust

enrichment The Company

Inyeon Co.,Ltd and 3


Compensation for

loss Park, Kyuk Mok The Company 1 Ongoing

Total ￦ 119,867

(7) Deposit for Loss Contingency

As of December 31, 2011, the Company has deposits of ￦9,411 million and ￦9,096 million to cover

probable losses from the sales of Daewoo Construction‟s shares and Daewoo International Corporation‟

shares, respectively, in an escrow account and records the amounts as provisions.

(8) Reserve for Loss Reimbursement

The Company has the obligation to reimburse customers for fraudulent credit card activities; the Company

records the expected losses as an accrued expense.

(9) Security on the Receivables Sold Relating to Asset-Backed Securitization

The Company continuously transfers receivables to maintain a certain level of its equity in the 2nd series

beneficiary certificates relating to the asset-backed securitization.

(10) Guarantee

The Company has a performance guarantee from the Seoul Guarantee Insurance Co., Ltd. amounting to

￦4,916 million in connection with airline ticket payments and others.

(11) Early Redemption Rule Associated with Asset-Backed Securitization

According to the agreement on the Company‟s Asset-Backed Securitization, in order to enhance credit level

of the asset-backed securities, several provisions are in place as trigger clauses to be used for early

redemption calls, thereby limiting the risk that the investors are exposed to resulting from a change in

- 42 -

quality of the assets in the future. In the event the asset-backed securitization of the Company is in violation

of the applicable trigger clause, the Company is obliged to make early redemption for the asset-backed

securities.

(12) Contract of Sale of Receivables

The Company entered into a contract with Hyundai Capital Services, Inc. relating to its sale of receivables

on January 24, 2006. In accordance with the contract, the Company sells the receivables that are 60 days or

more past due or written-off to Hyundai Capital Services, Inc. Such sale occurs three times a month on

designated cutoff dates at the amount calculated using a predetermined price pursuant to the contract.

29. ASSETS-BACKED BORROWINGS (ABS):

(1) Asset-backed borrowing and underlying assets

The Company transferred its card assets to a special purpose corporation (SPC) and issued ABS with them.

As the Company did not meet the requirements of a financial asset transfer, in accordance with K-IFRS

1039, the Company recognized this transaction as a borrowing and not as sales of assets. As such, card

assets transferred to the SPC are included as part of the Company‟s other card assets.

The details of asset-backed borrowing and underlying assets as of December 31, 2011, December 31, 2010

and January 1, 2010 are as follows (Unit: Won in millions):

.

Maturity


Senior

tranche

Underlying

asset

Senior

tranche

Underlying

asset

Senior

tranche

Underlying

asset

WORK&JOY 2007 2011-03-22 ￦ - ￦ - ￦ 190,000 ￦ 945,320 ￦ 334,856 ￦ 674,054

PRIVIA 1st SPC 2011-10-19 - - 302,720 682,688 - -

PRIVIA 2nd SPC 2014-04-24 461,320 1,020,544 - - - -

Discounts on debentures (2,023) - (390) - (985) -

Net book value ￦ 459,297 ￦ 1,020,544 ￦ 492,330 ￦ 1,628,008 ￦ 333,871 ￦ 674,054

(2) Details of contractual maturity of the Company‟s asset-backed borrowing as of December 31, 2011,

December 31, 2010 and January 1, 2010 are as follows (Unit: Won in millions):


Less than 1 year ￦ - ￦ 492,720 ￦ 334,856

1-2 years - - -

2-3 years 461,320 - -

461,320 492,720 334,856

Discounts on debentures (2,023) (390) (985)

Senior tranche ￦ 459,297 ￦ 492,330 ￦ 333,871

30. TRANSACTION WITH RELATED PARTIES

(1) Status of related parties

Related parties consist of entities related to the Company, post-employment benefits, a key management

personnel and a close member of that person‟s family, an entity controlled or jointly controlled and an

entity influenced significantly.

Details of related parties as of December 31, 2011 are as follows:

Companies

Controlling company Hyundai Motor Company

Related parties Green air, Glovis, Kia motor company, Kia Tigers, Daesung electric, Rotem,

MnSoft, Metia, BNG Steel, Samwoo, Aia, IHL Industry, NGV, MSEAT,

WISTCO, WIA, WIA Magna Powertrain, Eukor Car Carriers, Innocean, Iljin,

- 43 -

Jongro Academy, Jongro Eclass, Carnes, Kefico, Partecs, Hankook Economy

News, Korea Space and Aircraft, Haevichi Country Club, Hyundai Dymos,

Hyundai Movis, Hyundai Steel, Hyundai Capital, Hyundai Powertech, Hyundai

Hysco, HMC Investment bank, Auto Ever Systems, Haevichi Resort, Hyundai

AMCO, Chunbuk Hyundai motors FC, Hyundai Commercial, Seoul Metro

Line9, HL Green Power, Corentec, Hyundai construction, Hyundai engineering,

Hyundai city construction, Busan-Jungkwan energy, Hyundai energy, Songdo

Landmark City, Hyundai farm land&development, Hatayrnc, Hyundai C&I, Hyundai

Architects & Engineers Assoc, Hyundai matirials Busan Finance Center AMC,

Hyundai resource development institute.

(2) Transaction with related companies for the years ended December 31, 2011 and 2010 are as follows (Unit:

Won in millions):

Year ended December 31, 2011 Year ended December 31, 2010

Controlling

company

Company

with

significant

influence

Total

Controlling

company

Company

with

significant

influence

Total

Revenues

Card revenue ￦ 128,143 ￦ 55,050 ￦ 183,193 ￦ 87,107 ￦ 55,225 ￦ 142,332

Rental revenue - 200 200 - 168 168

Miscellaneous revenue - 22,354 22,354 - 17,996 17,996

128,143 77,604 205,747 87,107 73,389 160,496

Expense

Card expense 130 1,977 2,107 166 1,585 1,751

General and

administrative expense 459 35,370 35,829 140 34,341 34,481

Miscellaneous expense - 28,910 28,910 - 19,054 19,054

589 66,257 66,846 306 54,980 55,286

Others

Payment of advanced

payment - 8,015 8,015 - 10,864 10,864

Purchase of property and

equipment - 12,441 12,441 - 4,341 4,341

Purchase of intangible

assets - 166 166 - 2,048 2,048

Total ￦ - ￦ 20,622 ￦ 20,622 ￦ - ￦ 17,253 ￦ 17,253

(3) Outstanding receivables, payables and guarantee from transactions with related parties as of December 31,

2011, December 31, 2010 and January 1, 2010 are as follows (Unit: Won in millions):


Controlling company

Company

with

significant influence

Controlling company

Controlling company

Company

with


Total

Controlling company

Company

with


Total

Receivables

Card asset ￦ 60,555 ￦ 165,755 ￦ 226,310 ￦ 52,340 ￦ 153,009 ￦ 205,349 ￦ 35,860 ￦ 128,531 ￦ 164,391

Accounts

receivable 59 68 127 311 747 1,058 284 1,435 1,719

Other - 30,241 30,241 - 32 32 - 32 32 Allowance

for bad

debt (908) (2,464) (3,372) (785) (2,295) (3,080) (7) (62) (69) Total 59,706 193,600 253,306 51,866 151,493 203,359 36,137 129,936 166,073

Payables

Accounts

payable 35,013 54,520 89,533 42,029 37,717 79,746 18,688 29,068 47,756

Other 3,955 (18,030) (14,075) 3,938 (18,141) (14,203) 5,947 ( 19,259) (13,312)

Total ￦ 38,968 ￦ 36,490 ￦ 75,458 ￦ 45,967 ￦ 19,576 ￦ 65,543 ￦ 24,635 ￦ 9,809 ￦ 34,444

(4) Compensation for key executives

1) Compensation cost for key executives for the years ended December 31, 2011 and 2010 consist of

- 44 -

short-term employee benefit and retirement benefit.

2) Compensation for key management for the year ended December 31, 2011 consists of the following


Short-term employee benefit Retirement benefit Total

Key management 14,177 2,769 16,946

3) Key management includes directors (including non-executive directors) and members of the audit

committee with significant authority and responsibility over the Company‟s plan, direction and control.

31. OTHER COMPREHENSIVE INCOME

Other comprehensive income for the year ended December 31, 2011consists of the following (Unit: Won in

millions):


Beginning

Balance (*)

Decrease Disposal

Income tax

effect

Ending

balance

Other comprehensive

income

Effective portion of

changes in fair value

of cash flow hedges ￦ (4,260)

￦ (15,192) ￦ 3,956 ￦ 3,732 ￦ (11,764)

(*) Amounts before income tax effect

- 45 -

32. CONSOLIDATED STATEMENTS OF CASH FLOWS

(1) Cash and cash equivalents the Company‟s consolidated statements of financial position consist of cash on

hand, current deposits, and others. Details of cash and cash equivalents as of December 31, 2011,

December 31, 2010 and January 1, 2010 are as follows (Unit: Won in millions):


Cash on hand

￦ 4 ￦ 4 ￦ 8

Current deposits

8,749 44 1,420

Pass-book deposits

72,770 142,500 90,087

Other cash equivalents (*)

748,500 654,500 396,000

Total

￦ 830,023 ￦ 797,048 ￦ 487,515

(*) Other cash equivalents consist of MMDA, CMA and others.

(2) Non-cash investing activities and non-cash financing activities which are not reflected in the consolidated

statement of cash flow as of December 31, 2011 and 2010 are as follows (Unit: Won in millions):


Replacement of office equipment

￦ 4,703 ￦ 1,405

Replacement of long-term

borrowings to current portion

90,000 101,026

Gain (Loss) on valuation of

derivatives

(11,235) 15,080

33. FINANCIAL RISK MANAGEMENT:

(1) Introduction

1) General

The Company is exposed to various financial risks such as credit risk, liquidity risk and market risk

associated with financial instruments. The level of exposure to such risks, objectives of the Company and

its risk management policy and procedures are outlined below.

2) Risk management framework

The board of directors sets and oversees risk management framework. Responsibility for implementing

and monitoring the Company‟s risk management strategies and policies resides with Asset-Liability

Management Committee (ALCO) set by the board of directors. Each committee has a permanent and non-

permanent member and reports its activities to the board of directors on a regular basis.

The Company‟s risk management policy is to ensure that the Company identify and analyze the potential

risks to financial performance, determine the degree of risk and control acceptable to the Company and

monitor whether the Company confirms with the risk and its associated degree of acceptance. The risk

management policy and system are regularly reviewed to reflect changes in market conditions and

products and services the Company provides. The Company operates education and training program and

procedures and management standards so that all employees understand their roles and duties with the

goal to build organizational control environment.

The audit committee is responsible for monitoring whether the Company continues to comply with the

risk management policies and procedures and also the current risk management system is appropriate for

the risks that the Company is exposed to, with the assistance of internal auditors, which review regular

and irregular risk management procedures and report the results to the audit committee.

- 46 -

(2) Credit risk

1) General

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial

instrument fails to meet its contractual obligations, and arises primarily from the Company‟s loan, card

assets and securities. The Company considers all the elements of individual borrower‟s credit risk

exposure such as default and breach.

2) Risk management framework

The Company‟s exposure and credit ratings of its counterparties is primarily reviewed and managed for

accuracy by credit risk management department. Secondly, aggregate risks are allocated to total portfolio

and controlled by counterparty limits that are reviewed and approved by the risk management department.

To ensure that resolution and approval of the board of directors with respect to risk management are

effectively implemented, the Company sets and operates the risk management committee, which is a

permanent organization and holds a regular meeting once a month as a rule and frequently if necessary.

The risk management committee is assisted by independent risk management department (risk

management team) which oversees all the risks for the Company‟s operations comprehensively.

- Manages aggregate risks on the acceptable level of loss through portfolio limits management. These

limits of credit risk are established based on portfolio management standards and reflected into

business plan. Risk management committee receives a report of whether level of credit risk and limits

of the acceptable level of credit risk are in compliance with the standards.

- Acceptable limits on overdue over 1 month, normal credit card payment rate and etc are considered

into business plan, and credit risks are managed within the limits.

- Credit limit on a new customer (the applicant) is determined based on monthly estimated income

and liabilities computed using qualification standards. Final limit is granted with consideration of

application ratings and external ratings agencies‟ ratings. Credit limit on an existing customer is

downgraded or upgraded as a result of changes in combination of factors, including behavior ratings,

personal information such as employment, position, amounts used, days in arrears and etc.

- Target level on key factors, including expected loss, economic capital, portfolio quality index

(overdue rate, 30+@3MOB), etc is set and actively monitored, of which results are reported to risk

management committee.

- Measurement of expected loss using long-term probability of default and recording of allowance for

possible losses enables the Company to minimize the expected loss due to economy downturn.

- Through implementation and management of contingency plan, the Company announces the

appropriate contingency level according to the level of the deteriorating economy and quickly takes a

corresponding action. This enables the Company to proactively respond to rapidly changing credit

risks.

Each credit management department holds right to approve credit and is required to perform credit

policies and procedures and report important credit related issues to management and risk management

committee. Responsibility for portfolio performance and soundness resides with each credit management

department, which monitors and controls all credit risks arising from the portfolio.

- 47 -

3) Level of exposure to credit risk

The Company‟s level of exposure to credit risk as of December 31, 2011, December 31, 2010 and January

1, 2010 are summarized as follows (Unit: Won in millions):


Cash and bank deposits ￦ 863,054 ￦ 820,179 ￦ 487,569

Financial assets held to

maturity - - 27

Card assets (*1) 9,548,020 9,171,744 7,108,823

Loans 500 1,000 -

Other financial assets (*1,2) 146,308 128,622 177,794

Unused commitment 31,564,297 28,113,052 23,871,368

Total ￦ 42,122,179 ￦ 38,234,597 ￦ 31,645,581

(*1) Card assets are stated at book value before allowance for doubtful accounts.

(*2) Other financial assets consists of accounts payable and unearned income.

4) Analysis of credit soundness of financial assets

① Credit soundness of card assets neither past due nor impaired as of December 31, 2011, December 31,

2010 and January 1, 2010 are summarized as follows (Unit: Won in millions):

A. Retail December 31, 2011 December 31, 2010 January 1, 2010

Grade(*)

Book value

before

allowance for

doubtful

accounts

Allowance

for doubtful

accounts

Book value

before

allowance for

doubtful

accounts

Book value

before

allowance for

doubtful

accounts

Allowance

for doubtful

accounts

Book value

before

allowance for

doubtful

accounts

Book value

before

allowance for

doubtful

accounts

Allowance

for doubtful

accounts

Book value

Card receivables and cash

advances

1 ￦ 693,874 ￦ 370 ￦ 693,504 ￦ 690,042 ￦ 371 ￦ 689,671 ￦ 947,806 ￦ 391 ￦ 947,415

2 630,622 430 630,192 588,025 408 587,617 344,711 264 344,447

3 741,158 629 740,529 697,028 638 696,390 523,116 625 522,491

4 580,079 632 579,447 534,241 634 533,607 430,545 722 429,823

5 589,433 970 588,463 528,814 953 527,861 686,305 1,605 684,700

6 582,570 1,565 581,005 525,120 1,448 523,672 559,709 2,060 557,649

7 549,984 3,028 546,956 489,321 2,521 486,800 434,978 2,099 432,879

8 563,463 5,535 557,928 522,392 4,861 517,531 271,559 2,339 269,220

9 570,577 9,424 561,153 553,190 8,890 544,300 462,321 5,227 457,094

10 464,475 11,125 453,350 474,873 11,666 463,207 420,867 7,597 413,270

11 321,501 11,230 310,271 364,825 12,233 352,592 525,674 13,701 511,973

12 370,374 17,823 352,551 429,980 22,539 407,441 402,830 14,631 388,199

13 138,363 10,763 127,600 136,401 8,167 128,234 189,778 9,965 179,813

14 108,320 12,042 96,278 95,141 11,419 83,722 78,328 5,596 72,732

15 24,542 2,729 21,813 14,913 1,650 13,263 47,362 6,695 40,667

uncalculated 336,007 3,746 332,261

6,929,335 88,295 6,841,040 6,644,306 88,398 6,555,908 6,661,896 77,263 6,584,633

Card loan

1 19,480 55 19,425 8,774 23 8,751 - - -

2 59,451 227 59,224 45,864 203 45,661 - - -

3 84,113 546 83,567 134,001 634 133,367 - - -

4 113,442 801 112,641 140,295 1,234 139,061 - - -

5 176,958 1,656 175,302 541,545 7,796 533,749 - - -

6 210,234 2,371 207,863 450,669 10,343 440,326 - - -

7 201,924 2,673 199,251 256,291 8,575 247,716 - - -

8 224,432 3,441 220,991 163,724 7,518 156,206 - - -

9 183,896 3,459 180,437 97,980 6,289 91,691 - - -

10 146,402 3,155 143,247 30,821 2,499 28,322 - - -

11 110,753 2,867 107,886 62,390 7,509 54,881 - - -

12 86,085 2,458 83,627 - - - - - -

13 84,203 2,835 81,368 - - - - - -

14 48,392 2,345 46,047 - - - - - -

15 202,228 25,797 176,431 - - - - - -

1,951,993 54,688 1,897,307 1,932,354 52,623 1,879,731 - - -

Total ￦ 8,881,328 ￦ 142,981 ￦ 8,738,347 ￦ 8,576,660 ￦ 141,021 ￦ 8,435,639 ￦ 6,661,896 ￦ 77,263 ￦ 6,584,633

(*) Grades are internal credit ratings evaluated by the Company and as of December 31, 2011 credit ratings of

card loan was segmented.

- 48 -

B. Corporate


Grade(

*)

Book value

before

allowance for

doubtful

accounts

Allowance

for doubtful

accounts

Book value

Book value

before

allowance for

doubtful

accounts

Allowance

for doubtful

accounts

Book value

Book value

before

allowance for

doubtful

accounts

Allowance

for doubtful

accounts

Book value

1 ￦ 236,273 ￦ 260 ￦ 236,013 ￦ 173,953 ￦ 140 ￦ 173,813 ￦ 92,200 ￦ 21 ￦ 92,179

2 90,155 409 89,746 128,813 1,510 127,303 59,110 91 59,019

3 61,467 221 61,246 47,470 563 46,907 33,467 91 33,376

4 34,550 292 34,258 35,884 221 35,663 24,245 160 24,085

5 6,938 215 6,723 4,290 93 4,197 3,595 77 3,518

6 3,012 166 2,846 2,859 116 2,743 1,766 76 1,690

7 2,785 298 2,487 2,247 187 2,060 128 9 119

8 1,402 74 1,328 473 70 403 190 20 170

N (**) 2,296 1 2,295 1,356 9 1,347 18,576 158 18,418

Total ￦ 438,878 ￦ 1,936 ￦ 436,942 ￦ 397,345 ￦ 2,909 ￦ 394,436 ￦ 233,277 ￦ 703 ￦ 232,574

(*) Grades are internal credit ratings evaluated by the Company.

(**) N represents card assets consisting of sound government-related assets such as central and local

governments, public authorities.

② Credit soundness of credit cards past due but not impaired as of December 31, 2011, December 31,


December 31, 2011

Less than

1 month 1-2 months 2-3 months

More than

3 months Total

Retail ￦ 150,825 ￦ 26,686 ￦ - ￦ - ￦ 177,511

Corporate 12,131 4,637 - 3 16,771

162,956 31,323 - 3 194,282

Card assets

Card receivables 99,144 18,194 - 3 117,341

Cash advances 17,265 4,349 - - 21,614

Card loans 46,547 8,781 - - 55,328

162,956 31,324 - 3 194,283

Allowance for doubtful

accounts (7,317) (2,943) - (3) (10,263)

Book value ￦ 155,639 ￦ 28,381 ￦ - ￦ - ￦ 184,020

December 31, 2010

Less than


More than

3 months Total

Retail ￦ 126,309 ￦ 21,605 ￦ - ￦ - ￦ 147,914

Corporate 29,833 646 - 3 30,482

156,142 22,251 - 3 178,396

Card assets

Card receivables 97,645 10,475 - 3 108,123

Cash advances 19,009 4,418 - - 23,427

Card loans 39,488 7,358 - - 46,846

156,142 22,251 - 3 178,396


accounts (5,087) (1,990) - (3) (7,080)

Book value ￦ 151,055 ￦ 20,261 ￦ - ￦ - ￦ 171,316

January 1, 2010

Less than


More than

3 months Total

Retail ￦ 95,379 ￦ 12,488 ￦ - ￦ - ￦ 107,867

Corporate 5,488 17,310 322 68,620 91,740

100,867 29,798 322 68,620 199,607

Card assets

- 49 -

Card receivables 57,391 22,734 322 68,620 149,067

Cash advances 19,220 3,474 - - 22,694

Card loans 24,256 3,590 - - 27,846

100,867 29,798 322 68,620 199,607


accounts (3,522) (1,016) (1) (7) (4,546)

Book value ￦ 97,345 ￦ 28,782 ￦ 321 ￦ 68,613 ￦ 195,061

③ Credit soundness of credit cards past due and impaired as of December 31, 2011, December 31, 2010

and January 1, 2010 are summarized as follows (Unit: Won in millions):


Card assets ￦ 33,531 ￦ 19,342 ￦ 14,043


accounts

(18,573)

(14,965) (10,939)

Total ￦ 14,958 ￦ 4,377 ￦ 3,104

- 50 -

5) Concentrations of credit risk

① Concentration of credit risk by term structures as of December 31, 2011, December 31, 2010 and

January 1, 2010 are summarized as follows (Unit: Won in millions):

December 31, 2011

Retail

Corporate

Total Ratio

Allowance

for doubtful

accounts

Book value

Less than 3 months ￦ 2,780,370 ￦ 461,977 ￦ 3,242,347 33.96% (36,070) 3,206,277

3-6 months 2,019,680 75 2,019,755 21.15% (32,495) 1,987,260

6-12 months 1,925,037 - 1,925,037 20.16% (35,937) 1,889,100

1-2 years 1,609,716 - 1,609,716 16.86% (48,580) 1,561,136

2-3 years 694,083 - 694,083 7.27% (17,307) 676,776

3-4 years 41,371 - 41,371 0.43% (661) 40,710

4-5 years 1,636 - 1,636 0.02% (131) 1,505

More than 5 years 14,575 - 14,575 0.15% (2,603) 11,972

Total ￦ 9,086,468 ￦ 462,052 ￦ 9,548,520 100.00% ￦ (173,784) ￦ 9,374,736

December 31, 2010

Retail

Corporate

Total Ratio

Allowance

for doubtful

accounts

Book value

Less than 3 months ￦ 3,029,549 ￦ 374,478 ￦ 3,404,027 37.11% ￦ (38,356) ￦ 3,365,671

3-6 months 918,460 53,191 971,651 10.59% (15,437) 956,214

6-12 months 1,860,225 1,147 1,861,372 20.29% (35,552) 1,825,820

1-2 years 2,022,449 500 2,022,949 22.06% (50,597) 1,972,352

2-3 years 809,427 - 809,427 8.83% (19,220) 790,207

3-4 years 91,046 - 91,046 0.99% (1,474) 89,572

4-5 years 2,075 - 2,075 0.02% (291) 1,784

More than 5 years 10,197 - 10,197 0.11% (5,056) 5,141

Total ￦ 8,743,428 ￦ 429,316 ￦ 9,172,744 100.00% ￦ (165,983) ￦ 9,006,761

January 1, 2010

Retail

Corporate

Total Ratio

Allowance

for doubtful

accounts

Book value

Less than 3 months ￦ 2,608,031 ￦ 299,777 ￦ 2,907,808 40.90% ￦ (31,806) ￦ 2,876,002

3-6 months 737,449 642 738,091 10.38% (10,588) 727,503

6-12 months 1,148,743 - 1,148,743 16.16% (17,600) 1,131,143

1-2 years 1,481,755 - 1,481,755 20.84% (20,972) 1,460,783

2-3 years 796,233 - 796,233 11.20% (8,787) 787,446

3-4 years 28,813 - 28,813 0.41% (398) 28,415

4-5 years 1,756 - 1,756 0.03% (120) 1,636

More than 5 years 5,624 - 5,624 0.08% (3,180) 2,444

Total ￦ 6,808,404 ￦ 300,419 ￦ 7,108,823 100.00% ￦ (93,451) ￦ 7,015,372

② Concentrations of credit risk by industry of corporate loans as of December 31, 2011, December 31,



Book value

before

allowance

for doubtful

accounts

Ratio

Allowance

for

doubtful

accounts

Book

value

Book value

before

allowance

for

doubtful

accounts

Ratio

Allowance

for

doubtful

accounts

Book

value

Book value

before

allowance

for

doubtful

accounts Ratio

Allowance

for

doubtful

accounts

Book

value

Financing ￦136,413 29.52% ￦ (153) ￦136,260 ￦121,221 28.24% ￦ (161) ￦ 121,060 ￦ 96,560 32.14% ￦ (90) ￦ 96,470

Manufacturing 153,518 33.23% (3,589) 149,929 127,973 29.81% (601) 127,372 143 0.05% (1) 142

Service 131,772 28.52% (1,878) 129,894 150,854 35.14% (1,947) 148,907 49,374 16.44% (467) 48,907

Public 254 0.05% (73) 18

1 459 0.11% - 459

14,814 4.93% (61) 14,753

Others 40,095 8.68% (2,611) 37,484 28,808 6.70% (1,723) 27,085 139,528 46.44% (1,511) 138,017

Total ￦462,052 100.00% ￦ (8,304) ￦453,748 ￦ 429,315 100.00% ￦ (4,432) ￦ 424,883 ￦ 300,419 100.00% ￦ (2,130) ￦ 298,289

- 51 -

6) Card assets by the assessment methods for impairments as of December 31, 2011, December 31, 2010 and


December 31, 2011

Individual assessment Collective assessment Total

Book value before

allowance

for doubtful

accounts

Allowance

for doubtful

accounts

Allowance

rate

Book value before

allowance

for doubtful

accounts

Allowance

for doubtful

accounts

Allowance

rate

Book value before

allowance

for doubtful

accounts

Allowance

for doubtful

accounts

Allowance

rate

Card assets Card

receivables ￦ 1,368 ￦ - ￦ - ￦ 6,848,293 ￦ (85,356) 1.25% ￦ 6,849,661 ￦ (85,356) 1.25%

Cash

advances - - - 667,462 (21,327) 3.20% 667,462 (21,327) 3.20%

Card

loans - - - 2,030,897 (67,071) 3.30% 2,030,897 (67,071) 3.30%

Loans to

corporate - - - 500 (30) 6.07% 500 (30) 6.07%

Total ￦ 1,368 ￦ - ￦ - ￦ 9,547,152 ￦(173,784) 1.82% ￦ 9,548,520 ￦ (173,784) 1.82%

December 31, 2010


Book value

before allowance

for

doubtful accounts

Allowance

for doubtful accounts

Allowance rate

Book value

before allowance

for

doubtful accounts

Allowance

for

doubtful accounts

Allowance rate

Book value

before allowance

for

doubtful accounts

Allowance

for

doubtful accounts

Allowance rate

Card assets Card

receivables ￦ 1,665 - - ￦ 6,382,026 ￦ (75,319) 1.18% ￦ 6,383,691 ￦ (75,319) 1.18%

Cash

advances - - - 795,241 (27,129) 3.41% 795,241 (27,129) 3.41%

Card

loans - - - 1,992,811 (63,527) 3.19% 1,992,811 (63,527) 3.19%

Loans to

corporate - - - 1,000 (7) 0.70% 1,000 (7) 0.70%

Total ￦ 1,665 ￦ - ￦ - ￦ 9,171,078 ￦ (165,982) 1.81% ￦ 9,172,743 ￦ (165,982) 1.81%

January 1, 2010


Book value before

allowance

for doubtful

accounts


accounts

Allowance

rate

Book value before

allowance

for doubtful

accounts

Allowance

for doubtful

accounts

Allowance

rate

Book value before

allowance

for doubtful

accounts

Allowance

for doubtful

accounts

Allowance

rate

Card assets Card

receivables ￦ 6,281 - - ￦5,276,691 ￦ (42,809) 0.81% ￦ 5,282,972 ￦ (42,809) 0.81%

Cash advances - - - 765,398 (24,582) 3.21% 765,398 (24,582) 3.21%

Card loans - - - 1,060,453 (26,060) 2.45% 1,060,453 (26,060) 2.45%

Total ￦ 6,281 ￦ - ￦ - ￦ 7,102,542 ￦ (93,451) 1.31% ￦ 7,108,823 ￦ (93,451) 1.31%

(3) Liquidity risk

1) Liquidity risk

① General

Liquidity risk is the risk that the Company is unable to meet its payment obligations arising from financial

liabilities as they become due. The Company classifies and discloses contractual maturity of all financial

assets, liabilities and offshore accounts in relation to liquidity risk into four categories as immediately

- 52 -

payable, less than 1 year, 1~5 years and more than 5 years.

The cash flows disclosed in the maturity analysis is undiscounted contractual amount, including principal

and future interest payments, which results in disagreement with the discounted cash flows included in the

consolidated statement of financial position. Calculated cash flows are allocated into four categories,

which draw contractual maturity analysis of each financial asset and liability.

② Liquidity risk management process and guidance

General principles and the overall framework for managing liquidity risk across the Company are defined

in the Liquidity Risk Policy approved by the ALCO.

All transactions that affect in and out flows of Korean/foreign currency funds across the Company are

subject to liquidity risk management. Liquidity risk is centrally managed and controlled by the Financial

Planning Department, which reports into the ALCO on liquidity analysis and statistics, including liquidity

gap, liquidity ratio, maturity mismatch ratio and liquidity risk situation. The financial strategies to achieve

the Company‟s management goal including liquidity risk is set and overseen by the ALCO.

2) Residual contractual maturity analysis of financial assets and liabilities

The Company‟s financial assets and liabilities by residual contractual maturity as of December 31, 2011,

December 31, 2010 and January 1, 2010 are classified as follows (Unit: Won in millions):

December 31, 2011

Immediate

payment

Less than

1 year 1-5 years

More than

5 years Total

Financial assets

Cash and due from

financial institutions ￦ 857,554 ￦ 5,687 ￦ - ￦ - ￦ 863,241

Investment financial

assets 1,767 - - - 1,767

Card assets - 9,401,907 790,719 30,274 10,222,900

Loans - 541 - - 541

Derivatives assets - 1,912 643 - 2,555

Other assets - 133,544 10,380 933 144,857

Total ￦ 859,321 ￦ 9,543,591 ￦ 801,742 ￦ 31,207 ￦ 11,235,861

Financial liabilities

Borrowings ￦ - ￦ 544,343 ￦ 54,387 ￦ - ￦ 598,730

Debentures - 1,728,091 5,310,411 195,212 7,233,714

Derivatives liabilities - 1,817 3,509 - 5,326

Other liabilities 28,200 1,211,178 675 - 1,240,053

Total ￦ 28,200 ￦ 3,485,429 ￦ 5,368,982 ￦ 195,212 ￦ 9,077,823

(*) These amounts include all cash inflows from undiscounted principals and interests and derivatives

represent discounted contract amount without discount.

December 31, 2010

Immediate

payment

Less than

1 year 1-5 years

More than

5 years Total

Financial assets

Cash and due from

financial institutions ￦ 820,901 ￦ 148 ￦ - ￦ - ￦ 821,049


assets 1,776 - - - 1,776

Card assets - 9,008,393 771,337 20,112 9,799,842

Loans - 576 504 - 1,080

Derivatives assets - 13,307 441 - 13,748

Other assets - 125,573 9,274 22,029 156,876

- 53 -

Total ￦ 822,677 ￦ 9,147,997 ￦ 781,556 ￦ 42,141 ￦ 10,794,371


Borrowings ￦ - ￦ 1,439,519 ￦ 151,295 ￦ - ￦ 1,590,814

Debentures - 1,820,293 4,392,090 41,030 6,253,413


Other liabilities 52,143 822,882 16 - 875,041

Total ￦ 52,143 ￦ 4,112,991 ￦ 4,548,190 ￦ 41,030 ￦ 8,754,354



January 1, 2010

Immediate

payment

Less than

1 year 1-5 years

More than

5 years Total

Financial assets

Cash and due from

financial institutions ￦ 291,649 ￦ 196,060 ￦ - ￦ - ￦ 487,709


assets 82,577 14,861 - - 97,438

Card assets 370,663 6,656,407 392,409 27,474 7,446,953

Derivatives assets - 83,582 5,926 - 89,508

Other assets - 50,118 9,551 12,654 72,323

Total ￦ 744,889 ￦ 7,001,028 ￦ 407,886 ￦ 40,128 ￦ 8,193,931


Borrowings ￦ - ￦ 972,008 ￦ 102,032 ￦ - ￦ 1,074,040

Debentures - 1,718,222 3,004,357 - 4,722,579


Other liabilities 49,024 655,240 3,550 - 707,814

Total ￦ 49,024 ￦ 3,348,084 ￦ 3,121,722 ￦ - ￦ 6,518,830



(4) Market risk

1) Market risk

Market risk is the risk to the Company‟s earnings arising from changes in interest rates, stock price,

currency exchange rates or commodity prices. The trading market risk that the Company is mainly

exposed to is the interest rate risk arising from the change in the value of debt instruments and interest rate

embedded securities due to changes in market interest rate. The Company is additionally exposed to stock

price and foreign exchange rate fluctuation risk arising from loans, receivables, deposits, securities or

financial derivatives.

The market risk from the non-trading position also exposes the Company to interest rate risk and liquidity

risk. The trading position held for the Company‟s short-term funding purpose does not fall into the

category that expose the Company to interest rate risk as these are not sensitive to fluctuations in interest

rate due to short-term strategic management. Only risks arising from non-trading market risk are managed.

2) Market risk management organization

Incorporated market risk management policy is set by ALCO, which approves market risk limits, use of

new derivative financial instruments and day to day operations related to market risks. Furthermore,

ALCO determines VaR (Value at Risk) limits on bonds, stocks, foreign currency and financial derivatives

instruments, position limits and stop loss limits, and additionally sets scenario loss limits and sensitivity

limits on financial derivatives instruments.

- 54 -

Determination of interest rate and commission rate, enactment and amendment of ALM risk management

policy and interest rate and commission rate guidelines and analysis of monthly ALM risk lie with the

Chief Financial Committee. Interest risk limits are determined based on asset liability position and

expected interest rate fluctuation considering annual operational planning, and centrally measured and

monitored by the Financial Planning Team. Responsibility for management of both interest rate risk

condition, such as interest rate gap, duration gap, sensitivity, etc and compliance with interest rate risk

limits policy resides with the Financial Planning Team, which reports the results into the ALCO on a

monthly basis.

3) Non-trading position

The majority market risk from the Company‟s non-trading position is the interest rate risk. This interest

rate risk from non-trading position arises from two mismatch sources: mismatches between the maturity of

interest bearing assets and liabilities and between interest rate changing periods. The Company internally

assesses the interest rate risk arising from Koran and Foreign currency assets and liabilities including

derivatives financial instruments. And, most assets generating interest income and liabilities generating

interest expense are denominated in Korean won.

The objective of interest rate risk management is to reduce a decline in the value of assets due to changes

in market interest rates and to secure stable and optimal net interest income. The management of interest

rate risk is supported by a comprehensive analysis of interest rate gap (between assets generating interest

income and liabilities generating interest expense) and measurement of interest rate VaR and EaR

(Earnings-at-Risk).

The Company calculates risk index using the methodologies listed above, and discloses the interest rate

VaR calculated using duration.

4) Interest rate VaR (Value-at-Risk)

Interest rate VaR is a statistical estimate of the maximum potential decline in the value of net assets due to

the unfavorable changes in interest rate, using the VaR methodology, a key measure of market risk, into

interest rate risk assessment.

The interest rate VaR disclosed below is calculated using the BIS (the Bank for International Settlements)

standards framework. This methodology employs using revised duration proxy by maturity provided by

BIS. The assumption used to calculate the VaR is that expected range of interest rate fluctuation affected

by interest rate shock is 100bp parallel movement of benchmark rate curve. Although the VaR is a

generally used key measure of market risk, certain limitations to this methodology exist.

The VaR measures the potential loss in value of a risky asset or portfolio based on historical market

movements over a defined period for a given confidence interval. However, it is not always possible in

practice that the historical market movements reflect all future conditions and circumstances, which

results in variance in actual loss timing and size due to the changes in assumptions used in calculation.

The result of interest rate VaR calculated under normal distribution of interest rate is as follows (Unit:

Won in millions):


Interest rate VaR ￦ 24,005 ￦ 4,800 ￦ 11,536

(5) Capital Management

The Parent (specialized credit finance company) must maintain adjusted capital adequacy ratio in

accordance with Specialized Credit financial business and sub-regulations, and the ratio for the specialized

credit finance company must be more than 7 % (more than 8% for the credit card company).

This ratio is calculated dividing adjusted capital adequacy by adjusted total assets and all factors are based

on separate financial statement.

- 55 -

The Parent maintains an adjusted capital adequacy over 8%. Adjusted capital adequacy ratio as of

December 31, 2011, December 31, 2010 and January 1, 2010 are summarized as follows (Unit: Won in

millions):

December 31, 2011 December 31, 2010(*) January 1, 2010(*)

Adjusted equity ￦ 1,845,099 ￦ 1,843,315 ￦ 1,698,922

Adjusted total asset 9,426,320 9,842,155 7,542,615

Adjusted equity

ratio

19.57% 18.73% 22.52%

(*) Calculated under previous GAAP

34. FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

(1) Fair Value of Financial Assets and Liabilities

The fair value of financial assets and financial liabilities as of December 31, 2011, December 31, 2010 and



Book value Fair value Book value Fair value Book value Fair value

Assets

Financial assets Cash and due from

financial

institutions ￦ 863,054 ￦ 863,054 ￦ 820,179 ￦ 820,179 ￦ 487,569 ￦ 487,569

Investment

financial assets 1,767 1,767 1,776 1,776 97,438 97,438

Card assets 9,374,266 9,727,640 9,005,769 8,946,299 7,015,372 6,848,512

Loans 470 502 992 1,017 - -

Other assets 144,007 144,217 124,569 125,011 161,140 161,668

Total ￦ 10,383,564 ￦ 10,737,180 ￦ 9,953,285 ￦ 9,894,282 ￦ 7,761,519 ￦ 7,595,187

Liabilities


Borrowings ￦ 590,000 ￦ 590,623 ￦ 1,581,766 ￦ 1,572,060 ￦ 1,071,006 ￦ 1,072,477

Debentures 6,481,760 6,628,755 5,594,406 5,705,078 4,187,011 4,269,841

Other liabilities 1,291,499 1,245,368 1,033,192 947,345 818,809 750,440

Total ￦ 8,363,259 ￦ 8,464,746 ￦ 8,209,364 ￦ 8,224,483 ￦ 6,076,826 ￦ 6,092,758

Fair value is the amount for which an asset could be exchanged, or a liability settled, between

knowledgeable, willing parties in an arm‟s length transaction. The Company presents a comparative

disclosure of fair value and book value by financial assets and financial liabilities type. The best evidence

of fair value is a quoted price in an active market.

The fair values of financial instruments where no active market exists or where quoted prices are not

otherwise available are determined by using valuation techniques. Valuation techniques include using

recent arm‟s length market transactions between knowledgeable, willing parties, if available, reference to

the current fair value of another instrument that is substantially the same, discounted cash flow analysis and

option pricing models. If there is a valuation technique commonly used by market participants to price the

instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in

actual market transactions, the Company uses that technique.

Although the Company believes that the valuation techniques it has used are appropriate and the fair values

recorded in the consolidated statement of financial position are reasonably estimated, the application of

assumptions and estimates means that any selection of different assumptions and valuation techniques

would cause the reported results to differ. Furthermore, as various valuation techniques and assumptions

- 56 -

are used in estimating fair values, it might be difficult to compare the Company‟s results with fair values

determined by other financial institutions.

(2) Fair Value hierarchy

All financial instruments at fair value are categorized into one of the following three fair value hierarchy

levels.

Level 1: Fair value measurements are those derived from quoted prices (unadjusted) for identical assets or

liabilities in an active market. Examples are publicly traded stocks, derivatives and treasury bonds.

Level 2: Fair value measurements are those derived from valuation techniques of which for all significant

inputs are market-observable, either directly or indirectly. Examples include bonds denominated in Korean

won, bonds denominated in foreign currencies and general over-the-counter derivatives transactions, such

as swaps, forward contracts and options.

Level 3: Fair value measurements are those derived from valuation techniques which include significant

inputs which are not based on observable market data. Examples are unlisted stocks, complex structured

bonds and complex over-the-counter derivatives.

The best estimate of fair value is quoted prices in an active market if the financial instrument is traded in

the active market (Level 1). If there is a quoted price commonly used by market participants through stock

exchange, seller, broker, industrial organization, ratings agencies or supervisory authorities, that price is

considered regularly occurred in actual market transactions between knowledgeable, willing parties.

The table below provides the Company‟s financial assets and financial liabilities recorded at fair value in

the consolidated statement of financial position as of December 31, 2011, December 31, 2010 and January

1, 2010 (Unit: Won in millions):

December 31, 2011

Book value Fair value

Level 1 Level 2 Level 3(*)

Financial assets

Fair value financial assets


assets ￦ 1,767 ￦ 1,767 ￦ - ￦ - ￦ 1,767

Derivatives assets 2,555 2,555 - 2,555 -

￦ 4,322 ￦ 4,322 ￦ - ￦ 2,555 ￦ 1,767


Fair value financial

liabilities

Derivatives liabilities ￦ 5,326 ￦ 5,326 ￦￦ 5.326 ￦ -

- 57 -

(*) Available-for-sale financial assets classified as level 3 decreased by ￦8 million due to the impairment.

December 31, 2010



Financial assets



assets ￦ 1,776 ￦ 1,776 ￦ - ￦ - ￦ 1,776


￦ 15,524 ￦ 15,524 ￦ - ￦ 13,748 ￦ 1,776



liabilities

Derivatives liabilities ￦ 35,086 ￦ 35,086 ￦ - ￦ 35,086 ￦ -

(*) There was no change in the financial instruments classified as level 3 during the reporting period.

January 1, 2010



Financial assets



assets ￦ 97,438 ￦ 97,438 ￦ 80,828 ￦ 14,834 ￦ 1,776


￦ 186,946 ￦ 186,946 ￦ 80,828 ￦ 104,342 ￦ 1,776



liabilities

Derivatives liabilities ￦ 14,397 ￦ 14,397 ￦ - ￦ 14,397 ￦ -

(3) Financial assets and financial liabilities recorded at fair value

The table below provides the Company‟s financial assets and financial liabilities recorded at fair value in

the consolidated statements of financial position as of December 31, 2011, December 31, 2010 and January

1, 2010 (Unit: Won in millions):

December 31, 2011

Financial asset at

FVTPL

Loans and

receivables

Available-

for-sale

financial

assets

Hedging

derivatives Total Trading

Designated

at

FVTPL

Financial assets

Cash and bank

deposit ￦ - ￦ - ￦ 863,054 ￦ - ￦ - ￦ 863,054


assets - - - 1,767 - 1,767

Card assets - - 9,374,266 - - 9,374,266

Loans - - 470 - - 470

Other assets - - 141,452 - 2,555 144,007

Total ￦ - ￦ - ￦10,379,242 ￦ 1,767 ￦ 2,555 ￦10,383,564

December 31, 2011

Financial liabilities at

FVTPL

Amortized

cost

Hedging

derivatives Total

Trading

Designated at

FVTPL

- 58 -


Borrowings ￦ - ￦ - ￦ 590,000 ￦ - ￦ 590,000

Bonds payable - - 6,481,760 - 6,481,760

Other liabilities - - 1,286,172 5,327 1,291,499

Total ￦ - ￦ - ￦ 8,357,932 ￦ 5,327 ￦ 8,363,259

December 31, 2010

Financial asset at

FVTPL

Loans and

receivables

Available-

for-sale

financial

assets

Financial

assets

held to

maturity

Hedging


Designated

at

FVTPL

Financial assets

Cash and bank

deposit ￦ - ￦ - ￦ 820,179 ￦ - ￦ - ￦ - ￦ 820,179

Financial assets - - - 1,776 - - 1,776

Card assets - - 9,005,769 - - - 9,005,769

Loans - - 992 - - - 992

Other assets - - 110,821 - - 13,748 124,569

Total ￦ - ￦ - ￦ 9,937,761 ￦ 1,776 ￦ - ￦ 13,748 ￦ 9,953,285

December 31, 2010


FVTPL

Amortized

cost

Hedging

derivatives Total

Trading

Designated at

FVTPL


Borrowings ￦ - ￦ - ￦ 1,581,766 ￦ - ￦ 1,581,766

Bonds payable - - 5,594,406 - 5,594,406

Other liabilities - - 998,106 35,086 1,033,192

Total ￦ - ￦ - ￦ 8,174,278 ￦ 35,086 ￦ 8,209,364

January 1, 2010

Financial asset at

FVTPL

Loans and

receivables

Available-

for-sale

financial

assets

Financial

assets

held to

maturity

Hedging


Designated

at

FVTPL

Financial assets

Cash and bank deposit ￦ - ￦ - ￦ 487,569 ￦ - ￦ - ￦ - ￦ 487,569

Financial assets - - - 82,577 27 - 82,604

Card assets - - 7,015,371 - - - 7,015,371

Loans - - - - - - -

Other assets 14,834 - 71,632 - - 89,508 175,974

Total ￦14,834 ￦ - ￦ 7,574,572 ￦ 82,577 ￦ 27 ￦ 89,508 ￦ 7,761,518

January 1, 2010


FVTPL

Amortized

cost

Hedging

derivatives Total

Trading

Designated at

FVTPL


Borrowings ￦ - ￦ - ￦ 1,071,006 ￦ - ￦ 1,071,006

Bonds payable - - 4,187,011 - 4,187,011

Other liabilities - - 804,412 14,397 818,809

Total ￦ - ￦ - ￦ 6,062,429 ￦ 14,397 ￦ 6,076,826

- 59 -

35. INTEREST INCOME AND INTEREST EXPENSE:

Interest income and interest expense for the years ended December 31, 2011 and 2010 is as follows (Unit: Won

in millions):

Year ended

December 31, 2011

Year ended

December 31, 2010

Interest income

Cash and bank deposit ￦ 24,071 ￦ 13,369

Others 1,935 2,443

Total 26,006 15,812

Interest expense

Borrowings 32,635 50,130

Bonds payable 324,707 268,180

Others 32 202

Total 357,374 318,512

Net interest income ￦ (331,368) ￦ (302,700)

36. COMMISSION INCOME AND COMMISSION EXPENSE:

Commission income and commission expense for the years ended December 31, 2011 and 2010 is as follows


Year ended

December 31, 2011

Year ended

December 31, 2010

Commission income

Card assets ￦ 1,434,743 ￦ 1,416,197

Total 1,434,743 1,416,197

Commission expense

Service fee 488,265 444,586

Payment fee 13,098 12,356

A credit sale handling fee 108,046 94,611

Merchants co-payment fee 114 132

Overseas payment fee 31,552 25,890

Other 32,423 47,667

Total 673,498 625,242

Net commission income ￦ 761,245 ￦ 790,955

Commission income and commission expense are included in card income and card expenses, respectively.

37. NET INCOME OF FINANCIAL ASSETS:

Net income of financial assets for the years ended December 31, 2011 and 2010 is as follows (Unit: Won in

millions):


Gains

on disposals Impairment loss

Reversal of

impairment loss Net gain

Financial assets

available-for-sale ￦ 7,650 ￦ (8) ￦ 806 ￦ 8,448


Gains

on disposals Impairment loss

Reversal of

impairment loss Net gain

Financial assets

available-for-sale ￦ 101,145 ￦ - ￦ 2,616 ￦ 103,761

- 60 -

38. OTHER OPERATING INCOME AND OTHER OPERATING EXPENSES

Other operating income and other operating expenses for the years ended December 31, 2011 and 2010 is as



Other operating revenue

Foreign exchange gain ￦ 8,645 ￦ 29,024

Foreign currency translation gain 6,038 36,753

Gain on derivative transactions 7,630 4,559

Gain on valuation of derivatives 16,377 10,741

Rental revenue(Note 30) 1,053 1,028

Joint expenses settlement revenue 15,196 17,985

Others 976 1,656

Total ￦ 55,915 ￦ 101,746


Other operating expenses

Foreign exchange loss ￦ 10,149 ￦ 2,500

Foreign currency translation loss 16,397 10,897

Loss on derivative transactions 5,878 26,090

Loss on valuation of derivatives - 37,039

Donations 1,657 1,969

Joint expenses settlement cost 23,785 19,054

Others 6,694 2,994

Total ￦ 64,560 ￦ 100,543

39. Operating Income

The following table lists key items and related amounts that are recognized as operating income (expense) under K-

IFRS, but were recognized as non-operating income (expense) under K-GAAP as of December 31, 2011 and 2010.


Rental revenue ￦ 1,053 ￦ 1,028

Donations (1,657) (1,969)

Total ￦ (604) ￦ (941)

40. SEGMENT INFORMATION

Though the Company conducts business activities related to credit cards, installment financing, leasing, etc., in

accordance with relevant laws such as Specialized Credit Finance Business Act, it does not report separate segment

information, as management considers the Company to be operating under one core business.

Investor Relations

Hyundai Card 2011 review report(eng)