36.

Financial Risk Management

(1) Financial Risk Factors

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

The Group’s financial policy is set up in the long-term perspective and annually reported to the Board of Directors. The financial risk management is carried out by the Value Management Office, which identifies, evaluates and hedges financial risks. The treasury department in the Value Management Office considers various finance market conditions to estimate the effect from the market changes.

1) Market risk

The Group’s market risk management focuses on controlling the extent of exposure to the risk in order to minimize revenue volatility. Market risk is a risk that decreases value or profit of the Group’s portfolio due to changes in market interest rate, foreign exchange rate and other factors.

(i) Sensitivity analysis

Sensitivity analysis is performed for each type of market risk to which the Group is exposed. Reasonably possible changes in the relevant risk variable such as prevailing market interest rates, currency rates, equity prices or commodity prices are estimated and if the rate of change in the underlying risk variable is stable, the Group does not alter the chosen reasonably possible change in the risk variable. The reasonably possible change does not include remote or ‘worst case’ scenarios or ‘stress tests’.

(ii) Foreign exchange risk

The Group is exposed to foreign exchange risk arising from operating, investing and financing activities. Foreign exchange risk is managed within the range of the possible effect on the Group’s cash flows. Foreign exchange risk (i.e. foreign currency translation of overseas operating assets and liabilities) unaffecting the Group’s cash flows is not hedged but can be hedged at a particular situation.

As at December 31, 2016, 2017 and 2018, if the foreign exchange rate had strengthened/weakened by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:


(In millions of Korean won)	Fluctuation of foreign exchange rate			Income before tax¹			Shareholders’ equity
2016.12.31		10	%		(28,134	)		(23,817	)
2016.12.31		-10	%		28,134			23,817
2017.12.31		10	%		(10,132	)		(7,273	)
2017.12.31		-10	%		10,132			7,273
2018.12.31		10	%		(2,350	)		633
2018.12.31		-10	%		(2,851	)		(62	)

1	Computed with considering derivatives hedging effect applied by the Group to hedge foreign exchange risk of liabilities in foreign currencies

The above analysis is a simple sensitivity analysis which assumes that all the variables other than foreign exchange rates are held constant. Therefore, the analysis does not reflect any correlation between foreign exchange rates and other variables, nor the management’s decision to decrease the risk.

Details of financial assets and liabilities in foreign currencies as at December 31, 2016, 2017 and 2018, are as follows:


(In thousands of foreign currencies)	2016				2017				2018
(In thousands of foreign currencies)	Financial assets		Financial liabilities		Financial assets		Financial liabilities		Financial assets		Financial liabilities
USD		210,474		2,536,090		236,476		1,908,831		279,327		1,893,782
SDR¹		311		737		306		738		267		730
JPY		80,555		21,802,051		28,267		21,801,443		66,078		50,000,000
GBP		1		151		—		74		—		256
EUR		40		2,571		186		3,625		2		6
DZD²		471		—		47		—		618		—
CNY		15,262		381		46,555		10		16,315		271
UZS³		39,531		—		136,787		—		121,053		—
RWF⁴		1,203		—		3,346		—		857		—
THB⁵		—		—		—		—		1,685		1,685
IDR⁶		15,646,011		53,142,167		14,886,393		710,162		64,240,286		41,510,330
MMK⁷		2,750		—		84		—		84		—
TZS⁸		29,987		—		317,348		—		—		2,876
BWP⁹		15		—		42		—		897		—
HKD		254		—		—		—		—		—
BDT¹⁰		69,473		—		38,074		—		39,494		—
PLN¹¹		106,025		—		338		—		26		—
VND¹²		515,412		—		311,649		—		467,272		—
XAF¹³		—		—		—		—		666		—
CHF¹⁴		—		—		—		12		—		—

Special Drawing Rights.

Algeria Dinar.

Uzbekistan Sum.

Rwanda Franc.

Thailand Bhat.

Indonesia Rupiah.

Myanmar Kyat.

Tanzanian Shilling.

Botswana Pula.

Bangladesh Taka.

Polish Zloty.

Vietnam Dong.

Central African Franc.

Confoederatio Helvetia Franc.

(iii) Price risk

As at December 31, 2016, 2017 and 2018, the Group is exposed to equity securities price risk because the securities held by the Group are traded in active markets. If the market prices had increased/decreased by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:


(In millions of Korean won)	Fluctuation of price	Income before tax			Equity
2016.12.31	10%	￦	—		￦	539
2016.12.31	-10%		—			(539	)
2017.12.31	10%	￦	—		￦	686
2017.12.31	-10%		—			(686	)
2018.12.31	10%	￦	12		￦	898
2018.12.31	-10%		(12	)		(898	)

The above analysis is based on the assumption that the equity index had increased/decreased by 10% with all other variables held constant and all the Group’s marketable equity instruments had moved according to the historical correlation with the index. Gain or loss on equity securities classified as financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income can increase or decrease equity.

(iv) Cash flow and fair value interest rate risk

The Group’s interest rate risk arises from liabilities in foreign currency such as foreign currency debentures. Debentures in foreign currency issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by swap transactions. Debentures and borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group sets the policy and operates to minimize the uncertainty of the changes in interest rates and financial costs.

As at December 31, 2016, 2017 and 2018, if the market interest rate had increased/decreased by 100 bp with other variables held constant, the effects on profit before income tax and shareholders’ equity would be as follows:


(In millions of Korean won)	Fluctuation of interest rate	Income before tax			Shareholders’ equity
2016.12.31	+ 100 bp	￦	(3,456	)	￦	(1,673	)
2016.12.31	- 100 bp		3,445			(5,025	)
2017.12.31	+ 100 bp	￦	1,942		￦	4,868
2017.12.31	- 100 bp		(1,954	)		(5,198	)
2018.12.31	+ 100 bp	￦	1,059		￦	9,689
2018.12.31	- 100 bp		(1,958	)		(10,237	)

The above analysis is a simple sensitivity analysis which assumes that all the variables other than market interest rates are held constant. Therefore, the analysis does not reflect any correlation between market interest rates and other variables, nor the management’s decision to decrease the risk.

2) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s trade receivables from customers, debt securities and others.

Risk management

Credit risk is managed on the Group basis with the purpose of minimizing financial loss. Credit risk arises from the normal transactions and investing activities, where clients or other party fails to discharge an obligation on contract conditions. To manage credit risk, the Group considers the counterparty’s credit based on the counterparty’s financial conditions, default history and other important factors.

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as outstanding receivables. To minimize such risk, only the financial institutions with strong credit ratings are accepted.

The Group’s investments in debt instruments are considered to be low risk investments. The credit ratings of the investments are monitored for credit deterioration.

Security

For some trade receivables, the Group may obtain security in the form of guarantees or letters of credit, etc. which can be called upon if the counterparty is in default under the terms of the agreement.

Impairment of financial assets

The Group has four types of financial assets that are subject to the expected credit loss model:

•

trade receivables for sales of goods and provision of services,

•

contract assets relating to provision of services,

•

debt investments carried at fair value through other comprehensive income, and

•

other financial assets carried at amortized cost.

While cash equivalents are also subject to the impairment requirement, the identified impairment loss was immaterial.

As at December 31, 2017 and 2018, maximum exposure to credit risk is as follows.


(In millions of Korean won)	December 31, 2017		December 31, 2018
Cash and cash equivalents (except for cash on hand)	￦	1,926,620	￦	2,284,885
Trade and other receivables
Financial assets at amortized costs		6,793,397		5,425,996
Financial assets at fair value through other comprehensive income		—		1,097,348
Contract assets		—		398,797
Other financial assets
Derivatives financial assets for hedging		7,389		29,843
Financial assets at fair value through profit or loss		5,813		714,653
Financial assets at fair value through other comprehensive income		—		6,909
Financial assets at amortized costs		—		484,271
Available-for-sale financial assets		9,899		—
Held-to-maturity financial assets		151		—
Financial instruments and others		1,333,317		—
Financial guarantee contracts¹		143,969		65,760

Total	￦	10,220,555	￦	10,508,462

It is total amount guaranteed by the Group according to the guarantee contracts.

(i) Trade receivables and contract assets

The Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.

(ii) Cash equivalents (except for cash on hand)

The Group is also exposed to credit risk in relation to financial assets that are measured at fair value through profit or loss. The maximum exposure at the end of the reporting period is the carrying amount of these investments.

(iii) Other financial assets at amortized costs

Other financial assets at amortized cost include time deposits, other long-term financial instruments and others. All of the financial assets at amortized costs are considered to have low credit risk, and the loss allowance recognized during the period was, therefore, limited to 12 months expected losses. Management consider ‘low credit risk’ for other instruments when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term.

(iv) Financial assets at fair value through other comprehensive income

Financial assets at fair value through other comprehensive income include available-for-sale recognized in the prior financial year.

All of the debt investments at fair value through other comprehensive income are considered to have low credit risk, and the loss allowance recognized during the period was, therefore, limited to 12 months expected losses. Management consider ‘low credit risk’ for other instruments when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term.

The Group is also exposed to credit risk in relation to financial assets that are measured at fair value through other comprehensive income. The maximum exposure at the end of the reporting period is the carrying amount of these investments.

(v) Financial assets at fair value through profit or loss

3) Liquidity risk

The Group manages its liquidity risk by liquidity strategy and plans. The Group considers the maturity of financial assets and financial liabilities and the estimated cash flows from operations.

The table below analyzes the Group’s liabilities (including interest expenses) into relevant maturity groups based on the remaining period at the date of the end of each reporting period to the contractual maturity date. These amounts are contractual undiscounted cash flows and can differ from the amount in the financial statements.


	December 31, 2017
(In millions of Korean won)	Less than 1 year		1-5 years		More than 5 years		Total
Trade and other payables	￦	7,882,861	￦	1,219,835	￦	161,497	￦	9,264,193
Borrowings(including debentures)		1,623,996		3,666,726		2,317,209		7,607,931
Other non-derivative financial liabilities		4,117		31,290		142,706		178,113
Financial guarantee contracts¹		26,738		—		—		26,738

Total	￦	9,537,712	￦	4,917,851	￦	2,621,412	￦	17,076,975


	December 31, 2018
(In millions of Korean won)	Less than 1 year		1-5 years		More than 5 years		Total
Trade and other payables	￦	7,287,436	￦	1,173,579	￦	492,429	￦	8,953,444
Borrowings(including debentures)		1,507,232		3,669,060		2,378,272		7,554,564
Other non-derivative financial liabilities		6,123		37,358		132,152		175,633
Financial guarantee contracts¹		52,734		13,026		—		65,760

Total	￦	8,853,525	￦	4,893,023	￦	3,002,853	￦	16,749,401

It is total amount guaranteed by the Group according to guarantee contracts. Cash flow from financial guarantee contracts is classified as the maturity group in the earliest period when the financial guarantee contracts can be executed.

Cash outflow and inflow of derivatives settled gross or net are undiscounted contractual cash flow and can differ from the amount in the financial statements.


	December 31, 2016
(In millions of Korean won)	Less than 1 year		1-5 years		More than 5 years		Total
Outflow	￦	1,174,147	￦	1,176,715	￦	536,005	￦	2,886,867
Inflow		1,302,112		1,306,199		588,559		3,196,870


	December 31, 2017
(In millions of Korean won)	Less than 1 year		1-5 years		More than 5 years		Total
Outflow	￦	638,171	￦	546,791	￦	526,633	￦	1,711,595
Inflow		608,270		568,976		509,558		1,686,804


	December 31, 2018
(In millions of Korean won)	Less than 1 year		1-5 years		More than 5 years		Total
Outflow	￦	455,343	￦	1,466,915	￦	517,301	￦	2,439,559
Inflow		484,505		1,492,718		519,133		2,496,356

(2) Management of Capital Risk

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

The Group’s capital structure consists of liabilities including borrowings, cash and cash equivalents, and shareholders’ equity. The treasury department monitors the Group’s capital structure and considers cost of capital and risks related each capital component.

The debt-to-equity ratios as at December 31, 2017 and 2018, are as follows:


(In millions of Korean won)	December 31, 2017			December 31, 2018
Total liabilities	￦	16,712,367		￦	17,815,630
Total equity		13,183,354			14,658,490
Debt-to-equity ratio		127	%		122	%

The Group manages capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ in the statement of financial position plus net debt.

The gearing ratios as at December 31, 2017 and 2018, are as follows:


(In millions of Korean won, %)	December 31, 2017			December 31, 2018
Total borrowings	￦	6,860,539		￦	6,648,293
Less: cash and cash equivalents		(1,928,182	)		(2,703,422	)

Net debt		4,932,357			3,944,871
Total equity		13,183,354			14,658,490
Total capital		18,115,711			18,603,361
Gearing ratio		27	%		21	%

(3) Offsetting Financial Assets and Financial Liabilities

Details of the Group’s recognized financial assets subject to enforceable master netting arrangements or similar agreements are as follows:


(In millions of Korean won)	December 31, 2017
	Gross assets		Gross liabilities offset			Net amounts presented in the statement of financial position		Amounts not offset					Net amount
	Gross assets		Gross liabilities offset					Financial instruments			Cash collateral		Net amount
Derivative used for hedge¹	￦	3,284	￦	—		￦	3,284	￦	(3,284	)	￦	—	￦	—
Trade receivables²		85,755		(5,010	)		80,745		(73,109	)		—		7,636
Other financial assets		8,680		(436	)		8,244		(5,307	)		—		2,937

	￦	97,719	￦	(5,446	)	￦	92,273	￦	(81,700	)	￦	—	￦	10,573


(In millions of Korean won)	December 31, 2018
	Gross assets		Gross liabilities offset			Net amounts presented in the statement of financial position		Amounts not offset					Net amount
	Gross assets		Gross liabilities offset					Financial instruments			Cash collateral		Net amount
Trade receivables²	￦	78,833	￦	(1	)	￦	78,832	￦	(76,414	)	￦	—	￦	2,418
Other financial assets		19,825		—			19,825		(19,825	)		—		—

	￦	98,658	￦	(1	)	￦	98,657	￦	(96,239	)	￦	—	￦	2,418

It is the amount applied with master netting arrangements under the standard contract of International Swap and Derivatives Association (ISDA).

It is the amount for the Controlling Company and KT Powertel Co., Ltd, a subsidiary of the Group, applied with netting arrangements under the reference offer of the telecommunication facility interconnection and sharing data among telecommunications companies

The Group’s recognized financial liabilities subject to enforceable master netting arrangements or similar agreements are as follows:


(In millions of Korean won)	December 31, 2017
	Gross liabilities		Gross assets offset			Net amounts presented in the statement of financial position		Amounts not offset					Net amount
	Gross liabilities		Gross assets offset					Financial instruments			Cash collateral		Net amount
Derivative used for hedging¹	￦	26,135	￦	—		￦	26,135	￦	(3,284	)	￦	—	￦	22,851
Trade payables²		80,829		(5,217	)		75,612		(73,109	)		—		2,503
Other financial liabilities		5,549		(229	)		5,320		(5,307	)		—		13

	￦	112,513	￦	(5,446	)	￦	107,067	￦	(81,700	)	￦	—	￦	25,367


(In millions of Korean won)	December 31, 2018
	Gross liabilities		Gross assets offset			Net amounts presented in the statement of financial position		Amounts not offset					Net amount
	Gross liabilities		Gross assets offset					Financial instruments			Cash collateral		Net amount
Trade payables²	￦	78,317	￦	—		￦	78,317	￦	(76,413	)	￦	—	￦	1,904
Other financial liabilities		19,827		(1	)		19,826		(19,825	)		—		1

	￦	98,144	￦	(1	)	￦	98,143	￦	(96,238	)	￦	—	￦	1,905

It is the amount applied with master netting arrangements under the standard contract of International Swap and Derivatives Association (ISDA).