6-K 1 d571749d6k.htm FORM 6-K

Form 6-K

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

For the month of March 2019

Commission File Number 1-14926

KT Corporation

(Translation of registrant’s name into English)

90, Buljeong-ro,

Bundang-gu, Seongnam-si,

Gyeonggi-do,

Korea

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F  ☒            Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes  ☐            No  ☒

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 11, 2019
KT Corporation
By:		/s/ Seunghoon Chi

Name:		Seunghoon Chi
Title:		Vice President

By:   /s/ Youngkyoon Yun

Name:		Youngkyoon Yun
Title:		Director

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Exhibit 99.1

KT Corporation and Subsidiaries

Consolidated Financial Statements

December 31, 2018 and 2017

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KT Corporation and Subsidiaries

Index

December 31, 2018 and 2017

		Page(s)
Independent Auditor’s Report			1 – 4
Consolidated Financial Statements
Consolidated Statements of Financial Position			5 – 6
Consolidated Statements of Profit of Loss			7
Consolidated Statements of Comprehensive Income			8
Consolidated Statements of Changes in Equity			9 – 10
Consolidated Statements of Cash Flows			11 – 12
Notes to the Consolidated Financial Statements			13 – 126

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Independent Auditor’s Report

(English Translation of a Report Originally Issued in Korean)

To the Board of Directors and Shareholders of

KT Corporation

Opinion

We have audited the accompanying consolidated financial statements of KT Corporation and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of profit or loss, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2018 and 2017, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).

Basis for Opinion

We conducted our audits in accordance with Korean Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements of the Republic of Korea that are relevant to our audit of the consolidated financial statements and we have fulfilled our other ethical responsibilities in accordance with the ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

(1) Revenue recognition in telecommunication services through the billing systems

As described in Note 2, the Group identifies performance obligations in contracts with customers and recognizes revenue as the performance obligations are satisfied. The Group provides telecommunication services with various price plans to a large number of customers, and calculation, billing and collection of telecommunication services fee are processed through the billing systems.

Samil PricewaterhouseCoopers, 100 Hangang-daero, Yongsan-gu, Seoul 04386, Korea, www.samil.com

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The information generated by the billing systems is utilized as the basis for accounting for revenue recognition, and the amount of revenue processed through the billing systems is significant on the consolidated financial statements.

Therefore, we identified the occurrence of revenue from telecommunication services recorded in the billing systems as a key audit matter.

We performed test of controls and test of details in relation to revenue recognition through the billing systems.

Our audit approach included evaluation of the IT environment and testing the design and operating effectiveness of controls covering, in particular:

• Creation and modification of customer information in the billing systems

• Aggregation of customers’ usage information in the billing systems

• Billing and collection in the billing systems

• Data interface between the billing systems and the finance system

We also performed substantive audit procedures on customer contracts, service usage data and billing data recorded in the billing systems on a sample basis.

(2) Changes in revenue recognition with the application of Korean IFRS 1115 Revenue from Contracts with Customers (Korean IFRS 1115)

The Group has applied Korean IFRS 1115 from January 1, 2018. In accordance with the transitional provisions in Korean IFRS 1115, its comparative figures have not been restated, and the cumulative impact of initially applying the revenue standard is recognized as an adjustment to retained earnings amounting to W 967.6 billion as at January 1, 2018.

We identified the appropriateness of the Group’s accounting policy for revenue recognition in accordance with Korean IFRS 1115 and the accuracy of financial impact from applying the established accounting policy as a key audit matter. The detail impact of the application of the standard is discussed in Note 37.

Our audit approach included understanding and evaluating the Group’s internal controls over financial reporting for applying Korean IFRS 1115 and testing the design and operating effectiveness of controls covering, in particular:

• Evaluation of the accounting policy established by the Group in accordance with Korean IFRS 1115

• Understanding and evaluating changes in the Group’s financial information system to apply the new revenue recognition standard

• Testing the design and operating effectiveness of controls in regards to financial reporting to apply the new revenue recognition standard

• Substantive procedures to ensure consolidated finance statements impact on the beginning and ending balance with the application of Korean IFRS 1115 on a sample basis

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Other Matters

Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Korean IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Korean Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Korean Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

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• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Jin-Kyu Lee.

Seoul, Korea

March 11, 2019

This report is effective as of March 11, 2019, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

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KT Corporation and Subsidiaries

Consolidated Statements of Financial Position

December 31, 2018 and 2017, and January 1, 2017

(in millions of Korean won)		Notes				December 31, 2018				December 31, 2017				January 1, 2017
Assets
Current assets
Cash and cash equivalents			4,5			W	2,703,422			W	1,928,182			W	2,900,311
Trade and other receivables, net			4,6				5,807,421				5,992,753				5,481,527
Other financial assets			4,7				994,781				972,631				720,555
Current income tax assets							4,046				9,030				2,079
Inventories, net			8				683,998				457,726				377,981
Current assets held for sale			10				13,035				7,230				—
Other current assets			9				1,687,549				304,860				311,135
Total current assets							11,894,252				9,672,412				9,793,588
Non-current assets
Trade and other receivables, net			4,6				842,995				828,831				709,011
Other financial assets			4,7				623,176				754,992				664,726
Property and equipment, net			11,21				13,068,257				13,562,319				14,312,111
Investment properties, net			12				1,091,084				1,189,531				1,148,044
Intangible assets, net			13				3,407,123				2,632,704				3,022,803
Investments in associates and joint ventures			14				272,407				279,431				284,075
Deferred income tax assets			31				443,641				703,524				697,558
Other non-current assets			9				545,895				107,166				106,099
Total non-current assets							20,294,578				20,058,498				20,944,427
Total assets						W	32,188,830			W	29,730,910			W	30,738,015

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KT Corporation

Consolidated Statements of Financial Position

December 31, 2018 and 2017, and January 1, 2017

(in millions of Korean won)		Notes		December 31, 2018				December 31, 2017				January 1, 2017
Liabilities
Current liabilities
Trade and other payables		4,15		W	7,007,515			W	7,426,089			W	7,141,726
Borrowings		4,16			1,368,481				1,573,474				1,820,001
Other financial liabilities		4,7			942				37,223				233
Current income tax liabilities					249,837				82,983				102,842
Provisions		17			111,461				78,172				96,485
Deferred income					52,878				17,906				35,617
Other current liabilities		9			596,590				258,315				285,301
Total current liabilities					9,387,704				9,474,162				9,482,205
Non-current liabilities
Trade and other payables		4,15			1,513,864				1,001,369				1,188,311
Borrowings		4,16			5,279,812				5,110,188				6,300,790
Other financial liabilities		4,7			163,454				149,267				108,431
Net defined benefit liabilities		18			561,269				395,079				378,404
Provisions		17			163,995				124,858				100,694
Deferred income					110,702				91,698				85,372
Deferred income tax liabilities		31			206,473				128,462				137,680
Other non-current liabilities		9			70,277				45,227				27,125
Total non-current liabilities					8,069,846				7,046,148				8,326,807
Total liabilities					17,457,550				16,520,310				17,809,012
Equity attribute to owners of the Controlling Company
Share capital		22			1,564,499				1,564,499				1,564,499
Share premium					1,440,258				1,440,258				1,440,258
Retained earnings		23			11,328,859				9,988,396				9,790,768
Accumulated other comprehensive income		24			50,158				30,985				(1,432	)
Other components of equity		24			(1,181,083	)			(1,205,302	)			(1,217,934	)
					13,202,691				11,818,836				11,576,159
Non-controlling interest					1,528,589				1,391,764				1,352,844
Total equity					14,731,280				13,210,600				12,929,003
Total liabilities and equity				W	32,188,830			W	29,730,910			W	30,738,015

The above consolidated financial statements of financial position should be read in conjunction with the accompanying notes.

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KT Corporation and Subsidiaries

Consolidated Statements of Profit or Loss

Years Ended December 31, 2018 and 2017

(in millions of Korean won, except per share amounts)		Notes				2018				2017
Operating revenue			26			W	23,460,143			W	23,387,267
Operating expenses			28				22,198,621				22,011,981
Operating profit							1,261,522				1,375,286
Other income			29				215,998				287,388
Other expenses			29				319,895				573,549
Finance income			30				374,243				406,328
Finance costs			30				435,659				644,531
Share of net losses of associates and joint venture			14				(5,467	)			(13,892	)
Profit before income tax expense							1,090,742				837,030
Income tax expense			31				328,437				275,504
Profit for the year						W	762,305			W	561,526
Profit for the year attributable to:
Owners of the Controlling Company:						W	688,464			W	476,744
Non-controlling interest:							73,841				84,782
Earnings per share attributable to the equity holders of the Controlling Company during the year (in Korean won):			32
Basic earnings per share						W	2,809			W	1,946
Diluted earnings per share							2,809				1,945

The above consolidated statements of profit or loss should be read in conjunction with the accompanying notes.

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KT Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2018 and 2017

(in millions of Korean won)		Notes				2018				2017
Profit for the year						W	762,305			W	561,526
Other comprehensive income
Items that will not be reclassified to profit or loss:
Remeasurements of the net defined benefit liability			18				(73,511	)			(83,962	)
Share of remeasurement loss of associates and joint ventures							(816	)			(115	)
Gain on valuation of equity instruments at fair value through other comprehensive income							43,077				—
Items that may be subsequently reclassified to profit or loss:
Gain on valuation of debt instruments at fair value through other comprehensive income							734				—
Changes in value of available-for-sale financial assets							—				51,235
Other comprehensive income from available-for sale financial assets reclassified to profit or loss							—				(55,450	)
Valuation gain on cash flow hedge							17,268				(111,083	)
Other comprehensive income from cash flow hedges reclassified to profit or loss							(44,279	)			141,929
Share of other comprehensive income from associates and joint ventures							(41	)			10,280
Exchange differences on translation of foreign operations							2,940				(21,122	)
Total comprehensive income for the year						W	707,677			W	493,238
Total comprehensive income for the year attributable to:
Owners of the Controlling Company						W	632,072			W	428,334
Non-controlling interest							75,605				64,904

The above consolidated financial statements of financial position should be read in conjunction with the accompanying notes.

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KT Corporation and Subsidiaries

Consolidated Statements of Changes in Equity

Years Ended December 31, 2018 and 2017

						Attributable to owners of the Controlling Company
(in millions of Korean won)		Notes				Share capital				Share premium				Retained earnings				Accumulated other comprehensive income				Other components of equity				Total				Non-controlling interest				Total equity
Balance at December 31, 2016						W	1,564,499			W	1,440,258			W	9,656,544			W	(1,432	)		W	(1,217,934	)		W	11,441,935			W	1,352,844			W	12,794,779
Adjustments from prior years			45				—				—				134,224				—				—				134,224				—				134,224
Balance at January 1, 2017							1,564,499				1,440,258				9,790,768				(1,432	)			(1,217,934	)			11,576,159				1,352,844				12,929,003
Comprehensive income
Profit for the year							—				—				476,744				—				—				476,744				84,782				561,526
Changes in value of available-for-sale financial assets			4,7				—				—				—				(1,433	)			—				(1,433	)			(2,782	)			(4,215	)
Remeasurements of net defined benefit liability			18				—				—				(80,711	)			—				—				(80,711	)			(3,251	)			(83,962	)
Valuation gains on cash flow hedge			4,7				—				—				—				30,846				—				30,846				—				30,846
Share of other comprehensive income of associates and joint ventures							—				—				—				10,148				—				10,148				132				10,280
Share of loss on remeasurements of associates and joint ventures							—				—				(116	)			—				—				(116	)			1				(115	)
Exchange differences on translation of foreign operations							—				—				—				(7,144	)			—				(7,144	)			(13,978	)			(21,122	)
Total comprehensive income for the year							—				—				395,917				32,417				—				428,334				64,904				493,238
Transactions with owners
Dividends paid by the Controlling Company							—				—				(195,977	)			—				—				(195,977	)			—				(195,977	)
Dividends paid to non-controlling interest of subsidiaries							—				—				—				—				—				—				(47,162	)			(47,162	)
Changes in consolidation scope							—				—				—				—				—				—				250				250
Change in ownership interest in subsidiaries							—				—				—				—				5,441				5,441				21,242				26,683
Appropriations of loss on disposal of treasury stock							—				—				(2,312	)			—				2,312				—				—				—
Others							—				—				—				—				4,879				4,879				(314	)			4,565
Subtotal							—				—				(198,289	)			—				12,632				(185,657	)			(25,984	)			(211,641	)
Balance at December 31, 2017						W	1,564,499			W	1,440,258			W	9,988,396			W	30,985			W	(1,205,302	)		W	11,818,836			W	1,391,764			W	13,210,600

The above consolidated statements of changes of equity should be read in conjunction with the accompanying notes.

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KT Corporation and Subsidiaries

Consolidated Statements of Changes in Equity

Years Ended December 31, 2018 and 2017

						Attributable to owners of the Controlling Company
(in millions of Korean won)		Notes				Share capital				Share premium				Retained earnings				Accumulated other comprehensive income				Other components of equity				Total				Non-controlling interest				Total equity
Balance at January 1, 2018						W	1,564,499			W	1,440,258			W	9,988,396			W	30,985			W	(1,205,302	)		W	11,818,836			W	1,391,764			W	13,210,600
Changes in accounting policy			43				—				—				956,704				17,741				—				974,445				77,128				1,051,573
Adjusted total equity at the beginning of the financial year							1,564,499				1,440,258				10,945,100				48,726				(1,205,302	)			12,793,281				1,468,892				14,262,173
Comprehensive income
Profit for the year							—				—				688,464				—				—				688,464				73,841				762,305
Remeasurements of net defined benefit liability			18				—				—				(61,449	)			—				—				(61,449	)			(12,062	)			(73,511	)
Share of loss on remeasurements of joint ventures and associates							—				—				(816	)			—				—				(816	)			—				(816	)
Share of other comprehensive income of associates and joint ventures							—				—				—				(136	)			—				(136	)			95				(41	)
Valuation loss on cash flow hedge			4,7				—				—				—				(27,011	)			—				(27,011	)			—				(27,011	)
Gain(loss) on disposal of equity instruments at fair value through other comprehensive income			4,7				—				—				4,441				(4,441	)			—				—				—				—
Gain on valuation of financial instruments at fair value through other comprehensive income			4,7				—				—				—				30,731				—				30,731				13,080				43,811
Exchange differences on translation of foreign operations							—				—				—				2,289				—				2,289				651				2,940
Total comprehensive income for the year							—				—				630,640				1,432				—				632,072				75,605				707,677
Transactions with owners
Dividends paid by the Controlling Company							—				—				(245,097	)			—				—				(245,097	)			—				(245,097	)
Dividends paid to non-controlling interest of subsidiaries							—				—				—				—				—				—				(53,535	)			(53,535	)
Changes in consolidation scope							—				—				—				—				(1,803	)			(1,803	)			102				(1,701	)
Change in ownership interest in subsidiaries							—				—				—				—				11,118				11,118				37,471				48,589
Appropriations of loss on disposal of treasury stock							—				—				(2,046	)			—				2,046				—				—				—
Disposal of treasury stock							—				—				—				—				9,547				9,547				—				9,547
Others							—				—				262				—				3,311				3,573				54				3,627
Subtotal							—				—				(246,881	)			—				24,219				(222,662	)			(15,908	)			(238,570	)
Balance at December 31, 2018						W	1,564,499			W	1,440,258			W	11,328,859			W	50,158			W	(1,181,083	)		W	13,202,691			W	1,528,589			W	14,731,280

The above consolidated statements of changes of equity should be read in conjunction with the accompanying notes.

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KT Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2018 and 2017

(in millions of Korean won)		Notes				2018				2017
Cash flows from operating activities
Cash generated from operations			34			W	4,212,222			W	4,318,884
Interest paid							(304,428	)			(252,405	)
Interest received							242,951				93,769
Dividends received							14,074				10,843
Income tax paid							(154,355	)			(293,342	)
Net cash inflow from operating activities							4,010,464				3,877,749
Cash flows from investing activities
Collection of loans							64,023				55,190
Disposal of available-for-sale financial assets							—				146,429
Disposal of financial assets at fair value through profit or loss							397,224				—
Disposal of financial assets at amortized cost							255,290				—
Disposal of financial assets at fair value through other comprehensive income							2,474				—
Disposal of investments in associates and joint ventures							7,832				59,818
Disposal of assets held-for-sale							9,842				—
Disposal of current and non-current financial instruments							—				645,686
Disposal of property and equipment and investment properties							90,992				68,229
Disposal of intangible assets							20,037				22,680
Loans granted							(60,229	)			(59,800	)
Acquisition of available-for-sale financial assets							—				(89,027	)
Acquisition of financial assets at fair value through profit or loss							(158,787	)			—
Acquisition of financial assets at amortized cost							(248,789	)			—
Acquisition of financial assets at fair value through other comprehensive income							(16,239	)			—
Acquisition of investments in associates and joint ventures							(34,420	)			(41,780	)
Acquisition of current and non-current financial instruments							—				(1,231,917	)
Acquisition of property and equipment and investment properties							(2,260,879	)			(2,442,223	)
Acquisition of intangible assets							(746,213	)			(613,556	)
Decrease in cash due to business combination, etc.							(26,288	)			(2,974	)
Net cash outflow from investing activities							(2,704,130	)			(3,483,245	)

The above consolidated statements of cash flows should be read in conjunction with the accompanying notes.

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Consolidated Statements of Cash Flows

Years Ended December 31, 2018 and 2017

(in millions of Korean won)		Notes		2018				2017
Cash flows from financing activities		35
Proceeds from borrowings					1,473,016				616,257
Settlement of derivative assets and liabilities, net					(3,461	)			71,370
Cash inflow from consolidated equity transaction					—				27,261
Cash inflow from other financing activities					13,939				16,962
Repayments of borrowings					(1,612,731	)			(1,780,174	)
Dividends paid					(298,632	)			(243,140	)
Decrease in finance leases liabilities					(73,885	)			(71,735	)
Acquisition of treasury stock					(24,415	)			—
Cash outflow from consolidated equity transaction					(5,506	)			(300	)
Net cash outflow from financing activities					(531,675)				(1,363,499	)
Effect of exchange rate change on cash and cash equivalents					581				(3,134	)
Net increase (decrease) in cash and cash equivalents					775,240				(972,129	)
Cash and cash equivalents		5
Beginning of the year		5			1,928,182				2,900,311
End of the year				W	2,703,422			W	1,928,182

The above consolidated statements of cash flows should be read in conjunction with the accompanying notes.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

1. General Information

The consolidated financial statements include the accounts of KT Corporation, which is the controlling company as defined under Korean IFRS 1110 Consolidated Financial Statements, and its 63 controlled subsidiaries as described in Note 1.2 (collectively referred to as the “Group”).

1.1 The Controlling Company

KT Corporation (the “Controlling Company”) commenced operations on January 1, 1982, when it spun off from the Korea Communications Commission (formerly the Korean Ministry of Information and Communications) to provide telephone services and to engage in the development of advanced communications services under the Act of Telecommunications of Korea. The headquarters are located in Seongnam City, Gyeonggi Province, Republic of Korea, and the address of its registered head office is 90, Buljeong-ro, Bundang-gu, Seongnam City, Gyeonggi Province.

On October 1, 1997, upon the announcement of the Government-Investment Enterprises Management Basic Act and the Privatization Law, the Controlling Company became a government-funded institution under the Commercial Code of Korea.

On December 23, 1998, the Controlling Company’s shares were listed on the Korea Exchange.

On May 29, 1999, the Controlling Company issued 24,282,195 additional shares and issued American Depository Shares (ADS), representing new shares and 20,813,311 government-owned shares, at the New York Stock Exchange. On July 2, 2001, the additional ADS representing 55,502,161 government-owned shares were issued at the New York Stock Exchange.

In 2002, the Controlling Company acquired the entire government-owned shares in accordance with the Korean government’s privatization plan. At the end of the reporting period, the Korean government does not own any share in the Controlling Company.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

1.2 Consolidated Subsidiaries

The consolidated subsidiaries as at December 31, 2018 and 2017, are as follows:

						Controlling percentage ownership1 (%)
Subsidiary		Type of Business		Location		December 31, 2018				December 31, 2017				Closing month
KT Powertel Co., Ltd. 2		Trunk radio system business		Korea			44.8	%			44.8	%		December
KT Linkus Co., Ltd.		Public telephone maintenance		Korea			92.4	%			91.4	%		December
KT Submarine Co., Ltd. 2,4		Submarine cable construction and maintenance		Korea			39.3	%			39.3	%		December
KT Telecop Co., Ltd.		Security service		Korea			86.8	%			86.8	%		December
KT Hitel Co., Ltd.		Data communication		Korea			67.1	%			67.1	%		December
KT Service Bukbu Co., Ltd.		Opening services of fixed line		Korea			67.3	%			67.3	%		December
KT Service Nambu Co., Ltd.		Opening services of fixed line		Korea			77.3	%			77.3	%		December
KT Commerce Inc.		B2C, B2B service		Korea			100.0	%			100.0	%		December
KT Strategic Investment Fund No.1		Investment fund		Korea			100.0	%			100.0	%		December
KT Strategic Investment Fund No.2		Investment fund		Korea			100.0	%			100.0	%		December
KT Strategic Investment Fund No.3		Investment fund		Korea			100.0	%			100.0	%		December
KT Strategic Investment Fund No.4		Investment fund		Korea			100.0	%			100.0	%		December
BC-VP Strategic Investment Fund No.1		Investment fund		Korea			100.0	%			—			December
BC Card Co., Ltd.		Credit card business		Korea			69.5	%			69.5	%		December
VP Inc.		Payment security service for credit card, others		Korea			50.9	%			50.9	%		December
H&C Network		Call centre for financial sectors		Korea			100.0	%			100.0	%		December
BC Card China Co., Ltd.		Software development and data processing		China			100.0	%			100.0	%		December
INITECH Co., Ltd. 4		Internet banking ASP and security solutions		Korea			58.2	%			58.2	%		December
Smartro Co., Ltd.		VAN (Value Added Network) business		Korea			81.1	%			81.1	%		December
KTDS Co., Ltd. 4		System integration and maintenance		Korea			95.5	%			95.5	%		December
KT M Hows Co., Ltd.		Mobile marketing		Korea			90.0	%			90.0	%		December
KT M&S Co., Ltd.		PCS distribution		Korea			100.0	%			100.0	%		December
GENIE Music Corporation (KT Music Corporation) 2		Online music production and distribution		Korea			36.0	%			42.5	%		December
KT MOS Bukbu Co., Ltd. 4		Telecommunication facility maintenance		Korea			100.0	%			—			December
KT MOS Nambu Co., Ltd. 4		Telecommunication facility maintenance		Korea			98.4	%			—			December
KT Skylife Co., Ltd. 4		Satellite broadcasting business		Korea			50.3	%			50.3	%		December
Skylife TV Co., Ltd.		TV contents provider		Korea			92.6	%			92.6	%		December
KT Estate Inc.		Residential building development and supply		Korea			100.0	%			100.0	%		December
KT AMC Co., Ltd.		Asset management and consulting services		Korea			100.0	%			100.0	%		December
NEXR Co., Ltd.		Cloud system implementation		Korea			100.0	%			100.0	%		December
KTSB Data service		Data centre development and related service		Korea			51.0	%			51.0	%		December
KT Sat Co., Ltd.		Satellite communication business		Korea			100.0	%			100.0	%		December

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KT Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

						Controlling percentage ownership1 (%)
Subsidiary		Type of Business		Location		December 31, 2018				December 31, 2017				Closing month
Nasmedia, Inc. 3		Online advertisement		Korea			42.8	%			42.8	%		December
KT Sports Co., Ltd.		Management of sports group		Korea			100.0	%			100.0	%		December
KT Music Contents Fund No.1		Music contents investment business		Korea			80.0	%			80.0	%		December
KT Music Contents Fund No.2		Music contents investment business		Korea			100.0	%			100.0	%		December
KT-Michigan Global Content Fund		Content investment business		Korea			88.6	%			88.6	%		December
Autopion Co., Ltd.		Service for information and communication		Korea			100.0	%			100.0	%		December
KTCS Corporation 2,4		Database and online information provider		Korea			30.9	%			30.9	%		December
KTIS Corporation 2,4		Database and online information provider		Korea			30.1	%			30.1	%		December
KT M mobile		Special category telecommunications operator and sales of communication device		Korea			100.0	%			100.0	%		December
KT Investment Co., Ltd.		Technology business finance		Korea			100.0	%			100.0	%		December
Whowho&Company Co., Ltd.		Software development and supply		Korea			100.0	%			100.0	%		December
PlayD Co., Ltd. (N Search Marketing Co., Ltd.)		Advertising agency business		Korea			100.0	%			100.0	%		December
Next connect PFV		Residential building development and supply		Korea			100.0	%			—			December
KT Rwanda Networks Ltd.		Network installation and management		Rwanda			51.0	%			51.0	%		December
AOS Ltd.		System integration and maintenance		Rwanda			51.0	%			51.0	%		December
KT Belgium		Foreign investment business		Belgium			100.0	%			100.0	%		December
KT ORS Belgium		Foreign investment business		Belgium			100.0	%			100.0	%		December
Korea Telecom Japan Co., Ltd.		Foreign telecommunication business		Japan			100.0	%			100.0	%		December
KBTO sp.zo.o.		Electronic communication business		Poland			96.2	%			94.3	%		December
Korea Telecom China Co., Ltd.		Foreign telecommunication business		China			100.0	%			100.0	%		December
KT Dutch B.V.		Super iMax and East Telecom management		Netherlands			100.0	%			100.0	%		December
Super iMax LLC		Wireless high speed internet business		Uzbekistan			100.0	%			100.0	%		December
East Telecom LLC		Fixed line telecommunication business		Uzbekistan			91.0	%			91.0	%		December
Korea Telecom America, Inc.		Foreign telecommunication business		USA			100.0	%			100.0	%		December
PT. KT Indonesia		Foreign telecommunication business		Indonesia			99.0	%			99.0	%		December
PT. BC Card Asia Pacific		Software development and supply		Indonesia			99.9	%			99.9	%		December
KT Hong Kong Telecommunications Co., Ltd.		Fixed line communication business		Hong Kong			100.0	%			100.0	%		December
KT Hong Kong Limited		Foreign investment business		Hong Kong			100.0	%			100.0	%		December
Korea Telecom Singapore Pte. Ltd.		Foreign investment business		Singapore			100.0	%			100.0	%		December
Texnoprosistem LLP		Fixed line internet business		Uzbekistan			100.0	%			100.0	%		December
Nasmedia Thailand Company Limited		Internet advertising solution		Thailand			99.9	%			—			December

¹  Sum of the ownership interests owned by the Controlling Company and subsidiaries.

²  Although the Controlling Company owns less than 50% ownership in this entity, this entity is consolidated as the Controlling Company can exercise the majority voting rights in its decision-making process at all times considering the historical voting pattern at the shareholders’ meetings.

³  Although the Controlling Company owns less than 50% ownership in this entity, this entity is consolidated as the Controlling Company holds the majority of voting right based on an agreement with other investors.

⁴  The number of subsidiaries’ treasury stock is deducted from the total number of shares when calculating the controlling percentage ownership.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Changes in Scope of Consolidation

Subsidiaries newly included in the consolidation during the year ended December 31, 2018:

Location		Name of Subsidiary		Reason
Korea		BC-VP Strategic Investment Fund No.1		Newly established
Korea		KT MOS Bukbu Co., Ltd.		Acquisition
Korea		KT MOS Nambu Co., Ltd.		Acquisition
Korea		Next connect PFV		Newly established
Thailand		Nasmedia Thailand Company Limited		Newly established

Subsidiaries excluded from the consolidation during the year ended December 31, 2018:

Location		Name of Subsidiary		Reason
Korea		KT New Business Fund No.1		Liquidated

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Summarized information for consolidated subsidiaries as at and for the years ended December 31, 2018 and 2017, is as follows:

		December 31, 2018
(In millions of Korean won)		Total assets				Total liabilities				Operating revenues				Profit (loss) for the year
KT Powertel Co., Ltd.		W	124,064			W	28,217			W	65,169			W	(5,545	)
KT Linkus Co., Ltd.			54,147				44,895				103,139				1,216
KT Submarine Co., Ltd.			130,715				27,530				61,278				(4,286	)
KT Telecop Co., Ltd.			272,492				140,314				326,053				166
KT Hitel Co., Ltd.			272,708				66,043				278,888				657
KT Service Bukbu Co., Ltd.			30,599				23,964				195,779				(31	)
KT Service Nambu Co., Ltd.			37,452				27,939				229,937				160
BC Card Co., Ltd. 1			3,722,379				2,630,536				3,550,744				70,889
H&C Network 1			245,841				63,188				294,267				(15,944	)
Nasmedia Co., Ltd. 1			303,112				161,164				106,607				20,596
KTDS Co., Ltd. 1			148,675				95,834				434,013				8,586
KT M Hows Co., Ltd.			60,197				42,386				26,603				3,691
KT M&S Co., Ltd.			228,073				207,740				786,699				11,408
GENIE Music Corporation (KT Music Corporation)			221,559				75,827				171,233				6,374
KT MOS Bukbu Co., Ltd.			14,121				10,571				16,524				(782	)
KT MOS Nambu Co., Ltd.			14,313				8,927				14,899				(2,418	)
KT Skylife Co., Ltd. 1			816,001				149,841				690,821				52,010
KT Estate Inc. 1			1,695,995				304,712				568,285				51,854
KTSB Data service			8,632				523				4,627				(9,576	)
KT Sat Co., Ltd.			685,926				173,513				136,953				4,921
KT Sports Co., Ltd.			9,560				6,376				55,423				(154	)
KT Music Contents Fund No.1			14,092				1,035				559				294
KT Music Contents Fund No.2			7,629				281				150				(142	)
KT-Michigan Global Content Fund			12,741				—				869				(670	)
Autopion Co., Ltd.			8,838				5,801				12,016				453
KT M mobile Co., Ltd.			146,334				35,335				172,296				(10,085	)
KT Investment Co., Ltd. 1			74,580				58,040				8,095				247
KTCS Corporation 1			350,280				188,561				1,016,085				11,401
KTIS Corporation			229,246				68,997				450,826				7,900
Next connect PFV			385,769				34,370				143				(12,449	)
Korea Telecom Japan Co., Ltd.1			1,326				2,910				1,930				(126	)
Korea Telecom China Co., Ltd.			661				22				681				10
KT Dutch B.V.			31,693				41				191				105
Super iMax LLC			4,150				4,528				4,845				(424	)
East Telecom LLC 1			16,590				14,263				15,087				2,639
Korea Telecom America, Inc.			4,218				832				7,554				350
PT. KT Indonesia			8				—				—				—
KT Rwanda Networks Ltd. 2			144,129				162,801				15,025				(29,238	)
KT Belguium			90,172				1				—				(43	)
KT ORS Belgium			6,709				5				—				(46	)
KBTO sp.zo.o.			1,364				217				202				(3,771	)
AOS Ltd. 2			14,018				4,952				6,288				(680	)
KT Hong Kong Telecommunications Co., Ltd.			3,616				2,143				9,990				351

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

		December 31, 2017
(In millions of Korean won)		Total assets				Total liabilities				Operating revenues				Profit (loss) for the year
KT Powertel Co., Ltd.		W	115,125			W	18,937			W	67,337			W	2,112
KT Linkus Co., Ltd.			59,344				51,516				111,171				725
KT Submarine Co., Ltd.			142,797				34,056				73,738				8,243
KT Telecop Co., Ltd.			264,353				131,633				315,366				2,885
KT Hitel Co., Ltd.			258,240				52,943				227,631				3,225
KT Service Bukbu Co., Ltd.			29,281				22,096				194,621				688
KT Service Nambu Co., Ltd.			36,076				26,412				232,826				875
BC Card Co., Ltd. 1			4,048,263				2,955,038				3,628,560				156,109
H&C Network 1			273,856				65,446				277,603				16,104
Nasmedia Co., Ltd. 1			315,967				188,197				120,275				26,676
KTDS Co., Ltd. 1			144,922				93,343				458,862				11,584
KT M Hows Co., Ltd.			42,738				28,489				24,269				4,097
KT M&S Co., Ltd.			242,388				231,151				733,143				(9,707	)
GENIE Music Corporation (KT Music Corporation)			139,686				48,512				155,642				(3,401	)
KT Skylife Co., Ltd. 1			792,893				210,550				685,822				57,314
KT Estate Inc. 1			1,704,383				311,760				555,381				67,600
KTSB Data service			18,306				605				4,913				(1,651	)
KT Sat Co., Ltd.			742,391				220,804				140,096				29,601
KT Sports Co., Ltd.			11,131				7,805				53,163				(199	)
KT Music Contents Fund No.1			13,804				1,041				370				(499	)
KT Music Contents Fund No.2			7,500				11				—				(11	)
KT-Michigan Global Content Fund			14,575				147				159				(426	)
Autopion Co., Ltd.			6,306				3,530				6,669				(618	)
KT M mobile Co., Ltd.			93,601				21,453				157,592				(38,883	)
KT Investment Co., Ltd. 1			54,673				38,313				8,794				(619	)
KTCS Corporation 1			348,334				188,764				967,760				7,385
KTIS Corporation			223,818				62,569				438,131				8,337
Korea Telecom Japan Co., Ltd. 1			1,554				2,788				1,910				536
Korea Telecom China Co., Ltd.			665				32				1,030				348
KT Dutch B.V.			30,312				50				206				169
Super iMax LLC			3,449				4,886				7,276				(4,584	)
East Telecom LLC 1			11,672				11,748				19,498				(9,118	)
Korea Telecom America, Inc.			3,694				791				6,783				109
PT. KT Indonesia			8				—				—				(6	)
KT Rwanda Networks Ltd. 2			151,359				139,561				14,431				(22,762	)
KT Belgium			86,455				8				—				(2	)
KT ORS Belgium			1,769				14				—				(10	)
KBTO sp.zo.o.			3,311				2,268				46				(3,456	)
AOS Ltd. 2			9,437				4,519				8,938				(682	)
KT Hong Kong Telecommunications Co., Ltd.			2,578				1,497				7,304				494

¹  These companies are the intermediate controlling companies of other subsidiaries and the above financial information is from their consolidated financial statements.

²  At the end of the reporting period, convertible preferred stock issued by subsidiaries is included in liabilities.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

2. Significant Accounting Policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of Preparation

The Group maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS). The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language financial statements.

Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Group’s financial position, financial performance or cash flows, is not presented in the accompanying consolidated financial statements.

The consolidated financial statements of the Group have been prepared in accordance with Korean IFRS. These are the standards, subsequent amendments and related interpretations issued by the International Accounting Standards Board (IASB) that have been adopted by the Republic of Korea.

The preparation of the consolidated financial statements requires the use of critical accounting estimates. Management also needs to exercise judgement in applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.

2.2 Changes in Accounting Policy and Disclosures

(1) New and amended standards adopted by the Group

The Group has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2018, and the application has following impacts on the consolidated financial statements.

• Amendment to Korean IFRS 1028 Investments in Associates and Joint Ventures

When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organization, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure each investment separately at fair value through profit or loss in accordance with Korean IFRS 1109. The amendment does not have a significant impact on the financial statements because the Group is not a venture capital organization.

• Amendment to Korean IFRS 1040 Transfers of Investment Property

The amendment to Korean IFRS 1040 clarifies that a transfer to, or from, investment property, including property under construction, can only be made if there has been a change in use that is supported by evidence, and the list of evidence for a change of use in the standard was re-characterized as a non-exclusive list of example. The amendment does not have a significant impact on the financial statements.

• Amendment to Korean IFRS 1102 Share-based Payment

Amendments to Korean IFRS 1102 clarify accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. Amendments also clarify that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award. The amendment does not have a significant impact on the financial statements.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

• Enactment of Interpretation 2122 Foreign Currency Transaction and Advance Consideration

According to the enactment, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. The enactment does not have a significant impact on the financial statements.

• Korean IFRS 1109 Financial Instruments

The Group has applied Korean IFRS 1109 Financial Instruments on January 1, 2018, the date of initial application. In accordance with the transitional provisions in Korean IFRS 1109, comparative figures have not been restated, and the differences between previous book amounts and book amounts at the date of initial application are recognized to retained earnings. See Note 43 for further details on the impact of the application of the standard.

• Korean IFRS 1115 Revenue from Contracts with Customers

The Group has applied Korean IFRS 1115 Revenue from Contracts with Customers. In accordance with the transition provisions in Korean IFRS 1115, comparative figures have not been restated. The Group elected the modified retrospective approach, and recognized the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings as at January 1, 2018, the period of initial application. See Note 43 for further details on the impact of the application of the standard.

(2) New standards and interpretations not yet adopted by the Group

Certain new accounting standards and interpretations that have been published that are not mandatory for annual reporting period commencing January 1, 2018 and have not been early adopted by the Group are set out below.

• Korean IFRS 1116 Leases

Korean IFRS 1116 Leases issued on May 22, 2017 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. This standard will replace Korean IFRS 1017 Leases. The Group will apply the standards for annual periods beginning on or after January 1, 2019.

Under the new standard, with implementation of a single lease model, lessee is required to recognize assets and liabilities for all lease which lease term is over 12 months and underlying assets are not low value assets. A lessee is required to recognize a right-of-use asset and a lease liability representing its obligation to make lease payments.

The Group performed an impact assessment to identify potential financial effects of applying Korean IFRS 1116. The Group is analyzing the effects on the financial statements based on available information as at December 31, 2018 to identify effects on 2019 financial statements; however, it is difficult to provide reasonable estimates of financial effects until the analysis is complete.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

• Korean IFRS 1109 Financial Instruments

The narrow-scope amendments made to Korean IFRS 1109 Financial Instruments enable entities to measure certain prepayable financial assets with negative compensation at amortized cost. When a modification of a financial liability measured at amortized cost that does not result in the derecognition, a modification gain or loss shall be recognized in profit or loss. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted.

• Amendments to Korean IFRS 1019 Employee Benefits

The amendments require that an entity shall calculate current service cost and net interest for the remainder of the reporting period after a plan amendment, curtailment or settlement based on updated actuarial assumptions from the date of the change. The amendments also require that a reduction in a surplus must be recognized in profit or loss even if that surplus was not previously recognized because of the impact of the asset ceiling. The amendments are effective for plan amendments, curtailments and settlements occurring in reporting periods that begin on or after 1 January 2019.

• Amendments to Korean IFRS 1028 Investments in Associates and Joint Ventures

The amendments clarify that an entity shall apply Korean IFRS 1109 to financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term interests that, in substance, form part of the entity’s net investment in an associate or joint venture. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted. In accordance with the transitional provisions in Korean IFRS 1109, the restatement of the comparative information is not required and the cumulative effects of initially applying the amendments retrospectively should be recognized in the beginning balance of retained earnings (or other components of equity, as appropriate) at the date of initial application.

• Enactment to Interpretation of Korean IFRS 2123 Uncertainty over Income Tax Treatments

The Interpretation explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment, and includes guidance on how to determine whether each uncertain tax treatment is considered separately or together. It also presents examples of circumstances where a judgement or estimate is required to be reassessed. This Interpretation will be applied for annual periods beginning on or after January 1, 2019, and an entity can either restate the comparative financial statements retrospectively or recognize the cumulative effect of initially applying the Interpretation as an adjustment in the beginning balance at the date of initial application.

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• Annual Improvements to Korean IFRS 2015 – 2017 Cycle:

• Korean IFRS 1103 Business Combination

The amendments clarify that when a party to a joint arrangement obtains control of a business that is a joint operation, and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages. In such cases, the acquirer shall remeasure its entire previously held interest in the joint operation. These amendments will be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early adoption permitted.

• Korean IFRS 1111 Joint Agreements

The amendments clarify that when a party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business. In such cases, previously held interests in the joint operation are not remeasured. These amendments will be applied to transactions in which an entity obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early adoption permitted.

• Paragraph 57A of Korean IFRS 1012 Income Tax

The amendment is applied to all the income tax consequences of dividends and requires an entity to recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. These amendments will be applied for annual reporting periods beginning on or after January 1, 2019, with early adoption permitted.

• Korean IFRS 1023 Borrowing Costs

The amendments clarify that if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use (or sale), it becomes part of general borrowings. These amendments will be applied to borrowing costs incurred on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early adoption permitted.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

2.3 Consolidation

The Group has prepared the consolidated financial statements in accordance with Korean IFRS 1110 Consolidated Financial Statements.

(a) Subsidiaries

Subsidiaries are all entities (including special purpose entities (“SPEs”)) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. All other non-controlling interests are measured at fair values, unless otherwise required by other standards. Acquisition-related costs are expensed as incurred.

The excess of consideration transferred, amount of any non-controlling interest in the acquired entity and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recoded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognized directly in the profit or loss as a bargain purchase.

Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(b) Changes in ownership interests in subsidiaries without change of control

Any difference between the amount of the adjustment to non-controlling interest that do not result in a loss of control and any consideration paid or received is recognized in a separate reserve within equity attributable to owners of the Controlling Group.

(c) Disposal of subsidiaries

When the Group ceases to consolidate for a subsidiary because of a loss of control, any retained interest in the subsidiary is remeasured to its fair value with the change in carrying amount recognized in profit or loss.

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(d) Associates

Associates are all entities over which the Group has significant influence, and investments in associates are initially recognized at acquisition cost using the equity method. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. If there is any objective evidence that the investment in the associate is impaired, the Group recognizes the difference between the recoverable amount of the associate and its book amount as impairment loss.

(e) Joint Arrangement

A joint arrangement, wherein two or more parties have joint control, is classified as either a joint operation or a joint venture. A joint operator recognizes its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. A joint venture has rights to the net assets relating to the joint venture and accounts for that investment using the equity method.

2.4 Segment Reporting

Information of each operating segment is reported in a manner consistent with the business segment reporting provided to the chief operating decision-maker (Note 36). The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments.

2.5 Foreign Currency Translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which each entity operates (the “functional currency”). The consolidated financial statements are presented in Korean won, which is the Parent Company’s functional and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss. They are deferred in other comprehensive income if they relate to qualifying cash flow hedges and qualifying effective portion of net investment hedges, or are attributable to monetary part of the net investment in a foreign operation.

Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss within ‘other income or other expenses’.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognized in other comprehensive income.

(c) Translation to the presentation currency

The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

• assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the reporting period,

• income and expenses for each statement of profit or loss are translated at average exchange rates,

• equity is translated at the historical exchange rate, and

• all resulting exchange differences are recognized in other comprehensive income.

2.6 Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of less than three months.

2.7 Financial Assets

(a) Classification

From January 1, 2018, the Group classifies its financial assets in the following measurement categories:

• those to be measured at fair value through profit or loss

• those to be measured at fair value through other comprehensive income, and

• those to be measured at amortized cost.

The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.

For financial assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. The Group reclassifies debt investments when, and only when its business model for managing those assets changes.

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December 31, 2018 and 2017

For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income. Changes in fair value of the investments in equity instruments that are not accounted for as other comprehensive income are recognized in profit or loss.

(b) Measurement

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

Hybrid (combined) contracts with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

A. Debt instruments

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. The Group classifies its debt instruments into one of the following three measurement categories:

• Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method.

• Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment loss (and reversal of impairment loss), interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Foreign exchange gains and losses are presented in ‘finance income or finance costs’ and impairment loss in ‘finance costs or operating expenses’.

• Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented net in the statement of profit or loss within ‘finance income or finance costs’ in the period in which it arises.

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B. Equity instruments

The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognized in profit or loss as ‘finance income’ when the Group’s right to receive payments is established.

Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘finance income or finance costs’ in the statement of profit or loss as applicable. Impairment loss (and reversal of impairment loss) on equity investments measured at fair value through other comprehensive income are not reported separately from other changes in fair value.

(c) Impairment

The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortized cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables and lease receivables, the Group applies the simplified approach, which requires expected lifetime credit losses to be recognized from initial recognition of the receivables.

(d) Recognition and Derecognition

Regular way purchases and sales of financial assets are recognized or derecognized on trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

If a transfer does not result in derecognition because the Group has retained substantially all the risks and rewards of ownership of the transferred asset, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received.

(e) Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.

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December 31, 2018 and 2017

2.8 Derivative Instruments

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group has hedge relationships and designates certain derivatives as:

• hedges of a particular risk associated with the cash flows of recognized assets and liabilities and highly probable forecast transactions (cash flow hedges)

At inception of the hedge relationship, the Group documents the economic relationship between hedging instruments and hedged items including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of hedged items.

The fair values of derivative financial instruments designated in hedge relationships are disclosed in Note 39.

The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. A non-derivative financial asset and a non-derivative financial liability is classified as a current or non-current based on its expected maturity and its settlement, respectively.

The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the cash flow hedge reserve within equity, and the ineffective portion is recognized in ‘finance income (costs)’.

Amounts of changes in fair value of effective hedging instruments accumulated in equity are recognized as ‘finance income (costs)’ for the periods when the corresponding transactions affect profit or loss.

When a hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, any accumulated cash flow hedge reserve at that time remains in equity until the forecast transaction occurs, resulting in the recognition of a non-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the cash flow hedge reserve and deferred costs of hedging that were reported in equity are immediately reclassified to profit or loss.

2.9 Trade Receivables

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less loss allowance. See Note 6 for further information about the Group’s accounting for trade receivables and Note 2.7 (c) for a description of the Group’s impairment policies.

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2.10 Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the moving average method, except for inventories in-transit which is determined using the specific identification method.

2.11 Non-current Assets (or Disposal Group) Held-for-sale

Non-current assets (or disposal group) are classified as held for sale when their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. The assets are measured at the lower amount between their carrying amount and the fair value less costs to sell.

2.12 Property and Equipment

Property and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that is directly attributable to the acquisition of the items.

Depreciation of all property, plant and equipment, except for land, is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives as follows:

				Estimated Useful Life
Buildings				5 – 40 years
Structures				5 – 40 years
Machinery and equipment (Telecommunications equipment and others)				2 – 40 years
Others		Vehicles		4 – 6 years
		Tools		4 – 6 years
		Office equipment		2 – 6 years

The depreciation method, residual values and useful lives of property and equipment are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.

2.13 Investment Property

Investment property is a property held to earn rentals or for capital appreciation. An investment property is measured initially at its cost. After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. Investment property, except for land, is depreciated using the straight-line method over their useful lives from 10 to 40 years.

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December 31, 2018 and 2017

2.14 Intangible Assets

(a) Goodwill

Goodwill is measured as explained in Note 2.3 (a) and goodwill arising from acquisition of subsidiaries and business are included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of subsidiaries and business include the carrying amount of goodwill relating to the subsidiaries and business sold.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or group of CGUs, that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying amount of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed.

(b) Intangible assets except goodwill

Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses. Membership rights (condominium membership and golf membership) that have an indefinite useful life are not subject to amortization because there is no foreseeable limit to the period over which the assets are expected to be utilized. The Group amortizes intangible assets with a limited useful life using the straight-line method over the following periods:

		Estimated Useful Life
Development costs		5 – 6 years
Software		6 years
Industrial property rights		5 – 50 years
Frequency usage rights		5 – 10 years
Others 1		2 – 50 years

¹  Membership rights (condominium membership and golf membership) and broadcast license included in others are classified as intangible assets with indefinite useful life.

2.15 Borrowing Costs

General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred.

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December 31, 2018 and 2017

2.16 Government Grants

Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants related to assets are presented in the statement of financial position by setting up the grant as deferred income that is recognized in profit or loss on a systematic basis over the useful life of the asset. Grants related to income are presented as a credit in the statement of profit or loss within ‘other income’.

2.17 Impairment of Non-Financial Assets

Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.

2.18 Trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of reporting period which are unpaid. Trade and other payables are presented as current liabilities, unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method.

2.19 Financial Liabilities

(a) Classification and measurement

The Group’s financial liabilities at fair value through profit or loss are financial instruments held for trading. A financial liability is held for trading if it is incurred principally for the purpose of repurchasing in the near term. Derivatives that are not designated as hedging instruments or derivatives separated from financial instruments containing embedded derivatives are also categorized as held for trading.

The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and present as ‘trade payables’, ‘borrowings’ and ‘other financial liabilities’ in the statement of financial position.

Preferred shares that require mandatory redemption at a particular date are classified as liabilities. Interest expenses on these preferred shares using the effective interest method are recognized in the statement of profit or loss as ‘finance costs’, together with interest expenses recognized from other financial liabilities.

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(b) Derecognition

Financial liabilities are removed from the statement of financial position when it is extinguished; for example, when the obligation specified in the contract is discharged or cancelled or expired or when the terms of an existing financial liability are substantially modified. The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in profit or loss.

2.20 Financial Guarantee Contracts

Financial guarantee contracts are recognized as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value, subsequently at the higher of following and recognized in the statement of financial position within ‘other financial liabilities’.

• the amount determined in accordance with the expected credit loss model under Korean IFRS 1109 Financial Instruments and

• the amount initially recognized less, where appropriate, the cumulative amount of income recognized in accordance with Korean IFRS 1115 Revenue from Contracts with Customers

2.21 Employee Benefits

(a) Post-employment benefits

The Group operates both defined contribution and defined benefit pension plans.

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The contributions are recognized as employee benefit expenses when an employee has rendered service.

A defined benefit plan is a pension plan that is not a defined contribution plan. Generally, post-employment benefits are payable after the completion of employment, and the benefit amount depended on the employee’s age, periods of service or salary levels. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income.

Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs.

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(b) Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits or when the entity recognizes costs for a restructuring.

(c) Long-term employee benefits

Certain entities within the Group provide long-term employee benefits that are entitled to employees with service period for ten years and above. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. The Group recognizes service cost, net interest on other long-term employee benefits and remeasurements as profit or loss for the year. These liabilities are valued annually by an independent qualified actuary.

2.22 Share-based payments

Equity-settled share-based payment is recognized at fair value of equity instruments granted, and employee benefit expense is recognized over the vesting period. At the end of each period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting and service conditions. It recognizes the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

2.23 Provisions

Provisions for service warranties, make good obligation, and legal claims are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period, and the increase in the provision due to the passage of time is recognized as interest expense.

2.24 Leases

(a) Lessee

A lease is an agreement, whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases where all the risks and rewards of ownership are not transferred to the Group are classified as operating leases. Lease payments under operating leases are recognized as expenses on a straight-line basis over the lease term.

Leases where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized as lease assets and liabilities at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments.

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(b) Lessor

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership at the inception of the lease. A lease other than a finance lease is classified as an operating lease. Lease income from operating leases is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred by the lessor in negotiating and arranging an operating lease is added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income.

2.25 Share Capital

The Group classifies ordinary shares as equity.

Where the Controlling Company purchases its own shares, the consideration paid, including any directly attributable incremental costs, is deducted from equity until the share are cancelled or reissued. When these treasury shares are reissued, any consideration received is including in equity attributable to the equity holders of the Controlling Company.

2.26 Revenue Recognition

From January 1, 2018, the Group has applied Korean IFRS 1115 Revenue from Contracts with Customers.

(a) Identifying performance obligations

The Group mainly provides telecommunication services and sells handsets. With the application of Korean IFRS 1115, the Group identifies performance obligations with a customer such as providing telecommunication services, selling handsets and other. The revenue from handsets is recognized when a performance obligation is satisfied by transferring promised goods to customers, and the revenue from telecommunication services is recognized over the estimated contract periods of each services by transferring promised services to customers.

(b) Allocation the transaction price and Revenue recognition

With the application of Korean IFRS 1115, the Group allocates the transaction price to each performance obligation identified in the contract based on a relative stand-alone selling prices of the goods or services being provided to the customer. To allocate the transaction price to each performance obligation on a relative stand-alone price basis, the Group determines the stand-alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling price. The stand-alone selling price is the price at which the Group would sell a promised good or service separately to the customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the Group sells that good or service separately in similar circumstances and to similar customers. The Group recognizes the allocated amount as contract assets or contract liabilities, and amortizes it through the remaining period which is adjusted in operating income.

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(c) Incremental contract acquisition costs

The Group pays the commission fees when new customer subscribe for telecommunication services. The incremental contract acquisition costs are those commission fess that the Group incurs to acquire a contract with a customer that it would not have incurred if the contract had not been acquired.

According to Korean IFRS 1115, the Group recognizes as an asset the incremental contract acquisition costs and amortize it over the expected period of benefit. However, as a practical expedient, the Group may recognize the incremental contract acquisition costs as an expense when incurred if the amortization period of the asset is one year or less.

(d) Commission fees

Commission fees are recognized when it is probable that future economic benefits will flow to the entity and these benefits can be reliably measured. Revenues are measured at the fair value of the consideration received.

2.27 Current and Deferred Income Tax

The tax expense for the period consists of current and deferred tax. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

The tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Management periodically evaluates tax policies that are applied in tax returns in which applicable tax regulation is subject to interpretation. The Group recognizes current income tax on the basis of the amount expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognized only if it is probable that future taxable amount will be available to utilize those temporary differences and losses.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The Group recognizes a deferred tax liability all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint arrangements, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, The Group recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis.

The Group adopts the consolidated corporate tax return and calculates income tax expenses and income tax liabilities of the Group based on systematic and reasonable methods.

2.28 Dividend

Dividend distribution to the Group’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Group’s shareholders.

2.29 Approval of Issuance of the Financial Statements

The consolidated financial statements 2018 were approved for issue by the Board of Directors on February 12, 2019 and are subject to change with the approval of shareholders at their Annual General Meeting.

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December 31, 2018 and 2017

3. Critical Accounting Estimates and Assumptions

The preparation of financial statements requires the Group to make estimates and assumptions concerning the future. Management also needs to exercise judgement in applying the Group’s accounting policies. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. As the resulting accounting estimates will, by definition, seldom equal the related actual results, it can contain a significant risk of causing a material adjustment.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Additional information of significant judgement and assumptions of certain items are included in relevant notes.

3.1 Estimated Goodwill Impairment

The Group tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of cash-generating units (CGUs) is determined based on value-in-use calculations (Note 13).

3.2 Income Taxes

If certain portion of the taxable income is not used for investments or increase in wages or dividends in accordance with the Tax System For Recirculation of Corporate Income, the Group is liable to pay additional income tax calculated based on the tax laws. Accordingly, the measurement of current and deferred income tax is affected by the tax effects from the new tax system. As the Group’s income tax is dependent on the investments, increase in wages and dividends, there is an uncertainty measuring the final tax effects.

3.3 Fair Value of Derivatives and Financial Instruments

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period (Note 39).

3.4 Impairment of Financial Assets

The provision for impairment for financial assets are based on assumptions about risk of default and expected loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the impairment calculation based on the Group’s past history, existing market conditions as well as forward looking estimates at the end of each reporting period.

3.5 Net Defined Benefit Liability

The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions including the discount rate (Note 18).

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December 31, 2018 and 2017

3.6 Amortization of Contract Assets, Contract Liabilities and Contract Cost Assets

Contract assets, contract liabilities and contract cost assets recognized under the application of Korean IFRS 1115 are amortized over the expected periods of customer relationships. The estimate of the expected terms of customer relationship is based on the historical data. If management’s estimate changes, it may cause significant differences in the timing of revenue recognition and amounts recognized.

3.7 Provisions

As described in Note 17, the Group records provisions for litigation and assets retirement obligations at the end of the reporting period. The provisions are estimated based on the factors such as the historical experiences.

3.8 Useful Lives of Property and Equipment and Investment Property

The property and equipment, intangible assets, and investment properties, excluding land, goodwill, condominium memberships, golf club memberships and broadcast license, are depreciated using the straight-line method over their useful lives. The estimated useful lives are determined based on expected usage of the assets and the estimates can be materially affected by technical changes and other factors. The Group will increase depreciation expenses if the useful lives are considered shorter than the previously estimated useful lives.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

4. Financial Instruments by Category

Financial instruments by category as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018
Financial assets		Financial assets at amortized cost				Financial assets at fair value through profit or loss				Financial assets at fair value through other comprehensive income				Derivatives used for hedging				Total
Cash and cash equivalents		W	2,703,422			W	—			W	—			W	—			W	2,703,422
Trade and other receivables			5,553,068				—				1,097,348				—				6,650,416
Other financial assets			484,272				777,685				326,157				29,843				1,617,957

(in millions of Korean won)		December 31, 2018
Financial liabilities		Financial liabilities at amortized cost				Financial liabilities at fair value through profit and loss				Derivatives used for hedging				Total
Trade and other payables		W	8,521,379			W	—			W	—			W	8,521,379
Borrowings			6,648,293				—				—				6,648,293
Other financial liabilities			99,930				7,758				57,308				164,396

(In millions of Korean won)		December 31, 2017
Financial assets		Loans and receivables				Assets at fair value through profit and loss				Derivatives used for hedging				Available- for-sale				Held-to- Maturity				Total
Cash and cash equivalents		W	1,928,182			W	—			W	—			W	—			W	—			W	1,928,182
Trade and other receivables			6,821,584				—				—				—				—				6,821,584
Other financial assets			1,333,317				5,813				7,389				380,953				151				1,727,623

(In millions of Korean won)		December 31, 2017
Financial liabilities		Liabilities at fair value through profit and loss				Derivatives used for hedging				Financial liabilities at amortized cost				Total
Trade and other payables		W	—			W	—			W	8,427,458			W	8,427,458
Borrowings			—				—				6,683,662				6,683,662
Other financial liabilities			5,051				93,770				87,669				186,490

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Gains or losses arising from financial instruments by category for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Financial assets at amortized cost
Interest income 1		W	93,233			W	108,608
Gain (loss) on foreign currency transactions 4			19,396				(11,949	)
Loss on foreign currency translation			(2,901	)			(12,354	)
Loss on disposal			44				(20,351	)
Loss on valuation			(110,544	)			(44,219	)
Financial assets at fair value through profit or loss
Interest income 1			9,194				—
Dividend income			1,207				—
Gain on valuation			10,768				—
Gain on disposal			1,713				—
Financial assets at fair value through other comprehensive income
Interest income 1			163,390				—
Dividend income			1,704				—
Impairment loss			(2,416	)			—
Loss on disposal			(13,818	)			—
Other comprehensive income for the year 2			43,811				—
Assets at fair value through profit or loss
Dividend income			—				1
Gain on disposal			—				153
Loss on valuation			—				(464	)
Derivative used for hedging
Gain (loss) on transactions			7,272				(58,569	)
Gain (loss) on valuation			22,065				(63,640	)
Other comprehensive income for the year 2			20,078				(44,429	)
Reclassified to profit of loss from other comprehensive income for the year 2,3			(15,891	)			50,231
Available-for-sale
Interest income 1			—				453
Dividend income			—				5,174
Gain on disposal			—				89,598
Impairment loss			—				(6,137	)
Other comprehensive income for the year 2			—				51,235
Reclassified to profit or loss from other comprehensive income for the year 2			—				(55,450	)
Financial liabilities at fair value through profit or loss
Loss on valuation			(2,708	)			(3,078	)
Derivatives used for hedging
Gain on transactions			20,678				—
Gain (loss) on valuation			42,195				(145,885	)
Other comprehensive income for the year 2			(2,810	)			(66,624	)
Reclassified to profit or loss from other comprehensive income for the year 2,3			(28,388	)			91,698
Financial liabilities at amortized cost
Interest expense 1			(296,894	)			(302,464	)
Gain (loss) on repayment			(15	)			—
Gain (loss) on foreign currency transactions 4			(30,956	)			62,347
Gain (loss) on foreign currency translation			(66,050	)			225,695
Total		W	(116,643	)		W	(150,420	)

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

¹  BC Card Co., Ltd., etc., subsidiaries of the Group, recognized interest income and expenses as operating revenue and expenses, respectively. Related interest income recognized as operating revenue is W 21,021 million (2017: W 15,561 million) and related interest expense recognized as operating expense is W 21 million (2017: zero) for the year ended December 31, 2018.

² The amounts directly reflected in equity after adjustments of deferred income tax.

³ During the current and previous year, certain derivatives of the Group was settled and the related gain or loss on valuation of cash flow hedge in other comprehensive income was reclassified to profit or loss for the year.

⁴ BC Card Co., Ltd., a subsidiary of the Group recognized gain or loss on foreign currency transactions as interest income and expenses. Related interest income and expenses recognized as gain or loss on foreign currency transactions is W 20,422 million (2017: W 11,049 million) for the year ended December 31, 2018.

5. Cash and Cash Equivalents

Restricted cash and cash equivalents as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017				Description
Bank deposits		W	23,970			W	16,837			Deposit restricted for government project and others

Cash and cash equivalents in the statement of financial position equal to cash and cash equivalents in the statement of cash flows.

6. Trade and Other Receivables

Trade and other receivables as at December 31, 2018 and 2017, are as follows:

		December 31, 2018
(in millions of Korean won)		Total amounts				Provision for impairment				Present value discount				Carrying amount
Current assets
Trade receivables		W	3,422,086			W	(357,548	)		W	(9,873	)		W	3,054,665
Other receivables			2,827,864				(74,948	)			(160	)			2,752,756
Total		W	6,249,950			W	(432,496	)		W	(10,033	)		W	5,807,421
Non-current assets
Trade receivables		W	402,027			W	(2,376	)		W	(17,970	)		W	381,681
Other receivables			506,061				(18,874	)			(25,873	)			461,314
Total		W	908,088			W	(21,250	)		W	(43,843	)		W	842,995

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

		December 31, 2017
(in millions of Korean won)		Total amounts				Provision for impairment				Present value discount				Carrying amount
Current assets
Trade receivables		W	3,405,947			W	(438,817	)		W	(7,508	)		W	2,959,622
Other receivables			3,099,720				(66,402	)			(187	)			3,033,131
Total		W	6,505,667			W	(505,219	)		W	(7,695	)		W	5,992,753
Non-current assets
Trade receivables		W	366,107			W	(610)			W	(12,803	)		W	352,694
Other receivables			522,458				(17,970	)			(28,351	)			476,137
Total		W	888,565			W	(18,580	)		W	(41,154	)		W	828,831

The fair values of trade and other receivables with original maturities less than one year equal to their carrying amounts because the discounting effect is immaterial. The fair value of trade and other receivables with original maturities longer than one year, which are mainly from sales of goods, is determined discounting the expected future cash flow at the weighted average interest rate.

Details of changes in provision for impairment the years ended December 31, 2018 and 2017, are as follows:

		2018								2017
(in millions of Korean won)		Trade receivables				Other receivables				Trade receivables				Other receivables
Beginning balance 1		W	439,427			W	84,372			W	470,871			W	141,616
Provision			91,282				21,783				38,888				5,809
Reversal or written-off			(170,597	)			(14,520	)			(70,121	)			(61,220	)
Changes in the scope of consolidation			—				—				(107	)			(35	)
Others			(188	)			2,187				(104	)			(1,798	)
Ending balance 1		W	359,924			W	93,822			W	439,427			W	84,372

¹ Provisions for impairment on trade receivables measured at fair value through other comprehensive income are included.

Provisions for impairment on trade and other receivables are recognized as operating expenses, other expenses and finance costs.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Details of other receivables as at December 31, 2018 and 2017, are as follows:

(In millions of Korean won)		December 31, 2018				December 31, 2017
Loans		W	88,476			W	84,682
Receivables 1			2,739,825				3,029,036
Accrued income			10,171				12,186
Refundable deposits			370,481				391,458
Loans receivable			54,952				34,273
Finance lease receivables			22,230				20,526
Others			21,757				21,479
Less: Provision for impairment			(93,822	)			(84,372	)
		W 3,214,070				W 3,509,268

¹  The settlement receivables of BC Card Co., Ltd. of W 1,895,575 million (2016: W 2,262,829 million) are included.

The maximum exposure of trade and other receivables to credit risk is the carrying amount of each class of receivables mentioned above as at December 31, 2018.

A portion of the trade receivables is classified as financial assets at fair value through other comprehensive income considering the trade receivables business model for managing the asset and the cash flow characteristics of the contract.

7. Other Financial Assets and Liabilities

Details of other financial assets and liabilities as at December 31, 2018 and 2017, are as follows:

(In millions of Korean won)		December 31, 2018				December 31, 2017
Other financial assets
Financial assets at amortized cost 1,2		W	484,272			W	1,333,368
Financial assets at fair value through profit or loss 1,2,3			777,685				5,913
Financial assets at fair value through other comprehensive income			326,157				—
Available-for-sale financial assets 2			—				380,953
Derivatives used for hedging			29,843				7,389
Less: Non-current			(623,176	)			(754,992	)
Current		W	994,781			W	972,631
Other financial liabilities
Financial liabilities amortized cost		W	99,330			W	87,669
Financial liabilities at fair value through profit or loss			7,758				5,051
Derivatives used for hedging			57,308				93,770
Less: Non-current			(163,454	)			(149,267	)
Current		W	942			W	37,223

¹ As at December 31, 2018, the Group’s other financial assets amounting to W 60,978 million (2017: W 59,660 million), which consist of checking account deposits, deposits for Win-win Growth Cooperative loans and payment guarantee, are subject to withdrawal restrictions.

² In the prior year, a portion of the equity instrument was classified as available-for-sale financial assets and held-to-maturity financial assets. 

³  As at December 31, 2018, MMW(Money Market Wrap) and MMT(Money Market Trust) amounting to \ 610,862 million is included in other financial assets.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Details of financial assets at fair value through profit or loss as at December 31, 2018, are as follows:

(In millions of Korean won)		December 31, 2018
Equity instruments (Listed)		W	121
Equity instruments (Unlisted)			62,911
Debt securities			714,653
Total			777,685
Less: non-current			(269,148	)
Current		W	508,537

The maximum exposure of debt instruments of financial assets recognized at fair value through profit or loss to credit risk is the carrying amount as at December 31, 2018.

Investment in Korea Software Financial Cooperative amounting to W 1,136 million is provided as collateral.

W 94,531 million of available-for-sale was classified as financial assets at fair value through profit or loss in the prior year.

Details of financial assets at fair value through other comprehensive income as at December 31, 2018, are as follows:

(In millions of Korean won)		December 31, 2018
Equity instruments (Listed)		W	8,861
Equity instruments (Unlisted)			310,387
Debt securities			6,909
Total			326,157
Less: non-current			(326,157	)
Current		W	—

W 257,819 million of available-for-sale was classified as financial assets at fair value through other comprehensive income in the prior year.

Upon disposal of these equity investments, any balance within the accumulated other comprehensive income for these equity investments is not reclassified to profit or loss, but to retained earnings. Upon disposal of debt investments, remaining balance of the accumulated other comprehensive income of debt investments is reclassified to profit or loss.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Details of valuation of derivatives used for hedging as at December 31, 2018 and 2017, are as follows:

(In millions of Korean won)		December 31, 2018								December 31, 2017
		Assets				Liabilities				Assets				Liabilities
Interest rate swap 1		W	—			W	599			W	—			W	2,633
Currency swap 2			29,843				54,074				7,389				81,300
Currency forwards 3			—				2,635				—				9,837
Total			29,843				57,308				7,389				93,770
Less: non-current			(4,732	)			(56,366	)			(4,675	)			(56,547	)
Current		W	25,111			W	942			W	2,714			W	37,223

¹ The interest rate swap contract is to hedge the risk of variability in future fair value of the bond.

² The currency swap contract is to hedge the risk of variability in cash flow from the bond. In applying the cash flow hedge accounting, the Group hedges its exposures to cash flow fluctuation until September 7, 2034.

³ The currency forward contract is to hedge the risk of variability in cash flow from transactions in foreign currencies due to changes in foreign exchange rate.

The full value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months.

The valuation gains and losses on the derivative contracts for the years ended December 31, 2018 and 2017, are as follows:

(In millions of Korean won)		2018												2017
Type of Transaction		Valuation gain				Valuation loss				Other comprehensive income 1				Valuation gain				Valuation loss				Other comprehensive income 1
Interest rate swap		W	192			W	—			W	(488	)		W	38			W	—			W	637
Currency swap			58,912				2,045				22,139				19				187,468				(146,752	)
Currency forwards			7,201				—				—				—				22,114				(393	)
Total		W	66,305			W	2,045			W	21,651			W	57			W	209,582			W	(146,508	)

¹  The amounts are before adjustments of deferred income tax directly reflected in equity and allocation to the non-controlling interest.

The ineffective portion recognized in profit or loss on the cash flow hedge is valuation gain of W 263 million for the current period (2017: valuation loss of W 1,961 million).

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Details of financial liabilities at fair value through profit or loss as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Financial liabilities at fair value through profit or loss Derivative liabilities held for trading		W	7,758			W	5,051

The valuation gain and loss on financial liabilities at fair value through profit or loss for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)

2018

2017

Valuation gain

Valuation loss

Valuation gain

Valuation loss

Derivative liabilities held for trading

W

—

W

2,707

W

—

W

3,078

8. Inventories

Inventories as at December 31, 2018 and 2017, are as follows:

		December 31, 2018												December 31, 2017
(in millions of Korean won)		Acquisition cost				Valuation allowance				Carrying amount				Acquisition cost				Valuation allowance				Carrying amount
Merchandise		W	794,020			W	(113,581	)		W	680,439			W	504,321			W	(58,293)			W	446,028
Others			3,560				—				3,560				11,698				—				11,698
Total		W	797,580			W	(113,581	)		W	683,999			W	516,019			W	(58,293)			W	457,726

Cost of inventories recognized as expenses for the year ended December 31, 2018 amounts to W 3,926,199 million (for the year ended December 31, 2017: W 3,855,089 million) and valuation loss on inventory amounts to W 55,288 million for the year ended December 31, 2018 (for the year ended December 31, 2017: W 11,165 million).

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December 31, 2018 and 2017

9. Other Assets and Liabilities

Other assets and liabilities as at December 31, 2018 and 2017, are as follows:

(In millions of Korean won)		December 31, 2018				December 31, 2017
Other assets
Advance payments		W	162,784			W	164,950
Prepaid expenses 1			1,667,372				241,078
Contract assets 1			398,797				—
Others			4,491				5,998
Less: Non-current			(545,895	)			(107,166	)
Current		W	1,687,549			W	304,860
Other liabilities
Advances received		W	165,565			W	183,735
Withholdings			89,403				85,142
Unearned revenue			39,528				23,036
Contract liabilities 1			347,462				—
Others			24,909				11,629
Less: Non-current			(70,277	)			(45,227	)
Current		W	596,590			W	258,315

¹ As explained in Note 2, amounts include adjustments arising from adoption of Korean IFRS 1115 (Notes 26 and 43).

10. Assets Held for Sale

The Group decided to sell total shares of PT Mitra Transksi Indonesia, investments in associates, with the approval of the Board of Directors and shareholders. At the end of the reporting period, the associated asset amounting to W 13,035 million is presented as held for sale. After classifying the asset as held for sale, share of net profit or loss from the associate is not recognized.

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December 31, 2018 and 2017

11. Property and Equipment

Changes in property and equipment for the years ended December 31, 2018 and 2017, are as follows:

		2018
(in millions of Korean won)		Land				Buildings and structures				Machinery and equipment				Others				Construction- in-progress				Total
Acquisition cost		W	1,268,789			W	3,750,861			W	35,971,877			W	1,920,571			W	714,705			W	43,626,804
Less: Accumulated depreciation (including accumulated impairment loss and others)			(132	)			(1,738,439	)			(26,911,067	)			(1,413,733	)			(1,113	)			(30,064,485	)
Beginning, net			1,268,657				2,012,422				9,060,809				506,838				713,593				13,562,319
Acquisition and capital expenditure			9,897				1,728				137,088				101,832				2,037,085				2,287,630
Disposal and termination			(3,718	)			(2,640	)			(113,266	)			(4,336	)			(582	)			(124,542	)
Depreciation			—				(132,353	)			(2,398,782	)			(159,625	)			—				(2,690,760	)
Impairment (recovery of impairment)			—				(5,551	)			(1,237	)			(8,935	)			(170	)			(15,893	)
Transfer in (out)			7,663				127,052				1,767,878				9,525				(1,911,094	)			1,024
Inclusion in scope of consolidation			—				44				4,228				2,526				—				6,798
Transfer from(to) investment properties			(3,080	)			5,366				—				37,077				—				39,363
Others			1,768				1,617				18,298				(6,521	)			(12,844	)			2,318
Ending, net		W	1,281,187			W	2,007,685			W	8,475,016			W	478,381			W	825,988			W	13,068,257
Acquisition cost		W	1,281,319			W	3,873,074			W	36,327,007			W	1,981,646			W	826,583			W	44,289,629
Less: Accumulated depreciation (including accumulated impairment loss and others)			(132	)			(1,865,389	)			(27,851,991	)			(1,503,265	)			(595	)			(31,221,372	)

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

		2017
(in millions of Korean won)		Land				Buildings and structures				Machinery and equipment				Others				Construction- in-progress				Total
Acquisition cost		W	1,309,084			W	3,729,228			W	35,106,184			W	1,895,332			W	1,093,941			W	43,133,769
Less: Accumulated depreciation (including accumulated impairment loss and others)			(132	)			(1,604,496	)			(25,845,999	)			(1,370,409	)			(622	)			(28,821,658	)
Beginning, net			1,308,952				2,124,732				9,260,185				524,923				1,093,319				14,312,111
Acquisition and capital expenditure			1,948				120				237,218				129,464				2,262,681				2,631,431
Disposal and termination			(4,656	)			(4,022	)			(176,085	)			(8,242	)			(3,133	)			(196,138	)
Depreciation			—				(135,242	)			(2,469,459	)			(150,535	)			—				(2,755,236	)
Impairment (recovery of impairment)			—				—				(9,256	)			(1	)			(28	)			(9,285	)
Transfer in (out)			26,764				25,305				2,227,808				10,344				(2,600,908	)			(310,687	)
Exclusion in scope of consolidation			—				(19	)			(772	)			(120	)			(34	)			(945	)
Transfer from(to) investment properties			(64,449	)			1,793				—				1,184				—				(61,472	)
Others			98				(245	)			(8,830	)			(179	)			(38,304	)			(47,460	)
Ending, net		W	1,268,657			W	2,012,422			W	9,060,809			W	506,838			W	713,593			W	13,562,319
Acquisition cost		W	1,268,789			W	3,750,861			W	35,971,877			W	1,920,571			W	714,706			W	43,626,804
Less: Accumulated depreciation (including accumulated impairment loss and others)			(132	)			(1,738,439	)			(26,911,068	)			(1,413,733	)			(1,113	)			(30,064,485	)

Details of property and equipment provided as collateral as at December 31, 2018 and 2017, are as follows:

(In millions of Korean won)

December 31, 2018

Carrying amount

Secured amount

Related line item

Related amount

Secured party

Land and Buildings

W

13,163

W

15,113

Borrowings

W

7,878

Korea Development Bank

Others

50,278

40,252

10,063

Shinhan Bank

(In millions of Korean won)

December 31, 2017

Carrying amount

Secured amount

Related line item

Related amount

Secured party

Land and Buildings

W

13,115

W

15,995

Borrowings

W

2,730

Standard Charted Bank/Korea Development Bank

Others

53,757

38,570

16,071

Shinhan Bank

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The borrowing costs capitalized for qualifying assets amount to W 7,329 million (2017: W 8,473 million) in 2018. The interest rate applied to calculate the capitalized borrowing costs in 2018 is 3.22% (2017: 3.37% to 3.54%).

12. Investment Properties

Changes in investment properties for the years ended December 31, 2018 and 2017, are as follows:

		2018
(in millions of Korean won)		Land				Buildings				Construction- in-progress				Total
Acquisition cost		W	358,358			W	1,191,687			W	39,973			W	1,590,018
Less: Accumulated depreciation			(1,568	)			(398,919	)			—				(400,487	)
Beginning, net			356,790				792,768				39,973				1,189,531
Acquisition			1,111				7				74,145				75,263
Disposal			(4,729	)			(10,238	)			—				(14,997	)
Depreciation			—				(44,653	)			—				(44,653	)
Transfer from(to) property and equipment			3,080				(5,366	)			(37,077	)			(39,363	)
Transfer and others			(7,404	)			9,597				(76,920	)			(74,727	)
Ending, net		W	348,848			W	742,115			W	121			W	1,091,084
Acquisition cost		W	350,417			W	1,168,379			W	121			W	1,518,917
Less: Accumulated depreciation			(1,569	)			(426,264	)			—				(427,833	)

(in millions of Korean won)		2017
		Land				Buildings				Construction- in-progress				Total
Acquisition cost		W	302,750			W	1,119,885			W	78,765			W	1,501,400
Less: Accumulated depreciation			—				(353,356	)			—				(353,356	)
Beginning, net			302,750				766,529				78,765				1,148,044
Acquisition			—				775				48,075				48,850
Disposal			(3,493	)			(6,434	)			—				(9,927	)
Depreciation			—				(47,295	)			—				(47,295	)
Transfer from(to) property and equipment			64,449				(1,793	)			(1,184	)			61,472
Transfer and others			(6,916	)			80,986				(85,683	)			(11,613	)
Ending, net		W	356,790			W	792,768			W	39,973			W	1,189,531
Acquisition cost		W	358,358			W	1,191,687			W	39,973			W	1,590,018
Less: Accumulated depreciation			(1,568	)			(398,919	)			—				(400,487	)

The fair value of the Group’s investment properties is W 1,821,061 million as at December 31, 2018 (as at December 31, 2017: W 1,755,600 million). The fair value of investment properties is estimated based on the expected cash flow.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Rental income from investment properties is W 207,795 million in 2018 (2017: W 205,993 million) and direct operating expenses (including repairs and maintenance) arising from investment properties that generated rental income during the period are recognized as operating expenses.

Details of investment properties provided as collateral as at December 31, 2018 and 2017, are as follows:

(In millions of Korean won)

December 31, 2018

Carrying amount

Secured amount

Related account

Related amount

Land and Buildings

W

548,567

W

66,551

Deposits

W

59,492

Land and Buildings

5,292

3,987

Borrowings

3,322

(In millions of Korean won)

December 31, 2017

Carrying amount

Secured amount

Related account

Related amount

Land and Buildings

W

583,778

W

74,963

Deposits

W

63,923

Land and Buildings

7,897

7,905

Borrowings

5,270

13. Intangible Assets

Changes in intangible assets for the years ended December 31, 2018 and 2017, are as follows:

		2018
(in millions of Korean won)		Goodwill				Development costs				Software				Frequency usage rights				Others				Total
Acquisition cost		W	475,908			W	1,643,886			W	893,500			W	2,530,341			W	1,171,378			W	6,714,013
Less: Accumulated amortization (including accumulated impairment loss and others)			(306,028	)			(1,225,327	)			(703,259	)			(1,165,399	)			(681,297	)			(4,081,310	)
Beginning, net		W	168,880			W	418,559			W	190,241			W	1,364,942			W	490,081			W	2,632,703
Acquisition and capital expenditure			—				56,670				29,800				1,110,865				133,837				1,331,172
Disposal and termination			—				(3,436	)			(736	)			(558	)			(10,687	)			(15,417	)
Amortization			—				(147,304	)			(72,185	)			(318,815	)			(91,222	)			(629,526	)
Impairment			(518	)			—				(222	)			—				(12,256	)			(12,996	)
Inclusion in scope of consolidation			67,696				—				2,073				—				23,950				93,719
Others			—				10,621				16,973				66				(20,192	)			7,468
Ending, net		W	236,058			W	335,110			W	165,944			W	2,156,500			W	513,511			W	3,407,123
Acquisition cost		W	542,074			W	1,680,372			W	947,312			W	3,641,231			W	1,253,281			W	8,064,270
Less: Accumulated amortization (including accumulated impairment loss and others)			(306,016	)			(1,345,262	)			(781,368	)			(1,484,731	)			(739,770	)			(4,657,147	)

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

		2017
(in millions of Korean won)		Goodwill				Development costs 1				Software				Frequency usage rights				Others				Total
Acquisition cost		W	492,105			W	1,483,205			W	838,532			W	2,531,654			W	1,154,993			W	6,500,489
Less: Accumulated amortization (including accumulated impairment loss and others)			(238,619	)			(1,148,529	)			(641,394	)			(854,365	)			(594,779	)			(3,477,686	)
Beginning, net		W	253,486			W	334,676			W	197,138			W	1,677,289			W	560,214			W	3,022,803
Acquisition and capital expenditure			—				247,863				60,475				—				78,372				386,710
Disposal and termination			—				(14,806	)			(548	)			—				(11,859	)			(27,213	)
Amortization			—				(151,718	)			(73,174	)			(311,146	)			(99,112	)			(635,150	)
Impairment			(84,606	)			—				(3	)			—				(31,486	)			(116,095	)
Exclusion in scope of consolidation			—				(332	)			(3,216	)			—				(1,374	)			(4,922	)
Others			—				2,876				9,569				(1,201	)			(4,674	)			6,570
Ending, net		W	168,880			W	418,559			W	190,241			W	1,364,942			W	490,081			W	2,632,703
Acquisition cost		W	474,908			W	1,643,886			W	893,500			W	2,530,341			W	1,171,378			W	6,714,013
Less: Accumulated amortization (including accumulated impairment loss and others)			(306,028	)			(1,225,327	)			(703,259	)			(1,165,399	)			(681,297	)			(4,081,310	)

¹  The Group’s development costs mainly consist of acquisition costs to develop a combined billing system and an information management system.

The carrying amount of membership rights with indefinite useful life not subject to amortization, except for goodwill, is W 239,619 million as at December 31, 2018 (as at December 31, 2017: W 238,053 million).

The Group won a portion of the 3.5GHz and 28GHz bands at an auction in June 2018 under Article 11 (Assignment of Radio Frequencies for Consideration) of the Radio Waves Act. The purchase consideration for the right to use a radio frequency of the 3.5GHz and 28GHz bands are W 968,000 million and W 207,800 million, respectively. The Group made down payments for the 3.5GHz and 28GHz bands in November 2018, and the remaining consideration for the 3.5GHz and 28GHz bands will be paid in installments annually for 10 years and 5 years, respectively.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Goodwill is allocated to the Group’s cash-generating unit which is identified by operating segments. As at December 31, 2018, goodwill allocated to each cash-generation unit is as follows:

(In millions of Korean won)
Cash generating Unit		Amount
Customer/Marketing
Telecom Wireless business 1		W	65,047
Finance
BC Card Co., Ltd. 1			41,234
Others
GENIE Music Corporation (KT Music Corporation) 1			55,114
PlayD Co., Ltd. (N SEARCH MARKETING Corporation) 1			42,745
KT Telecop Co., Ltd. 1			15,418
KT MOS Bukbu Co., Ltd and others			16,490
Total		W	236,058

¹ The recoverable amounts of telecom wireless business, BC Card Co., Ltd. and PlayD Co., Ltd. (N SEARCH MARKETING Corporation) are calculated based on value-in use calculations. The recoverable amounts of GENIE Music Corporation (KT Music Corporation) and KT Telecop Co., Ltd. are calculated based on value-in use calculations or fair value less costs to sell. These calculations use pre-tax cash flow projections for the next five years based on financial budgets. Cash flow that exceeds the period of financial budgets is projected by expected growth rate. This growth rate does not exceed the long-term average growth rate of the industry which the cash-generate unit belongs in. The Group estimated its revenue growth rate based on past performance and its expectation of future market changes. The Group determined cash flow projections based on past performance and its estimation of market growth. Specific risk of related operating segment is reflected in discount rate.

14. Investments in Associates and Joint Ventures

Details of associates as at December 31, 2018 and 2017, are as follows:

		Percentage of ownership (%)								Location		Date of financial statements
		December 31, 2018				December 31, 2017
Korea Information & Technology Fund			33.3	%			33.3	%		Korea		December 31
KT-SB Venture Investment Fund 1			50.0	%			50.0	%		Korea		December 31
KT-IBKC Future Investment Fund 11			50.0	%			50.0	%		Korea		December 31
KT-CKP New Media Investment Fund			49.7	%			49.7	%		Korea		December 31
K Bank Inc. 1			10.0	%			10.0	%		Korea		December 31

¹ At the end of the reporting period, even though the Group (KT-SB Venture Investment Fund and KT-IBKC Future Investment Fund 1) has 50% ownership, the equity method of accounting has been applied as the Group, which is a limited partner of the investment fund, cannot participate in determining the operating and financial policies. Also, 8.8% of non-voting convertible stock are excluded in deriving percentage of ownership of K bank Inc.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Changes in investments in associates and joint ventures for the years ended December 31, 2018 and 2017, are as follows:

		2018
(In millions of Korean won)		Beginning				Acquisition (Disposal)				Share of net profit from associates and joint ventures1				Impairment				Others				Ending
Korea Information & Technology Fund		W	139,534			W	—			W	15,037			W	—			W	(6,316)			W	148,255
KT-SB Venture Investment Fund			2,942				—				1,528				—				—				4,470
KT-IBKC Future Investment Fund 1			10,825				(1,050	)			1,028				—				(842	)			9,961
KT-CKP New Media Investment Fund			2,294				(1,229	)			(784	)			—				—				281
K Bank Inc.			42,108				26,725				(19,504	)			—				3,326				52,655
Others 1			81,728				2,446				8,607				—				(36,016	)			56,785
		W	279,431			W	26,912			W	5,912			W	—				W (39,848	)		W	272,407

¹ The Group classified total shares of PT Mitra Transksi Indonesia as assets held for sale (Note 10).

		2017
(In millions of Korean won)		Beginning				Acquisition (Disposal)				Share of net profit from associates and joint ventures1				Impairment				Others				Ending
Korea Information & Technology Fund		W	134,969			W	—			W	4,275			W	—			W	290			W	139,534
KT-SB Venture Investment Fund			4,736				(1,069	)			(725	)			—				—				2,942
Mongolian Telecommunications			6,244				—				(348	)			—				(5,896	)			—
KT Wibro Infra Co., Ltd.			52,200				(52,200	)			—				—				—				—
KT-IBKC Future Investment Fund 1			3,621				7,500				(296	)			—				—				10,825
KT-CKP New Media Investment Fund			4,454				(2,970	)			810				—				—				2,294
K Bank Inc.			—				26,543				(17,244	)			—				32,809				42,108
Others			77,851				3,178				(1,952	)			(3,662	)			6,313				81,728
		W	284,075			W	(19,018	)		W	(15,480	)		W	(3,662	)		W	33,516			W	279,431

¹ KT investment Co., Ltd., a subsidiary of the Group, recognized its share in net profit from associates and joint ventures as operating revenue and expense. These include its share in net loss from associates and joint ventures of W 445 million (2017: W 1,588 million) recognized as operating expense during the period.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Summarized financial information of associates and joint ventures as at and for the years ended December 31, 2018 and 2017, is as follows:

(In millions of Korean won)		December 31, 2018
		Current assets				Non-current assets				Current liabilities				Non-current liabilities
Korea Information & Technology Fund		W	118,024			W	326,740			W	—			W	—
KT-SB Venture Investment			4,322				4,624				6				—
KT-IBKC Future Investment Fund 1			19,922				—				—				—
KT-CKP New Media Investment Fund			25				540				—				—
K Bank Inc.			2,094,152				90,505				1,901,389				3,185

(In millions of Korean won)		2018
		Operating revenue				Profit (loss) for the year				Other comprehensive income				Total comprehensive income				Dividends received from associates
Korea Information & Technology Fund		W	59,524			W	45,110			W	(13,422)			W	31,688			W	1,842
KT-SB Venture Investment			—				3,056				—				3,056				—
KT-IBKC Future Investment Fund 1			2,665				2,057				—				2,057				—
KT-CKP New Media Investment Fund			371				(629	)			—				(629	)			—
K Bank Inc.			66,787				(79,671	)			1,432				(78,440	)			—

(In millions of Korean won)		December 31, 2017
		Current assets				Non-current assets				Current liabilities				Non-current liabilities
Korea Information & Technology Fund		W	144,874			W	273,727			W	—			W	—
KT-SB Venture Investment			120				5,770				6				—
KT-IBKC Future Investment Fund 1			5,499				16,302				152				—
KT-CKP New Media Investment Fund			287				4,333				—				—
K Bank Inc.			1,258,969				92,137				1,116,154				1,177

(In millions of Korean won)		2017
		Operating revenue				Profit (loss) for the year				Other comprehensive income				Total comprehensive income				Dividends received from associates
Korea Information & Technology Fund		W	36,462			W	12,825			W	1,868			W	14,693			W	739
KT-SB Venture Investment			3				(1,449	)			—				(1,449	)			—
KT-IBKC Future Investment Fund 1			15				(593	)			—				(593	)			—
KT-CKP New Media Investment Fund			1,593				1,632				—				1,632				—
K Bank Inc.			20,926				(83,787	)			(746	)			(84,533	)			—

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Details of a reconciliation of the summarized financial information to the carrying amount of interests in the associates and joint ventures as at and for the years end December 31, 2018 and 2017, are as follows:

(In millions of Korean won)		2018
		Net assets (a)				Percentage of ownership (b)				Share in net assets (c)=(a)x(b)				Intercompany transaction and others (d)				Book amount (c)+(d)
Korea Information & Technology Fund		W	444,764				33.30	%		W	148,255			W	—			W	148,255
KT-SB Venture Investment			8,940				50.00	%			4,470				—				4,470
KT-IBKC Future Investment Fund 1			19,922				50.00	%			9,961				—				9,961
KT-CKP New Media Investment Fund			565				49.70	%			280				—				280
K Bank Inc. 1			280,083				10.00	%			52,655				—				52,655

¹ 8.8% of non-voting convertible stock are excluded from percentage of ownership for K Bank Inc.

(In millions of Korean won)		2017
		Net assets (a)				Percentage of ownership (b)				Share in net assets (c)=(a)x(b)				Intercompany transaction and others (d)				Book amount (c)+(d)
Korea Information & Technology Fund		W	418,601				33.33	%		W	139,534			W	—			W	139,534
KT-SB Venture Investment			5,884				50.00	%			2,942				—				2,942
KT-IBKC Future Investment Fund 1			21,649				50.00	%			10,825				—				10,825
KT-CKP New Media Investment Fund			4,620				49.67	%			2,294				—				2,294
K Bank Inc. 1			233,775				10.00	%			42,108				—				42,108

¹ 8% of non-voting convertible stock are excluded from percentage of ownership for K Bank Inc.

Due to discontinuance of equity method of accounting, the Group has not recognized loss from associates and joint ventures of W 1,908 million for the year ended December 31, 2018 (for the year ended December 31, 2017: W 4,391 million). The accumulated comprehensive loss of associates and joint ventures as at December 31, 2018, which was not recognized by the Group is W 6,475 million (as at December 31, 2017: W 17,045 million).

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

15. Trade and Other Payables

Details of trade and other payables as at December 31, 2018 and 2017, are as follows:

(In millions of Korean won)		December 31, 2018				December 31, 2017
Current liabilities
Trade payables		W	1,236,489			W	1,399,287
Other payables			5,771,026				6,026,802
Total		W	7,007,515			W	7,426,089
Non-current liabilities
Trade payables		W	3,207			W	4,787
Other payables			1,510,657				996,582
Total		W	1,513,864			W	1,001,369

Details of other payables as at December 31, 2018 and 2017, are as follows:

(In millions of Korean won)		December 31, 2018				December 31, 2017
Non-trade payables 1		W	5,191,268			W	4,775,178
Accrued expenses			904,135				1,011,089
Operating deposits			819,968				850,999
Others			366,312				386,118
Less: non-current			(1,510,657	)			(996,582	)
Current		W	5,771,026			W	6,026,802

¹ Settlement payables of BC Card Co., Ltd., a subsidiary of the Group, of W 1,996,320 million related to credit card transactions are included as at December 31, 2018 (2017: W 2,365,477 million).

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

16. Borrowings

Details of borrowings as at December 31, 2018 and 2017, are as follows:

Debentures

(In millions of Korean won and foreign currencies in thousands)						December 31, 2018								December 31, 2017
Type		Maturity		Annual interest rates		Foreign currency				Korean won				Foreign currency				Korean won
MTNP notes 1		Sept. 07, 2034		6.500%			USD 100,000			W	111,810				USD 100,000			W	107,140
FR notes		Aug. 28, 2018		—			—				—				USD 300,000				321,420
MTNP notes		Apr. 22, 2019		2.625%			USD 350,000				391,335				USD 350,000				374,990
MTNP notes		Jan. 29, 2018		—			—				—				JPY 6,800,000				64,539
MTNP notes		Feb. 23, 2018		—			—				—				JPY 15,000,000				142,367
MTNP notes		July. 18, 2026		2.500%			USD 400,000				447,240				USD 400,000				428,560
MTNP notes		Aug. 07, 2022		2.625%			USD 400,000				447,240				USD 400,000				428,560
FR notes 2		Aug. 23, 2020		LIBOR(3M)+0.40%			USD 200,000				223,620				—				—
FR notes 2		Aug. 23, 2023		LIBOR(3M)+0.90%			USD 100,000				111,810				—				—
MTNP notes		July. 06, 2020		0.310%			JPY 4,000,000				40,527				—				—
MTNP notes		July. 06, 2021		0.380%			JPY16,000,000				162,109				—				—
MTNP notes		Nov. 13, 2020		0.300%			JPY 30,000,000				303,954								—
The 173-2nd Public bond		Aug. 06, 2018		—			—				—				—				100,000
The 179th Public bond		Mar. 29, 2018		—			—				—				—				260,000
The 180-2nd Public bond		Apr. 26, 2021		4.710%			—				380,000				—				380,000
The 181-2nd Public bond		Aug. 26, 2018		—			—				—				—				90,000
The 181-3rd Public bond		Aug. 26, 2021		4.090%			—				250,000				—				250,000
The 182-2nd Public bond		Oct. 28, 2021		4.310%			—				100,000				—				100,000
The 183-2nd Public bond		Dec. 22, 2021		4.090%			—				90,000				—				90,000
The 183-3rd Public bond		Dec. 22, 2031		4.270%			—				160,000				—				160,000
The 184-1st Public bond		Apr. 10, 2018		—			—				—				—				120,000
The 184-2nd Public bond		Apr. 10, 2023		2.950%			—				190,000				—				190,000
The 184-3rd Public bond		Apr. 10, 2033		3.170%			—				100,000				—				100,000
The 185-1st Public bond		Sept. 16, 2018		—			—				—				—				200,000
The 185-2nd Public bond		Sept. 16, 2020		3.650%			—				300,000				—				300,000
The 186-2nd Public bond		June 26, 2019		3.078%			—				170,000				—				170,000
The 186-3rd Public bond		June 26, 2024		3.418%			—				110,000				—				110,000
The 186-4th Public bond		June 26, 2034		3.695%			—				100,000				—				100,000
The 187-2nd Public bond		Sept. 02, 2019		2.965%			—				220,000				—				220,000
The 187-3rd Public bond		Sept. 02, 2024		3.314%			—				170,000				—				170,000
The 187-4th Public bond		Sept. 02, 2034		3.546%			—				100,000				—				100,000
The 188-1st Public bond		Jan. 29, 2020		2.259%			—				160,000				—				160,000
The 188-2nd Public bond		Jan. 29, 2025		2.454%			—				240,000				—				240,000
The 188-3rd Public bond		Jan. 29, 2035		2.706%			—				50,000				—				50,000
The 189-1st Public bond		Jan. 28, 2019		1.761%			—				100,000				—				100,000
The 189-2nd Public bond		Jan. 28, 2021		1.946%			—				130,000				—				130,000

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(In millions of Korean won and foreign currencies in thousands)								December 31, 2018								December 31, 2017
Type		Maturity		Annual interest rates				Foreign currency				Korean won				Foreign currency				Korean won
The 189-3rd Public bond		Jan. 28, 2026			2.203	%			—				100,000				—				100,000
The 189-4rd Public bond		Jan. 28, 2036			2.351	%			—				70,000				—				70,000
The 190-1st Public bond		Jan. 29, 2021			2.548	%			—				110,000				—				—
The 190-2nd Public bond		Jan. 30, 2023			2.749	%			—				150,000				—				—
The 190-3rd Public bond		Jan. 30, 2028			2.947	%			—				170,000				—				—
The 190-4th Public bond		Jan. 30, 2038			2.931	%			—				70,000				—				—
The 17th unsecured bond		Apr. 22, 2018			—				—				—				—				60,000
Subtotal													6,029,645								5,987,576
Less: Current portion													(880,940	)							(1,357,776	)
Discount on bonds													(20,056	)							(19,347	)
Total												W	5,128,649							W	4,610,453

¹  As at December 31, 2018, the Group has outstanding notes in the amount of USD 100 million with fixed interest rates under Medium Term Note Program (“MTNP”) registered in the Singapore Stock Exchange, which allowed issuance of notes of up to USD 2,000 million. However, the MTN program has been suspended since 2007.

²  The Libor (3M) is approximately 2.808% as at December 31, 2018.

Short-term borrowings

(In millions of Korean won)
Type		Financial institution		Annual interest rates				December 31, 2018				December 31, 2017
Operational		NongHyup Bank			3.78%			W	15,000			W	—
		Shinhan Bank			3.70%~4.72%				59,800				113,300
		Shinhan Bank, Indonesia			8.90%				614				—
		Korea Development Bank			2.50%~4.35%				16,200				12,000
		Soohyup Bank			4.57%				1,000				3,000
		Total						W	92,614			W	128,300

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Long-term borrowings

(In millions of Korean won and thousands of foreign currencies)										December 31, 2018								December 31, 2017
Financial institution		Type				Annual interest rates				Foreign currency				Korean won				Foreign currency				Korean won
Export-Import Bank of Korea			Inter-Korean Cooperation Fund 1				1.50%				—			W	3,948				—			W	4,688
Shinhan Bank			General loans				2.93%				—				5,000				—				30,000
			Facility loans				3.01%				—				30,000				—				6,000
			Vessel facility loans 2				LIBOR(3M)+0.706%				USD 9,000				10,063				USD 15,000				16,071
KEB Hana Bank			General loans				3.95%				—				—				—				3,000
Standard Charted Bank			General loans				3.16%				—				6,000				—				8,000
NongHyup Bank			General loans				2.86%				—				8,000				—				8,000
			Facility loans				2.00%				—				104				—				123
Industrial Bank of Korea			General loans				3.02%				—				10,000				—				—
			General loans				3.30%				—				30,000				—				30,000
Kookmin Bank			Facility loans				2.59%				—				—				—				2,333
NH Investment & Security Co., Ltd.			Commercial papers				3.17%				—				300,000				—				300,000
Others			Redeemable convertible preferred stock 3				1.00%				—				950				—				950
			Kookmin Bank and other 2				4.586%				USD 127,023				142,025				USD 166,108				177,968
Subtotal														W	546,090							W	587,133
Less: Current portion															(394,927	)						W	(87,398	)
Total														W	151,163							W	499,735

¹  The above Inter-Korean Cooperation Fund is repayable in installments over 13 years after a seven-year grace period.

²  LIBOR(3M) is approximately 2.808% as at December 31, 2018.

³  Skylife TV Co., Ltd., a subsidiary of the Group, issued 1,900,000 of redeemable convertible preferred stock with a par value per share of W 500 in 2010.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Repayment schedule of the Group’s debentures and borrowings including the portion of current liabilities as at December 31, 2018, is as follows:

		Debentures												Borrowings												Total
(in millions of Korean won)		In local currency				In foreign currency				Sub- total				In local currency				In foreign currency				Sub- total
Jan. 1, 2019 ~ Dec. 31, 2019		W	490,000			W	391,335			W	881,335			W	436,518			W	51,023			W	487,541			W	1,368,876
Jan. 1, 2020 ~ Dec. 31, 2020			460,000				568,101				1,028,101				1,468				47,054				48,522				1,076,623
Jan. 1, 2021 ~ Dec. 31, 2021			1,060,000				162,109				1,222,109				45,518				43,700				89,218				1,311,327
Jan. 1, 2022 ~ Dec. 31, 2022			—				447,240				447,240				518				10,925				11,443				458,683
Thereafter			1,780,000				670,860				2,450,860				1,980				—				1,980				2,452,840
Total		W	3,790,000			W	2,239,645			W	6,029,645			W	486,002			W	152,702			W	638,704			W	6,668,349

17. Provisions

Changes in provisions for the years ended December 31, 2018 and 2017, are as follows:

		2018
(In millions of Korean won)		Litigation				Restoration cost				Others				Total
Beginning balance		W	18,305			W	100,216			W	84,508			W	203,030
Increase (transfer)			44,594				25,975				26,958				97,526
Usage			(3,002	)			(3,181	)			(11,780	)			(17,963	)
Reversal			(1,137	)			(4,182	)			(1,818	)			(7,137	)
Ending balance		W	58,760			W	118,828			W	97,869			W	275,456
Current		W	14,513			W	1,736			W	95,212			W	111,461
Non-current			44,247				117,092				2,656				163,995

		2017
(In millions of Korean won)		Litigation				Restoration cost				Others				Total
Beginning balance		W	19,038			W	101,312			W	76,829			W	197,179
Increase (transfer)			3,842				2,827				41,550				48,219
Usage			(1,740	)			(2,178	)			(22,382	)			(26,300	)
Reversal			(2,834	)			(1,723	)			(11,467	)			(16,024	)
Changes in scope of consolidation			—				(22	)			(22	)			(44	)
Ending balance		W	18,036			W	100,216			W	84,508			W	203,030
Current		W	17,238			W	1,766			W	59,168			W	78,172
Non-current			1,068				98,450				25,340				124,858

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

18. Net Defined Benefit Liabilities

The amounts recognized in the statements of financial position as at December 31, 2018 and 2017, are determined as follows:

(In millions of Korean won)		December 31, 2018				December 31, 2017
Present value of defined benefit obligations		W	2,201,876			W	1,911,166
Fair value of plan assets			(1,643,046	)			(1,519,779	)
Liabilities		W	561,269			W	395,079
Assets		W	2,439			W	3,692

Changes in the defined benefit obligations for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Beginning		W	1,911,166			W	1,713,184
Current service cost			225,667				210,336
Interest expense			51,691				38,994
Benefit paid			(121,372	)			(154,600	)
Changes due to settlements of plan			9,801				(61	)
Remeasurements:
Actuarial gains and losses arising from changes in demographic assumptions			4,600				3,353
Actuarial gains and losses arising from changes in financial assumptions			114,548				36,946
Actuarial gains and losses arising from experience adjustments			(19,919	)			63,583
Changes in scope of consolidation			23,784				(569	)
Ending		W	2,201,876			W	1,911,166

Changes in the fair value of plan assets for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Beginning		W	1,519,779			W	1,334,780
Interest income			41,233				30,303
Remeasurements:
Return on plan assets (excluding amounts included in interest income)			1,409				(5,557	)
Benefits paid			(116,303	)			(130,510	)
Employer contributions			179,100				290,895
Changes in scope of consolidation			17,828				(132	)
Ending		W	1,643,046			W	1,519,779

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Amounts recognized in the consolidated statement of profit or loss for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Current service cost		W	225,667			W	210,336
Net Interest cost			10,459				8,691
Past service cost			9,801				(61	)
Transfer in (out)			(13,881	)			(9,196	)
Total expenses		W	232,045			W	209,770

Principal actuarial assumptions used are as follows:

		December 31, 2018		December 31, 2017
Discount rate		2.20% ~ 3.34%		1.85% ~ 3.66%
Future salary increase		1.39% ~ 7.82%		1.00% ~ 8.03%

The sensitivity of the defined benefit obligations as at December 31, 2018, to changes in the principal assumptions is:

(in percentage, in millions of Korean won)

Effect on defined benefit obligation

Changes in assumption

Increase in assumption

Decrease in assumption

Discount rate

0.5% point

W

(72,851

)

W

82,527

Salary growth rate

0.5% point

75,647

(63,267

)

A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.

The above sensitivity analyses are based on an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the statement of financial position.

The Group actively monitors how the duration and the expected yield of the investments match the expected cash outflows arising from the pension obligations. Expected contributions to post-employment benefit plans for the year ending December 31, 2019, are W 320,899 million.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The expected maturity analysis of undiscounted pension benefits as at December 31, 2018, is as follows:

(in millions of Korean won)

Less than 1 year

Between 1-2 years

Between 2-5 years

Over 5 years

Total

Pension benefits

W

183,106

W

225,706

W

726,283

W

3,972,768

W

5,107,863

The weighted average duration of the defined benefit obligations is 7.4 years.

19. Defined Contribution Plan

Recognized expense related to the defined contribution plan for the year ended December 31, 2018, is W 48,210 million (for the year ended December 31, 2017: W 45,936 million).

20. Commitments and Contingencies

As at December 31, 2018, major commitments with local financial institutions are as follows:

(In millions of Korean won and foreign currencies in thousands)

Financial institution

Currency

Limit

Used amount

Bank overdraft

Kookmin Bank and others

KRW

1,697,000

—

Commercial papers

NH Investment & Securities Co., Ltd.

KRW

300,000

300,000

Inter-Korean Cooperation Fund

Export-Import Bank of Korea

KRW

37,700

3,948

Collateralized loan on electronic accounts receivable-trade

Shinhan Bank and others

KRW

495,560

70,759

Plus electronic notes payable

Industrial Bank of Korea

KRW

50,000

960

Loans for working capital

Korea Development Bank and others

KRW

254,300

158,000

Facility loans

Shinhan Bank and others

KRW

10,123

8,406

Kookmin Bank and others

USD

212,000

127,024

Facility loans on ships

Shinhan Bank

USD

9,000

9,000

Export L/C

Shinhan Bank

USD

—

1,156

Derivatives transaction limit

Korea Development Bank

KRW

100,000

64,622

FX forward trading commitment

Shinhan Bank

USD

11,500

—

Total

KRW

2,944,683

606,695

USD

232,500

137,180

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

As at December 31, 2018, guarantees received from financial institutions are as follows:

(In millions of Korean won and foreign currencies in thousands)

Financial institution

Currency

Limit

Performance guarantee

Seoul Guarantee Insurance     and others

KRW

299,689

USD

1,200

Guarantee for import letters of credit

Industrial Bank of Korea and others

USD

5,980

Guarantee for payment in Korean currency

Shinhan Bank and others

KRW

5

Guarantee for payment in foreign currency

KEB Hana Bank and others

USD

51,766

PLN1

23,000

Comprehensive credit line

KEB Hana Bank and others

KRW

40,000

Comprehensive credit line

KEB Hana Bank

USD

10,000

Bid guarantee

KEB Hana Bank

USD

400

Bid guarantee

Korea Software Financial Cooperative     and others

KRW

58,992

Performance guarantee / Warranty Guarantee

KRW

376,420

Guarantee for advances received/others

KRW

124,901

Bid guarantee

Seoul Guarantee Insurance

KRW

350

Warranty guarantee

KRW

1,037

Guarantees for licensing

KRW

4,070

Performance guarantee / Warranty Guarantee

KRW

996

Guarantees for public sale

KRW

120

Guarantees for deposits

KRW

3,525

Total

KRW

910,105

USD

69,346

PLN1

23,000

¹  Polish Zloty.

As at December 31, 2018, guarantees provided by the Group to a third party, are as follows:

(In millions of Korean won and foreign currencies in thousands)

Subject to payment guarantees

Creditor

Currency

Limit

Used amount

Period

KT Estate Inc.

Busan Gaya Centreville Buyers

Shinhan Bank

KRW

4,854

2,503

Nov 10, 2017 ~ Oct. 31, 2020

KT Estate Inc.

Daegu Beomeo-Crossroads SeohanIDaum Buyers

Shinhan Bank

KRW

8,172

4,271

Oct. 29, 2017 ~ Nov. 30, 2020

KT Hitel Co., Ltd.

KEB Hana Bank

Cash payers

KRW

538

—

Apr 19, 2018 ~ Apr 19, 2019

KT Hitel Co., Ltd.

Korea Software Financial Cooperative

Yonsei University and others

KRW

34,715

1,616

Oct 22, 2018 ~ Oct 22, 2021

BC Card Co., Ltd

PT Bccard Asia Pacific

Shinhan Bank, Indonesia

IDR

8,000,000

8,000,000

Sep 18, 2018 ~ Sep 17, 2019

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The Controlling Company is jointly and severally obligated with KT Sat Co., Ltd. to pay KT Sat Co., Ltd.’s liabilities incurred prior to spin-off. As at December 31, 2018, the Controlling Company and KT Sat Co., Ltd. are jointly and severally liable for reimbursement of W 3,480 million.

For the year ended December 31, 2018, the Group made agreements with the Securitization Specialty Companies (2018: Giga LTE Thirty seventh to Forty second Securitization Specialty Co., Ltd., 2017: Giga LTE Thirty first to Thirty sixth Securitization Specialty Co., Ltd.), and disposed of its trade receivables related to handset sales. The Group also made asset management agreements with each securitization specialty company and in accordance with the agreement the Group will receive asset management fees upon liquidation of securitization specialty company.

As at December 31, 2018, the Group is a defendant in 172 lawsuits with the total claimed amount of W 169,246 million (2017: W 112,639 million). As at December 31, 2018, litigation provisions of W 58,776 million for pending lawsuits and unasserted claims are recorded as liabilities for potential loss in the ordinary course of business. The final outcomes of the cases cannot be estimated at the end of the reporting period.

In December 2013, Asia Broadcast Satellite Holdings Ltd. (“ABS”) filed a request for meditation to the International Chamber of Commerce (“ICC”) for the compensation of damages from the ownership of the satellite Koreasat-3 (“K3”) and the alleged breach of the entrustment control contract related to K3, which was made and entered into with the Controlling Company and its subsidiary, KT Sat Co., Ltd. In July 2017, the ICC issued a partial ruling that ABS has the ownership of K3, and in March 2018, the final ruling was issued that KT Sat co., Ltd. should pay compensation for damages to ABS. However, in October 2017, the Controlling Company and its subsidiary, KT Sat Co., Ltd. filed a lawsuit seeking the cancellation of the partial ruling in the Federal Court of New York, and filed the other lawsuit in May 2018 seeking the cancellation of the final ruling. The Federal Court of New York dismissed the first case in April and the second case in July 2018. The Controlling Company and its subsidiary, KT Sat Co., Ltd. filed an appeal to the US Court of Appeals for the Second Circuit in August 2018. The outcome of the appeal cannot be reasonably estimated at the end of the reporting period.

According to the financial and other covenants included in certain debentures and borrowings, the Group is required to maintain certain financial ratios such as debt-to-equity ratio, use the funds for the designated purpose and report to the creditors periodically. The covenant also contains restriction on provision of additional collateral and disposal of certain assets.

At the end of the reporting period, the Group is offering construction completion guarantee agreement to development of Nonsan Hwagidong apartment complex. If a contingent event occurs in between November 24, 2017 and to August 9, 2019, the Group collaterally guarantees the debt of AbleNS 1st Co. up to \ 6,000 million.

At the end of the reporting period, the Group participates in Algerie Sidi Abdela new town development consortium (percentage of ownership: 2.5%) and has joint liability with other consortium participants.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

At the end of the reporting period, contract amount of property and equipment acquisition agreement made but not yet recognized amounts to W 1,474,009 million (2017: W 622,059 million).

21. Lease

The Group’s non-cancellable lease arrangements as at December 31, 2018, are as follows:

Details of finance lease assets as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Acquisition costs		W	343,055			W	325,975
Less: Accumulated depreciation			(152,244	)			(126,091	)
Net balance		W	190,811			W	199,884

As at December 31, 2018, the Group recognized financial lease assets as other property and equipment. The related depreciation amounted to W 63,070 million for the year ended December 31, 2018 (for the year ended December 31, 2017: W 58,535 million).

Details of future minimum lease payments as at December 31, 2018 and 2017, under finance lease contracts are summarized below:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Total amount of minimum lease payments
Within one year		W	77,615			W	88,441
From one year to five years			124,498				132,113
More than five years			79				81
Total			202,192				220,635
Unrealized interest expense			38,334				43,758
Net amount of minimum lease payments
Within one year			59,324				68,651
From one year to five years			104,456				108,146
More than five years			78				80
Total		W	163,858			W	176,877

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Details of future minimum lease payments as at December 31, 2018 and 2017, under operating lease contracts are summarized below:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Within one year		W	109,025			W	109,258
From one year to five years			263,395				266,434
Thereafter			1,153				1,635
Total		W	373,573			W	377,327

Operating lease expenses incurred for the years ended December 31, 2018 and 2017, amounted to W 132,225 million and W 126,250 million, respectively.

22. Share Capital

As at December 31, 2018 and 2017, the Group’s number of authorized shares is one billion.

December 31, 2018

December 31, 2017

Number of outstanding shares

Par value per share (Korean won)

Ordinary Shares (in millions of Korean won)

Number of outstanding shares

Par value per share (Korean won)

Ordinary Shares (in millions of Korean won)

Ordinary shares 1

261,111,808

W

5,000

W

1,564,499

261,111,808

W

5,000

W

1,564,499

¹  The Group retired 51,787,959 treasury shares against retained earnings. Therefore, the ordinary shares amount differs from the amount resulting from multiplying the number of shares issued.

23. Retained Earnings

Details of retained earnings as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Legal reserve 1		W	782,249			W	782,249
Voluntary reserves 2			4,651,362				4,651,362
Unappropriated retained earnings			5,895,248				4,554,785
Total		W	11,328,859			W	9,988,396

¹  The Commercial Code of the Republic of Korea requires the Controlling Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued share capital. The reserve is not available for the payment of cash dividends, but may be transferred to share capital with the approval of the Controlling Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Controlling Company’s majority shareholders.

²  The provision of research and development of human resources is separately accumulated with tax reserve fund during earned surplus disposal by Tax Reduction and Exemption Control Act of Korea. Reversal of this provision can be paid out as dividends according to related tax law.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

24. Accumulated Other Comprehensive Income and Other Components of Equity

As at December 31, 2018 and 2017, the details of the Controlling Company’s accumulated other comprehensive income are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Changes in investments in associates and joint ventures		W	(871	)		W	(735	)
Loss on derivatives valuation			(30,474	)			(3,463	)
Gain on valuation of financial assets at fair value through other comprehensive income			96,704				—
Gain of valuation on available-for-sale			—				52,673
Exchange differences on translation for foreign operations			(15,201	)			(17,490	)
Total		W	50,158			W	30,985

Changes in accumulated other comprehensive income for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Beginning				Changes in accounting policy				Increase/ decrease				Reclassifica- tion to gain or loss				Ending
Changes in investments in associates and joint ventures		W	(735	)		W	—			W	(136	)		W	—			W	(871	)
Gain or loss on derivatives valuation			(3,463	)			—				17,268				(44,279	)			(30,474	)
Gain on valuation of financial assets at fair value through other comprehensive income			52,673				17,741				26,290				—				96,704
Exchange differences on translation for foreign operations			(17,490	)							2,289				—				(15,201	)
Total		W	30,985			W	17,741			W	45,711			W	(44,279	)		W	50,158

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		2017
		Beginning				Increase/ decrease				Reclassifica- tion to gain or loss				Ending
Changes in investments in associates and joint ventures		W	(10,883	)		W	10,148			W	—			W	(735	)
Gain or loss on derivatives valuation			(34,309	)			(111,083	)			141,929				(3,463	)
Gain or loss of valuation on available-for-sale			54,106				54,017				(55,450	)			52,673
Exchange differences on translation for foreign operations			(10,346	)			(7,144	)			—				(17,490	)
Total		W	(1,432	)		W	(54,062	)		W	86,479			W	30,985

The Group’s other components of equity as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Treasury stock 1		W	(830,874	)		W	(853,108	)
Gain or loss on disposal of treasury stock 2			(12,251	)			873
Share-based payments			5,956				6,483
Others 3			(343,914	)			(359,550	)
Total		W	(1,181,083	)		W	(1,205,302	)

¹ During the year ended December 31, 2018, the Group acquired treasury stock of 847,620 and disposed of 895,333 treasury shares.

² The amount directly reflected in equity is W 5,410 million (2017: W 653 million) for the year ended December 31, 2018.

³ Profit or loss incurred from transactions with non-controlling interest and investment difference incurred from change in proportion of subsidiaries are included.

As at December 31, 2018 and 2017, the details of treasury stock are as follows:

		December 31, 2018				December 31, 2017
Number of shares (in shares)			15,967,040				16,014,753
Amounts (In millions of Korean won)		W	830,874			W	853,108

Treasury stock is expected to be used for the stock compensation for the Group’s directors and employees and other purposes.

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December 31, 2018 and 2017

25. Share-based Payments

Details of share-based payments as at December 31, 2018, are as follows:

		12th grant
Grant date		August 2, 2018
Grantee		CEOs, inside directors, outside directors, executives
Vesting conditions		Service condition: 1 year Non-market performance condition: achievement of performance
Fair value per option (in Korean won)		W 28,350
Total compensation costs (in Korean won)		W 5,956 million
Estimated exercise date (exercise date)		During 2019
Valuation method		Fair value method

Changes in the number of stock options for the years ended December 31, 2018 and 2017, are as follows:

		2018
		Beginning				Grant				Expired				Exercised1				Ending				Number of shares exercisable
11th grant			316,949				—				312,181				4,768				—				—
12th grant			—				353,325				—				—				353,325				—
Total			316,949				353,325				312,181				4,768				353,325				—

		2017
		Beginning				Grant				Expired				Exercised1				Ending				Number of shares exercisable
10th grant			318,506				—				193,094				125,412				—				—
11th grant			—				316,949				—				—				316,949				—
Total			318,506				316,949				193,094				125,412				316,949				—

¹  The weighted average price of ordinary shares at the time of exercise in 2018 was W 27,300 (2017: W 31,797).

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

26. Revenue from Contracts with Customers and Relevant Contract Assets and Liabilities

The Group has recognized the following amounts relating to revenue in the statement of profit or loss:

(in millions of Korean won)		2018
Revenue from contracts with customers		W	23,252,348
Revenue from other sources			207,795
Total revenue		W	23,460,143

Operating revenues for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Services provided		W	19,931,141			W	19,898,725
Sales of goods 1			3,529,002				3,488,542
Total		W	23,460,143			W	23,387,267

¹  Includes revenue from construction commitment recognized using percentage of completion method.

Revenues from services provided are recognized over time, and sales of goods are recognized at a point of time.

The contract assets and liabilities recognized in relation to the revenues from contracts with customers are as follows:

(in millions of Korean won)		December 31, 2018				January 1, 2018
Contract assets		W	398,797			W	421,131
Contract liabilities			347,461				282,836
Deferred revenue			96,198				88,732

The contract costs recognized as assets are as follows:

(in millions of Korean won)		December 31, 2018				January 1, 2018
Contract costs recognized as assets		W	1,469,855			W	1,306,409

The Group recognized W 1,397,318 million of operating expenses in the current reporting period which relates to contract cost assets.

In 2018, the recognized revenue arising from carried-forward contract liabilities from prior year is as follows:

(in millions of Korean won)		2018
Revenue recognized that was included in the contract liability balance at the beginning of the year
Allocation of the transaction price		W	183,905
Deferred revenue of joining/installment fee			37,975
Others			1,536
Total		W	225,416

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

27. Construction Commitments

Changes in construction contracts for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Beginning				Increase				Gain from construction				Ending
Gwangju (Ssangam) complex residence		W	156,364			W	32,141			W	186,883			W	1,622
Daegu (Susung) complex residence			100,442				33,236				42,276				91,402
Busan (Gaya) apartment			79,015				1				31,018				47,998

(in millions of Korean won)		2017
		Beginning				Increase				Gain from construction				Ending
Gwangju (Ssangam) complex residence		W	332,001			W	—			W	175,637			W	156,364
Daegu (Susung) complex residence			—				105,884				5,442				100,442
Busan (Gaya) apartment			—				86,544				7,529				79,015
Busan (Youngdo) apartment			36,530				493				37,023				—

Gains or losses from construction in progress as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018
		Cumulative construction revenue				Cumulative construction cost				Cumulative gain or loss from construction				Progress billings				Advance payments
Gwangju (Ssangam) complex residence		W	394,156			W	329,171			W	64,985			W	271,284			W	—
Daegu (Susung) complex residence			47,718				33,064				14,654				55,648				7,930
Busan (Gaya) apartment			38,547				28,400				10,147				34,347				—

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		December 31, 2017
		Cumulative construction revenue				Cumulative construction cost				Cumulative gain or loss from construction				Progress billings				Advance payments
Gwangju (Ssangam) complex residence		W	207,273			W	174,983			W	32,290			W	179,085			W	—
Daegu (Susung) complex residence			5,442				3,771				1,671				21,177				15,735
Busan (Gaya) apartment			7,529				5,547				1,982				17,657				10,128
Busan (Youngdo) apartment			97,905				75,388				22,517				97,905				—

Amounts due from and to customers for contract work as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018
		Amount due from customers for contract work 1				Amount due to customers for contract work 2
Gwangju (Ssangam) complex residence		W	122,872			W	—
Daegu (Susung) complex residence			—				7,930
Busan (Gaya) apartment			4,200				—
Busan (Youngdo) apartment			—				—

(in millions of Korean won)		December 31, 2017
		Amount due from customers for contract work 1				Amount due to customers for contract work 2
Gwangju (Ssangam) complex residence		W	28,188			W	—
Daegu (Susung) complex residence			—				15,735
Busan (Gaya) apartment			—				10,128
Busan (Youngdo) apartment			—				—

¹ Amount due from customers for contract work is recorded as non-trade receivables in the consolidated statements of financial position.

²  Amount due to customers for contract work is recorded as advance payments in the consolidated statements of financial position.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

28. Operating Expenses

Operating expenses for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Salaries and wages		W	3,845,842			W	3,568,456
Depreciation			2,674,205				2,745,969
Amortization			607,527				618,533
Commissions			1,080,168				1,085,865
Interconnection charges			579,613				640,612
International interconnection fee			226,627				214,058
Purchase of inventories			4,224,346				3,945,999
Changes of inventories			(242,859	)			(79,745	)
Sales commission			1,942,841				2,201,778
Service cost			1,540,869				1,428,405
Utilities			323,411				323,313
Taxes and dues			285,131				279,574
Rent			460,377				448,772
Insurance premium			73,654				69,384
Installation fee			143,669				146,783
Advertising expenses			157,675				197,114
Research and development expenses			176,758				168,635
Card service cost			3,112,618				3,094,894
Others			986,149				913,582
Total		W	22,198,621			W	22,011,981

Details of employee benefits for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Short-term employee benefits		W	3,505,214			W	3,297,944
Post-employment benefits (defined benefit)			232,045				209,770
Post-employment benefits (defined contribution)			48,210				45,936
Share-based payment			8,439				7,660
Others			51,934				6,949
Total		W	3,845,842			W	3,568,259

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December 31, 2018 and 2017

29. Other Income and Other Expenses

Other income for the years ended December 31, 2018 and 2017, consists of:

(in millions of Korean won)		2018				2017
Gains on disposal of property and equipment and investment properties		W	41,340			W	30,499
Gains on disposal of intangible assets			9,571				12,312
Compensation on property and equipment			101,163				124,630
Gains on government subsidies			18,037				26,021
Gain on disposal of investments in subsidiaries and associates			3,744				1,438
Others			42,143				92,488
Total		W	215,998			W	287,388

Other expenses for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Loss on disposal of property and equipment		W	95,657			W	180,792
Loss on disposal of intangible assets			5,315				16,583
Loss on disposal of associates			7				2,417
Impairment loss on property and equipment			15,904				9,285
Impairment loss on intangible asset			12,997				116,095
Donation			58,336				85,377
Other allowance for bad debts			21,123				3,335
Others			110,556				159,665
Total		W	319,895			W	573,549

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

30. Financial Income and Costs

Details of financial income for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Interest income		W	244,796			W	93,078
Gain on foreign currency transactions			17,175				79,653
Gain on foreign currency translation			3,691				225,580
Gain on settlement of derivatives			27,950				—
Gain on valuation of derivatives			66,305				57
Others			14,326				7,960
Total		W	374,243			W	406,328

Details of financial costs for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Interest expenses		W	296,873			W	302,464
Loss on foreign currency transactions			49,156				40,303
Loss on foreign currency translation			72,642				12,239
Loss on settlement of derivatives			—				58,569
Loss on valuation of derivatives			2,045				209,582
Loss on disposal of trade receivables			13,818				20,355
Impairment loss on available-for-sale financial assets			—				9
Others			1,125				1,010
Total		W	435,659			W	644,531

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

31. Deferred Income Tax and Income Tax Expense

The analysis of deferred tax assets and deferred tax liabilities as at December 31, 2018 and 2017, is as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Deferred tax assets
Deferred tax assets to be recovered within 12 months		W	406,962			W	309,641
Deferred tax assets to be recovered after more than 12 months			1,347,985				1,140,252
Deferred tax assets before offsetting			1,754,947				1,449,893
Deferred tax liabilities
Deferred tax liability to be recovered within 12 months			(415,097	)			(15,705	)
Deferred tax liability to be recovered after more than 12 months			(1,102,682	)			(859,126	)
Deferred tax liabilities before offsetting			(1,517,779	)			(874,831	)
Deferred tax assets after offsetting		W	443,641			W	703,524
Deferred tax liabilities after offsetting		W	206,473			W	128,462

The gross movements on the deferred income tax account for the years ended December 31, 2018 and 2017, are calculated as follows:

(in millions of Korean won)		2018				2017
Beginning		W	575,062			W	559,878
Changes in accounting policy			(372,078	)			—
Credited to the statement of profit or loss			959				(6,618	)
Charged to other comprehensive income			36,115				21,802
Ending		W	237,168			W	575,062

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:

(in millions of Korean won)		2018
		Beginning				Changes in accounting policy				Statement of profit or loss				Other comprehen- sive income				Ending
Deferred tax liabilities
Available-for-sale financial assets		W	(30,520)			W	30,520			W	—			W	—			W	—
Investment in subsidiaries, associates, and joint ventures			(96,650	)			—				2,867				179				(93,604	)
Depreciation			—				—				(424	)			—				(424	)
Advanced depreciation provision			(248,592	)			—				(64,592	)			—				(313,184	)
Deposits for severance benefits			(387,856	)			—				(11,126	)			—				(398,982	)
Accrued income			(2,150	)			—				592				—				(1,558	)
Reserve for technology and human resource development			(314	)			—				110				—				(204	)
Prepaid expenses			—				(352,139	)			(17,777	)			—				(369,916	)
Contract assets			—				(23,663	)			12,158				—				(11,505	)
Financial assets at fair value through profit or loss			—				(30,856	)			30,195				—				(661	)
Financial assets at fair value through other comprehensive income			—				(8,587	)			(17,638	)			(15,573	)			(41,798	)
Others			(108,749	)			—				(177,194	)			—				(285,943	)
Total		W	(874,831	)		W	(384,725	)		W	(242,829	)		W	(15,394	)		W	(1,517,779	)
Deferred tax assets
Derivative instruments		W	24,724			W	—			W	(26,128)			W	9,745			W	8,341
Provision for impairment or trade receivables			121,656				(9,096	)			(12,673	)			—				99,887
Inventory valuation			—				—				121				—				121
Contribution for construction			18,271				—				(1,471	)			—				16,800
Unsettled expenses			106,168				—				21,729				—				127,897
Provisions			24,079				—				12,099				—				36,178
Property and equipment			232,074				—				(1,796	)			—				230,278
Defined benefit liabilities			467,049				—				3,980				42,813				513,842
Withholding of facilities expenses			7,382				—				(773	)			—				6,609
Deduction of installment receivables			—				—				42				—				42
Assets retirement obligation			20,836				—				3,696				—				24,532
Gain or loss foreign currency translation			143				—				10,529				—				10,672
Deferred revenue			26,334				15,809				(2,502	)			—				39,641
Tax loss carryforward			2,699				—				1,364				—				4,063
Trade receivables			—				2,890				(1,293	)			—				1,597
Others			247,702				154				284,742				(1,049	)			531,549
Total		W	1,299,117			W	9,757			W	291,666			W	51,509			W	1,652,049
Temporary difference, net Tax credit carryforwards			150,776				—				(47,878	)			—				102,898
Total net balance		W	575,062			W	(372,078	)		W	959			W	36,115			W	237,168

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		2017
		Beginning				Statement of profit or loss				Other comprehensive income				Ending
Deferred tax liabilities
Derivative instruments		W	(49,188	)		W	49,188			W	—			W	—
Available-for-sale financial assets			(31,702	)			(164	)			1,346				(30,520	)
Investment in subsidiaries, associates, and joint ventures			(50,746	)			(42,659	)			(3,245	)			(96,650	)
Depreciation			(39,498	)			39,498				—				—
Advanced depreciation provision			(225,687	)			(22,905	)			—				(248,592	)
Deposits for severance benefits			(307,730	)			(80,126	)			—				(387,856	)
Accrued income			(2,024	)			(126	)			—				(2,150	)
Reserve for technology and human resource development			(747	)			433				—				(314	)
Others			(119,366	)			10,617				—				(108,749	)
Total		W	(826,688	)		W	(46,244	)		W	(1,899	)		W	(874,831	)
Deferred tax assets
Derivative instruments		W	—			W	34,572			W	(9,848	)		W	24,724
Provision for impairment or trade receivables			110,276				11,380				—				121,656
Inventory valuation			48				(48	)			—				—
Contribution for construction			18,091				180				—				18,271
Accrued expenses			80,356				10,683				—				91,039
Provisions			20,221				3,858				—				24,079
Property and equipment			232,915				(841	)			—				232,074
Defined benefit liabilities			372,492				67,751				26,806				467,049
Withholding of facilities expenses			6,910				472				—				7,382
Accrued payroll expenses			25,915				(10,786	)			—				15,129
Deduction of installment receivables			13,887				(13,887	)			—				—
Assets retirement obligation			18,086				2,750				—				20,836
Gain or loss foreign currency translation			67,701				(67,558	)			—				143
Deferred revenue			26,113				221				—				26,334
Tax credit carryforwards			199,599				(48,823	)			—				150,776
Tax loss carryforward			—				2,699				—				2,699
Others			193,956				47,003				6,743				247,702
Total		W	1,386,566			W	39,626			W	23,701			W	1,449,893
Net balance		W	559,878			W	(6,618	)		W	21,802			W	575,062

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The tax impacts recognized directly to equity as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018												December 31, 2017
		Before recognition				Tax effect				After recognition				Before recognition				Tax effect				After recognition
Loss on valuation of available-for-sale securities		W	—			W	—			W	—			W	(5,561	)		W	1,346			W	(4,215	)
Gain on valuation of financial assets at fair value through other comprehensive income			59,384				(15,573	)			43,811				—				—				—
Gain (loss) on valuation of hedge instruments			(36,756	)			9,745				(27,011	)			40,694				(9,848	)			30,846
Remeasurements of net defined benefit liabilities			(116,324	)			42,813				(73,511	)			(110,768	)			26,806				(83,962	)
Share of gain(loss) of associates and joint ventures, and others			(1,036	)			179				(857	)			13,410				(3,245	)			10,165
Exchange differences on translation for foreign operations			3,989				(1,049	)			2,940				(27,865	)			6,743				(21,122	)
Total		W	(90,743	)		W	36,115			W	(54,628	)		W	(90,090	)		W	21,802			W	(68,288	)

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Details of income tax expense for the years ended December 31, 2018 and 2017, are calculated as follows:

(in millions of Korean won)		2018				2017
Current income tax expenses		W	329,396			W	268,886
Impact of change in temporary difference			(959	)			6,618
Income tax expense		W	328,437			W	275,504

The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the entities as follows:

(in millions of Korean won)		2018				2017
Profit before income tax		W	1,090,742			W	837,030
Expected tax expense at statutory tax rate		W	289,592			W	202,099
Tax effect:
Income not taxable for tax purposes			(85,322	)			(19,268	)
Expenses not deductible for tax purposes			18,126				39,746
Tax credit and deductions			(20,319	)			(27,211	)
Others			126,360				80,138
Income tax expense		W	328,437			W	275,504

32. Earnings per Share

Basic earnings per share is calculated by dividing the profit from operations attributable to equity holders of the Group by the weighted average number of ordinary shares outstanding during the period, excluding ordinary shares purchased by the Group and held as treasury stock.

Basic earnings per share from operations for the years ended December 31, 2018 and 2017, is calculated as follows:

(in millions of Korean won)		2018				2017
Profit attributable to ordinary shares (in millions of Korean won)		W	688,464			W	476,744
Weighted average number of ordinary shares outstanding (in number of shares)			245,049,466				245,017,175
Basic earnings per share (in Korean won)		W	2,809			W	1,946

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Diluted earnings per share from operations is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Group has dilutive potential ordinary shares from convertible redeemable preferred stocks, convertible bond and other share-based payments.

Diluted earnings per share from operations for the years ended December 31, 2018 and 2017, is calculated as follows:

(in millions of Korean won)		2018				2017
Profit attributable to ordinary shares (in millions of Korean won)		W	688,464			W	476,744
Adjusted net income attributable to ordinary shares (In millions of Korean won)			—				—
Diluted profit attributable to ordinary shares (in millions of Korean won)		W	688,464			W	476,744
Number of dilutive potential ordinary shares outstanding (in number of shares)			1,163				79,880
Weighted average number of ordinary shares outstanding (in number of shares)			245,050,629				245,097,055
Diluted earnings per share (in Korean won)		W	2,809			W	1,945

Diluted earnings per share is earnings per outstanding of ordinary shares and dilutive potential ordinary shares. Diluted earnings per share is calculated by dividing adjusted profit for the period by the sum of the number of ordinary shares and dilutive potential ordinary shares.

33. Dividend

The dividends paid by the Group in 2018 were W 245,097 million (W 1,000 per share). The dividends paid by the Group in 2017 were W 195,977 million (W 800 per share). A dividend in respect of the year ended December 31, 2018, of W 1,100 per share, amounting to a total dividend of W 269,659 million, is to be proposed at the shareholders’ meeting on March 29, 2019.

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December 31, 2018 and 2017

34. Cash Generated from Operations

Cash flows from operating activities for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
1. Profit for the year		W	762,305			W	561,526
2. Adjustments for:
Income tax expense			328,437				275,504
Interest income 1			(265,817	)			(108,639	)
Interest expense 1			296,894				302,464
Dividends income			(2,910	)			(4,785	)
Depreciation			2,735,413				2,802,531
Amortization of intangible assets			629,526				635,150
Provisions for severance benefits (defined benefits)			245,926				218,966
Impairment losses on trade receivables			113,064				45,704
Share of net profit or loss of associates and joint ventures			5,912				15,480
Loss (gain) on disposal of associates and joint ventures			(3,737	)			979
Impairment loss on associates and joint ventures			—				3,662
Loss on disposal of property and equipment, and investment in properties			68,688				150,293
Impairment loss on property and equipment, and investment in properties			15,904				9,285
Loss (gain) on disposal of intangible assets			(4,256	)			4,271
Impairment loss on intangible assets			12,997				116,095
Loss (gain) on foreign currency translation			68,952				(213,341	)
Loss (gain) on valuation of derivatives, net			(92,210	)			268,094
Gain on disposal of financial assets at fair value through profit or loss			(1,712	)			—
Gain on valuation of financial assets at fair value through profit or loss			(10,768	)			—
Gain on disposal of financial assets at amortized cost			(44	)			—
Impairment loss on available for sale securities			—				9
Gain on disposal of available-for-sale securities			—				(89,598	)
Others			(68,376	)			(260,478	)
3. Changes in operating assets and liabilities
Increase in trade receivables			(81,217	)			(303,340	)
Decrease (increase) in other receivables			257,759				(370,310	)
Decrease (increase) in other current assets			(123,258	)			11,792
Decrease (increase) in other non-current assets			19,556				(43,790	)
Increase in inventories			(274,209	)			(97,709	)
Increase (decrease) in trade payables			(167,841	)			162,110
Increase (decrease) in other payables			(448,301	)			214,689
Increase in other current liabilities			291,548				345,543
Increase (decrease) in other non-current liabilities			(17,220	)			14,198
Increase (decrease) in provisions			79,526				(12,574	)
Increase (decrease) in deferred revenue			48,201				(13,086	)
Increase in plan assets			(53,301	)			(203,420	)
Payment of severance benefits			(153,209	)			(118,391	)
4. Cash generated from operations(1+2+3)		W	4,212,222			W	4,318,884

¹  BC Card Co., Ltd. and other subsidiaries of the Group recognized interest income and expenses as operating income and expenses, respectively. Related interest income recognized as operating revenue is W 21,021 million (2017: W 15,561 million) and related interest expense recognized as operating expense is W 21 million (2017: zero) for the year ended December 31, 2018.

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December 31, 2018 and 2017

The Group made agreements with securitization specialty companies and disposed of its trade receivables related to handset sales (Note 20). Cash flows from the disposals are presented in cash generated from operations.

Significant transactions not affecting cash flows for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Reclassification of the current portion of borrowings		W	1,149,599			W	1,416,066
Reclassification of construction-in-progress to property and equipment			1,988,014				2,686,591
Reclassification of accounts payable from property and equipment			122,185				225,601
Reclassification of accounts payable from intangible assets			584,595				(227,108	)
Reclassification of payable from defined benefit liability			(31,838	)			36,209
Reclassification of payable from plan assets			(9,497	)			43,035

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December 31, 2018 and 2017

35. Changes in Liabilities Arising from Financing Activities

Changes in liabilities arising from financial activities for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Beginning				Cash flows				Non-cash																				Ending
										Newly acquired				Exchange difference				Fair value change				Scope changes				Others
Borrowing		W	6,683,662			W	(139,715	)		W	3,000			W	70,095			W	—			W	15,000			W	16,252			W	6,648,294
Financial lease liabilities			176,878				(73,885	)			61,187				—				—				—				(322	)			163,858
Derivative liabilities			98,820				(14,587	)			—				(37,344	)			35,809				—				(17,631	)			65,067
Derivative assets			(7,389	)			11,126				—				(22,474	)			(3,419	)			—				(7,687	)			(29,843	)
Total		W	6,951,971			W	(217,061	)		W	64,187			W	10,277			W	32,390			W	15,000			W	(9,388	)		W	6,847,376

(in millions of Korean won)		2017
		Beginning				Cash flows				Non-cash																				Ending
										Newly acquired				Exchange difference				Fair value change				Scope changes				Others
Borrowing		W	8,120,791			W	(1,163,917	)		W	—			W	(221,495	)		W	—			W	(2,206	)		W	(49,511	)		W	6,683,662
Financial lease liabilities			180,714				(71,735	)			68,938				—				—				—				(1,039	)			176,878
Derivative liabilities			16,901				—				—				130,674				(28,015	)			—				(20,740	)			98,820
Derivative assets			(227,318	)			71,370				—				76,552				(2,687	)			—				74,694				(7,389	)
Total		W	8,091,088			W	(1,164,282	)		W	68,938			W	(14,269	)		W	(30,702	)		W	(2,206	)		W	3,404			W	6,951,971

36. Segment Information

The Group’s operating segments are as follows:

Details		Business service
Marketing/Customer		Mobile/fixed line telecommunication service and convergence business
Corporate customer business		B2B business and others
Finance		Credit card business and others
Satellite TV		Satellite TV business
Others		IT, facility security and global business, and others

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December 31, 2018 and 2017

Details of each segment for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Operating revenues				Operating income				Depreciation and amortization
Marketing/Customer		W	14,061,629			W	886,515			W	2,293,809
Corporate customer business 1			2,509,880				208,584				546,635
Finance			3,560,417				145,463				22,504
Satellite TV			690,821				66,735				98,310
Others			6,373,639				6,532				380,384
			27,196,386				1,313,829				3,341,642
Elimination			(3,736,243	)			(52,307	)			5,637
Consolidated amount		W	23,460,143			W	1,261,522			W	3,347,279

¹  The reporting segment of the current period has changed. However, the reporting segment of the prior period has not been restated to reflect the change.

(in millions of Korean won)		2017
		Operating revenues				Operating income				Depreciation and amortization
Marketing/Customer		W	16,242,552			W	1,018,593			W	2,895,930
Finance			3,637,917				205,678				28,827
Satellite TV			685,822				75,373				99,216
Others			6,491,890				119,104				332,153
			27,058,181				1,418,748				3,356,126
Elimination			(3,670,914	)			(43,462	)			8,376
Consolidated amount		W	23,387,267			W	1,375,286			W	3,364,502

Operating revenues for the years ended December 31, 2018 and 2017, and non-current assets as at December 31, 2018 and 2017, by geographical regions, are as follows:

(in millions of Korean won)		Operating revenues								Non-current assets 1
Location		2018				2017				December 31, 2018				December 31, 2017
Domestic		W	23,400,311			W	23,322,041			W	17,426,879			W	17,246,640
Overseas			59,832				65,226				139,585				137,914
Total		W	23,460,143			W	23,387,267			W	17,566,464			W	17,384,554

¹  It is total amounts of property and equipment, intangible assets and investment properties.

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December 31, 2018 and 2017

37. Related Party Transactions

The list of related party of the Group as at December 31, 2018, is as follows:

Relationship		Name of Entity
Associates and joint ventures		Korea Information & Technology Investment Fund, K- Realty CR-REITs No.1, KT-SB Venture Investment Fund, Boston Global Film & Contents Fund L.P., QTT Global (Group) Company Limited, CU Industrial Development Co., Ltd., PHI Healthcare. (HooH Healthcare Inc.), KD Living, Inc., Oscar Ent. Co., Ltd., KT-CKP New Media Investment Fund, LoginD Co., Ltd., K-REALTY CR-REIT 6, K Bank, Inc., ISU-kth Contents Investment Fund, Daiwon Broadcasting Co., Ltd., KT-DSC creative economy youth start-up investment fund, Gyeonggi-KT Green Growth Fund, Korea electronic Vehicle charging service, PT. Mitra Transaksi Indonesia, K-REALTY RENTAL HOUSING REIT 2, AI RESEARCH INSTITUTE, KT-IBKC future investment fund 1, KT-IBKC Future Investment Fund 1, Gyeonggi-KT Yoojin Superman Fund, FUNDA Co., Ltd., FUNDA Co., Ltd., CHAMP IT Co.,Ltd., GE Premier 1st Corporate Restructuring Real Estate Investment Trust Company, Alliance Internet Corp., JB Emerging Market Specialty Investment Private Equity Trust No.1, Little big pictures.
Others 1		KT ENGCORE Co., Ltd.

¹ Although the entity is not the related party of the Group in accordance with Korean IFRS 1024, the entity belongs to the Large Enterprise Group to which the Group also belongs in accordance with the Monopoly Regulation and Fair Trade Act.

Outstanding balances of receivables and payables in relations to transactions with related parties as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)				December 31, 20178
				Receivables								Payables
				Trade receivables				Other receivables				Trade payables				Other payables
Associates		K-REALTY CR REIT 1		W	674			W	30,910			W	—			W	—
and		K Bank, Inc.			627				12,435				—				296
joint ventures		Others			775				1,225				4				1,116
Others		KT ENGCORE Co., Ltd.			2,187				7,733				1,207				109,662
		Total		W	4,514			W	52,302			W	1,211			W	111,074

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December 31, 2018 and 2017

(in millions of Korean won)				December 31, 2017
				Receivables												Payables
				Trade receivables				Loans and others				Other receivables				Trade payables				Other payables
Associates and joint ventures		K-REALTY CR REIT 1		W	778			W	—			W	33,800			W	—			W	—
		MOS GS Co., Ltd.			17				—				—				—				392
		MOS Daegu Co., Ltd.			1				—				—				—				1,388
		MOS Chungcheong Co., Ltd.			1				—				290				—				1,827
		MOS Gangnam Co., Ltd.			6				—				1				—				287
		MOS GB Co., Ltd.			17				—				1				—				778
		MOS BS Co., Ltd.			34				—				1				—				46
		MOS Honam Co., Ltd.			2				—				1				—				384
		K Bank, Inc.			1,338				—				7,994				—				296
		NgeneBio			1				2,510				—				—				3
		Others			54				—				1,281				—				2,135
Others		KT ENGCORE Co., Ltd.			7,189				—				2,921				13,029				105,344
		Total		W	9,438			W	2,510			W	46,290			W	13,029			W	112,880

Significant transactions with related parties for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)				2018
				Sales								Purchases
				Operating revenue				Other income				Operating expenses				Others 1
Associates and joint ventures		K- Realty CR-REITs No.1		W	2,088			W	—			W	31,984			W	—
		MOS GS Co., Ltd. 2			493				—				11,234				789
		MOS Daegu Co., Ltd. 2			229				—				8,475				300
		MOS Chungcheong Co., Ltd. 2			540				—				8,795				364
		MOS Gangnam Co., Ltd. 2			333				—				11,005				544
		MOS GB Co., Ltd. 2			1,378				—				16,101				418
		MOS BS Co., Ltd. 2			324				—				10,601				592
		MOS Honam Co., Ltd. 2			331				—				9,901				598
		K Bank, Inc.			15,705				—				7,004				—
		NgeneBio 3			3				—				—				—
		Others			2,777				111				9,542				5
Others		KT ENGCORE Co., Ltd.			4,224				4				112,063				174,210
		Total		W	28,425			W	115			W	236,705			W	177,820

¹  The amounts include acquisition of property and equipment and others.

²  It is the amount before excluded from consolidation during the year.

³  It is the amount before excluded from associates during the year

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December 31, 2018 and 2017

(in millions of Korean won)				2017
				Sales								Purchases
				Operating revenue				Other income				Operating expenses				Others 1
Associates and joint ventures		K- Realty CR-REITs No.1		W	2,233			W	—			W	35,532			W	—
		MOS GS Co., Ltd.			704				—				15,135				1,811
		MOS Daegu Co., Ltd.			335				—				7,580				934
		MOS Chungcheong Co., Ltd.			455				—				14,523				1,019
		MOS Gangnam Co., Ltd.			484				—				14,971				1,409
		MOS GB Co., Ltd.			987				—				20,060				1,591
		MOS BS Co., Ltd.			460				—				15,495				462
		MOS Honam Co., Ltd.			493				—				13,220				1,074
		K Bank, Inc.			29,939				—				59				—
		NgeneBio 2			3				40				—				—
		Others			1,026				123				11,311				73
Others		KT ENGCORE Co., Ltd.			4,691				2				119,973				168,652
		K-Realty Rental Housing REIT 1 3			410				—				—				—
		Total		W	42,220			W	165			W	267,859			W	177,025

¹  The amounts include acquisition of property and equipment and others.

²  It is the amount after excluded from consolidation during the year.

³  It is the amount before excluded from entities in the Large Enterprise Group during the year.

Key management compensation for the years ended December 31, 2018 and 2017, consists of:

(in millions of Korean won)		2018				2017
Salaries and other short-term benefits		W	2,762			W	2,879
Post-employment benefits			751				311
Stock-based compensation			878				1,331
Total		W	4,391			W	4,521

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December 31, 2018 and 2017

Fund transactions with related parties for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Equity contributions in cash and others				Dividend income
Associates and joint ventures
PHI Healthcare Inc. (HooH Healthcare Inc.)			W 1,000			W	—
KT-CKP New Media Investment Fund			(1,229	)			—
PT. Mitra Transaksi Indonesia 1			1,567				—
Gyeonggi-KT Yoojin Superman Fund			1,000				—
KT-DSC creative economy youth start-up investment fund			(1,800	)			—
KT-IBKC future investment fund 1			(1,050	)			—
Korea Electronic Vehicle Charging Service			168				—
K Bank, Inc.			26,725				—
GE Premier 1st Corporate Restructuring Real Estate Investment Trust Company			(3,423	)			—
JB Emerging Market Specialty Investment Private Equity Trust No.1			3,960				202
K-REALTY CR REIT 1			—				8,932
Korea Information & Technology Investment Fund			—				1,842
MOS GS Co., Ltd.2			(147	)			8
MOS Daegu Co., Ltd. 2			(147	)			8
MOS Chungcheong Co., Ltd. 2			(153	)			8
MOS Gangnam Co., Ltd. 2			(180	)			10
MOS GB Co., Ltd. 2			(203	)			12
MOS BS Co., Ltd. 2			(183	)			10
MOS Honam Co., Ltd. 2			(206	)			10
Daiwon Broadcasting Co., Ltd.			—				85
Boston Global Film & Contents Fund L.P.			(986	)			—
Gyeonggi-KT Green Growth Fund			—				19
Total			W24,713			W	11,146

¹  It is the amount before reclassification to assets held for sale.

²  It is the amount before included in consolidation during the year.

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December 31, 2018 and 2017

(in millions of Korean won)		2017
		Equity contributions in cash				Dividend income
Associates and joint ventures
PT. Mitra Transaksi Indonesia		W	5,194			W	—
KT-IBKC future investment fund 1			7,500				—
CHAMP IT Co.,Ltd.			750				—
Korea Electronic Vehicle Charging Service			864				—
Gyeonggi-KT Yoojin Superman Fund			1,000				—
K-REALTY CR REIT 1			—				5,392
K Bank, Inc.			26,543				—
Korea Information & Technology Investment Fund			—				739
MOS GS Co., Ltd.			—				12
MOS Daegu Co., Ltd.			—				12
MOS Chungcheong Co., Ltd.			—				12
MOS Gangnam Co., Ltd.			—				10
MOS GB Co., Ltd.			—				15
MOS BS Co., Ltd.			—				10
MOS Honam Co., Ltd.			—				10
Total		W	41,851			W	6,212

38. Financial Risk Management

(1) Financial Risk Factors

The Group’s activities expose it to a variety of financial risks: market 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.

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December 31, 2018 and 2017

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

(in millions of Korean won)		Fluctuation of foreign exchange rate				Income before tax1				Equity
2018.12.31			+ 10	%			W  (2,350	)		W	633
			- 10	%			(2,851	)			(62	)
2017.12.31			+ 10	%			W(10,132	)		W	(7,273	)
			- 10	%			10,132				7,273

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.

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December 31, 2018 and 2017

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

(in thousands of foreign currencies)		December 31, 2018								December 31, 2017
		Financial assets				Financial liabilities				Financial assets				Financial liabilities
USD		W	279,327			W	1,893,782			W	236,476			W	1,908,831
SDR			267				730				306				738
JPY			66,078				50,000,000				28,267				21,801,443
GBP			—				256				—				74
EUR			2				6				186				3,625
DZD			618				—				47				—
CNY			16,315				27,954				46,555				10
UZS			121,053				—				136,787				—
RWF			857				—				3,346				—
THB			1,685				1,685				—				—
IDR			64,240,286				41,510,330				14,886,393				710,162
MMK			84				—				84				—
TZS			—				2,876				317,348				—
BWP			897				—				42				—
BDT			39,494				—				38,074				—
PLN			26				—				338				—
VND			467,272				—				311,649				—
XAF			666				—				—
CHF			—				—				—				12

(iii) Price risk

As at December 31, 2018 and 2017, 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 equity would have been as follows:

(in millions of Korean won)		Fluctuation of price				Income before tax				Equity
2018.12.31			+ 10	%			W    12			W	898
			- 10	%			(12	)			(898	)
2017.12.31			+ 10	%			W  —			W	686
			- 10	%			—				(686	)

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December 31, 2018 and 2017

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

(in millions of Korean won)		Fluctuation of interest rate				Income before tax				Equity
2018.12.31			+ 100 bp				W 1,059				W 9,689
			- 100 bp				(1,958	)			(10,237	)
2017.12.31			+ 100 bp				W 1,942				W 4,868
			- 100 bp				(1,954	)			(5,198	)

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.

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December 31, 2018 and 2017

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.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The maximum exposure to credit risk of the Group’s financial instruments without considering value of collaterals as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Cash and cash equivalents (except for cash on hand)			W 2,284,885				W 1,926,620
Trade and other receivables
Financial assets at amortized costs			5,553,068				6,821,584
Financial assets at fair value through other comprehensive income			1,097,348				—
Contract assets			398,797				—
Other financial assets
Derivatives financial assets for hedging			29,843				7,389
Financial assets at fair value through profit or loss			714,653				5,813
Financial assets at fair value through other comprehensive income			6,909				—
Financial assets at amortized costs			484,272				—
Available-for-sale financial assets			—				9,899
Held-to-maturity financial assets			—				151
Financial instruments and others			—				1,333,317
Financial guarantee contracts 1			65,760				143,969
Total		W	10,635,535			W	10,248,742

¹  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.

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December 31, 2018 and 2017

(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

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.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

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, 2018
(in millions of Korean won)		Less than 1 year				1-5 years				More than 5 years				Total
Trade and other payables		W	7,287,436			W	1,173,579			W	492,429			W	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 contracts 1			52,734				13,026				—				65,760
Total		W	8,853,525			W	4,893,023			W	3,002,853			W	16,749,401

		December 31, 2017
(in millions of Korean won)		Less than 1 year				1-5 years				More than 5 years				Total
Trade and other payables		W	7,882,861			W	1,219,835			W	161,497			W	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 contracts 1			26,738				—				—				26,738
Total		W	9,537,712			W	4,917,851			W	2,621,412			W	17,076,975

¹  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.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

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, 2018
(in millions of Korean won)		Less than 1 year				1-5 years				More than 5 years				Total
Outflows		W	455,343			W	1,466,915			W	517,301			W	2,439,559
Inflows			484,505				1,492,718				519,133				2,496,356

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

(2) Capital Risk Management

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, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Total liabilities		W	17,457,550			W	16,520,310
Total equity			14,731,280				13,210,600
Debt-to-equity ratio			119	%			125	%

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.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

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

(in millions of Korean won)		December 31, 2018				December 31, 2017
Total borrowings		W	6,648,294			W	6,860,539
Less: cash and cash equivalents			(2,703,422	)			(1,928,182	)
Net debt			3,944,872				4,932,357
Total equity			14,731,280				13,210,600
Total capital			18,676,152				18,142,957
Gearing ratio			21	%			27	%

(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:

December 31, 2018

(in millions of Korean won)

Gross assets

Gross liabilities offset

Net amounts presented in the statement of financial position

Amounts not offset

Net amount

Financial instruments

Cash collateral

Trade receivables 2

W

78,833

W    (1

)

W78,832

W(76,414

)

W—

W

2,418

Other financial assets

19,825

—

19,825

(19,825

)

—

—

Total

W

98,658

W    (1

)

W98,657

W(96,239

)

W—

W

2,418

		December 31, 2017
(in millions of Korean won)		Gross assets				Gross liabilities offset				Net amounts presented in the statement of financial position				Amounts not offset								Net amount
														Financial instruments				Cash collateral
Derivate used for hedge 1		W	3,284			W	—				W  3,284				W  (3,284	)			W—			W	—
Trade receivables 2			85,755				(5,010	)			80,745				(73,109	)			—				7,636
Other financial assets			8,680				(436	)			8,244				(5,307	)			—				2,937
Total		W	97,719			W	(5,446	)			W92,273				W(81,700	)			W—			W	10,573

¹  It is the amount applied with master netting arrangements under the standard contract of International Swap and Derivatives Association (ISDA).

²  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.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

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, 2018
		Gross liabilities				Gross assets offset				Net amounts presented in the statement of financial position				Amounts not offset								Net amount
														Financial instruments				Cash collateral
Trade payables 2		W	78,317			W	—			W	78,317			W	(76,413	)			W—			W	1,904
Other financial liabilities			19,827				(1	)			19,826				(19,825	)			—				1
Total		W	98,144			W	(1	)		W	98,143			W	(96,238	)			W—			W	1,905

(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
														Financial instruments				Cash collateral
Derivate used for hedging 1		W	26,135			W	—			W	26,135			W	(3,284	)			W—			W	22,851
Trade payables 2			80,829				(5,217	)			75,612				(73,109	)			—				2,503
Other financial liabilities			5,549				(229	)			5,320				(5,307	)			—				13
Total		W	112,513			W	(5,446	)		W	107,067			W	(81,700	)			W—			W	25,367

¹  It is the amount applied with master netting arrangements under the standard contract of International Swap and Derivatives Association (ISDA).

²  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.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

39. Fair Value

(1) Fair Value of Financial Instruments by Category

Carrying amount and fair value of financial instruments by category as at December 31, 2018 and 2017, are as follows:

		December 31, 2018								December 31, 2017
(in millions of Korean won)		Carrying amount				Fair value				Carrying amount				Fair value
Financial assets
Cash and cash equivalents		W	2,703,422				1			W	1,928,182				1
Trade and other receivables
Financial assets measured at amortized cost			5,553,068				1				6,821,584				1
Financial assets at fair value through other comprehensive income			1,097,348				1,097,348				—				—
Other financial assets
Financial assets measured at amortized cost 2			484,272				1				1,333,368				1
Financial assets at fair value through profit or loss 2			777,685				777,685				5,913				5,913
Financial assets at fair value through other comprehensive income 2			326,157				326,157				—				—
Available-for-sale financial assets 3			—				—				319,402				319,402
Derivative financial assets for hedging			29,843				29,843				7,389				7,389
Total		W	10,971,795							W	10,415,838
Financial liabilities
Trade and other payables		W	8,521,379				1			W	8,427,458				1
Borrowings			6,648,293				1				6,683,662				6,738,326
Other financial liabilities
Financial liabilities at amortized cost			99,330				1				87,670				1
Financial liabilities at fair value through profit or loss			7,758				7,758				5,051				5,051
Derivative financial liabilities for hedging			57,308				57,308				93,770				93,770
Total		W	15,334,068							W	15,297,611

¹  The Group did not conduct fair value estimation since the book amount is a reasonable approximation of the fair value.

²  In the prior year, a portion of the equity instrument was classified as available-for-sale financial assets and financial assets held-to-maturity.

³  As at December 31, 2017, equity instruments that do not have a quoted price in an active market are measured at cost because their fair value cannot be measured reliably and excluded from the fair value disclosures.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(2) Fair Value Hierarchy

Assets measured at fair value or for which the fair value is disclosed are categorized within the fair value hierarchy, and the defined levels are as follows:

• Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

• Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is prices) or indirectly (that is, derived from prices) (Level 2).

• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

Fair value hierarchy classifications of the financial assets and financial liabilities that are measured at fair value or its fair value is disclosed as at December 31, 2018, are as follows:

		December 31, 2018
(in millions of Korean won)		Level 1				Level 2				Level 3				Total
Assets
Trade and other receivables
Financial assets at fair value through other comprehensive income		W	—			W	1,097,348			W	—			W	1,097,348
Other financial assets
Financial assets at fair value through profit or loss 1			121				613,964				163,600				777,685
Financial assets at fair value through other comprehensive income 1			8,861				5,760				311,536				326,157
Derivative financial assets for hedging			—				29,843				—				29,843
Disclosed fair value
Investment properties			—				—				1,821,061				1,821,061
Total		W	8,982			W	1,746,915			W	2,296,197			W	4,052,094
Liabilities
Other financial liabilities
Financial liabilities at fair value through profit or loss		W	—			W	—			W	7,758			W	7,758
Derivative financial liabilities for hedging			—				47,125				10,183				57,308
Total		W	—			W	47,125			W	17,941			W	65,066

¹  In the prior year, a portion of the equity instrument was classified as available-for-sale financial assets.

²  The highest and best use of a non-financial asset does not differ from its current use.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

		December 31, 2017
(in millions of Korean won)		Level 1				Level 2				Level 3				Total
Assets
Recurring fair value measurements
Other financial assets
Financial assets at fair value through profit or loss		W	—			W	—			W	5,813			W	5,813
Derivative financial assets for hedging			—				7,389				—				7,389
Available-for-sale financial assets			6,859				5,466				307,077				319,402
Disclosed fair value
Investment properties 1			—				—				1,755,600				1,755,600
Total		W	6,859			W	12,855			W	2,068,490			W	2,088,204
Liabilities
Recurring fair value measurements
Other financial liabilities
Financial liabilities at fair value through profit or loss		W	—			W	—			W	5,051			W	5,051
Derivative financial liabilities for hedging			—				76,045				17,725				93,770
Total		W	—			W	76,045			W	22,776			W	98,821

¹ The highest and best use of a non-financial asset does not differ from its current use.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(3) Transfers Between Fair Value Hierarchy Levels of Recurring Fair Value Measurements

There are no transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements.

Details of changes in Level 3 of the fair value hierarchy for the recurring fair value measurements are as follows:

		2018
		Financial assets								Financial liabilities
(in millions of Korean won)		Financial assets at fair value through profit or loss 3				Financial assets at fair value through other comprehensive income 3				Financial liabilities at fair value through profit or loss 2				Derivative financial liabilities for hedging 1
Beginning balance		W	97,547			W	238,517			W	5,051			W	17,725
Changes in accounting policy			32,745				2,085				—				—
Purchases			21,365				8,802				—				—
Reclassification			1,581				(296	)			—				—
Changes in scope of consolidation			—				364
Sales			(1,852	)			(1,099	)			—				—
Amount recognized in profit or loss1,2			12,214				89				2,707				(17,255	)
Amount recognized in other comprehensive income 1			—				63,074				—				9,713
Ending balance		W	163,600			W	311,536			W	7,758			W	10,183

¹  Amount recognized in profit or loss of derivative financial liabilities for hedging are comprised of both gain on valuation of derivatives and accumulated other comprehensive loss.

² Amount recognized in profit or loss of derivative financial liabilities for hedging are comprised of loss on valuation of derivatives.

³ In prior year, a portion of the equity instrument was classified as available-for-sale financial assets.

		2017
(in millions of Korean won)		Financial assets at fair value through profit or loss				Available-for-sale				Other derivative financial liabilities				Derivative financial liabilities for hedging
Beginning balance		W	6,277			W	287,889			W	1,973			W	—
Reclassification			—				(277	)			—				—
Amount recognized in other comprehensive income			—				58,450				—				(1,909	)
Purchases			—				85,287				—				—
Amount recognized in profit or loss			(464	)			(113	)			3,078				19,634
Sales			—				(124,159	)			—				—
Ending balance		W	5,813			W	307,077			W	5,051			W	17,725

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(4) Valuation Technique and the Inputs

Valuation techniques and inputs used in the recurring, non-recurring fair value measurements and disclosed fair values categorized within Level 2 and Level 3 of the fair value hierarchy as at December 31, 2018 and 2017, are as follows:

December 31, 2018

(in millions of Korean won)

Fair value

Level

Valuation techniques

Assets

Trade and other receivables

Financial assets at fair value through other comprehensive income

W

1,097,348

2

DCF Model

Other financial assets

Financial assets at fair value through profit or loss

777,564

2,3

DCF Model, Adjusted net asset model

Financial assets at fair value through other comprehensive income

317,296

2,3

DCF Model

Derivative financial assets for hedging

29,843

2

DCF Model

Investment properties

1,821,061

3

DCF Model

Liabilities

Other financial liabilities

Financial liabilities at fair value through profit or loss

W

7,758

3

DCF Model, Comparable Company Analysis

Derivative financial liabilities for hedging

57,308

2,3

Hull-White model, DCF Model

December 31, 2017

(in millions of Korean won)

Fair value

Level

Valuation techniques

Assets

Other financial assets

Derivative financial assets for hedging

W

7,389

2

DCF Model

Available-for-sale financial assets

312,543

2,3

DCF Model

Financial assets at fair value through profit or loss

5,813

3

DCF Model

Investment properties

1,755,600

3

DCF Model

Liabilities

Other financial liabilities

Derivative financial liabilities for hedging

W

93,770

2,3

Hull-White model, DCF Model

Other derivative financial liabilities

5,051

3

DCF Model, Comparable Company Analysis

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(5) Valuation Processes for Fair Value Measurements Categorized Within Level 3

The Group uses external experts that perform the fair value measurements required for financial reporting purposes. External experts report directly to the chief financial officer (CFO), and discusses valuation processes and results with the CFO in line with the Group’s closing dates.

(6) Gains and Losses on Valuation at the Transaction Date

In the case that the Group values derivative financial instruments using inputs not based on observable market data, and the fair value calculated by the said valuation technique differs from the transaction price, then the fair value of the financial instruments is recognized as the transaction price. The difference between the fair value at initial recognition and the transaction price is deferred and amortized using a straight-line method by maturity of the financial instrument. However, in the case that inputs of the valuation techniques become observable in markets, the remaining deferred difference is immediately recognized in full in profit for the year.

In relation to this, details and changes of the total deferred difference for the years ended December 31, 2018 and 2017, are as follows:

		2018								2017
(in millions of Korean won)		Derivatives used for hedging				Derivative held for trading				Derivatives used for hedging				Derivative held for trading
I. Beginning balance		W	6,532			W	(5,647	)		W	—			W	(8,470	)
II. New transactions			—				—				7,126				—
III. Recognized at fair value through profit or loss			(1,425	)			2,823				(594	)			2,823
IV. Ending balance (I+II+III)		W	5,107			W	(2,824	)		W	6,532			W	(5,647	)

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

40. Interests in Unconsolidated Structured Entities

Details of information about its interests in unconsolidated structured entities, which the Group does not have control over, including the nature, purpose and activities of the structured entity and how the structured entity is financed, are as follows:

Classes of entities		Nature, purpose, activities and others
Real estate finance		A structured entity incorporated for the purpose of real estate development is provided with funds by investors’ investments in equity and borrowings from financial institutions (including long-term and short-term loans and issuance of ABCP due in three months), and based on these, the structured entity implements activities such as real estate acquisition, development and mortgage loans. The structured entity repays loan principals with funds incurred from instalment house sales after the completion of real estate development or with collection of the principal of mortgage loan. The remaining shares are distributed to investors. As at December 31, 2018, this entity is engaged in real estate finance structured entity, and generates revenues by receiving dividends from direct investments in or receiving interests on loans to the structured entity. Financial institutions, including the Entity, are provided with guarantees including joint guarantees or real estate collateral from investors and others. Consequently, the entity is a priority over other parties in the preservation of claim. However, when the credit rating of investors and others decreases or when the value of real estate decreases, the entity may be obliged to cover losses.
PEF and investment funds		Minority investors including managing members contribute to PEF and investment funds incorporated for the purpose of providing funds to the small, medium, or venture entities, and the managing member implements activities such as investments in equity or loans based on the contributions. As at December 31, 2018, the entity is engaged in PEF and investment funds structured entity, and after contributing to PEF and investment funds, the entity receives dividends for operating revenues from these contributions. The entity is provided with underlying assets of PEF and investment funds as collateral. However, when the value of the underlying assets decreases, the entity may be obliged to cover losses.
M&A finance		A structured entity incorporated for the purpose of supporting a certain group’s financial structure improvement or acquiring equity or convertible bonds is provided with funds by investors’ investments in equity and long-term or short-term borrowings from financial institutions, and based on these, the structured entity acquires shares held by the entity, which has plans to improve its financial structure, or to dispose convertible bonds and others. The structured entity repays loan principals with funds incurred from disposals of holding shares after a certain period. The remaining shares are distributed to investors. As at December 31, 2018, the entity is engaged in M&A finance structured entity, and receives interests. Financial institutions are provided with guarantees including joint guarantees or shares subject to M&A from investors and others. Consequently, the entity is a priority over other parties in the preservation of claim. However, when the credit rating of investors and others decreases or when the value of shares provided as collateral decreases, the Group may be obliged to cover losses.
Asset securitization		The Group transfers accounts receivable for handset sales to its Special Purpose Company (“SPC”) for asset securitization. SPC issues the asset-backed securities with accounts receivable for handset sales as an underlying asset, and makes payment for the underlying asset acquired.
Other		There are other structured entity types, which the entity is engaged in, such as shipping finance, SPAC and others. Interest income is realized from the entity’s loans to the relevant structured entity. When the credit rating of the shipping group decreases, or the value of vessels decreases, the entity may be obliged to cover losses. When SPAC is listed or merged after the entity invests in shares or convertible bonds issued by the relevant structured entity, revenues are realized from disposal of the shares of the convertible bonds. However, the entity may be obliged to cover losses when SPAC is liquidated if the SPAC is not listed or merged.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Details of scale of unconsolidated structured entities and nature of the risks associated with an entity’s interests in unconsolidated structured entities as at December 31, 2018 and 2017, are as follows:

		December 31, 2018
(in millions of Korean won)		Real Estate Finance				PEF and Investment Funds				Asset Securitization				Total
Total assets of unconsolidated structured entities		W	1,429,910			W	3,701,718			W	2,751,208			W	7,882,836
Assets recognized in statement of financial position
Other financial assets		W	24,421			W	94,075			W	—			W	118,496
Joint ventures and associates			7,293				166,159				—				173,452
Total		W	31,714			W	260,234			W	—			W	291,948
Maximum loss exposure 1
Investment assets		W	31,714			W	260,234			W	—			W	291,948
Total		W	31,714			W	260,234			W	—			W	291,948

¹  It includes the investments recognized in the Group’s financial statements and the amounts which are probable to be determined when certain conditions are met by agreements including purchase agreements, credit granting and others.

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December 31, 2018 and 2017

		December 31, 2017
(in millions of Korean won)		Real Estate Finance				PEF and Investment Funds				Asset Securitization				Total
Total assets of unconsolidated structured entities		W	1,426,620			W	3,779,377			W	2,619,445			W	7,825,442
Assets recognized in statement of financial position
Other financial assets		W	21,800			W	52,666			W	—			W	74,466
Joint ventures and associates			10,168				164,030				—				174,198
Total		W	31,968			W	216,696			W	—			W	248,664
Maximum loss exposure 1
Investment assets		W	31,968			W	216,696			W	—			W	248,664
Total		W	31,968			W	216,696			W	—			W	248,664

¹  It includes the investments recognized in the Group’s financial statements and the amounts which are probable to be determined when certain conditions are met by agreements including purchase agreements, credit granting and others.

41. Information About Non-controlling Interests

(1) Changes in Accumulated Non-controlling Interests

Profit or loss allocated to non-controlling interests and accumulated non-controlling interests of subsidiaries that are material to the Group for the years ended December 31, 2018 and 2017, is as follows:

		2018
(in millions of Korean won)		Non-controlling Interests rate (%)				Accumulated non-controlling interests at the beginning of the year				Profit or loss allocated to non-controlling interests				Dividends paid to non-controlling interests				Others				Accumulated non-controlling interests at the end of the year
KT Skylife Co., Ltd.			49.73	%		W	328,302			W	23,405			W	(8,279	)		W	30,722			W	374,150
BC Card Co., Ltd.			30.46	%			339,067				28,418				(35,924	)			13,986				345,547
KT Powertel Co., Ltd.			55.15	%			53,053				(3,058	)			—				2,870				52,865
KT Hitel Co.,Ltd.			32.87	%			53,146				454				—				(1,264	)			52,336
KT Telecop Co., Ltd.			13.18	%			103,468				59				—				(170	)			103,357

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December 31, 2018 and 2017

(in millions of Korean won)		2017
		Non-controlling Interests rate (%)		Accumulated non-controlling interests at the beginning of the year				Profit or loss allocated to non-controlling interests				Dividends paid to non-controlling interests				Others				Accumulated non-controlling interests at the end of the year
KT Skylife Co., Ltd.		49.73%		W	329,676			W	9,395			W	(9,817	)		W	(952	)		W	328,302
BC Card Co., Ltd.		30.46%			329,338				43,961				(29,490	)			(4,742	)			339,067
KT Powertel Co., Ltd.		55.15%			51,751				1,165				—				137				53,053
KT Hitel Co.,Ltd.		32.87%			51,798				870				—				478				53,146
KT Telecop Co., Ltd.		13.18%			103,532				381				—				(445	)			103,468

(2) Summarized Financial Information on Subsidiaries

The summarized financial information for each subsidiary with non-controlling interests that are material to the Group before inter-group eliminations is as follows:

Summarized consolidated statements of financial position as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018
		KT Skylife Co., Ltd.				BC Card Co., Ltd.				KT Powertel Co., Ltd.				KT Hitel Co., Ltd.				KT Telecop Co., Ltd.
Current assets		W	301,739			W	2,997,429			W	84,785			W	161,162			W	52,367
Non-current assets			514,263				724,950				39,279				111,546				220,125
Current liabilities			112,411				2,520,050				27,187				63,231				85,648
Non-current liabilities			37,430				110,486				1,030				2,812				54,666
Equity			666,161				1,091,843				95,847				206,665				132,178
(in millions of Korean won)		December 31, 2017
		KT Skylife Co., Ltd.				BC Card Co., Ltd.				KT Powertel Co., Ltd.				KT Hitel Co., Ltd.				KT Telecop Co., Ltd.
Current assets		W	324,632			W	3,225,262			W	73,527			W	150,368			W	73,023
Non-current assets			468,261				823,001				41,598				107,872				191,330
Current liabilities			185,995				2,868,669				18,450				49,922				90,569
Non-current liabilities			24,555				86,369				487				3,021				41,064
Equity			582,343				1,093,225				96,188				205,297				132,720

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Summarized consolidated statements of comprehensive income for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		KT Skylife Co., Ltd.				BC Card Co., Ltd.				KT Powertel Co., Ltd.				KT Hitel Co., Ltd.				KT Telecop Co., Ltd.
Sales		W	690,821			W	3,550,744			W	65,169			W	278,888			W	326,053
Profit (loss) for the year			52,010				70,889				(5,545	)			657				166
Other comprehensive income			(4,223	)			45,715				(247	)			81				(1,683	)
Total comprehensive income (loss)			47,787				116,604				(5,792	)			738				(1,517	)

(in millions of Korean won)		2017
		KT Skylife Co., Ltd.				BC Card Co., Ltd.				KT Powertel Co., Ltd.				KT Hitel Co., Ltd.				KT Telecop Co., Ltd.
Sales		W	685,822			W	3,628,560			W	67,337			W	227,631			W	315,366
Profit for the year			57,314				156,109				2,112				3,225				2,885
Other comprehensive income			(1,728	)			(14,390	)			250				(189	)			(3,375	)
Total comprehensive income (loss)			55,586				141,719				2,362				3,036				(490	)1⁄4

Summarized consolidated statements of cash flows for the years ended December 31, 2018 and 2017, are as follows:

		2018
(in millions of Korean won)		KT Skylife Co., Ltd.				BC Card Co., Ltd.				KT Powertel Co., Ltd.				KT Hitel Co., Ltd.				KT Telecop Co., Ltd.
Cash flows from operating activities		W	183,474			W	86,299			W	11,603			W	43,855			W	40,351
Cash flows from investing activities			(139,846	)			128,538				(2,580	)			(26,335	)			(76,969	)
Cash flows from financing activities			(77,647	)			(117,561	)			—				—				10,000
Net increase (decrease) in cash and cash equivalents			(34,019	)			97,276				9,023				17,520				(26,618	)
Cash and cash equivalents at beginning of year			65,747				177,826				6,626				21,647				32,326
Exchange differences			—				(13	)			—				19				—
Cash and cash equivalents at end of year			31,728				275,089				15,649				39,186				5,708

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		2017
		KT Skylife Co., Ltd.				BC Card Co., Ltd.				KT Powertel Co., Ltd.				KT Hitel Co., Ltd.				KT Telecop Co., Ltd.
Cash flows from operating activities		W	99,269			W	108,203			W	13,895			W	28,320			W	57,262
Cash flows from investing activities			(81,758	)			(568,518	)			(17,354	)			(36,086	)			(43,483	)
Cash flows from financing activities			(19,739)				(97,221	)			—				—				—
Net increase (decrease) in cash and cash equivalents			(2,228	)			(557,536	)			(3,459	)			(7,766	)			13,779
Cash and cash equivalents at beginning of year			67,975				735,546				10,085				29,460				18,547
Exchange differences			—				(184	)			—				(47	)			—
Cash and cash equivalents at end of year			65,747				177,826				6,626				21,647				32,326

(3) Transactions with Non-controlling Interests

The effect of changes in the ownership interest on the equity attributable to owners of the Group during 2018 and 2017 is summarized as follows:

(in millions of Korean won)		2018				2017
Carrying amount of non-controlling interests acquired		W	(194	)		W	(732)
Consideration paid to non-controlling interests			11,312				6,173
Excess of consideration paid recognized in parent’s equity		W	11,118			W	5,441

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

42. Business Combination

On May 31, 2018, the Group’s subsidiary, KT Telecop Co., Ltd. acquired the unmanned security business and SI business of SG Safety Corporation for \ 27,570 million. The acquisition is expected to increase the Group’s market share and competitiveness in the market. The Group additionally acquired treasury stock from MOS GB Co., Ltd. and MOS Chungcheong Co., Ltd., associates of the Group, for \11,048 million. The business combination is expected to enhance specialization and efficiency in installation of wireless network infrastructure and its maintenance. GENIE Music Corporation, a subsidiary of the Group, merged with CJ Digital Music Co., Ltd. (“acquired company”) by issuing 8,922,685 shares of subsidiaries to CJ ENM CO., Ltd., who owns 100% of shares of the acquired company, and acquiring all shares (1,600,000 shares) of the acquired company. The merger is expected to increase the Group’s market share in music service and distribution business, and also reduce costs through economies of scale.

Details of the business combination are as follows:

(in millions of Korean won)		Business line		Date		Purchase consideration
SG Safety Corporation		Unmanned security business		May 31, 2018		W	27,544
KT MOS Bukbu Co., Ltd.		Telecommunication facility maintenance		September 30, 2018			8,160
KT MOS Nambu Co., Ltd.		Telecommunication facility maintenance		September 30, 2018			6,310
CJ Digital Music Co., Ltd.		Music distribution		October 10, 2018			50,948

Fair value of the purchase consideration from the business combination is as follows:

(in millions of Korean won)		SG Safety Corporation				KT MOS Bukbu Co., Ltd				KT MOS Nambu Co., Ltd.				CJ Digital Music Co., Ltd.
Cash and cash equivalents		W	28,000			W	6,283			W	4,765			W	—
Settled receivables 1			(456	)			—				—				—
Fair value of equity instruments previously held 2			—				1,877				1,545				—
Fair value of equity instruments newly issued 3			—				—				—				50,948
Total		W	27,544			W	8,160			W	6,310			W	50,948

¹  Uncollected amount which incurred after the payment of consideration from adjustment of purchase consideration caused by additional retirement benefit.

²  The shares previously held by KT MOS Bukbu Co., Ltd. (93,994 ordinary shares) and KT MOS Nambu Co., Ltd. (65,831 ordinary shares) , non-listed entities, were evaluated by using the profit approach.

³  The fair value (\50,948 million) of 8,992,685 ordinary shares of GENIE Music Corporation, the consideration transferred, was based on the share price disclosed at the merger date. The issuance cost amounting to \31 million were deducted from deemed issuance price.

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December 31, 2018 and 2017

Fair value of the assets and liabilities recognized as a result of the acquisition at the acquisition date are as follows:

(in millions of Korean won)		SG Safety Corporation				KT MOS Bukbu Co., Ltd				KT MOS Nambu Co., Ltd.				CJ Digital Music Co., Ltd.
Recognized amounts of identifiable assets acquired		W	17,763			W	14,924			W	12,242			W	28,117
Cash and cash equivalents			—				7,864				3,340				1,556
Trade and other receivables			—				4,827				6,318				11,200
Other current assets			1,367				160				85				484
Inventories			—				—				—				5
Current income tax assets			—				—				75
Property and equipment			4,047				855				1,104				791
Intangible assets							997				478				1,860
Distribution agency contract (included in intangibles)			—				—				—				11,753
Contractual customer relationship (included in intangibles)			10,467				—				—				468
Deferred income tax assets			—				113				576				—
Other non-current assets			1,882				10				—				—
Other non-current financial assets			—				98				266				—
Recognized amounts of identifiable liabilities assumed			5,637				10,050				6,433				25,559
Trade and other payables			120				6,767				3,327				18,947
Borrowings			5,000				—				—				—
Other current liabilities			—				363				703				3,481
Current income tax liabilities			—				103				—
Post-employment benefit obligations			517				2,768				2,360				311
Deferred income tax liabilities			—				—				—				2,497
Other non-current liabilities			—				49				43				323
Total		W	12,126			W	4,874			W	5,809			W	2,558

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

As at December 31, 2018, details of the recognized goodwill as a result of the business combination are as follows:

(in millions of Korean won)		SG Safety Corporation				KT MOS Bukbu Co., Ltd				KT MOS Nambu Co., Ltd.				CJ Digital Music Co., Ltd.
Purchase consideration		W	27,544			W	8,160			W	6,310			W	50,948
Add: Non-controlling interests 1			—				—				101				—
Less:
Fair value of identifiable net assets			12,126				4,874				5,809				2,558
Goodwill 2		W	15,418			W	3,286			W	602			W	48,390

¹  Non-controlling interests for KT MOS Nambu Co., Ltd. acquired during the year ended December 31, 2018 are measured at proportionate shares of acquiree’s identifiable net assets.

²  The goodwill from the business combination is attributable to economies of scale expected and the acquired customer relationships.

Details of cash outflows as a result of acquisition are as follows:

(in millions of Korean won)		SG Safety Corporation 1				KT MOS Bukbu Co., Ltd				KT MOS Nambu Co., Ltd.				CJ Digital Music Co., Ltd.
Purchase consideration
Cash 1		W	28,000			W	6,283			W	4,765			W	—
Less :
Recognized amounts of cash and cash equivalents			—				7,864				3,340				1,556
Total		W	28,000			W	(1,581	)		W	1,425			W	(1,556	)

¹  The difference from purchase considerations of \ 27,544 million is attributable to uncollected settled receivables.

Since the unmanned security business acquired from SG Safety Corporation is incorporated into the Group’s main business segment, the security services business, it is difficult to identify revenue and net profit generated from business combination during the reporting period.

Since KT MOS Bukbu Co., Ltd. and KT MOS Nambu Co., Ltd. are incorporated into the network business, it is difficult to identify revenue and net profit generated from business combination during the reporting period.

According to the contract, KT Telecop Co., Ltd. has the right to be reimbursed from SG Safety Corporation in the amount equivalent to 35 times the difference between the target revenue and monthly security business revenue as at December 31, 2023. However, as at the end of the reporting period, related reimbursement asset is not recognized since it is reasonably expected that the revenue will meet its target.

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December 31, 2018 and 2017

43. Changes in Accounting Policies

(1) Adoption of Korean IFRS 1115 Revenue from Contracts with Customers

As explained in Note 2, the Group has applied Korean IFRS 1115 Revenue from Contracts with Customers from January 1, 2018. In accordance with the transitional provisions in Korean IFRS 1115, comparative figures have not been restated. Financial statement line items affected by the adoption of the new rules in the current period are as follows:

The impact on the financial statements due to the application of Korean IFRS 1115 at the date of initial application (January 1, 2018) is as follows:

(in millions of Korean won)		Before application of Korean IFRS 1115 (*)				Adjustment				After application of Korean IFRS 1115
Current assets		W	9,672,412			W	1,272,321			W	10,944,733
Trade and other receivables			5,992,753				4,475				5,997,228
Inventories			457,726				(16,587	)			441,139
Other current assets 1,2			304,860				1,284,433				1,589,293
Others			2,917,073				—				2,917,073
Non-current assets			20,058,498				67,245				20,125,743
Trade and other receivables			828,831				(2,285	)			826,546
Deferred income tax assets			703,524				(353,088	)			350,436
Other non-current assets 1,2			107,166				422,618				529,784
Others			18,418,977				—				18,418,977
Total assets		W	29,730,910			W	1,339,566			W	31,070,476
Current liabilities		W	9,474,162			W	249,840			W	9,724,002
Trade and other payables			7,426,089				297				7,426,386
Deferred revenue			17,906				33,655				51,561
Provisions			78,172				177				78,349
Other current liabilities 1			258,315				215,711				474,026
Others			1,693,680				—				1,693,680
Non-current liabilities			7,046,148				80,236				7,126,384
Deferred revenue			91,698				23,831				115,529
Deferred income tax liabilities			128,462				6,905				135,367
Other non-current liabilities 1			45,227				49,500				94,727
Others			6,780,761				—				6,780,761
Total liabilities		W	16,520,310			W	330,064			W	16,850,386
Equity attribute to owners of the Controlling Company		W	11,818,836			W	932,517			W	12,751,353
Non-controlling interest			1,391,764				76,973				1,468,737
Total equity		W	13,210,600			W	1,009,490			W	14,220,090

(*) The amounts in this column are before the adjustments from the adoption of Korean IFRS 1109.

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December 31, 2018 and 2017

The effect of adoption of Korean IFRS 1115 on the consolidated financial statements for the year ended December 31, 2018, is as follows.

• Consolidated statement of financial position

(in millions of Korean won)		Reported Amount (*)				Adjustments				Amount before application of Korean IFRS 1115
Current assets		W	11,894,252			W	(1,353,352	)		W	10,540,900
Trade and other receivables			5,807,421				7,141				5,814,562
Inventories			683,998				34,811				718,809
Other current assets 1,2			1,687,549				(1,395,304	)			292,245
Others			3,715,284				—				3,715,284
Non-current assets			20,294,578				(88,666	)			20,205,912
Trade and other receivables			842,995				4,617				847,612
Deferred income tax assets			443,641				355,694				799,335
Other non-current assets 1,2			545,895				(448,977	)			96,918
Others			18,462,047				—				18,462,047
Total assets		W	32,188,830			W	(1,442,018	)		W	30,746,812
Current liabilities		W	9,387,704			W	(341,584	)		W	9,046,120
Deferred revenue			52,878				(38,057	)			14,821
Provisions			111,461				(565	)			110,896
Other current liabilities 1			596,590				(302,962	)			293,628
Others			8,626,775				—				8,626,775
Non-current liabilities			8,069,846				(54,508	)			8,015,338
Deferred revenue			110,702				(27,233	)			83,469
Deferred income tax liabilities			206,473				(21,019	)			185,454
Other non-current liabilities 1			70,277				(6,256	)			64,021
Others			7,682,394				—				7,682,394
Total liabilities		W	17,457,550			W	(396,092	)		W	17,061,458
Equity attribute to owners of the Controlling Company		W	13,202,691			W	(966,564	)		W	12,236,127
Non-controlling interest			1,528,589				(79,362	)			1,449,227
Total equity		W	14,731,280			W	(1,045,926	)		W	13,685,354

(*) Amounts include adjustments arising from adoption of Korean IFRS 1109.

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Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

¹  Allocation the transaction price

With the implementation of Korean IFRS 1115, the Group allocates the transaction price to each performance obligation identified in the contract based on a relative stand-alone selling prices of the goods or services being provided to the customer. To allocate the transaction price to each performance obligation on a relative stand-alone price basis, the Group determines the stand-alone selling price at contract inception of the distinct goods or services underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling price. The stand-alone selling price is the price at which the Group would sell promised goods or services separately to the customer. The best evidence of a stand-alone selling price is the observable price of a goods or services when the Group sells that goods or services separately in similar circumstances and to similar customers. The Group recognizes the allocated amount as contract assets or contract liabilities, and amortizes it through the remaining period which is adjusted in operating income.

In relation to this, as at December 31, 2018, contract assets and contract liabilities are increased by W 398,797 million (January 1, 2018: W 421,131 million) and W 347,461 million (January 1, 2018: W 282,836 million), respectively.

²  Incremental costs of obtaining a contract

The Group pays the commission fees when new customer subscribe for telecommunication services. The incremental costs of obtaining a contract are those commission fees that the Group incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.

According to Korean IFRS 1115, the Group recognizes as an asset the incremental cost of obtaining contract and amortize it through the contract period. However, as a practical expedient, the Group recognizes the incremental costs of obtaining a contracts as an expense when incurred if the amortization period of the asset is one year or less.

In relation to this, prepaid expenses are increased by W 1,444,822 million as at December 31, 2018 (January 1, 2018: W 1,285,443 million).

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KT Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

• Consolidated statement of profit or loss

(in millions of Korean won)		Reported Amount (*)				Adjustments				Amount before application of Korean IFRS 1115
Operating revenue		W	23,460,143			W	291,594			W	23,751,737
Operating expenses			22,198,621				334,719				22,533,340
Operating profit			1,261,522				(43,125	)			1,218,397
Other income			215,998				—				215,998
Other expenses			319,895				—				319,895
Financial income			374,243				(3,862	)			370,381
Financial costs			435,659				16,860				452,519
Share of net losses of associates and joint venture			(5,467	)			—				(5,467	)
Profit before income tax			1,090,742				(63,847	)			1,026,895
Income tax expense			328,437				(16,710	)			311,727
Profit for the year		W	762,305			W	(47,137	)		W	715,168

(*) Amounts include adjustments arising from adoption of Korean IFRS 1109.

• Consolidated statement of cash flows

The application of Korean IFRS 1115 has no material impact on cash flows from operating, investing and financing activities on the statements of cash flows.

(2) Adoption of Korean IFRS 1109 Financial Instruments

The Group has applied Korean IFRS 1109 Financial Instruments from January 1, 2018. In accordance with the transitional provisions in Korean IFRS 1109, comparative figures have not been adjusted.

Korean IFRS 1109 replaces Korean IFRS 1039, Financial Instruments: Recognition and Measurement, relating to the recognition of financial assets and financial liabilities, classification, measurement and elimination of financial instruments, impairment of financial assets and hedge accounting. Korean IFRS 1109 also significantly amends other standards dealing with financial instruments such as Korean IFRS 1107 Financial Instruments: Disclosures.

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KT Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

(a) Beginning balance of retained earnings after adjustment

Details of the Group’s beginning balance of retained earnings after adjustment due to application of Korean IFRS 1109, are as follows:

(in millions of Korean won)		January 1, 2018
Beginning balance—Korean IFRS 1039		W	9,988,396
Reclassification of available-for-sale securities to financial assets at fair value through profit or loss			32,754
Reclassification of available-for-sale securities to financial assets at fair value through other comprehensive income			2,191
Increase in provision for impairment of financial assets at amortized cost			(1,817	)
Increase in provision with unused limit			(287	)
Decrease in deferred income tax assets			(8,395	)
Adjustments of non-controlled interests			(259	)
Adjustments to retained earnings from adoption of Korean IFRS 1109			24,187
Beginning balance of retained earnings—Korean IFRS 1109			10,012,583
Adjustment to retained earnings from adoption of Korean IFRS 1115			932,517
Beginning balance of retained earnings after adjustment		W	10,945,100

(b) Classification and Measurement of Financial Instruments

On the date of initial application of Korean IFRS 1109, January 1, 2018, the Group’s management has assessed which business models apply to the financial assets held by the Group and has classified its financial instruments into the appropriate Korean IFRS 1109 categories. The main effects resulting from this reclassification are as follows:

(in millions of Korean won)

Classification in accordance with

Amount in accordance with

Account

Korean IFRS1039

Korean IFRS 1109

Korean IFRS 1039

Korean IFRS 1109

Differences

Financial assets

Cash and cash equivalent

Loans and receivables

Financial assets measured at amortized cost

W

1,928,182

W

1,928,182

W

—

Trade and other receivables

Loans and receivables

Financial assets measured at amortized cost

6,821,584

5,852,276

(1,028

)

Financial assets at fair value through other comprehensive income

980,766

24,486

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KT Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

Other financial assets		Loans and receivables		Financial assets measured at amortized cost			1,333,317				462,075				(789	)
										Financial assets at fair value through profit or loss							870,453				—
		Financial assets at fair value through profit or loss		Financial assets at fair value through profit or loss			5,813				5,813				—
		Derivative financial assets for hedging purpose		Derivative financial assets for hedging purpose			7,389				7,389				—
		Financial assets available-for-sale		Financial assets measured at amortized cost			380,953				28,603				—
									Financial assets at fair value through profit or loss		129,276				32,745
											Financial assets at fair value through other comprehensive income							257,904				2,085
			Financial assets held-to-maturity		Financial assets measured at amortized cost		151				51				—
					Financial assets at fair value through profit or loss						100				—
											Financial assets at fair value through other comprehensive income							—				—
Financial liabilities
Trade payables and payables		Other financial liabilities measured at amortized cost		Financial assets measured at amortized cost		W	8,427,458			W	8,427,458			W	—
Borrowing		Other financial liabilities measured at amortized cost		Financial assets measured at amortized cost			6,683,662				6,683,662				—
Other financial liabilities		Financial liabilities at fair value through profit or loss		Financial liabilities at fair value through profit or loss			5,051				5,051				—
Other financial liabilities		Derivative financial liabilities for hedging purpose		Derivative financial liabilities for hedging purpose			93,770				93,770				—
Other financial liabilities		Other financial liabilities measured at amortized cost		Financial assets measured at amortized cost			89,104				89,391				287

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KT Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The impact on these changes on the Group’s equity as at January 1, 2018, is as follows:

(in millions of Korean won)		Accumulated other comprehensive income				Retained earnings
Reclassification from loans and receivables to financial assets at fair value through other comprehensive income, and fair value assessment		W	24,486			W	—
Reclassification from available-for-sale financial assets to financial assets at fair value through profit or loss, and fair value assessment			(9	)			32,754
Reclassification from available-for-sale financial assets to financial assets at fair value through other comprehensive income			(106	)			2,191
Increase in provision for impairment of financial assets at amortized cost			—				(1,817	)
Increase in provision with unused limit			—				(287	)
Income tax effect			(6,734	)			(8,395	)
Adjustments of non-controlled interests			104				(259	)
Total adjustments from application of Korean IFRS 1109		W	17,741			W	24,187

44. Event after Reporting Period

Subsequent to the reporting period, public bonds issued are as follow:

(in millions of Korean won)		Issue date				Carrying amount				Interest rate				Redemption date
The 191—1st Public bond			2019.01.15			W	220,000				2.048	%			2022.01.14
The 191—2nd Public bond			2019.01.15				80,000				2.088	%			2024.01.15
The 191—3rd Public bond			2019.01.15				110,000				2.160	%			2029.01.15
The 191—4th Public bond			2019.01.15				90,000				2.213	%			2039.01.14

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KT Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

45. Restatement of prior financial statements

The Group revised the prior period financial statements to correct errors in relation to the under-statement of revenue due to omission of data transferring from billing system to finance system, and the details are as follows:

Consolidated Statements of financial position

(in millions of Korean won)		December 31, 2017												January 1, 2017
		Before adjustment				After adjustment				Difference				Before adjustment				After adjustment				Difference
Current assets		W	9,522,130			W	9,672,412			W	150,282			W	9,643,306			W	9,793,588			W	150,282
Trade and other receivables			5,842,471				5,992,753				150,282				5,331,245				5,481,527				150,282
Total assets		W	29,580,628			W	29,730,910			W	150,282			W	30,587,733			W	30,738,015			W	150,282
Current liabilities		W	9,458,104				9,474,162			W	16,058			W	9,466,147			W	9,482,205			W	16,058
Trade and other payables			7,424,135				7,426,089				1,954				7,139,772				7,141,726				1,954
Current income tax liabilities			68,879				82,983				14,104				88,738				102,842				14,104
Total liabilities		W	16,504,252			W	16,520,310			W	16,058			W	17,792,954			W	17,809,012			W	16,058
Equity attribute to owners of the Controlling Company		W	11,684,612			W	11,818,836			W	134,224			W	11,441,935			W	11,576,159			W	134,224
Retained earnings			9,854,172				9,988,396				134,224				9,656,544				9,790,768				134,224
Total equity			13,076,376				13,210,600				134,224				12,794,779				12,929,003				134,224
Total liabilities and equity		W	29,580,628			W	29,730,910			W	150,282			W	30,587,733			W	30,738,015			W	150,282

Consolidated Statements of changes in equity

(in millions of Korean won)		Before adjustment								After adjustment								Difference
		Retained earnings				Owners of the Controlling Company				Retained earnings				Owners of the Controlling Company				Retained earnings				Owners of the Controlling Company
Balance at January 1, 2017		W	9,656,544			W	11,441,935			W	9,790,768			W	11,576,159			W	134,224			W	134,224
Balance at December 31, 2017			9,854,172				11,684,612				9,988,396				11,818,836				134,224				134,224

Notes related to the adjustments of consolidated statement of financial position and consolidated statement of changes in equity above were restated.

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KT Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

The effects from adjustments of financial statements before 2017 are as follows:

(in millions of Korean won)		Before adjustment				After adjustment				Difference
2016
Revenue		W	22,743,665			W	786,989			W	43,324
Profit for the year			797,844				834,571				36,727
Equity			12,794,779				12,929,003				134,224
2015
Revenue			22,281,221				22,296,152				14,931
Profit for the year			631,288				642,607				11,319
Equity			12,165,465				12,262,962				97,497
2014
Revenue			23,421,673				23,428,064				6,391
Loss for the year			(966,176	)			(961,333	)			4,843
Equity			11,790,288				11,876,466				86,178
2013(*)
Revenue			23,810,599				23,824,434				13,835
Loss for the year			(60,251	)			(48,764	)			11,487
Equity			12,864,910				12,946,245				81,335

(*) The increase in retained earnings due to revision of prior period financial statements before January 1, 2013 is W 69,848 million.

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KT Corporation

Separate Financial Statements

December 31, 2018 and 2017

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KT Corporation

Index

December 31, 2018 and 2017

		Page(s)
Independent Auditor’s Report			1 – 4
Separate Financial Statements
Statements of Financial Position			5 – 6
Statements of Profit or Loss			7
Statements of Comprehensive Income			8
Statements of Changes in Equity			9
Statements of Cash Flows			10
Notes to the Separate Financial Statements			11 – 105
Report on Independent Auditor’s Review of Internal Control over Financial Reporting			106 – 107
Report on the Effectiveness of the Internal Control over Financial Reporting			108

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Independent Auditor’s Report

(English Translation of a Report Originally Issued in Korean)

To the Board of Directors and Shareholders of

KT Corporation

Opinion

We have audited the accompanying separate financial statements of KT Corporation (the Company), which comprise the separate statements of financial position as at December 31, 2018 and 2017, and the separate statements of profit or loss, separate statements of comprehensive income, separate statements of changes in equity and separate statements of cash flows for the years then ended, and notes to the separate financial statements, including a summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying separate financial statements present fairly, in all material respects, the separate financial position of the Company as at December 31, 2018 and 2017, and its separate financial performance and its separate cash flows for the years then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).

Basis for Opinion

We conducted our audits in accordance with Korean Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements of the Republic of Korea that are relevant to our audit of the separate financial statements and we have fulfilled our other ethical responsibilities in accordance with the ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the separate financial statements of the current period. These matters were addressed in the context of our audit of the separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

(1) Revenue recognition in telecommunication services through the billing systems

As described in Note 2, the Company identifies performance obligations in contracts with customers and recognizes revenue as the performance obligations are satisfied. The Company provides telecommunication services with various price plans to a large number of customers, and calculation, billing and collection of telecommunication services fee are processed through the billing systems.

    Samil PricewaterhouseCoopers, 100 Hangang-daero, Yongsan-gu, Seoul 04386, Korea, www.samil.com

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The information generated by the billing systems is utilized as the basis for accounting for revenue recognition, and the amount of revenue processed through the billing systems is significant on the financial statements.

Therefore, we identified the occurrence of revenue from telecommunication services recorded in the billing systems as a key audit matter.

We performed test of controls and test of details in relation to revenue recognition through the billing systems.

Our audit approach included evaluation of the IT environment and testing the design and operating effectiveness of controls covering, in particular:

• Creation and modification of customer information in the billing systems

• Aggregation of customers’ usage information in the billing systems

• Billing and collection in the billing systems

• Data interface between the billing systems and the finance system

We also performed substantive audit procedures on customer contracts, service usage data and billing data recorded in the billing systems on a sample basis.

(2) Changes in revenue recognition with the application of Korean IFRS 1115 Revenue from Contracts with Customers (Korean IFRS 1115)

The Company has applied Korean IFRS 1115 from January 1, 2018. In accordance with the transitional provisions in Korean IFRS 1115, its comparative figures have not been restated, and the cumulative impact of initially applying the revenue standard is recognized as an adjustment to retained earnings amounting to W 967.6 billion as at January 1, 2018.

We identified the appropriateness of the Company’s accounting policy for revenue recognition in accordance with Korean IFRS 1115 and the accuracy of financial impact from applying the established accounting policy as a key audit matter. The detail impact of the application of the standard is discussed in Note 37.

Our audit approach included understanding and evaluating the Company’s internal controls over financial reporting for applying Korean IFRS 1115 and testing the design and operating effectiveness of controls covering, in particular:

• Evaluation of the accounting policy established by the Company in accordance with Korean IFRS 1115

• Understanding and evaluating changes in the Company’s financial information system to apply the new revenue recognition standard

• Testing the design and operating effectiveness of controls in regards to financial reporting to apply the new revenue recognition standard

• Substantive procedures to ensure finance statements impact on the beginning and ending balance with the application of Korean IFRS 1115 on a sample basis

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Other Matters

Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such separate financial statements may differ from those generally accepted and applied in other countries.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the separate financial statements in accordance with Korean IFRS, and for such internal control as management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the separate financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Korean Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these separate financial statements.

As part of an audit in accordance with Korean Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

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• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Jin-Kyu Lee.

Seoul, Korea

March 11, 2019

This report is effective as of March 11, 2019, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying separate financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

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KT Corporation    

Separate Statements of Financial Position     

December 31, 2018 and 2017, and January 1, 2017                     

(in millions of Korean won)
		Notes				December 31, 2018				December 31, 2017				January 1, 2017
Assets
Current assets
Cash and cash equivalents			4,5			W	1,779,745			W	1,166,402			W	1,602,397
Trade and other receivables, net			4,6				2,968,764				2,890,596				2,740,443
Other financial assets			4,7				75,401				54,774				289,613
Inventories, net			8				465,273				232,246				178,096
Current assets held for sale			13				—				2,772				—
Other current assets			9				1,572,436				183,060				190,812
Total current assets							6,861,619				4,529,850				5,001,361
Non-current assets
Trade and other receivables, net			4,6				766,316				735,671				622,045
Other financial assets			4,7				130,651				75,896				198,777
Property and equipment, net			10,20				10,864,398				11,375,047				11,961,193
Investment properties, net			11				600,624				633,851				662,985
Intangible assets, net			12				2,773,387				2,100,215				2,337,549
Investments in subsidiaries, associates and joint ventures			13				3,547,683				3,584,978				3,638,856
Deferred income tax assets			29				—				421,745				401,346
Other non-current assets			9				466,228				27,952				26,507
Total non-current assets							19,149,287				18,955,355				19,849,258
Total assets						W	26,010,906			W	23,485,205			W	24,850,619

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KT Corporation    

Separate Statements of Financial Position     

December 31, 2018 and 2017, and January 1, 2017                                      

(in millions of Korean won)
						December 31, 2018				December 31, 2017				January 1, 2017
Liabilities
Current liabilities
Trade and other payables			4,14			W	4,002,408			W	4,111,478			W	4,183,046
Borrowings			4,15				1,181,434				1,298,534				1,608,064
Other financial liabilities			4,7				—				33,106				—
Current income tax liabilities							182,548				14,104				36,655
Provisions			16				103,703				67,480				92,007
Deferred income							48,002				11,295				29,298
Other current liabilities			9				390,402				76,728				94,659
Total current liabilities							5,908,497				5,612,725				6,043,729
Non-current liabilities
Trade and other payables			4,14				1,460,062				958,189				1,135,738
Borrowings			4,15				5,132,103				4,914,400				5,960,983
Other financial liabilities			4,7				61,833				53,145				13,386
Net defined benefit liabilities			17				429,163				302,319				284,931
Provisions			16				111,982				93,920				92,388
Deferred income							105,241				85,713				79,416
Deferred income tax liabilities			29				29,116				—				—
Other non-current liabilities			9				61,181				19,492				21,305
Total non-current liabilities							7,390,681				6,427,178				7,588,147
Total liabilities							13,299,178				12,039,903				13,631,876
Equity
Share capital			21				1,564,499				1,564,499				1,564,499
Share premium							1,440,258				1,440,258				1,440,258
Retained earnings			22				10,740,042				9,478,730				9,290,428
Accumulated other comprehensive income			23				(11,251	)			(1,502	)			(32,091	)
Other components of equity			23				(1,021,820	)			(1,036,683	)			(1,044,351	)
Total equity							12,711,728				11,445,302				11,218,743
Total liabilities and equity						W	26,010,906			W	23,485,205			W	24,850,619

The above separate financial statements of financial position should be read in conjunction with the accompanying notes.

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KT Corporation    

Separate Statements of Profit or Loss    

Years Ended December 31, 2018 and 2017                     

(in millions of Korean won, except per share amounts)
		Notes		2018				2017
Operating revenue		25		W	17,356,537			W	17,341,316
Operating expenses		26			16,404,913				16,389,155
Operating profit					951,624				952,161
Other income		27			367,783				390,253
Other expenses		27			379,797				505,973
Finance income		28			334,467				351,624
Finance costs		28			388,401				575,673
Profit before income tax					885,676				612,392
Income tax expense		29			324,452				149,124
Profit for the year				W	561,224			W	463,268
Earnings per share
Basic earnings per share		30		W	2,290			W	1,891
Diluted earnings per share		30			2,290				1,890

The above separate statements of profit or loss should be read in conjunction with the accompanying notes.

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KT Corporation    

Separate Statements of Comprehensive Income    

Years Ended December 31, 2018 and 2017         

(in millions of Korean won)
		Notes				2018				2017
Profit for the year						W	561,224			W	463,268
Other comprehensive income
Items that will not be reclassified to profit or loss:
Remeasurements of the net defined benefit liability			17				(42,959	)			(76,677	)
Loss on valuation of equity instruments at fair value through other comprehensive income							(1,587	)			—
Items that may be subsequently reclassified to profit or loss:
Changes in value of available-for-sale financial assets			4,7				—				(5	)
Changes in fair value of debt instruments measured at fair value through other comprehensive income			4				2,569				—
Valuation gain(loss) on cash flow hedges			4,7				16,360				(111,335	)
Other comprehensive income from cash flow hedges reclassified to profit or loss			4				(44,843	)			141,929
Total other comprehensive loss						W	(70,460	)		W	(46,088	)
Total comprehensive income for the year						W	490,764			W	417,180

The above separate statements of comprehensive income should be read in conjunction with the accompanying notes.

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KT Corporation

Separate Statements of Changes in Equity

Years Ended December 31, 2018 and 2017

(in millions of Korean won)
		Notes				Share capital		Share premium		Retained earnings		Accumulated other comprehensive income		Other components of equity		Total
Balance at December 31, 2016						W1,564,499		W 1,440,258		W 9,156,204		W (32,091)		W (1,044,351)		W 11,084,519
Adjustments from prior years			39			—		—		134,224		—		—		134,224
Balance at December 31, 2017						1,564,499		1,440,258		9,290,428		(32,091)		(1,044,351)		11,218,743
Comprehensive income
Profit for the year						—		—		463,268		—		—		463,268
Changes in value of available-for-sale financial assets			4			—		—		—		(5)		—		(5)
Remeasurements of the net defined benefit liability			17			—		—		(76,677)		—		—		(76,677)
Valuation gain on cash flow hedge						—		—		—		30,594		—		30,594
Total comprehensive income for the year						—		—		386,591		30,589		—		417,180
Transactions with equity holders
Dividends paid						—		—		(195,977)		—		—		(195,977)
Appropriation of retained earnings related to loss on disposal of treasury stock						—		—		(2,312)		—		2,312		—
Others						—		—		—		—		5,356		5,356
Balance at December 31, 2017						W 1,564,499		W 1,440,258		W 9,478,730		W (1,502)		W (1,036,683)		W 11,445,302
Balance at January 1, 2018						W 1,564,499		W 1,440,258		W 9,478,730		W (1,502)		W (1,036,683)		W 11,445,302
Changes in accounting policy			37			—		—		990,190		17,752		—		1,007,942
Adjusted total equity at the beginning of the financial year						1,564,499		1,440,258		10,468,920		16,250		(1,036,683)		12,453,244
Comprehensive income
Profit for the year						—		—		561,224		—		—		561,224
Gain on valuation of equity instruments at fair value through other comprehensive income			4			—		—		—		982		—		982
Remeasurements of the net defined benefit liability			17			—		—		(42,959)		—		—		(42,959)
Valuation loss on cash flow hedge			4			—		—		—		(28,483)		—		(28,483)
Total comprehensive income for the year						—		—		518,265		(27,501)		—		490,764
Transactions with equity holders
Dividends paid			31			—		—		(245,097)		—		—		(245,097)
Appropriation of retained earnings related to loss on disposal of treasury stock			22			—		—		(2,046)		—		2,046		—
Disposal of treasury stock						—		—		—		—		7,065		7,065
Others						—		—		—		—		5,752		5,752
Balance at December 31, 2018						W 1,564,499		W 1,440,258		W 10,740,042		W (11,251)		W (1,021,820)		W 12,711,728

The above separate statements of changes in equity should be read in conjunction with the accompanying notes.

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KT Corporation

Separate Statements of Cash Flows

Years Ended December 31, 2018 and 2017

(in millions of Korean won)
		Notes				2018				2017
Cash flows from operating activities
Cash generated from operations			32			W	3,489,612			W	3,700,944
Interest paid							(288,461	)			(242,098	)
Interest received							204,310				63,147
Dividends received							182,805				139,448
Income tax paid							(28,966	)			(182,800	)
Net cash inflow from operating activities							3,559,300				3,478,641
Cash flows from investing activities
Collection of loans							60,168				52,317
Disposal of current financial instruments at amortized cost							2,060				—
Disposal of non-current financial instruments at amortized cost							2,520				—
Disposal of financial assets at fair value through profit or loss							2,199				—
Disposal of financial instruments							—				160,001
Disposal of available-for-sale financial assets							—				9,411
Disposal of Investments in subsidiaries, associates and joint ventures							4,875				60,168
Disposal of assets held for sale							2,742				—
Disposal of property and equipment							65,479				23,574
Disposal of intangible assets							9,560				17,626
Loans granted							(62,870	)			(51,468	)
Acquisition of current financial instruments at amortized cost							(290	)			—
Acquisition of financial assets at fair value through profit or loss							(3,049	)			—
Acquisition of financial assets at fair value through other comprehensive income							(16,239	)			—
Acquisition of current financial instruments							—				(50,000	)
Acquisition of available-for-sale financial assets							—				(3,776	)
Acquisition of Investments in subsidiaries, associates and joint ventures							(61,116	)			(80,145	)
Acquisition of property and equipment							(1,990,108	)			(2,211,867	)
Acquisition of intangible assets							(623,134	)			(537,340	)
Net cash outflow from in investing activities							(2,607,203	)			(2,611,499	)
Cash flows from financing activities
Proceeds from borrowings and bonds							1,330,899				444,348
Dividend paid							(245,097	)			(195,977	)
Repayments of borrowings and debentures							(1,322,537	)			(1,551,268	)
Settlement of derivative assets and liabilities, net							(3,461	)			71,370
Acquisition of treasury stock							(24,415	)			—
Decrease in finance leases liabilities							(73,873	)			(71,575	)
Net cash outflow from financing activities			33				(338,484	)			(1,303,102	)
Effect of exchange rate change on cash and cash equivalents							(270	)			(35	)
Net increase (decrease) in cash and cash equivalents							613,343				(435,995	)
Cash and cash equivalents
Beginning of the year			5				1,166,402				1,602,397
End of the year			5			W	1,779,745			W	1,166,402

The above separate financial statements of cash flows should be read in conjunction with the accompanying notes.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

1. General Information

KT Corporation (the “Company”) commenced operations on January 1, 1982, when it spun off from the Korea Communications Commission (formerly the Korean Ministry of Information and Communications) to provide telephone services and to engage in the development of advanced communications services under the Act of Telecommunications of Korea. The address of the Company’s registered office is 90, Buljeong-ro, Bundang-gu, Seongnam City, Gyeonggi Province, Korea.    

On October 1, 1997, upon the announcement of the Act on the Management of Government-Invested Institutions and the Privatization Law, the Company became a government-funded institution under the Commercial Code of Korea.

On December 23, 1998, the Company’s shares were listed on the Korea Exchange.

On May 29, 1999, the Company issued 24,282,195 additional shares and issued American Depository Shares (ADS), representing new shares and 20,813,311 government-owned shares, at the New York Stock Exchange. On July 2, 2001, the additional ADS representing 55,502,161 government-shares were issued at the New York Stock Exchange.

In 2002, the Company acquired the entire government-owned shares in accordance with the Korean government’s privatization plan. At the end of reporting period, the Korean government does not own any share in the Company.

2. Significant Accounting Policies

The principal accounting policies applied in the preparation of these separate financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of Preparation

The Company maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS). The accompanying separate financial statements have been condensed, restructured and translated into English from the Korean language financial statements.

Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, financial performance or cash flows, is not presented in the accompanying separate financial statements.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The separate financial statements of the Company have been prepared in accordance with Korean IFRS. These are the standards, subsequent amendments and related interpretations issued by the International Accounting Standards Board (IASB) that have been adopted by the Republic of Korea.

The preparation of the separate statements requires the use of critical accounting estimates. Management also needs to exercise judgement in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the separate financial statements are disclosed in Note 3.

2.2 Changes in Accounting Policies and Disclosures

(1) New and amended standards adopted by the Company

The Company has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2018 and the application has following impacts on the separate financial statements.

• Amendment to Korean IFRS 1028 Investments in Associates and Joint Ventures

When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organization, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure each investment separately at fair value through profit or loss in accordance with Korean IFRS 1109. The amendment does not have a significant impact on the financial statements because the Company is not a venture capital organization.

• Amendment to Korean IFRS 1040 Transfers of Investment Property

The amendment to Korean IFRS 1040 clarifies that a transfer to, or from, investment property, including property under construction, can only be made if there has been a change in use that is supported by evidence, and the list of evidence for a change of use in the standard was re-characterized as a non-exclusive list of example. The amendment does not have a significant impact on the financial statements.

• Amendment to Korean IFRS 1102 Share-based Payment

Amendments to Korean IFRS 1102 clarify accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. Amendments also clarify that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award. The amendment does not have a significant impact on the financial statements.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

• Enactment of Interpretation 2122 Foreign Currency Transaction and Advance Consideration

According to the enactment, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. The enactment does not have a significant impact on the financial statements.

• Korean IFRS 1109 Financial Instruments

The Company has applied Korean IFRS 1109 Financial Instruments on January 1, 2018, the date of initial application. In accordance with the transitional provisions in Korean IFRS 1109, comparative figures have not been restated, and the differences between previous book amounts and book amounts at the date of initial application are recognized to retained earnings. See Note 37 for further details on the impact of the application of the standard.

• Korean IFRS 1115 Revenue from Contracts with Customers

The Company has applied Korean IFRS 1115 Revenue from Contracts with Customers. In accordance with the transition provisions in Korean IFRS 1115, comparative figures have not been restated. The Company elected the modified retrospective approach, and recognized the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings as at January 1, 2018, the period of initial application. See Note 37 for further details on the impact of the application of the standard.

(2) New standards and interpretations not yet adopted by the Company

Certain new accounting standards and interpretations that have been published that are not mandatory for annual reporting period commencing January 1, 2018 and have not been early adopted by the Company are set out below.

• Korean IFRS 1116 Leases

Korean IFRS 1116 Leases issued on May 22, 2017 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. This standard will replace Korean IFRS 1017 Leases. The Company will apply the standards for annual periods beginning on or after January 1, 2019.

Under the new standard, with implementation of a single lease model, lessee is required to recognize assets and liabilities for all lease which lease term is over 12 months and underlying assets are not low value assets. A lessee is required to recognize a right-of-use asset and a lease liability representing its obligation to make lease payments.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The Company performed an impact assessment to identify potential financial effects of applying Korean IFRS 1116. The Company is analyzing the effects on the financial statements based on available information as at December 31, 2018 to identify effects on 2019 financial statements; however, it is difficult to provide reasonable estimates of financial effects until the analysis is complete.

• Korean IFRS 1109 Financial Instruments

The narrow-scope amendments made to Korean IFRS 1109 Financial Instruments enable entities to measure certain prepayable financial assets with negative compensation at amortized cost. When a modification of a financial liability measured at amortized cost that does not result in the derecognition, a modification gain or loss shall be recognized in profit or loss. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted.

• Amendments to Korean IFRS 1019 Employee Benefits

The amendments require that an entity shall calculate current service cost and net interest for the remainder of the reporting period after a plan amendment, curtailment or settlement based on updated actuarial assumptions from the date of the change. The amendments also require that a reduction in a surplus must be recognized in profit or loss even if that surplus was not previously recognized because of the impact of the asset ceiling. The amendments are effective for plan amendments, curtailments and settlements occurring in reporting periods that begin on or after 1 January 2019.

• Amendments to Korean IFRS 1028 Investments in Associates and Joint Ventures

The amendments clarify that an entity shall apply Korean IFRS 1109 to financial instruments in an associate or joint venture to which the equity method is not applied. These include long-term interests that, in substance, form part of the entity’s net investment in an associate or joint venture. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted. In accordance with the transitional provisions in Korean IFRS 1109, the restatement of the comparative information is not required and the cumulative effects of initially applying the amendments retrospectively should be recognized in the beginning balance of retained earnings (or other components of equity, as appropriate) at the date of initial application.

• Enactment to Interpretation of Korean IFRS 2123 Uncertainty over Income Tax Treatments

The Interpretation explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment, and includes guidance on how to determine whether each uncertain tax treatment is considered separately or together. It also presents examples of circumstances where a judgement or estimate is required to be reassessed. This Interpretation will be applied for annual periods beginning on or after January 1, 2019, and an entity can either restate the comparative financial statements retrospectively or recognize the cumulative effect of initially applying the Interpretation as an adjustment in the beginning balance at the date of initial application.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

• Annual Improvements to Korean IFRS 2015 – 2017 Cycle:

• Korean IFRS 1103 Business Combination

The amendments clarify that when a party to a joint arrangement obtains control of a business that is a joint operation, and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages. In such cases, the acquirer shall remeasure its entire previously held interest in the joint operation. These amendments will be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early adoption permitted.

• Korean IFRS 1111 Joint Agreements

The amendments clarify that when a party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business. In such cases, previously held interests in the joint operation are not remeasured. These amendments will be applied to transactions in which an entity obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early adoption permitted.

• Paragraph 57A of Korean IFRS 1012 Income Tax

The amendment is applied to all the income tax consequences of dividends and requires an entity to recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. These amendments will be applied for annual reporting periods beginning on or after January 1, 2019, with early adoption permitted.

• Korean IFRS 1023 Borrowing Costs

The amendments clarify that if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use (or sale), it becomes part of general borrowings. These amendments will be applied to borrowing costs incurred on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early adoption permitted.

2.3 Subsidiaries, Associates and Joint ventures

The financial statements of the Company are the separate financial statements prepared in accordance with Korean IFRS 1027 Separate Financial Statements. Investments in subsidiaries, joint ventures and associates are recognized at cost under the direct equity method. Management applied the carrying amounts under the previous K-GAAP at the time of transition to Korean IFRS as deemed cost of investments. The Company recognizes dividend income from subsidiaries, joint ventures and associates in profit or loss when its right to receive the dividend is established.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

2.4 Foreign Currency Translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Company are measured using the currency of the primary economic environment in which each entity operates (the “functional currency”). The separate financial statements are presented in Korean won, which is the Company’s functional and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss. They are deferred in other comprehensive income if they relate to qualifying cash flow hedges and qualifying effective portion of net investment hedges, or are attributable to monetary part of the net investment in a foreign operation.

Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss within ‘other income or other expenses’.

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognized in other comprehensive income.

2.5 Financial Assets

(a) Classification

From January 1, 2018, the Company classifies its financial assets in the following measurement categories:

• those to be measured at fair value through profit or loss

• those to be measured at fair value through other comprehensive income, and

• those to be measured at amortized cost.

The classification depends on the Company’s business model for managing the financial assets and the contractual terms of the cash flows.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

For financial assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. The Company reclassifies debt investments when, and only when its business model for managing those assets changes.

For investments in equity instruments that are not held for trading, this will depend on whether the Company has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income. Changes in fair value of the investments in equity instruments that are not accounted for as other comprehensive income are recognized in profit or loss.

(b) Measurement

At initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset or the issuance of the financial liabilities. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

Hybrid (combined) contracts with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

A. Debt instruments

Subsequent measurement of debt instruments depends on the Company’s business model for managing the asset and the cash flow characteristics of the asset. The Company classifies its debt instruments into one of the following three measurement categories:

• Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method.

• Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment loss (and reversal of impairment loss), interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Foreign exchange gains and losses are presented in ‘finance income or finance costs’ and impairment loss in ‘finance costs or operating expenses’.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

• Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented net in the statement of profit or loss within ‘finance income or finance costs’ in the period in which it arises.

B. Equity instruments

The Company subsequently measures all equity investments at fair value. Where the Company’s management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognized in profit or loss as ‘finance income’ when the Company’s right to receive payments is established.

Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘finance income or finance costs’ in the statement of profit or loss as applicable. Impairment loss (and reversal of impairment loss) on equity investments measured at fair value through other comprehensive income are not reported separately from other changes in fair value.

(c) Impairment

The Company assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortized cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables and contract assets, the Company applies the simplified approach, which requires expected lifetime credit losses to be recognized from initial recognition of the receivables.

(d) Recognition and Derecognition

Regular way purchases and sales of financial assets are recognized or derecognized on trade-date, the date on which the Company commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership.

If a transfer does not result in derecognition because the Company has retained substantially all the risks and rewards of ownership of the transferred asset, the Company continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(e) Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Company or the counterparty.

2.6 Derivative Instruments

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company has hedge relationships and designates certain derivatives as:

• hedges of a particular risk associated with the cash flows of recognized assets and liabilities and highly probable forecast transactions (cash flow hedges)

At inception of the hedge relationship, the Company documents the economic relationship between hedging instruments and hedged items including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of hedged items.

The fair values of derivative financial instruments designated in hedge relationships are disclosed in Note 36.

The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. A non-derivative financial asset and a non-derivative financial liability is classified as a current or non-current based on its expected maturity and its settlement, respectively.

The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the cash flow hedge reserve within equity, and the ineffective portion is recognized in ‘finance income (costs)’.

Amounts of changes in fair value of effective hedging instruments accumulated in equity are recognized as ‘finance income (costs)’ for the periods when the corresponding transactions affect profit or loss.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

When a hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, any accumulated cash flow hedge reserve at that time remains in equity until the forecast transaction occurs, resulting in the recognition of a non-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the cash flow hedge reserve and deferred costs of hedging that were reported in equity are immediately reclassified to profit or loss.

2.7 Trade Receivables

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less loss allowance. See Note 6 for further information about the Company’s accounting for trade receivables and Note 2.5 (c) for a description of the Company’s impairment policies.

2.8 Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the moving average method, except for inventories in-transit which is determined using the specific identification method.

2.9 Non-current Assets (or Disposal Group) Held-for-sale

Non-current assets (or disposal group) are classified as held for sale when their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. The assets are measured at the lower amount between their carrying amount and the fair value less costs to sell.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

2.10 Property and Equipment

Property and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that is directly attributable to the acquisition of the items.

Depreciation of all property, plant and equipment, except for land, is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives as follows:

				Estimated Useful Life
Buildings				10 – 40 years
Structures				10 – 40 years
Telecommunications equipment				2 – 40 years
Others		Vehicles		4 years
		Tools		4 years
		Office equipment		2 – 4 years

The depreciation method, residual values and useful lives of property and equipment are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.

2.11 Investment Property

Investment property is a property held to earn rentals or for capital appreciation or both. An investment property is measured initially at its cost. After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. Investment property, except for land, is depreciated using the straight-line method over their useful lives from 10 to 40 years.

2.12 Intangible Assets

(a) Goodwill

Goodwill represents the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of the Company’s previously held equity interest in the acquiree over the net acquired identifiable assets at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or group of CGUs, that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying amount of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(b) Intangible assets, except for goodwill

Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses. Membership rights (condominium membership and golf membership) and broadcast rights that have an indefinite useful life are not subject to amortization because there is no foreseeable limit to the period over which the assets are expected to be utilized. The Company amortizes intangible assets with a limited useful life using the straight-line method over the following periods:

		Estimated Useful Life
Development costs		6 years
Goodwill		indefinite useful life
Software		6 years
Industrial property rights		5 – 50 years
Frequency usage rights		5 – 10 years
Others 1		2 – 50 years

¹  Membership rights (condominium membership and golf membership) included in others are classified as intangible assets with indefinite useful life.

2.13 Borrowing Costs

General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred.

2.14 Government Grants

Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Company will comply with all attached conditions. Government grants related to assets are presented in the statement of financial position by setting up the grant as deferred income that is recognized in profit or loss on a systematic basis over the useful life of the asset. Grants related to income are presented as a credit in the statement of profit or loss within ‘other income’.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

2.15 Impairment of Non-financial Assets

Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.

2.16 Trade and other payables

These amounts represent liabilities for goods and services provided to the Company prior to the end of reporting period which are unpaid. Trade and other payables are presented as current liabilities, unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method.

2.17 Financial Liabilities

(a) Classification and measurement

Financial liabilities at fair value through profit or loss are financial instruments held for trading. A financial liability is held for trading if it is incurred principally for the purpose of repurchasing in the near term. Derivatives that are not designated as hedging instruments or derivatives separated from financial instruments containing embedded derivatives are also categorized as held for trading.

The Company classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and present as ‘trade and other payables’, ‘borrowings’, and ‘other financial liabilities’ in the statement of financial position.

Preferred shares that require mandatory redemption at a particular date are classified as liabilities. Interest expenses on these preferred shares using the effective interest method are recognized in the statement of profit or loss as ‘finance costs’, together with interest expenses recognized from other financial liabilities.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(b) Derecognition

Financial liabilities are removed from the statement of financial position when it is extinguished; for example, when the obligation specified in the contract is discharged or cancelled or expired or when the terms of an existing financial liability are substantially modified. The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in profit or loss.

2.18 Employee Benefits

(a) Post-employment benefits

The Company operates both defined contribution and defined benefit pension plans.

A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The contributions are recognized as employee benefit expenses when an employee has rendered service.

A defined benefit plan is a pension plan that is not a defined contribution plan. Generally, post-employment benefits are payable after the completion of employment, and the benefit amount depended on the employee’s age, periods of service or salary levels. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income.

Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs.

(b) Termination benefits

Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits or when the entity recognizes costs for a restructuring.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(c) Long-term employee benefits

Certain entities within the Company provide long-term employee benefits that are entitled to employees with service period for ten years and above. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. The Company recognizes service cost, net interest on other long-term employee benefits and remeasurements as profit or loss for the year. These liabilities are valued annually by an independent qualified actuary.

2.19 Share-based Payments

Equity-settled share-based payment is recognized at fair value of equity instruments granted, and employee benefit expense is recognized over the vesting period. At the end of each period, the Company revises its estimates of the number of options that are expected to vest based on the non-market vesting and service conditions. It recognizes the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

2.20 Provisions

Provisions for service warranties, make good obligation, and legal claims are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period, and the increase in the provision due to the passage of time is recognized as interest expense.

2.21 Leases

(a) Lessee

A lease is an agreement, whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Company are classified as operating leases. Payments made under operating leases are charge to profit or loss on a straight-line basis over the period of lease.

Leases where the Company, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(b) Lessor

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership at the inception of the lease. A lease other than a finance lease is classified as an operating lease. Lease income from operating leases is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred by the lessor in negotiating and arranging an operating lease is added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income.

2.22 Share Capital

The Company classifies ordinary shares as equity.

Where the Company purchases its own shares, the consideration paid including any directly attributable incremental costs is deducted from equity attributable to the equity holders of the Company until the share are cancelled or reissued. When these treasury shares are reissued, any consideration received is including in equity attributable to the equity holders of the Company.

2.23 Revenue Recognition

From January 1, 2018, the Company has applied Korean IFRS 1115 Revenue from Contracts with Customers.

(a) Identifying performance obligations

The Company mainly provides telecommunication services and sells handsets. With the application of Korean IFRS 1115, the Company identifies performance obligations with a customer such as providing telecommunication services, selling handsets and other. The revenue from handsets is recognized when a performance obligation is satisfied by transferring promised goods to customers, and the revenue from telecommunication services is recognized over the estimated contract periods of each services by transferring promised services to customers.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(b) Allocation the transaction price and Revenue recognition

With the application of Korean IFRS 1115, the Company allocates the transaction price to each performance obligation identified in the contract based on a relative stand-alone selling prices of the goods or services being provided to the customer. To allocate the transaction price to each performance obligation on a relative stand-alone price basis, the Company determines the stand-alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling price. The stand-alone selling price is the price at which the Group would sell a promised good or service separately to the customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the Group sells that good or service separately in similar circumstances and to similar customers. The Group recognizes the allocated amount as contract assets or contract liabilities, and amortizes it through the remaining period which is adjusted in operating income.

(c) Incremental contract acquisition costs

The Company pays the commission fees when new customer subscribe for telecommunication services. The incremental contract acquisition costs are those commission fess that the Company incurs to acquire a contract with a customer that it would not have incurred if the contract had not been acquired.

According to Korean IFRS 1115, the Company recognizes as an asset the incremental contract acquisition costs and amortize it over the expected period of benefit. However, as a practical expedient, the Company may recognize the incremental contract acquisition costs as an expense when incurred if the amortization period of the asset is one year or less.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

2.24 Current and Deferred Tax

The tax expense for the period consists of current and deferred tax. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

The tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. The Company recognizes current income tax on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the separate financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognized only if it is probable that future taxable amounts will be available to utilize those temporary differences and losses.

The Company recognizes a deferred tax liability all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint arrangements, except to the extent that the Company is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, The Company recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis.

The Company adopts the consolidated corporate tax return and calculates income tax expenses and income tax liabilities of the Company and its subsidiaries based on systematic and reasonable methods.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

2.25 Dividend

Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders.

2.26 Approval of Issuance of the Financial Statements

The separate financial statements 2018 were approved for issue by the Board of Directors on February 12, 2019 and are subject to change with the approval of shareholders at their Annual General Meeting.

3. Critical Accounting Estimates and Assumptions

The preparation of financial statements requires the Company to make estimates and assumptions concerning the future. Management also needs to exercise judgement in applying the Company’s accounting policies. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. As the resulting accounting estimates will, by definition, seldom equal the related actual results, it can contain a significant risk of causing a material adjustment.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Additional information of significant judgement and assumptions of certain items are included in relevant notes.

3.1 Estimated Goodwill Impairment

The Company tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of a cash generating unit (CGU) is determined based on value-in-use calculations (Note 12).

3.2 Income Taxes

If certain portion of the taxable income is not used for investments or increase in wages or dividends in accordance with the Tax System For Recirculation of Corporate Income, the Company is liable to pay additional income tax calculated based on the tax laws. Accordingly, the measurement of current and deferred income tax is affected by the tax effects from the new system. As the Company’s income tax is dependent on the investments, increase in wages and dividends, there is an uncertainty in measuring the final tax effects.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

3.3 Fair Value of Financial Instruments

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period (Note 36).

3.4 Impairment of Financial Assets

The provision for impairment for financial assets are based on assumptions about risk of default and expected loss rates. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation based on the Company’s past history, existing market conditions as well as forward looking estimates at the end of each reporting period.

3.5 Net Defined Benefit Liability

The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions including the discount rate (Note 17).

3.6 Amortization of Contract Assets, Contract Liabilities and Contract Cost Assets

Contract assets, contract liabilities and contract cost assets recognized under the application of Korean IFRS 1115 are amortized over the expected periods of customer relationships. The estimate of the expected terms of customer relationship is based on the historical data. If management’s estimate changes, it may cause significant differences in the timing of revenue recognition and amounts recognized.

3.7 Provisions

As described in Note 16, the Company records provisions for litigation and assets retirement obligations at the end of the reporting period. The provisions are estimated based on the factors such as the historical experiences.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

3.8 Useful Lives of Property and Equipment and Investment Property

The property and equipment, intangible assets, and investment properties, excluding land, goodwill, condominium memberships and golf club memberships, are depreciated using the straight-line method over their useful lives. The estimated useful lives are determined based on expected usage of the assets and the estimates can be materially affected by technical changes and other factors. The Company will increase depreciation expenses if the useful lives are considered shorter than the previously estimated useful lives.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

4. Financial Instruments by Category

Financial instruments by category as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018
Financial assets		Financial assets at amortized cost				Financial assets at fair value through profit or loss				Financial assets at fair value through other comprehensive income				Derivatives used for hedging				Total
Cash and cash equivalents		W	1,779,745			W	—			W	—			W	—			W	1,779,745
Trade and other receivables			2,637,732				—				1,097,348				—				3,735,080
Other financial assets			54,074				101,278				20,857				29,843				206,052

(in millions of Korean won)		December 31, 2018
Financial liabilities		Financial liabilities at amortized cost				Financial liabilities at fair value through profit and loss				Derivatives used for hedging				Total
Trade and other payables		W	5,462,470			W	—			W	—			W	5,462,470
Borrowings			6,313,537				—				—				6,313,537
Other financial liabilities			—				7,758				54,075				61,833

(in millions of Korean won)		December 31, 2017
Financial assets		Loans and receivables				Derivatives used for hedging				Available -for-sale				Total
Cash and cash equivalents		W	1,166,402			W	—			W	—			W	1,166,402
Trade and other receivables			3,626,267				—				—				3,626,267
Other financial assets			58,365				7,389				64,916				130,670

(in millions of Korean won)		December 31, 2017
Financial liabilities		Financial liabilities at amortized cost				Liabilities at fair value through profit and loss				Derivatives used for hedging				Total
Trade and other payables		W	5,069,667			W	—			W	—			W	5,069,667
Borrowings			6,212,934				—				—				6,212,934
Other financial liabilities			—				5,051				81,200				86,251

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

Gains and losses arising from financial instruments by category for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Financial assets at amortized cost
Interest income		W	59,588			W	72,384
Impairment loss			(86,934	)			(32,728	)
Gain (loss) on foreign currency transactions			6,948				(1,424	)
Gain (loss) on foreign currency translation			3,029				(11,751	)
Loss on disposal			—				(19,389	)
Financial assets at fair value through profit or loss
Dividend income			8				—
Gain on valuation			9,838				—
Gain on disposal			1,267				—
Financial assets at fair value through other comprehensive income
Interest income			163,125				—
Impairment loss			(2,417	)			—
Loss on disposal			(13,818	)			—
Other comprehensive income for the year 1			982				—
Available-for-sale
Interest income			—				272
Dividend income			—				2
Gain on disposal			—				4,690
Impairment loss			—				(9	)
Other comprehensive income for the year 1			—				(5	)
Derivative assets used for hedging
Gain (loss) on transactions			7,272				(58,569	)
Gain (loss) on valuation			22,065				(63,640	)
Other comprehensive income for the year 1			19,170				(44,429	)
Reclassified to profit of loss from other comprehensive income for the year 1,2			(16,455	)			50,231
Financial liabilities at amortized cost
Interest expense			(271,570	)			(282,243	)
Gain (loss) on foreign currency transactions			(30,862	)			58,713
Gain (loss) on foreign currency translation			(65,645	)			200,833
Financial liabilities at fair value through profit or loss
Loss on valuation			(2,707	)			(3,078	)

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		2018				2017
Derivative liabilities used for hedging
Gain on transactions			20,678				—
Gain (loss) on valuation			34,802				(123,828	)
Other comprehensive income for the year 1			(2,810	)			(66,906	)
Reclassified to profit or loss from other comprehensive income for the year 1,2			(28,388	)			91,698
Total		W	(172,834	)		W	(229,176	)

¹ The amounts directly reflected in equity after adjustments of deferred income tax.

² During the current and previous year, certain derivatives of the Company were settled and the related gain or loss on valuation of cash flow hedge in other comprehensive income was reclassified to profit or loss for the year.

5. Cash and Cash Equivalents

Restricted cash and cash equivalents as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017				Description
Bank deposits		W	19,440			W	16,182			Deposit restricted for government project and other

Cash and cash equivalents in the statement of financial position equal to cash and cash equivalents in the statement of cash flows.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

6. Trade and Other Receivables

Trade and other receivables as at December 31, 2018 and 2017, are as follows:

		December 31, 2018
(in millions of Korean won)		Total amounts				Provision for impairment				Present value discount				Carrying amount
Current assets
Trade receivables		W	3,048,786			W	(319,044)			W	(9,562)			W	2,720,180
Other receivables			298,971				(50,254)				(133)				248,584
Total		W	3,347,757			W	(369,298)			W	(9,695)			W	2,968,764
Non-current assets
Trade receivables		W	380,398			W	(2,107)			W	(16,042)			W	362,249
Other receivables			427,438				(141)				(23,230)				404,067
Total		W	807,836			W	(2,248)			W	(39,272)			W	766,316

		December 31, 2017
(in millions of Korean won)		Total amounts				Provision for impairment				Present value discount				Carrying amount
Current assets
Trade receivables		W	2,995,408			W	(403,512)			W	(7,265)			W	2,584,631
Other receivables			352,186				(46,089)				(132)				305,965
Total		W	3,347,594			W	(449,601)			W	(7,397)			W	2,890,596
Non-current assets
Trade receivables		W	345,485			W	(296)			W	(11,483)			W	333,706
Other receivables			427,393				(23)				(25,405)				401,965
Total		W	772,878			W	(319)			W	(36,888)			W	735,671

The fair values of trade and other receivables with original maturities less than one year equal to their carrying amount because the discounting effect is immaterial. The fair value of trade and other receivables with original maturities longer than one year, which are mainly from sales of goods, is determined discounting the expected future cash flow at the weighted average interest rate.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

Details of changes in provision for impairment for the years ended December 31, 2018 and 2017, are as follows:

		2018								2017
(in millions of Korean won)		Trade receivables				Other receivables				Trade receivables				Other receivables
Beginning 1		W	403,808			W	46,112			W	433,368			W	102,527
Provision			72,653				16,698				32,631				97
Reversal or write-off			(120,996	)			(12,415	)			(62,191	)			(56,512	)
Ending 1		W	355,465			W	50,395			W	403,808			W	46,112

¹  Provisions for impairment on trade receivables measured at fair value through other comprehensive income are included.

Provision for impairment on trade and other receivables is recognized as operating expenses, other expenses and finance costs.

Details of other receivables as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Loans		W	75,456			W	73,080
Receivables			275,081				328,135
Accrued income			1,144				2,492
Refundable deposits			351,234				349,922
Others			131				413
Provision for impairment			(50,395	)			(46,112	)
Total		W	652,651			W	707,930

The maximum exposure of trade and other receivables to credit risk is the carrying amount of each class of receivables mentioned above as at December 31, 2018.

A portion of the trade receivables is classified as financial assets at fair value through other comprehensive income considering the trade receivables business model for managing the asset and the cash flow characteristics of the contract.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

7. Other Financial Assets and Liabilities

Details of other financial assets and liabilities as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Other financial assets
Financial assets measured at amortized cost 1		W	54,074			W	58,365
Financial assets at fair value through profit or loss 2			101,278				—
Financial assets at fair value through other comprehensive income 2			20,857				—
Available-for-sale financial assets			—				64,916
Derivatives used for hedging			29,843				7,389
Less: Non-current			(130,651	)			(75,896	)
Current		W	75,401			W	54,774
Other financial liabilities
Financial liabilities at fair value through profit or loss		W	7,758			W	5,051
Derivatives used for hedging			54,075				81,200
Less: Non-current			(61,833	)			(53,145	)
Current		W	—			W	33,106

¹  As at December 31, 2018, the Company’s financial instruments amounting to W4,075 million (December 31, 2017: \ 8,365 million), which consist of checking account deposits and deposits for Win-win Growth Cooperative loans, are subject to withdrawal restrictions.

² In the prior financial year, a portion of the equity instrument was classified as available-for-sale financial assets.

Details of financial assets at fair value through profit or loss as at December 31, 2018 and December 31, 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017 1
Equity instruments (Listed)		W	122			W	—
Equity instruments (Unlisted)			—				—
Debt instruments			101,156				—
Less : Non-current			(101,278	)			—
Current		W	—			W	—

¹  In the prior fiscal year, a portion of the financial assets was classified as available-for-sale financial assets where management intended to hold them for the medium to long-term. The carrying amount as at December 31, 2017 was W58,145 million.

The maximum exposure of debt instruments of financial assets at fair value through profit or loss to credit risk is the carrying amount as at December 31, 2018.

Investment in Korea Software Financial Cooperative amounting to W1,136 million is provided as collateral.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

Details of financial assets at fair value through other comprehensive income as at December 31, 2018 and December 31, 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017 1
Equity instruments (Listed)		W	3,095			W	—
Equity instruments (Unlisted)			17,762				—
Debt instruments			—				—
Less : Non-current			(20,857	)			—
Current		W	—			W	—

¹  In the prior fiscal year, a portion of the financial assets was classified as available-for-sale financial assets where management intended to hold them for the medium to long-term. The carrying amount as at December 31, 2017 was W 6,771 million.

Upon disposal of these equity investments, any balance within the other comprehensive income for these equity investments is not reclassified profit or loss, but to retained earnings. Upon disposal of these debt investments, remaining balance of the accumulated other comprehensive income of these debt investments is reclassified to profit or loss.

Derivatives used for hedging as at December 31, 2018 and December 31, 2017, are as follows:

(in millions of Korean won)		December 31, 2018								December 31, 2017
		Assets				Liabilities				Assets				Liabilities
Currency swap 1		W	29,843			W	54,075			W	7,389			W	81,200
Less: Non-current			(4,732	)			(54,075	)			(4,675	)			(48,094	)
Current		W	25,111			W	—			W	2,714			W	33,106

¹ The currency swap contract is entered to hedge bond payables’ cash flow fluctuation risk arising from fluctuation of interest rate and exchange rate, and the maximum expected period exposed to cash flow fluctuation risk due to the forecast transactions subject to hedge is September 7, 2034.

The full fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months.

The valuation gain and loss on the derivative contracts for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)

2018

2017

Type of Transaction

Valuation gain

Valuation loss

Other comprehensive Income 1

Valuation gain

Valuation loss

Other comprehensive income 1

Currency swap

W

58,912

W

2,045

W

22,139

W

—

W

187,468

W

(146,881

)

¹  Before adjustment of deferred income tax directly reflected in equity.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The ineffective portion recognized in profit or loss concerning cash flow hedge is valuation gain of W 71 million for the year ended December 31, 2018 (December 31, 2017: valuation loss of W 2,018 million).

Details of financial liabilities at fair value through profit or loss as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Financial liabilities at fair value through profit or loss Derivative liabilities held for trading		W	7,758			W	5,051

The valuation gain and loss on financial liabilities at fair value through profit or loss for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)

2018

2017

Valuation gain

Valuation loss

Valuation gain

Valuation loss

Derivative liabilities held for trading

W

—

W

2,707

W

—

W

3,078

8. Inventories

Inventories as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)

December 31, 2018

December 31, 2017

Acquisition cost

Valuation allowance

Carrying amount

Acquisition cost

Valuation allowance

Carrying amount

Merchandise

W

571,566

W

(106,293

)

W

465,273

W

284,090

W

(51,844

)

W

232,246

Cost of inventories recognized as expenses for the year ended December 31, 2018 amounts to W 3,327,661 million (December 31, 2017: W 3,363,690 million), and valuation loss on inventory amounts to W 54,449 million for the year ended December 31, 2018 (December 31, 2017: W 10,405 million).

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

9. Other Assets and Liabilities

Other assets and liabilities as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Other assets
Advance payments		W	46,579			W	55,242
Prepaid expenses 1			1,625,219				155,770
Contract assets 1			366,866				—
Less: Non-current			(466,228	)			(27,952	)
Current		W	1,572,436			W	183,060
Other liabilities
Advance received		W	62,861			W	60,938
Withholdings			20,122				21,210
Unearned revenue			23,835				14,072
Contract liabilities 1			344,765				—
Less: Non-current			(61,181	)			(19,492	)
Current		W	390,402			W	76,728

¹ As explained in Note 2, amounts include adjustments arising from adoption of Korean IFRS 1115 (Note 25).

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

10. Property and Equipment

Changes in property and equipment for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Land				Buildings and structures				Telecommuni- cations equipment				Others				Construction- in-progress				Total
Acquisition cost		W	938,667			W	2,954,300			W	33,910,943			W	1,453,205			W	674,864			W	39,931,979
Less: Accumulated depreciation (including accumulated impairment loss and others)			(131	)			(1,459,217	)			(25,966,300	)			(1,130,171	)			(1,113	)			(28,556,932	)
Beginning, net		W	938,536			W	1,495,083			W	7,944,643			W	323,034			W	673,751			W	11,375,047
Acquisition and capital expenditure			4,718				1,160				110,161				88,986				1,899,816				2,104,841
Disposal and termination			(18,419	)			(6,836	)			(110,239	)			(3,287	)			(580	)			(139,361	)
Depreciation			—				(98,485	)			(2,199,903	)			(115,378	)			—				(2,413,766	)
Transfer to investment properties			5,182				57,068				1,672,733				7,922				(1,814,382	)			(71,477	)
Others			2,293				2,031				12,841				(8,051	)			—				9,114
Ending, net		W	932,310			W	1,450,021			W	7,430,236			W	293,226			W	758,605			W	10,864,398
Acquisition cost		W	932,442			W	2,993,851			W	34,191,604			W	1,467,760			W	759,200			W	40,344,857
Less: Accumulated depreciation (including accumulated impairment loss and others)			(132	)			(1,543,830	)			(26,761,368	)			(1,174,534	)			(595	)			(29,480,459	)

(in millions of Korean won)		2017
		Land				Buildings and structures				Telecommuni- cations equipment				Others				Construction- in-progress				Total
Acquisition cost		W	912,387			W	2,928,545			W	33,472,178			W	1,434,494			W	678,425			W	39,426,029
Less: Accumulated depreciation (including accumulated impairment loss and others)			(131	)			(1,355,088	)			(25,007,058	)			(1,101,938	)			(621	)			(27,464,836	)
Beginning, net		W	912,256			W	1,573,457			W	8,465,120			W	332,556			W	677,804			W	11,961,193
Acquisition and capital expenditure			1,948				16				202,058				103,321				2,087,248				2,394,591
Disposal and termination			(568	)			(957	)			(170,307	)			(6,380	)			(3,086	)			(181,298	)
Depreciation			—				(102,036	)			(2,289,316	)			(110,984	)			—				(2,502,336	)
Transfer to investment properties			26,763				25,306				1,735,479				4,486				(2,088,215	)			(296,181	)
Others			(1,863	)			(703	)			1,609				35				—				(922	)
Ending, net		W	938,536			W	1,495,083			W	7,944,643			W	323,034			W	673,751			W	11,375,047
Acquisition cost		W	938,667			W	2,954,300			W	33,910,943			W	1,453,205			W	674,864			W	39,931,979
Less: Accumulated depreciation (including accumulated impairment loss and others)			(131	)			(1,459,217	)			(25,966,300	)			(1,130,171	)			(1,113	)			(28,556,932	)

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The borrowing costs capitalized for qualifying assets amount to W 7,329 million for the year ended December 31, 2018 (December 31, 2017: W 7,190 million). The interest rate applied to calculate the capitalized borrowing costs in 2018 is 3.22 % (2017: 3.37 %).

11. Investment Properties

Changes in investment properties for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018												2017
		Land				Buildings				Total				Land				Buildings				Total
Acquisition cost		W	183,193			W	866,575			W	1,049,768			W	181,331			W	870,476			W	1,051,807
Less: Accumulated depreciation			—				(415,917	)			(415,917	)			—				(388,822	)			(388,822	)
Beginning, net			183,193				450,658				633,851				181,331				481,654				662,985
Depreciation			—				(28,903	)			(28,903	)			—				(31,221	)			(31,221	)
Transfer from (to) property, plant and equipment			(2,292	)			(2,032	)			(4,324	)			1,862				225				2,087
Ending, net		W	180,901			W	419,723			W	600,624			W	183,193			W	450,658			W	633,851
Acquisition cost		W	180,901			W	857,950			W	1,038,851			W	183,193			W	866,575			W	1,049,768
Less: Accumulated depreciation			—				(438,227	)			(438,227	)			—				(415,917	)			(415,917	)

The fair value of investment properties is W 1,573,970 million as at December 31, 2018 (December 31, 2017: W 1,691,010 million). The fair value of investment properties is estimated based on the expected cash flow.

Rental income from investment properties is W 196,574 million for the year ended December 31, 2018 (for the year ended December 31, 2017: W 208,407 million) and direct operating expenses (including repairs and maintenance) arising from investment properties that generated rental income during the period are recognized as operating expenses.

Details of investment properties provided as collateral as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)

December 31, 2018

Collateral

Carrying amount

Secured amount

Related account

Related amount

Land and Building

W

186,252

W

39,177

Deposits received

W

34,965

(in millions of Korean won)

December 31, 2017

Collateral

Carrying amount

Secured amount

Related account

Related amount

Land and Building

W

197,783

W

44,705

Deposits received

W

38,115

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

12. Intangible Assets

Changes in intangible assets for the years ended December 31, 2018 and 2017, are as follows:

		2018
(in millions of Korean won)		Goodwill				Industrial rights				Development costs				Software				Frequency usage rights				Others				Total
Acquisition cost		W	65,057			W	29,105			W	1,714,859			W	668,894			W	2,522,269			W	284,025			W	5,284,209
Less : Accumulated depreciation (including accumulated impairment loss and others)			—				(15,823	)			(1,272,541	)			(549,218	)			(1,164,107	)			(182,305	)			(3,183,994	)
Beginning, net		W	65,057			W	13,282			W	442,318			W	119,676			W	1,358,162			W	101,720			W	2,100,215
Acquisition and capital expenditure			—				3,538				58,888				13,143				1,110,865				20,710				1,207,144
Disposal and termination			—				(570	)			(3,433	)			(22	)			(558	)			(5,231	)			(9,814	)
Amortization			—				(2,245	)			(145,542	)			(43,451	)			(318,447	)			(14,473	)			(524,158	)
Ending, net		W	65,057			W	14,005			W	352,231			W	89,346			W	2,150,022			W	102,726			W	2,773,387
Acquisition cost		W	65,057			W	29,882			W	1,751,968			W	681,937			W	3,633,133			W	293,795			W	6,455,772
Less : Accumulated depreciation (including accumulated impairment loss and others)			—				(15,877	)			(1,399,737	)			(592,591	)			(1,483,111	)			(191,069	)			(3,682,385	)

		2017
(in millions of Korean won)		Goodwill				Industrial rights				Development costs 1				Software				Frequency usage rights				Others				Total
Acquisition cost		W	65,057			W	25,705			W	1,545,032			W	625,137			W	2,522,269			W	286,485			W	5,069,685
Less : Accumulated depreciation (including accumulated impairment loss and others)			—				(14,406	)			(1,188,275	)			(502,236	)			(853,239	)			(173,980	)			(2,732,136	)
Beginning, net		W	65,057			W	11,299			W	356,757			W	122,901			W	1,669,030			W	112,505			W	2,337,549
Acquisition and capital expenditure			—				4,482				260,320				44,257				—				11,370				320,429
Disposal and termination			—				(374	)			(14,806	)			(421	)			—				(6,854	)			(22,455	)
Amortization			—				(2,125	)			(159,953	)			(47,061	)			(310,868	)			(15,301	)			(535,308	)
Ending, net		W	65,057			W	13,282			W	442,318			W	119,676			W	1,358,162			W	101,720			W	2,100,215
Acquisition cost		W	65,057			W	29,105			W	1,714,859			W	668,894			W	2,522,269			W	284,025			W	5,284,209
Less : Accumulated depreciation (including accumulated impairment loss and others)			—				(15,823	)			(1,272,541	)			(549,218	)			(1,164,107	)			(182,305	)			(3,183,994	)

¹  The Company’s development costs mainly consist of acquisition costs to develop a combined billing system and an information management system.

The carrying amount of membership rights with indefinite useful life not subject to amortization is W 66,687 million as at December 31, 2018 (December 31, 2017: W 66,356 million).

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The Company won a portion of the 3.5GHz and 28GHz bands at an auction in June 2018 under Article 11 (Assignment of Radio Frequencies for Consideration) of the Radio Waves Act. The purchase consideration for the right to use a radio frequency of the 3.5GHz and 28GHz bands are W 968,000 million and W 207,800 million, respectively. The Company made down payments for the 3.5GHz and 28GHz bands in November 2018, and the remaining consideration for the 3.5GHz and 28GHz bands will be paid in installments annually for 10 years and 5 years, respectively.

The Company annually performs assessment of goodwill impairment. The recoverable amount of all CGUs has been determined based on value-in-use calculations. These calculation use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates. The growth rate does not exceed the long-term average growth rate included in industry report specific to the industry in which the CGU operates.

The Company determined the gross margin rate based on past performance and its expectations of market development. The average growth rates used are estimated based on the historical growth rate. In addition, the Company estimated the pre-tax cash flow based on past performance and its expectation of market growth, and the applied pre-tax discount rates reflected specific risks relating to the relevant CGUs.

As a result of impairment test, the Company concluded that the carrying amount of CGUs does not exceed the recoverable amount of CGUs. Therefore, the Company did not recognize the impairment loss on goodwill for the years ended December 31, 2018 and 2017.

13. Investments in Subsidiaries, Associates and Joint ventures

Carrying amount in investments in subsidiaries, associates and joint ventures as at December 31, 2018 and 2017, is as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Subsidiaries		W	3,256,846			W	3,317,738
Associates and joint ventures			290,837				267,240
Total		W	3,547,683			W	3,584,978

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Investments in subsidiaries as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		Location				Percentage of ownership (%)				Carrying amount
										December 31, 2018				December 31, 2017
KT Estate Inc.			Korea				100.0	%		W	1,084,522			W	1,084,522
KT Sat Co., Ltd.			Korea				100.0	%			390,530				390,530
KTCS Corporation 1			Korea				7.6	%			6,427				6,427
KTIS Corporation 1			Korea				30.1	%			30,633				30,633
KT Skylife Co., Ltd.			Korea				50.3	%			311,696				311,696
BC Card Co., Ltd.			Korea				69.5	%			633,004				633,004
KT M&S Co., Ltd.			Korea				100.0	%			26,764				26,764
KT Hitel Co., Ltd.			Korea				63.7	%			120,078				120,078
KT Belgium			Belgium				100.0	%			54,512				86,432
KT Powertel Co., Ltd. 1			Korea				44.8	%			37,419				37,419
Genie Music Corporation (KT Music Corporation) 1			Korea				36.0	%			37,417				37,417
KT Dutch B.V			Netherlands				100.0	%			32,359				55,847
KT Telecop Co., Ltd.			Korea				86.8	%			26,045				26,045
KT Submarine Co., Ltd. 1			Korea				39.3	%			24,370				24,370
Nasmedia, Inc. 2			Korea				42.7	%			23,051				23,051
KT New Business Fund No.1			Korea				—				—				8,112
KT Strategic Investment Fund No.1			Korea				90.9	%			2,021				20,000
KTDS Co., Ltd.			Korea				95.5	%			19,616				19,616
KTSB Data Service			Korea				51.0	%			4,104				18,870
KT Strategic Investment Fund No.2			Korea				90.9	%			12,973				20,000
KT Sports			Korea				66.0	%			6,600				6,600
KT M mobile Co., Ltd.			Korea				100.0	%			200,000				200,000
KT Service Bukbu Co., Ltd.			Korea				67.3	%			7,092				7,092
KT Service Nambu Co., Ltd.			Korea				76.4	%			10,160				10,160
KT Strategic Investment Fund No.3			Korea				86.7	%			13,000				13,000
KT Strategic Investment Fund No.4			Korea				95.0	%			19,000				9,500
PlayD Co., Ltd. (N Search Marketing Co., Ltd.) 3			Korea				33.3	%			20,000				20,000
KT MOS Bukbu Co., Ltd.4			Korea				100.0	%			6,832				—
KT MOS Nambu Co., Ltd.4			Korea				98.4	%			5,462				—
Next connect PFV			Korea				100.0	%			23,421				—
Others			Korea								67,738				70,553
Total										W	3,256,846			W	3,317,738

¹  At the end of the reporting period, although sum of percentage of ownership of the Company and its subsidiaries is less than 50% ownership in this entity, this entity is included in investments in subsidiaries due to the dispersion of the non-controlling interests and voting patterns at the shareholders’ meetings in the past.

²  At the end of the reporting period, although the Company owns less than 50% ownership in this entity, this entity is included in investments in subsidiaries as the Company holds the majority of voting right based on an agreement with other investors.

³ At the end of the reporting period, this entity is included in investments in subsidiaries as the Nasmedia Co., Ltd., holds ownership of 66.7% the Company and subsidiary holds ownership of 100%.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Investments in associates and joint ventures as at and for the years ended December 31, 2018 and 2017, are as follows:

										Carrying amount
(in millions of Korean won)		Location				Percentage of ownership (%)				December 31, 2018				December 31, 2017
KIF Investment Fund			Korea				33.3	%		W	115,636			W	115,636
KT-SB Venture Investment Fund 1			Korea				50.0	%			6,437				6,437
KT-IBKC Future Investment Fund 1			Korea				43.3	%			8,840				9,750
KT-CKP New Media Investment Fund			Korea				49.7	%			301				1,530
K Bank Inc. 2			Korea				10.0	%			89,768				63,043
Others							—				69,855				70,844
Total										W	290,837			W	267,240

¹ At the end of the reporting period, although the Company owns 50% ownership in this entity, this entity is included in investments in joint ventures as the Company cannot unilaterally make decisions on determining the operating and financial policies.

² At the end of the reporting period, although the Company owns less than 20% ownership in this entity, this entity is included in investments in associates as the Company has significant influence on determining the operating and financial policies, and 8.8% of non-voting convertible stock are excluded.

Changes in investments in subsidiaries, associates and joint ventures for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Beginning		W	3,584,978			W	3,638,856
Acquisition			81,815				80,054
Disposal			(12,189	)			(64,498	)
Impairment 1			(106,921	)			(97,800	)
Others 2			—				28,366
Ending		W	3,547,683			W	3,584,978

¹ During the current year, the Company recognized impairment loss of W 106,921 million for KT Strategic Investment Fund No.1, KT Strategic Investment Fund No.2, KT Dutch B.V, KT Belgium, and KTSB Data Service. During the prior year, the Company recognized impairment loss of W 97,800 million in KT M&S Co., Ltd.

² During the prior year, W 36,500 million of K Bank and W 3,000 million of GE Premier 1st Corporate Restructuring Real Estate Investment Trust Company were reclassified as investment in subsidiaries, associates and joint ventures, and the Company reclassified W 11,135 million of Mongolian Telecommunications as assets held for sale.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Marketable investments in subsidiaries, associates and joint ventures as at December 31, 2018 and 2017, are as follows:

		December 31, 2018
		Number of shares				Carrying amount (in millions of Korean won)				Fair value (in millions of Korean won)
KT Skylife Co., Ltd.			23,908,000			W	311,696			W	274,942
KT Hitel Co., Ltd.			22,750,000				120,078				109,655
KT Submarine Co., Ltd.			8,085,000				24,370				25,872
Nasmedia, Inc.			3,742,406				23,051				106,284
Genie Music Corporation (KT Music Corporation)			20,904,514				37,417				100,551
KTCS Corporation			3,177,426				6,427				7,896
KTIS Corporation			10,196,190				30,633				24,930
Total						W	553,672			W	650,130

		December 31, 2017
		Number of shares				Carrying amount (in millions of Korean won)				Fair value (in millions of Korean won)
KT Skylife Co., Ltd.			23,908,000			W	311,696			W	321,563
KT Hitel Co., Ltd.			22,750,000				120,078				146,283
KT Submarine Co., Ltd.			8,085,000				24,370				35,534
Nasmedia, Inc.			3,742,406				23,051				278,809
Genie Music Corporation (KT Music Corporation)			20,904,514				37,417				99,192
KTCS Corporation			3,177,426				6,427				7,213
KTIS Corporation			10,196,190				30,633				30,792
Total						W	553,672			W	919,386

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

14. Trade and Other Payables

Details of trade and other payable as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Current Liabilities
Accounts payable		W	782,582			W	947,025
Other payables			3,219,826				3,164,453
Total		W	4,002,408			W	4,111,478
Non-current Liabilities
Other payables			1,460,062				958,189
Total		W	1,460,062			W	958,189

Details of other payables as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Non-trade payable		W	3,260,968			W	2,687,309
Accrued expenses			584,857				532,316
Operating deposits			500,899				557,149
Others			333,164				345,868
Less: Non-current			(1,460,062	)			(958,189	)
Current		W	3,219,826			W	3,164,453

15. Borrowings

Details of borrowings as at December 31, 2018 and 2017, are as follows:

Debentures

(in millions of Korean won and thousands of foreign currencies)										December 31, 2018								December 31, 2017
Type		Maturity				Annual interest rates				Foreign currency				Korean won				Foreign currency				Korean won
MTNP notes 1			Sep. 7, 2034				6.500	%			USD 100,000			W	111,810				USD 100,000			W	107,140
FR notes			Aug. 28, 2018				—				—				—				USD 300,000				321,420
MTNP notes			Apr. 22, 2019				2.625	%			USD 350,000				391,335				USD 350,000				374,990
MTNP notes			Jan. 29, 2018				—				—				—				JPY 6,800,000				64,539
MTNP notes			Feb. 23, 2018				—				—				—				JPY 15,000,000				142,367
MTNP notes			Jul. 18, 2026				2.500	%			USD 400,000				447,240				USD 400,000				428,560
MTNP notes			Aug. 7, 2022				2.625	%			USD 400,000				447,240				USD 400,000				428,560
FR notes 2			Aug. 23, 2020				LIBOR(3M)+0.400	%			USD 200,000				223,620				—				—
FR notes 2			Aug. 23, 2023				LIBOR(3M)+0.900	%			USD 100,000				111,810				—				—
MTNP notes			July 6, 2020				0.310	%			JPY 4,000,000				40,527				—				—
MTNP notes			July 6, 2021				0.380	%			JPY 16,000,000				162,109				—				—
MTNP notes			Nov 13, 2020				0.300	%			JPY 30,000,000				303,954				—				—

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in millions of Korean won and thousands of foreign currencies)										December 31, 2018								December 31, 2017
Type		Maturity				Annual interest rates				Foreign currency				Korean won				Foreign currency				Korean won
The 173-2nd Public bond			Aug. 6, 2018				—				—				—				—				100,000
The 179th Public bond			Mar. 29, 2018				—				—				—				—				260,000
The 180-2nd Public bond			Apr. 26, 2021				4.710	%			—				380,000				—				380,000
The 181-2nd Public bond			Aug. 26, 2018				—				—				—				—				90,000
The 181-3rd Public bond			Aug. 26, 2021				4.090	%			—				250,000				—				250,000
The 182-2nd Public bond			Oct. 28, 2021				4.310	%			—				100,000				—				100,000
The 183-2nd Public bond			Dec. 22, 2021				4.090	%			—				90,000				—				90,000
The 183-3rd Public bond			Dec. 22, 2031				4.270	%			—				160,000				—				160,000
The 184-1st Public bond			Apr. 10, 2018				—				—				—				—				120,000
The 184-2nd Public bond			Apr. 10, 2023				2.950	%			—				190,000				—				190,000
The 184-3rd Public bond			Apr. 10, 2033				3.170	%			—				100,000				—				100,000
The 185-1st Public bond			Sep. 16, 2018				—				—				—				—				200,000
The 185-2nd Public bond			Sep. 16, 2020				3.650	%			—				300,000				—				300,000
The 186-2nd Public bond			Jun 26, 2019				3.078	%			—				170,000				—				170,000
The 186-3rd Public bond			Jun 26, 2024				3.418	%			—				110,000				—				110,000
The 186-4th Public bond			Jun 26, 2034				3.695	%			—				100,000				—				100,000
The 187-2nd Public bond			Sep. 2, 2019				2.965	%			—				220,000				—				220,000
The 187-3rd Public bond			Sep. 2, 2024				3.314	%			—				170,000				—				170,000
The 187-4th Public bond			Sep. 2, 2034				3.546	%			—				100,000				—				100,000
The 188-1st Public bond			Jan. 29, 2020				2.259	%			—				160,000				—				160,000
The 188-2nd Public bond			Jan. 29, 2025				2.454	%			—				240,000				—				240,000
The 188-3rd Public bond			Jan. 29, 2035				2.706	%			—				50,000				—				50,000
The 189-1st Public bond			Jan. 28, 2019				1.761	%			—				100,000				—				100,000
The 189-2nd Public bond			Jan. 28, 2021				1.946	%			—				130,000				—				130,000
The 189-3rd Public bond			Jan. 28, 2026				2.203	%			—				100,000				—				100,000
The 189-4th Public bond			Jan. 28, 2036				2.351	%			—				70,000				—				70,000
The 190-1th Public bond			Jan 29, 2021				2.548	%			—				110,000				—				—
The 190-2nd Public bond			Jan 30, 2023				2.749	%			—				150,000				—				—
The 190-3rd Public bond			Jan 30, 2028				2.947	%			—				170,000				—				—
The 190-4th Public bond			Jan 30, 2038				2.931	%			—				70,000				—				—
Total															6,029,645								5,927,576
Less : Current portion															(880,941	)							(1,297,794	)
Discount on bonds															(20,056	)							(19,330	)
Net														W	5,128,648							W	4,610,452

¹  As at December 31, 2018, the Company has outstanding notes in the amount of USD 100 million with fixed interest rates under Medium Term Note Program (“MTNP”) registered in the Singapore Stock Exchange, which allowed issuance of notes of up to USD 2,000 million. However, the MTN program has been suspended since 2007.

²  The Libor (3M) is approximately 2.808% as at December 31, 2018.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Long-term Borrowings

(in millions of Korean won) Financial institution		Type		Maturity				Annual interest rates				December 31, 2018				December 31, 2017
Export-Import Bank of Korea		Inter-Korean Cooperation Fund 1			July 10, 2026				1.500	%		W	3,948			W	4,688
NH Investment & Securities Co., Ltd.		Long-term commercial papers			Feb. 18, 2019				3.170	%			300,000				300,000
Total													303,948				304,688
Less: Current portion													(300,493	)			(740	)
Net												W	3,455			W	303,948

¹  Inter-Korean Cooperation Fund is repayable in installments over 13 years after a seven-year grace period.

Repayment schedule of the Company’s debentures and borrowings as at December 31, 2018, is as follows:

(in millions of Korean won)		Bonds												Borrowings
		In local currency				In foreign currency				Sub- total				In local currency				Total
Jan. 1 2019~Dec. 31, 2019		W	490,000			W	391,335			W	881,335			W	300,493			W	1,181,828
Jan. 1 2020~Dec. 31, 2020			460,000				568,101				1,028,101				493				1,028,594
Jan. 1 2021~Dec. 31, 2021			1,060,000				162,109				1,222,109				493				1,222,602
Jan. 1 2022~Dec. 31, 2022			—				447,240				447,240				493				447,733
Thereafter			1,780,000				670,860				2,450,860				1,976				2,452,836
Total		W	3,790,000			W	2,239,645			W	6,029,645			W	303,948			W	6,333,593

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

16. Provisions

Changes in provisions for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Litigation				Restoration cost				Others				Total
Beginning		W	14,236			W	91,388			W	55,776			W	161,400
Increase & Transfer			347				24,492				45,942				70,781
Usage			—				(2,152	)			(10,567	)			(12,719	)
Reversal			(70	)			(3,533	)			(174	)			(3,777	)
Ending		W	14,513			W	110,195			W	90,977			W	215,685
Current portion		W	14,513			W	—			W	89,190			W	103,703
Non-current portion			—				110,195				1,787				111,982
(in millions of Korean won)		2017
		Litigation				Restoration cost				Others				Total
Beginning		W	18,235			W	92,388			W	73,772			W	184,395
Increase & Transfer			10				2,042				14,850				16,902
Usage			(1,740	)			(1,519	)			(21,906	)			(25,165	)
Reversal			(2,269	)			(1,523	)			(10,940	)			(14,732	)
Ending		W	14,236			W	91,388			W	55,776			W	161,400
Current portion		W	14,236			W	—			W	53,244			W	67,480
Non-current portion			—				91,388				2,532				93,920

17. Net Defined Benefit Liability

The amounts recognized in the statements of financial position are determined as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Present value of defined benefit obligations		W	1,620,349			W	1,436,666
Fair value of plan assets			(1,191,186	)			(1,134,347	)
Liabilities		W	429,163			W	302,319

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Changes in the defined benefit obligations for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Beginning		W	1,436,666			W	1,285,300
Current service cost			130,354				122,140
Interest expense			39,685				30,449
Benefits paid			(57,075	)			(97,522	)
Remeasurements:
Actuarial gains and losses arising from changes in demographic assumptions			5,339				—
Actuarial gains and losses arising from changes in financial assumptions			97,556				45,425
Actuarial gains and losses arising from experience adjustments			(32,176	)			50,874
Ending		W	1,620,349			W	1,436,666

Changes in the fair value of plan assets for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Beginning		W	1,134,347			W	1,000,369
Interest income			31,334				23,698
Remeasurements:			(9,511	)			(4,857	)
Employer contributions			89,000				200,000
Benefits paid			(53,984	)			(84,863	)
Ending		W	1,191,186			W	1,134,347

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Amounts recognized in the statements of profit or loss for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Current service cost		W	130,354			W	122,140
Net interest expense			8,351				6,751
Transfer out			(10,871	)			(9,730	)
Total expense		W	127,834			W	119,161

Principal actuarial assumptions were as follows:

		December 31, 2018				December 31, 2017
Discount rate			2.33	%			2.82	%
Future salary increases			5.75	%			5.35	%

The sensitivity of the defined benefit obligations as at December 31, 2018, to changes in the principal assumptions is:

(in millions of Korean won)		Effect on defined benefit obligation
		Changes in assumption				Increase in assumption				Decrease in assumption
Discount rate			0.5	%p		W	(59,128	)		W	62,934
Future salary growth rate			0.5	%p			56,334				(53,611	)

A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the statement of financial position.

The Company reviews the funding level on an annual basis and has a policy of eliminating deficit from the fund. Expected contributions to post-employment benefit plans for the year ending December 31, 2019, are W 214,759 million.

The expected maturity analysis of undiscounted pension benefits as at December 31, 2018, is as follows:

(in millions of Korean won)

Less than 1 year

Between 1-2 years

Between 2-5 years

Over 5 years

Total

Pension benefits

W

80,927

W

125,238

W

475,515

W

3,198,721

W

3,880,401

The weighted average duration of the defined benefit obligations is 7.7 years.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

18. Defined Contribution Plan

Recognized expense related to the defined contribution plan for the year ended December 31, 2018, is W37,345 million (for the year ended December 31, 2017: W35,640 million).

19. Commitments and Contingencies

As at December 31, 2018, major commitments with local financial institutions are as follows:

(in millions of Korean won and foreign currencies in thousands)

Financial institution

Currency Limit

Used amount

Bank overdraft

Kookmin Bank and others

KRW

1,690,000

—

Commercial papers

NH Investment & Securities Co., Ltd. and others

KRW

300,000

300,000

Inter-Korean Cooperation Fund

Export-Import Bank of Korea

KRW

37,700

3,948

Collateralized loan on accounts receivable – trade

Shinhan Bank and others

KRW

340,000

42,569

Plus electronic notes payable

Industrial Bank of Korea

KRW

50,000

960

Export L/C

Shinhan Bank

USD

—

1,156

Derivatives transaction limit

Korea Development Bank

KRW

100,000

64,622

Forward trading commitment

Shinhan Bank

USD

11,500

—

Total

KRW

2,517,700

412,099

USD

11,500

1,156

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

As at December 31, 2018, guarantees received from financial institutions are as follows:

(in millions of Korean won and foreign currencies in thousands)		Financial institution		Currency				Limit
Comprehensive line of credit		KEB Hana Bank			KRW				3,000
					USD				10,000
Bid guarantee		Korea Software Financial Cooperative			KRW				49,247
Contract and warranty guarantee		Korea Software Financial Cooperative			KRW				342,444
Prepayment and other guarantee		Korea Software Financial Cooperative			KRW				118,202
Guarantees for bonds payable in Korean currency		Shinhan Bank			KRW				5
Guarantees for bonds payable in foreign currency		Kookmin Bank and others			USD				51,084
		KEB Hana Bank			PLN	1			23,000
Performance guarantee		Shinhan Bank			KRW				123,348
Performance guarantee		Seoul Guarantee Insurance			KRW				20,639
Guarantee for licensing		Seoul Guarantee Insurance			KRW				2,554
Guarantee for deposits		Seoul Guarantee Insurance			KRW				1,648
Auction guarantee		Seoul Guarantee Insurance			KRW				120
Total					KRW				661,207
					USD				61,084
					PLN	1			23,000

¹  Polish zloty.

The Company is jointly and severally obligated with KT Sat Co., Ltd. to pay KT Sat Co., Ltd.’s liabilities incurred prior to spin-off. As at December 31, 2018, the Company and KT Sat Co., Ltd. are jointly and severally liable for reimbursement of W 3,480 million.

For the year ended December 31, 2018, the Company entered into agreements with the Securitization Specialty Companies (2018: Olleh KT Thirty-seventh to Forty-second Securitization Specialty Co., Ltd., 2017: Olleh KT Thirty-first to Thirty-sixth Securitization Specialty Co., Ltd.,) and disposed of its trade receivables related to handset sales. The Company also made asset management agreements with each securitization specialty company and in accordance with the agreement the Company will receive asset management fees upon liquidation of securitization specialty company.

As at December 31, 2018, the Company is a defendant in 151 lawsuits with the total claimed amount of W 98,579 million. As at December 31, 2018, litigation provisions of W 14,513 million for pending lawsuits and unasserted claims are recorded as liabilities for potential loss in the ordinary course of business. The final outcomes of the cases cannot be estimated at the end of the reporting period.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

In December 2013, Asia Broadcast Satellite Holdings Ltd. (“ABS”) filed a request for meditation to the International Chamber of Commerce (“ICC”) for the compensation of damages from the ownership of the satellite Koreasat-3 (“K3”) and the alleged breach of the entrustment control contract related to K3, which was made and entered into with the Company and its subsidiary, KT Sat Co., Ltd. In July 2017, the ICC issued a partial ruling that ABS has the ownership of K3, and in March 2018, the final ruling was issued that KT Sat co., Ltd. should pay compensation for damages to ABS. However, in October 2017, the Company and its subsidiary, KT Sat Co., Ltd. filed a lawsuit seeking the cancellation of the partial ruling in the Federal Court of New York, and filed the other lawsuit in May 2018 seeking the cancellation of the final ruling. The Federal Court of New York dismissed the first case in April and the second case in July 2018. The Company and its subsidiary, KT Sat Co., Ltd. filed an appeal to the US Court of Appeals for the Second Circuit in August 2018. The outcome of the appeal cannot be reasonably estimated at the end of the reporting period.

According to the financial and other covenants included in certain debentures and borrowings, the Company is required to maintain certain financial ratios such as debt-to-equity ratio, use the funds for the designated purpose and report to the creditors periodically. The covenant also contains restriction on provision of additional collateral and disposal of certain assets.

At the end of the reporting period, the Company is offering construction completion guarantee agreement to development of Nonsan Hwagidong apartment complex. If a contingent event occurs in between November 24, 2017 and to August 9, 2019, the Company collaterally guarantees the debt of AbleNS 1st Co. up to W 6,000 million.

At the end of the reporting period, the Company participates in Algerie Sidi Abdela new town development consortium (percentage of ownership: 2.5%) and has joint liability with other consortium participants.

At the end of the reporting period, contract amount of property and equipment acquisition agreement made but not yet recognized amounts to W1,115,622 million (December 31, 2017: W619,628 million).

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

20. Lease

Details of finance lease assets as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Acquisition costs		W	341,060			W	319,052
Less : Accumulated depreciation			(150,714	)			(120,046	)
Net balance		W	190,346			W	199,006

As at December 31, 2018, the Company recognized finance lease assets as other property and equipment. The related depreciation amounted to W62,330 million for the year ended December 31, 2018 (for the year ended December 31, 2017: W57,833 million).

Details of future minimum lease payments as at December 31, 2018 and 2017, under finance lease contracts are summarized below:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Total minimum lease payments
Within one year		W	77,529			W	88,338
From one year to five years			124,426				131,954
Over five years			79				81
Total		W	202,034			W	220,373
Unrealized interest expense		W	38,324			W	43,656
Net amount of minimum lease payments
Within one year			59,246				68,648
From one year to five years			104,386				107,989
Over five years			78				80
Total		W	163,710			W	176,717

Details of future minimum lease payments as at December 31, 2018 and 2017, under operating lease contracts are summarized below:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Within one year		W	94,992			W	104,966
From one year to five years			171,991				259,093
Over five years			—				—
Total		W	266,983			W	364,059

Operating lease expenses incurred for the year ended December 31, 2018 amounts to W122,166 million (for the year ended December 31, 2017: W121,140 million).

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

21. Share Capital

As at December 31, 2018 and 2017, the Company’s number of authorized shares is one billion.

December 31, 2018

December 31, 2017

Number of outstanding shares

Par value per share (in Korean won)

Ordinary shares (in millions of Korean won)

Number of outstanding shares

Par value per share (in Korean won)

Ordinary shares (in millions of Korean won)

Ordinary shares1

261,111,808

W 5,000

W1,564,499

261,111,808

W5,000

W1,564,499

¹  The Company retired 51,787,959 treasury shares against retained earnings. Therefore, the ordinary shares amount differs from the amount resulting from multiplying the number of shares issued by W5,000 par value per share of ordinary share.

22. Retained Earnings

Details of retained earnings as December 31, 2018 and 2017, are as follows:

		December 31, 2018				December 31, 2017
Legal reserve 1		W	782,249			W	782,249
Voluntary reserves 2			4,651,362				4,651,362
Unappropriated retained earnings			5,306,431				4,045,119
Total		W	10,740,042			W	9,478,730

¹  The Commercial Code of the Republic of Korea requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued share capital. The reserve is not available for the payment of cash dividends, but may be transferred to share capital with the approval of the Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.

² The provision of research and development of human is separately accumulated with tax reserve fund during earned surplus disposal by Tax Reduction and Exemption Control Act of Korea. Reversal of this provision can be paid out as dividends according to related tax law.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The appropriation of retained earnings for the years ended December 31, 2018 and 2017, is as follows:

(in millions of Korean won)		Note				2018				2017
Unappropriated retained earnings from prior year						W	3,663,752			W	3,524,304
Changes in accounting policy							990,190				—
Adjustments from prior years							134,224				—
Remeasurements of net defined benefit liabilities							(42,959	)			(76,677	)
Profit for the year							561,224				463,268
Retained earnings available for appropriation							5,306,431				3,910,895
Reversal of voluntary reserve							—				—
Appropriation of loss on disposal of treasury stock							(15,169	)			(2,046	)
Dividends
(Cash dividend (%):
Ordinary shares:							(269,659	)			(245,097	)
W1,100 (22.0%) in 2018
W1,000 (20.0%) in 2017)
Appropriation of retained earnings							(284,828	)			(247,143	)
Retained earnings after appropriation						W	5,021,603			W	3,663,752

The comparative statement of appropriation of retaining earnings which was approved at the annual general meeting on March 23, 2018, does not reflect revision effects of financial statements described in Note 39.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

23. Accumulated Other Comprehensive Income and Other Components of Equity

As at December 31, 2018 and 2017, the details of the Company’s accumulated other comprehensive income are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Gain on valuation of financial assets at fair value through other comprehensive income		W	18,734			W	—
Loss on derivatives valuation			(29,985	)			(1,502	)
Total		W	(11,251	)		W	(1,502	)

Changes in accumulated other comprehensive income for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Beginning				Changes in accounting policy				Increase (Decrease)				Reclassification to gain or loss				Ending
Gain on valuation of financial assets at fair value through other comprehensive income		W	—			W	17,752			W	982			W	—			W	18,734
Gain (loss) on derivatives valuation			(1,502	)			—				16,360				(44,843	)			(29,985	)
Total		W	(1,502	)		W	17,752			W	17,342			W	(44,843	)		W	(11,251	)

(in millions of Korean won)		2017
		Beginning				Increase/ decrease				Reclassification to gain or loss				Ending
Gain (loss) on valuation of available-for-sale		W	5			W	(5	)		W	—			W	—
Gain (loss) on derivatives valuation			(32,096	)			(111,335	)			141,929				(1,502	)
Total		W	(32,091	)		W	(111,340	)		W	141,929			W	(1,502	)

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

As at December 31, 2018 and 2017, the Company’s other components of equity are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Treasury stock1		W	(830,874	)		W	(853,108	)
Loss on disposal of treasury stock2			(15,169	)			(2,046	)
Share-based payments			5,956				6,483
Other			(181,733	)			(188,012	)
Total		W	(1,021,820	)		W	(1,036,683	)

¹  During the current year, the Company acquired treasury stock of 847,620 and disposed of 895,333 treasury shares.

²  The amounts of income tax effect directly reflected in equity is W5,410 million for the year ended December 31, 2018 (for the year ended December 31, 2017: W653 million).

As at December 31, 2018 and 2017, details of treasury stock are as follows:

		December 31, 2018				December 31, 2017
Number of shares (in shares)			15,967,040				16,014,753
Amounts (in millions of Korean won)		W	830,874			W	853,108

Treasury stock is expected to be used for the stock compensation for the Company’s directors and employees, and other purposes.

24. Share-based Payments

Details of share-based payments as at December 31, 2018, are as follows:

		12th grant
Grant date		August 2, 2018
Grantee		CEOs, inside directors, outside directors, executives
Vesting conditions		Service condition: 1 year Non-market performance condition: achievement of performance
Fair value per option (in Korean won)		W28,350
Total compensation costs (in Korean won)		W5,956 million
Estimated exercise date (exercise date)		During 2019
Valuation method		Fair value method

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Changes in the number of share-based payment for the years ended December 31, 2018 and 2017, are as follows:

		2018
		Beginning				Grant				Expired				Exercised1				Ending				Number of shares exercisable
11th grant			316,949				—				312,181				4,768				—				—
12th grant			—				353,325				—				—				353,325				—
Total			316,949				353,325				312,181				4,768				353,325				—

¹  The weighted average price of ordinary shares at the time of exercise during 2018 was W27,300 (2017: W31,797).

		2017
		Beginning				Grant				Expired				Exercised				Ending				Number of shares exercisable
10th grant			318,506				—				193,094				125,412				—				—
11th grant			—				316,949				—				—				316,949				—
Total			318,506				316,949				193,094				125,412				316,949				—

25. Revenue from Contracts with Customers and Relevant Contract Assets and Liabilities

The Company has recognized the following amounts relating to revenue in the statement of profit or loss:

(in millions of Korean won)		2018
Revenue from contracts with customers		W	17,159,963
Revenue from other sources			196,574
Total revenue		W	17,356,537

Operating revenues for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Services provided		W	14,511,585			W	14,586,234
Sales of goods			2,844,952				2,755,082
Total		W	17,356,537			W	17,341,316

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Revenues from services provided are recognized over time, and revenue from sales of goods are recognized at a point in time.

The contract assets and liabilities recognized in relation to the revenues from contracts with customers are as follows:

(in millions of Korean won)		December 31, 2018				January 1, 2018
Contract assets		W	366,866			W	385,389
Contract liabilities			344,765				279,911
Deferred revenue			85,138				80,264

The contract costs recognized as assets are as follows:

(in millions of Korean won)		December 31, 2018				January 1, 2018
Contract costs recognized as assets		W	1,487,855			W	1,289,706

The Company recognized W1,423,423 million of operating expenses in the current reporting period which relates to contract cost assets.

The Company did not recognize an impairment loss in anticipation of full recovery of costs recognized as assets.

In 2018, the recognized revenue arising from carried-forward contract liabilities from prior year is as follows:

(in millions of Korean won)		2018
Revenue recognized that was included in the contract liability balance at the beginning of the year
Allocation of the transaction price		W	170,490
Deferred revenue of joining/installment fee			36,570
Total		W	207,060

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

26. Operating Expenses

Operating expenses for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Salaries and wages		W	2,208,947			W	2,066,574
Depreciation			2,400,120				2,492,051
Amortization			517,044				524,480
Commissions			1,544,818				1,521,954
Interconnection charges			579,680				641,790
International interconnection fee			226,899				214,580
Purchase of inventories			3,615,138				3,428,244
Changes of inventories			(233,028	)			(54,149	)
Sales commission			2,043,160				2,257,083
Service cost			685,718				620,435
Purchase of contents			529,614				453,948
Utilities			304,439				304,439
Taxes and dues			248,943				247,432
Rent			434,612				434,282
Insurance premium			61,593				59,521
Installation fee			420,146				415,015
Advertising expenses			152,209				184,874
Research and development expenses			180,272				170,095
Others			484,589				406,507
Total		W	16,404,913			W	16,389,155

Details of employee benefits for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Short-term employee benefits		W	1,984,360			W	1,901,031
Post-employment benefits (defined benefit)			127,834				119,160
Post-employment benefits (defined contribution)			37,345				35,640
Share-based payment			8,439				7,660
Post-employment benefits (others)			50,969				3,083
Total		W	2,208,947			W	2,066,574

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

27. Other Income and Other Expenses

Other income for the years ended December 31, 2018 and 2017, consists of:

(in millions of Korean won)		2018				2017
Gain on disposal of property and equipment		W	37,938			W	17,739
Gain on disposal of intangible assets			4,100				11,028
Compensation on property and equipment			101,163				124,630
Gain on disposal of investments in subsidiaries, associates and joint ventures			2				519
Dividends received			182,797				139,447
Gains on government subsidies			18,037				26,021
Others			23,746				70,869
Total		W	367,783			W	390,253

Other expenses for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Loss on disposal of property and equipment		W	92,857			W	172,473
Loss on disposal of intangible assets			4,354				15,857
Loss on disposal of investments in subsidiaries, associates and joint ventures			7,316				4,849
Impairment loss on investments in subsidiaries, associates and joint ventures			106,921				97,800
Donation			50,202				72,260
Others			118,417				142,734
Total		W	379,797			W	505,973

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

28. Financial Income and Costs

Details of financial income for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Interest income		W	222,713			W	72,656
Gain on foreign currency transaction			9,994				73,588
Gain on foreign currency translation			3,497				200,672
Gain on settlement of derivatives			27,950				—
Gain on valuation of derivatives			58,912				—
Others			11,401				4,708
Total		W	334,467			W	351,624

Details of financial costs for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Interest expenses		W	271,570			W	282,243
Loss on foreign currency transaction			33,908				16,299
Loss on foreign currency translation			66,113				11,590
Loss on settlement of derivatives			—				58,569
Loss on valuation of derivatives			2,045				187,468
Loss on disposal of trade receivables			13,818				19,389
Others			947				115
Total		W	388,401			W	575,673

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

29. Deferred Income Tax and Income Tax Expense

The analyses of deferred tax assets and deferred tax liabilities as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Deferred tax assets
Deferred tax assets to be recovered within 12 months		W	313,044			W	261,118
Deferred tax assets to be recovered after more than 12 months			852,396				767,725
			1,165,440				1,028,843
Deferred tax liabilities
Deferred tax liability to be recovered within 12 months			(380,444	)			(128	)
Deferred tax liability to be recovered after more than 12 months			(814,112	)			(606,970	)
			(1,194,556	)			(607,098	)
Deferred tax assets (liabilities), net		W	(29,116	)		W	421,745

The gross movements on the deferred income tax account for the years ended December 31, 2018 and 2017, are calculated as follows:

(in millions of Korean won)		2018				2017
Beginning		W	421,745			W	401,346
Changes in accounting policy			(382,323	)			—
Charged to the statement of profit or loss			(116,024	)			5,685
Charged to other comprehensive income			47,486				14,714
Ending		W	(29,116	)		W	421,745

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:

(in millions of Korean won)		2018
		Beginning				Changes in accounting policy				Statement of profit or loss				Other comprehensive income				Ending
Deferred tax liabilities
Investment in subsidiaries, associates and joint ventures		W	(1,455	)		W	—			W	1,455			W	—			W	—
Deposits for severance benefits			(311,945	)			—				(1,217	)			—				(313,162	)
Deferred tax gain on disposal of fixed assets			(256,523	)			—				(64,591	)			—				(321,114	)
Accrued income			(96	)			—				(8	)			—				(104	)
Gain or loss foreign currency translation			(11,605	)			—				11,605				—				—
Contract assets			—				(29,007	)			23,196				—				(5,811	)
Prepaid expenses			—				(354,669	)			(36,488	)			—				(391,157	)
Others			(25,473	)			—				(137,735	)			—				(163,208	)
Total		W	(607,097	)		W	(383,676	)		W	(203,783	)		W	—			W	(1,194,556	)
Deferred tax assets
Derivative instruments		W	22,534			W	—			W	(24,339	)		W	10,215			W	8,410
Investments in subsidiaries, associates and joint ventures			—				—				3,054				(52	)			3,002
Depreciation expenses and impairment loss			79,130				—				19,571				—				98,701
Provision for impairment on trade receivable			103,035				(8,772	)			(15,057	)			—				79,206
Available-for-sale financial assets			15,681				—				(15,681	)			—				—
Financial assets at fair value through other comprehensive income			—				(8,574	)			12,889				52				4,367
Contribution for construction			9,643				—				(1,471	)			—				8,172
Unsettled expenses			96,640				—				18,784				—				115,424
Provisions			19,254				—				8,418				—				27,672
Defined benefit liabilities			395,084				—				(6,365	)			37,271				425,990
Withholding of facilities expenses			7,382				—				(773	)			—				6,609
Present value discount			3,584				—				1,621				—				5,205
Assets retirement obligation			20,147				—				3,734				—				23,881
Gain or loss foreign currency translation			—				—				10,534				—				10,534
Deferred revenue			26,520				15,809				(2,041	)			—				40,288
Trade receivable			—				2,890				(1,293	)			—				1,597
Others			79,432				—				124,043				—				203,475
Total		W	878,066			W	1,353			W	135,628			W	47,486			W	1,062,533
Temporary difference, net			270,969				(382,323	)			(68,155	)			47,486				(132,023	)
Tax credit carryforwards			150,776				—				(47,869	)			—				102,907
Total net balance		W	421,745			W	(382,323	)		W	(116,024	)		W	47,486			W	(29,116	)

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		2017
		Beginning				Statement of profit or loss				Other comprehensive income				Ending
Deferred tax liabilities
Investment in subsidiaries, associates and joint ventures		W	(1,234	)		W	(221	)		W	—			W	(1,455	)
Derivative instruments			(48,705	)			48,705				—				—
Depreciation			(37,971	)			37,971				—				—
Deposits for severance benefits			(242,089	)			(69,856	)			—				(311,945	)
Deferred tax gain on disposal of fixed assets			(233,614	)			(22,909	)			—				(256,523	)
Accrued income			(369	)			273				—				(96	)
Gain or loss foreign currency translation			—				(11,605	)			—				(11,605	)
Others			(37,653	)			12,180				—				(25,473	)
		W	(601,635	)		W	(5,462	)		W	—			W	(607,097	)
Deferred tax assets
Provision for impairment on trade receivable		W	92,425			W	10,610			W	—			W	103,035
Available-for-sale financial assets			14,132				1,547				2				15,681
Contribution for construction			9,462				181				—				9,643
Derivative instruments			—				32,301				(9,767	)			22,534
Depreciation			—				1,669				—				1,669
Accrued expenses			53,796				10,710				—				64,506
Provisions			22,266				(3,012	)			—				19,254
Defined benefit liabilities			311,043				59,561				24,480				395,084
Withholding of facilities expenses			6,910				472				—				7,382
Accrued payroll expenses			43,541				(11,407	)			—				32,134
Deduction of installment receivables			13,897				(13,897	)			—				—
Present value discount			2,809				775				—				3,584
Assets retirement obligation			17,376				2,771				—				20,147
Gain or loss foreign currency translation			67,558				(67,558	)			—				—
Deferred revenue			26,141				379				—				26,520
Tax credit carryforwards			199,599				(48,823	)			—				150,776
Others			122,026				34,867				—				156,893
		W	1,002,981			W	11,146			W	14,715			W	1,028,842
Net balance		W	401,346			W	5,684			W	14,715			W	421,745

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The total of unrecognized temporary differences as deferred tax liabilities at the end of the reporting date is W126,309 million (2017: W52,340 million) related to investment in subsidiaries, associates and joint ventures, and the total of unrecognized temporary differences as deferred tax assets at the end of the reporting date is W558,102 million (2017: W97,800 million) related to investment in subsidiaries, associates and joint ventures.

The tax impact recognized directly to equity as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018												2017
		Before recognition				Tax effect				After recognition				Before recognition				Tax effect				After recognition
Loss on valuation of available-for-sale securities		W	—			W	—			W	—			W	(6	)		W	1			W	(5	)
Gain on valuation of financial assets at fair value through other comprehensive income			930				52				982				—				—				—
Hedge instruments valuation gain (loss)			(38,698	)			10,215				(28,483	)			40,361				(9,767	)			30,594
Remeasurements of net defined benefit liabilities			(80,230	)			37,271				(42,959	)			(101,156	)			24,480				(76,676	)
Adjustments on capital in associates			—				(52	)			(52	)			—				—				—
Total		W	(117,998	)		W	47,486			W	(70,512	)		W	(60,801	)		W	14,714			W	(46,087	)

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Details of income tax expenses for the years ended December 31, 2018 and 2017, are calculated as follows:

(in millions of Korean won)		2018				2017
Current income tax expenses		W	208,428			W	154,809
Impact of change in temporary difference			116,024				(5,685	)
Total income tax expense		W	324,452			W	149,124

The tax on the Company’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the entities as follows:

(in millions of Korean won)		2018				2017
Profit before income tax		W	885,676			W	612,392
Expected tax expense at statutory tax rate		W	233,199			W	147,737
Tax effects of
Income not taxable for tax purposes			(81,041	)			(15,911	)
Expenses not deductible for tax purposes			12,790				36,839
Tax credit and deferred tax effects due to consolidated tax return			(25,655	)			(35,588	)
Others			185,159				16,047
Income tax expense		W	324,452			W	149,124

30. Earnings per Share

Basic earnings per share is calculated by dividing the profit for the period by the weighted average number of ordinary shares outstanding during the year, excluding ordinary shares purchased by the Company and held as treasury stock.

Basic earnings per share for the years ended December 31, 2018 and 2017, is calculated as follows:

(in millions of Korean won)		2018				2017
Profit attributable to ordinary shares (in millions of Korean won)		W	561,224			W	463,268
Weighted average number of ordinary shares outstanding			245,049,466				245,017,175
Basic earnings per share (in Korean won)			2,290				1,891

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Diluted earnings per share from operations is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has dilutive potential ordinary shares from other share-based payments.

Diluted earnings per share for the years ended December 31, 2018 and 2017, is calculated as follows:

(in millions of Korean won)		2018				2017
Profit attributable to ordinary shares (in millions of Korean won)		W	561,224			W	463,268
Adjusted profit for the year attributable to ordinary shares (in millions of Korean won)			561,224				463,268
Number of dilutive potential ordinary shares outstanding			1,163				79,880
Weighted-average number of ordinary shares outstanding and dilutive ordinary shares			245,050,629				245,097,055
Diluted earnings per share (in Korean won)			2,290				1,890

Diluted earnings per share is earnings per outstanding of ordinary shares and dilutive potential ordinary shares. Diluted earnings per share is calculated by dividing adjusted profit for the period by the sum of the number of ordinary shares and dilutive potential ordinary shares.

31. Dividends

The dividends paid by the Company in 2018 were W245,097 million (W1,000 per share). The dividends paid by the Company in 2017 were W195,977 million (W800 per share). A dividend in respect of the year ended December 31, 2018, of W1,100 per share, amounting to a total dividend of W269,659 million, is to be proposed at the shareholders’ meeting on March 29, 2019.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

32. Cash Generated from Operations

Cash flows from operating activities for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
1. Profit for the year		W	561,224			W	463,268
2. Adjustments for:
Income tax expense			324,452				149,124
Interest income			(222,713	)			(72,656	)
Interest expense			271,570				282,243
Dividends income			(182,805	)			(139,448	)
Depreciation			2,442,669				2,533,557
Amortization of intangible assets			524,158				535,308
Provisions for severance benefits (defined benefits)			138,705				128,891
Impairment losses on trade receivables			89,351				32,728
Loss on disposal of subsidiaries, associates and joint ventures			7,314				4,330
Impairment loss on interests in associates and joint ventures			106,921				97,800
Loss on disposal of property and equipment			54,649				154,734
Loss on disposal of intangible assets			254				4,829
Loss (gain) on foreign currency translation			62,616				(189,082	)
Loss (gain) on valuation of derivatives, net			(82,109	)			249,114
Gain on valuation of financial assets at fair value through profit or loss			(9,838	)			—
Gain on disposal of financial assets at fair value through profit or loss			(1,267	)			—
Impairment loss on available for sale securities			—				9
Gain on disposal of available-for-sale securities			—				(4,690	)
Others			176,121				(74,889	)
3. Changes in operating assets and liabilities
Increase in trade receivables			(183,384	)			(326,599	)
Decrease in other receivables			32,443				22,924
Increase in other current assets			(134,558	)			(6,750	)
Increase in other non-current assets			(36,753	)			(1,445	)
Increase in inventories			(298,113	)			(65,891	)
Increase (decrease) in trade payables			(167,031	)			150,640
Increase (decrease) in other payables			(8,790	)			35,527
Increase (decrease) in other current liabilities			77,801				(20,889	)
Decrease in other non-current liabilities			(2,348	)			(1,812	)
Increase (decrease) in provisions			51,739				(16,999	)
Decrease in deferred revenue			(3,024	)			(11,659	)
Post-employment benefits paid (defined benefits)			(87,685	)			(77,422	)
Increase in plan assets			(11,957	)			(133,851	)
4. Cash generated from operations(1+2+3)		W	3,489,612			W	3,700,944

The Company made agreements with securitization specialty companies and disposed of its trade receivables related to handset sales (Note 19). Cash flows from the disposals are presented in cash generated from operations.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Significant transactions not affecting cash flows for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018				2017
Reclassification of the current portion of borrowings		W	1,164,003			W	1,357,243
Reclassification of construction-in-progress to property and equipment			1,814,382				2,088,215
Reclassification of accounts payable from property and equipment			(24,381	)			(197,573	)
Reclassification of accounts payable from intangible assets			581,477				(222,388	)
Reclassification of payable from defined benefit liability			(30,610	)			20,100
Reclassification of payable from plan assets			(23,059	)			18,714

33. Changes in Liabilities Arising from Financing Activities

Changes in liabilities arising from financial activities for the year ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Beginning				Cash flows				Non-cash																Ending
										Newly acquired				Exchange difference				Fair value change				Other changes
Borrowing		W	6,212,934			W	8,362			W	—			W	63,725			W	—			W	28,516			W	6,313,537
Financial lease liabilities			176,717				(73,873	)			61,187				—				—				(321	)			163,710
Derivative liabilities			86,251				(13,597	)			—				(37,344	)			41,027				(14,504	)			61,833
Derivative assets			(7,389	)			10,136				—				(22,474	)			(3,419	)			(6,697	)			(29,843	)
Total		W	6,468,513			W	(68,972	)		W	61,187			W	3,907			W	37,608			W	6,994			W	6,509,237

(in millions of Korean won)		2017
		Beginning				Cash flows				Non-cash																Ending
										Newly acquired				Exchange difference				Fair value change				Other changes
Borrowing		W	7,569,047			W	(1,106,920	)		W	—			W	(197,075	)		W	—			W	(52,118	)		W	6,212,934
Financial lease liabilities			180,629				(71,575	)			68,939				—				—				(1,276	)			176,717
Derivative liabilities			13,386				—				—				120,974				(27,369	)			(20,740	)			86,251
Derivative assets			(214,648	)			71,370				—				63,882				(2,687	)			74,694				(7,389	)
Total		W	7,548,414			W	(1,107,125	)		W	68,939			W	(12,219	)		W	(30,056	)		W	560			W	6,468,513

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

34. Related Party Transactions

The list of subsidiaries, associates, joint ventures and others of the Company as at December 31, 2018, is as follows:

Relationship		Name of Entity
Subsidiaries		KT Hitel Co., Ltd., KTCS Corporation, KTIS Corporation, KT Service Bukbu Co., Ltd., KT Service Nambu Co., Ltd., KT Powertel Co., Ltd., KT Linkus Co., Ltd., KT Telecop Co., Ltd., KTDS Co., Ltd., Nasmedia, Inc., KT M Hows Co., Ltd., KT M&S Co., Ltd., GENIE Music Corporation(KT Music Corporation), KT Estate Inc., KT Skylife Co., Ltd., H&C Network, KTSB Data service, KT Sat Co., Ltd., KT Submarine Co., Ltd., KT Sports Co., Ltd., KT Strategic Investment Fund No.1, KT Strategic Investment Fund No.2, KT Music Contents Fund 1, Korea Telecom America, Inc., Korea Telecom Japan Co., Ltd., Korea Telecom China Co., Ltd., KT Dutch B.V., PT. KT Indonesia, KT AMC, KT Commerce Inc., BC Card Co., Ltd., VP Inc., BC Card China Co., Ltd., Skylife TV Co., Ltd., Initech Co., Ltd., Smartro Co., Ltd., East Telecom LLC, Super iMax LLC, KTNEXR Co., Ltd., KT Rwanda Networks Ltd., KT Belgium, KT ORS Belgium, KT-Michigan Global Contents Fund, Autopion Co., Ltd., KBTO sp.zo.o, Africa Olleh Services Ltd., KT M mobile, KT investment Co., Ltd, PT. BCCard Asia Pacific, Whowho&Company Co., Ltd., KT Hongkong Telecommunications Co., Ltd., KT Strategic Investment Fund No.3 , PlayD Co., Ltd. (N search Marketing Co., Ltd.), KT Hong Kong Limited, Korea Telecom Singapore Pte, Ltd., Texnoprosistem LLP, KT Music Contents Fund No.2, KT Strategic Investment Fund No.4, BC-VP Strategic Investment Fund No.1, KT MOS Bukbu Co., Ltd., KT MOS Nambu Co., Ltd., Nasmedia Thailand Co., Ltd., Next Connect PFV
Associates		Korea Information & Technology Investment Fund., K-REALTY CR REIT 1, KT-SB Venture Investment Fund, Boston Global Film & Contents Fund L.P., QTT Global (Group) Company Limited, CU Industrial Development Co., Ltd, PHI Healthcare Inc. (HooH Healthcare Inc.), KD Living, Inc., Oscar Ent. Co., Ltd., KT-CKP New Media Investment Fund, LoginD Co., Ltd., K-REALTY CR-REIT 6, ISU-kth Contents Fund L.P., K Bank Inc., ISU-kth Contents Investment Fund, Daiwon Broadcasting Co., Ltd., KT-DSC creative economy youth start-up investment fund, Gyeonggi-KT Green Growth Fund, Korea Electronic Vehicle Charging Service, PT.MitraTransaksiIndonesia, K-REALTY RENTAL HOUSING REIT 2, AI RESEARCH INSTITUTE, KT-IBKC Future Investment Fund 1, Gyeonggi-KT Yoojin Superman Fund, FUNDA Co., Ltd, CHAMP IT Co., Ltd., GE Premier 1st Corporate Restructuring Real Estate Investment Trust Company, Alliance Internet Corp., JB Emerging Market Specialty Investment Private Equity Trust No.1, Little big pictures
Others 1		KT ENGCORE Co., Ltd.

¹  Although the entity is not the related party of the Company in accordance with Korean IFRS 1024, the entity belongs to the Large Enterprise Group to which the Company also belongs in accordance with the Monopoly Regulation and Fair Trade Act.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The amount of the installment handset sales receivable succeeded by KTIS Corporation, KTCS Corporation and KT M&S Co., Ltd. is W681,234 million.

The Company has entered into an additional agreements in relation to providing communication service in wholesale with KT M mobile. In connection with the agreement, the Company offsets all or partial receivables against payables for joining mobile telecommunication services and usage of network arising from telecommunication operating.

Outstanding balances of receivables and payables in relation to transaction with related parties as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018
		Receivables												Payables
		Trade receivables				Loans				Other receivables				Trade payables				Other payables
Subsidiaries
KT Linkus Co., Ltd.		W	930			W	—			W	10			W	—			W	16,229
KT Telecop Co., Ltd.			1,010				—				792				1,960				3,171
KTCS Corporation			1,070				—				—				—				50,147
KTIS Corporation			—				—				3,559				3,719				33,389
KT Skylife Co., Ltd.			585				—				3,862				—				11,365
KT Service Bukbu Co., Ltd.			4				—				5				—				18,226
KT Service Nambu Co., Ltd.			—				—				12				—				20,894
KTDS Co., Ltd.			249				—				1,248				—				92,011
KT Estate Inc.			2,753				—				45,806				—				35,142
Skylife TV Co., Ltd. 3			452				2,357				2,365				—				1,977
BC Card Co., Ltd. 1			508				—				7				—				1,243
KT Sat Co., Ltd.			435				—				—				—				1,756
KT M mobile			7,575				—				161				—				1,274
KT Hitel Co., Ltd.			1,414				—				308				14,947				8,772
KT Commerce Inc.			49				—				168				7,274				77,653
KT M Hows Co., Ltd.			158				—				799				—				1,017
KT M&S Co., Ltd.			20,750				—				—				—				62,294
GENIE Music Corporation			1,206				—				—				—				12,785
Nasmedia, Inc.			3,773				—				4				—				808
KT MOS Bukbu Co., Ltd. 2			5				—				—				—				6,100
KT MOS Nambu Co., Ltd. 2			3				—				—				—				5,092
Others			7,335				800				15,966				409				12,140
Associates and joint ventures
K-REALTY CR REIT 1			—				—				30,910				—				—
K Bank Inc.			159				—				—				—				—
Others			403				—				3				—				—
Others
KT ENGCORE Co., Ltd.			—				—				7,729				305				108,956
Total		W	50,826			W	3,157			W	113,714			W	28,614			W	582,441

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

¹ As at December 31, 2018, W1,171 million of the unsettled amount (2017: W1,092 million) in credit card transaction with BC Card Co., Ltd. is included in trade payables.

²  It is the amount after excluded from consolidation during the year.

³ The convertible bonds issued by Skylife TV Co., Ltd. is classified as financial assets at fair value through profit or loss.

(in millions of Korean won)		December 31, 2017
		Receivables												Payables
		Trade receivables				Loans				Other receivables				Trade payables				Other payables
Subsidiaries
KT Linkus Co., Ltd.		W	1,240			W	—			W	13			W	—			W	14,565
KT Telecop Co., Ltd.			798				—				95				1,222				2,441
KTCS Corporation			1,682				50				—				—				45,913
KTIS Corporation			2,330				—				4,834				51				35,762
KT Service Bukbu Co., Ltd.			11				—				8				—				17,729
KT Service Nambu Co., Ltd.			—				—				5				—				18,608
KT Skylife Co., Ltd.			858				—				4,281				—				13,713
Skylife TV Co., Ltd.			416				3,000				—				—				2,403
KTDS Co., Ltd.			1,114				—				812				—				91,409
KT Estate Inc.			934				—				43,102				—				39,857
BC Card Co., Ltd.			5,451				—				11				5,887				1,313
KT Sat Co., Ltd.			330				—				—				—				2,352
KT Hitel Co., Ltd.			1,886				—				21				14,176				8,174
KT Commerce Inc.			253				—				44				14,346				84,443
KT M Hows Co., Ltd.			—				—				356				—				2,621
KT M&S Co., Ltd.			243				—				57				—				65,086
GENIE Music Corporation ( KT Music Corporation)			497				—				19				—				5,654
KT M mobile			6,479				—				—				—				6,979
Nasmedia, Inc.			8,049				—				3				—				1,310
Others			5,942				1,461				1,161				420				9,273
Associates and joint ventures
K-REALTY CR REIT 1			—				—				33,800				—				—
MOS GS Co., Ltd.			9				—				—				—				392
MOS Daegu Co., Ltd.			1				—				—				—				1,388
MOS Chungcheong Co., Ltd.			1				—				290				—				1,753
MOS Gangnam Co., Ltd.			4				—				1				—				287
MOS GB Co., Ltd.			5				—				1				—				778
MOS BS Co., Ltd.			18				—				1				—				26
MOS Honam Co., Ltd.			1				—				1				—				384
K Bank, Inc.			—				—				138				—				—
NgeneBio Co., Ltd. 1			1				1,900				—				—				—
Others			14				—				1				—				701
Others
KT ENGCORE Co., Ltd.			4,983				—				2,861				12,488				103,686
Total		W	43,550			W	6,411			W	91,916			W	48,590			W	579,000

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

¹  It is the amount after excluded from consolidation during the year.

Significant transactions with related parties for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018
		Sales								Purchases
		Operating revenue				Other income				Operating expenses				Others 1
Subsidiaries
KT Linkus Co., Ltd.		W	10,499			W	24			W	66,130			W	1,787
KT Telecop Co., Ltd.			14,342				18				16,024				7,029
Ktcs Corporation			69,271				1				318,773				—
Ktis Corporation			50,246				60				285,675				335
KT Skylife Co., Ltd.			26,806				31				52,182				—
KT Service Bukbu Co., Ltd.			14,167				—				185,146				816
KT Service Nambu Co., Ltd.			13,949				—				215,841				611
KTDS Co., Ltd.			13,102				2				296,005				51,611
KT Estate Inc.			18,767				—				164,384				5,064
Skylife TV Co., Ltd.			5,426				285				9,248				—
BC Card Co., Ltd.			7,818				4				25,724				1,290
KT Sat Co., Ltd.			5,184				—				16,814				—
KT M mobile			59,847				—				8,842				—
KT Hitel Co., Ltd.			15,336				2				54,868				4,431
KT Commerce Inc.			1,013				1				191,853				159,836
KT M Hows Co., Ltd.			1,112				—				1,999				—
KT M&S Co., Ltd.			501,807				32				209,332				35
Nasmedia, Inc.			491				—				4,138				—
GENIE Music Corporation			2,250				—				42,306				—
Others			28,493				11				86,026				4,874
Associates and joint ventures
K-REALTY CR REIT 1			—				—				31,984				—
NgeneBio Co., Ltd. 2			3				—				—				—
K Bank Inc.			2,212				—				—				—
MOS GS Co., Ltd.			398				—				11,234				789
MOS Daegu Co., Ltd.			166				—				8,475				300
MOS Chungcheong Co., Ltd.			229				—				8,284				364
MOS Gangnam Co., Ltd.			184				—				11,005				544
MOS GB Co., Ltd.			602				—				16,101				418
MOS BS Co., Ltd.			151				—				10,601				592
MOS Honam Co., Ltd.			282				—				9,901				598
Others			1,618				111				2,863				1
Others
KT ENGCORE Co., Ltd.			575				4				106,586				173,993
Total		W	866,346			W	586			W	2,468,344			W	415,318

¹  The amount includes acquisition of property and equipment, and others.

²  It is the amount before excluded from associates during the year.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		2017
		Sales								Purchases
		Operating revenue				Other income				Operating expenses				Others 1
Subsidiaries
KT Linkus Co., Ltd.		W	8,814			W	27			W	65,929			W	338
KT Telecop Co., Ltd.			11,885				4				8,847				5,238
KTCS Corporation			60,843				72				301,775				19
KTIS Corporation			64,790				21				278,818				42
KT Service Bukbu Co., Ltd.			14,489				5				185,530				1,900
KT Service Nambu Co., Ltd.			13,067				9				217,085				841
KT Skylife Co., Ltd.			24,138				39				46,096				—
Skylife TV Co., Ltd.			4,957				90				9,774				—
KTDS Co., Ltd.			13,889				1				240,309				144,424
KT Estate Inc.			8,164				7				170,139				4,622
BC Card Co., Ltd.			6,963				3				21,949				5,525
KT Sat Co., Ltd.			4,705				—				20,761				4
KT Hitel Co., Ltd.			12,064				3				50,035				5,547
KT Commerce Inc.			1,277				—				183,400				183,462
KT M Hows Co., Ltd.			978				4				1,742				—
KT M&S Co., Ltd.			505,905				45				190,383				—
GENIE Music Corporation (KT Music Corporation)			1,888				—				36,137				189
KT M mobile			56,158				—				9,522				118
Others			22,260				313				58,979				1,077
Associates and joint ventures
K-REALTY CR REIT 1			—				—				35,532				—
MOS GS Co., Ltd.			594				—				15,135				1,811
MOS Daegu Co., Ltd.			220				—				7,580				934
MOS Chungcheong Co., Ltd.			303				—				13,888				1,019
MOS Gangnam Co., Ltd.			265				—				14,971				1,409
MOS GB Co., Ltd.			705				—				20,060				1,591
MOS BS Co., Ltd.			201				—				15,495				462
MOS Honam Co., Ltd.			372				—				13,220				1,074
K Bank Inc.			1,991				—				46				—
NgeneBio Co., Ltd. 2			2				30				—				—
Others			296				123				4,644				—
Others
KT ENGCORE Co., Ltd.			687				—				112,443				167,033
Total		W	842,870			W	796			W	2,350,224			W	528,679

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

¹  The amount includes acquisition of property and equipment, and others.

²  It is the amount after excluded from consolidation during the year.

Key management compensation for the years ended December 31, 2018 and 2017, consists of:

(in millions of Korean won)		2018				2017
Salaries and other short-term benefits		W	2,762			W	2,879
Post-employment benefits			751				311
Stock-based compensation			878				1,331
Total		W	4,391			W	4,521

Fund transactions with related parties for the years ended December 31, 2018 and 2017, are as follows:

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		2018
		Loans transactions								Equity contributions in cash				Dividend income
		Loans				Repayments
Subsidiaries
KTCS Corporation		W	—			W	50			W	—			W	254
Autopion Co., Ltd.			310				661				—				—
KT Submarine Co., Ltd.			—				—				—				404
KTIS Corporation			—				—				—				816
KT Skylife Co., Ltd.			—				—				—				8,368
KTDS Co., Ltd.			—				—				—				6,408
KT Estate Inc.			—				—				—				56,310
BC Card Co., Ltd.			—				—				—				81,996
KT Sat Co., Ltd.			—				—				—				14,800
Nasmedia, Inc.			—				—				—				2,582
KBTO sp.zo.o.			—				—				3,984				—
KT ORS Belgium			—				—				4,943				—
KT New Business Fund No.1			—				—				(796	)			—
KT MOS Bukbu Co., Ltd.			—				—				8,152
KT MOS Nambu Co., Ltd.			—				—				6,482
KT Strategic Investment Fund No.4			—				—				9,500				—
Next Connect PFV 1			—				—				23,421
Associates and joint ventures
KT-CKP New Media Investment Fund			—				—				(1,229	)			—
PHI Healthcare Inc. (HooH Healthcare Inc.)			—				—				1,000				—
KT-DSC creative economy youth start-up investment fund											(1,080	)
KT-IBKC Future Investment Fund 1			—				—				(910	)			—
K-REALTY CR REIT 1			—				—				—				8,932
KIF-IMM IT Investment Fund			—				—				—				1,842
MOS GS Co., Ltd.			—				—				(147	)			8
MOS Daegu Co., Ltd.			—				—				(147	)			8
MOS Chungcheong Co., Ltd.			—				—				(153	)			8
MOS Gangnam Co., Ltd.			—				—				(180	)			10
MOS GB Co., Ltd.			—				—				(203	)			12
MOS BS Co., Ltd.			—				—				(183	)			10
MOS Honam Co., Ltd.			—				—				(206	)			10
K Bank, Inc.			—				—				26,725				—
Gyeonggi-KT Yoojin Superman Fund			—				—				1,000				—
Korea electronic Vehicle charging service			—				—				168				—
Boston Global Film & Contents Fund L.P.			—				—				(858	)
Gyeonggi-KT Green Growth Fund			—				—				—				19
Total		W	310			W	711			W	79,283			W	182,797

¹ During the current year, the Company invested W18,671 million in kind to Next Connect PFV.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		2017
		Loans transactions								Equity contributions in cash				Dividend income
		Loans				Repayments
Subsidiaries
KTCS Corporation		W	60			W	84			W	—			W	254
KT Linkus Co., Ltd			—				—				150				—
KT Submarine Co., Ltd.			—				—				—				404
Ktis Corporation			—				—				—				816
KT Skylife Co., Ltd.			—				—				—				9,922
KTDS Co., Ltd.			—				—				—				5,904
KT Estate Inc.			—				—				—				46,854
BC Card Co., Ltd.			—				—				—				67,310
Nasmedia, Inc.			—				—				—				1,460
KT Commerce Inc.			—				—				—				326
KBTO Sp.z o. o.			—				—				5,978				—
KT Strategic Investment Fund No.3			—				—				6,500				—
KT Music Contents Fund No.2			—				—				2,000				—
KT Strategic Investment Fund No.4			—				—				9,500				—
KT Music Contents Fund No.1			—				—				1,050				—
KT Belgium			—				—				16,971				—
Autopion Co., Ltd.			1,461				1,400				—				—
Associates and joint ventures
K-REALTY CR REIT 1			—				—				—				5,392
KT-IBKC Future Investment Fund 1			—				—				6,500				—
K Bank, Inc.			—				—				26,543				—
Others			—				—				1,865				805
Total		W	1,521			W	1,484			W	77,057			W	139,447

At the end of the reporting period, the Company entered into a credit card agreement with a limit of W4,843 million (2017: W4,817 million) with BC Card Co., Ltd.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

35. Financial Risk Management

(1) Financial Risk Factors

The Company’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivatives to hedge certain financial risk exposures such as cash flow risk.

The Company’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 market conditions to estimate the effect from the market changes.

(1) Market risk

The Company’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 Company’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 Company 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 Company 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 Company 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 Company’s cash flows. Foreign exchange risk (i.e, foreign currency translation of overseas operating assets and liabilities) not affecting the Company’s cash flows is not hedged but can be hedged at a particular situation.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

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

(in millions of Korean won)		Fluctuation of foreign exchange rate				Income before tax 1				Equity
2018.12.31			+ 10	%		W	(3,322	)		W	(2,509	)
			- 10	%			3,322				2,509
2017.12.31			+ 10	%		W	(5,948	)		W	(3,089	)
			- 10	%			5,948				3,089

¹  Computed with considering derivatives hedging effect applied by the Company 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, 2018 and 2017, are as follows:

(in thousands of foreign currencies)		December 31, 2018								December 31, 2017
		Financial assets				Financial liabilities				Financial assets				Financial liabilities
USD		W	165,574			W	1,665,563			W	126,588			W	1,652,424
SDR			267				730				306				738
JPY			36,600				50,000,000				—				21,800,000
MMK			84				—				84				—
EUR			1				6				175				12
DZD			618				—				47				—
BDT			39,494				—				38,074				—
PLN			26				—				338				—
RWF			857				—				3,346				—
UZS			121,053				—				136,787				—
VND			467,272				—				311,649				—
TZS			—				2,876				317,348				—
XAF			666				—				—				—
BWP			897				—				42				—

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

iii) Price risk

As at December 31, 2018, the Company is exposed to equity securities price risk because the securities held by the Company 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 equity would have been as follows:

(in millions of Korean won)		Fluctuation of price				Income before tax				Equity
2018.12.31			+ 10	%		W	12			W	322
			- 10	%			(12	)			(322	)
2017.12.31			+ 10	%		W	—			W	9
			- 10	%			—				(9	)

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 Company’s marketable equity instruments had moved according to the historical correlation with the index. Equity would increase/decrease as a result of 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.

iv) Cash flow and fair value interest rate risk

The Company’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 Company to cash flow interest rate risk which is partially offset by swap transactions. Debentures and borrowings issued at fixed rates expose the Company to fair value interest rate risk. The Company sets the policy and operates to minimize the uncertainty of the changes in interest rates and financial costs.

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

(in millions of Korean won)		Fluctuation of interest rate				Income before tax				Equity
2018.12.31			+ 100 bp			W	120			W	9,540
			- 100 bp				(1,019	)			(10,155	)
2017.12.31			+ 100 bp			W	291			W	3,356
			- 100 bp				(303	)			(3,686	)

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.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(2) Credit risk

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 principally from the Company’s trade receivables from customers, debt securities and others

• Risk management

Credit risk is managed on the Company 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 Company 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 Company’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 Company 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 Company has three 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, and

• other financial assets carried at amortized cost.

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

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

The maximum exposure to credit risk of the Company’s financial instruments without considering value of collaterals as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018				December 31, 2017
Cash and cash equivalents (except for cash on hand)		W	1,778,565			W	1,165,532
Trade and other receivables
Financial assets at amortized costs			2,637,732				3,626,267
Financial assets at fair value through other comprehensive income			1,097,348				—
Contract assets			366,866				—
Other financial assets
Derivatives financial assets for hedging purposes			29,843				7,389
Financial assets at fair value through profit or loss			101,156				—
Financial assets at amortized costs			54,074				58,365
Available-for-sale financial assets			—				4,900
Total		W	6,065,584			W	4,862,453

i) Trade receivables and contract assets

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

To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of sales over a period of 36 month before December 31, 2018 and the corresponding historical credit losses experienced within this period.

ii) Cash equivalents (except for cash on hand)

The Company is also exposed to credit risk in relation to cash equivalents. 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.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

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 finance 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 Company 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

The Company 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.

(3) Liquidity risk

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

The table below analyzes the Company’s liabilities (including interest expenses) into relevant maturity groups based on the remaining period at the report date to the contractual maturity date and these amounts are contractual undiscounted cash flows:

(in millions of Korean won)		December 31, 2018
		Less than 1 year				1-5 years				More than 5 years				Total
Trade and other payables		W	4,043,158			W	1,131,334			W	488,325			W	5,662,817
Borrowings (including debentures)			1,393,799				3,567,301				2,378,272				7,339,372
Others1			9,480				—				—				9,480
Total		W	5,446,437			W	4,698,635			W	2,866,597			W	13,011,669

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		December 31, 2017
		Less than 1 year				1-5 years				More than 5 years				Total
Trade and other payables		W	4,146,410			W	914,052			W	158,106			W	5,218,568
Borrowings (including debentures)			1,474,485				3,488,074				2,317,203				7,279,762
Others1			13,328				—				—				13,328
Total		W	5,634,223			W	4,402,126			W	2,475,309			W	12,511,658

¹ It consists of the maximum limit related to joint responsibility and agreement of assumption of debts. The cash flows on agreement are classified based on the earliest period that the agreement can be executed (Note 19).

As at December 31, 2018 and 2017, 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.

(in millions of Korean won)		December 31, 2018
		Less than 1 year				1-5 years				More than 5 years				Total
Outflows		W	403,892			W	1,372,045			W	517,301			W	2,293,238
Inflows			433,720				1,396,917				519,134				2,349,771

(in millions of Korean won)		December 31, 2017
		Less than 1 year				1-5 years				More than 5 years				Total
Outflows		W	588,914			W	407,503			W	526,633			W	1,523,050
Inflows			557,858				428,339				509,558				1,495,755

(2) Capital Risk Management

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

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

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

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

(in millions of Korean won)		December 31, 2018				December 31, 2017
Total liabilities		W	13,299,178			W	12,039,903
Total equity			12,711,728				11,445,302
Debt-to-equity ratio			105	%			105	%

The Company manages capital on the basis of the gearing ratio. The 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’ as shown in the statement of financial position plus net debt.

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

(in millions of Korean won)		December 31, 2018				December 31, 2017
Total borrowings		W	6,313,537			W	6,212,934
Less: cash and cash equivalents			(1,779,745	)			(1,166,402	)
Net debt			4,533,792				5,046,532
Total equity			12,711,728				11,445,302
Total capital		W	17,245,520			W	16,491,834
Gearing ratio			26	%			31	%

(3) Offsetting Financial Assets and Financial Liabilities

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

(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
														Financial instruments				Cash collateral
Trade receivables 2			78,752				—				78,752				(76,414	)			—				2,338
Total		W	78,752			W	—			W	78,752			W	(76,414	)		W	—			W	2,338

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(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
														Financial instruments				Cash collateral
Derivate used for hedging 1		W	3,284			W	—			W	3,284			W	(3,284	)		W	—			W	—
Trade receivables 2			76,292				—				76,292				(73,438	)			—				2,854
Total		W	79,576			W	—			W	79,576			W	(76,722	)		W	—			W	2,854

¹ Netting arrangements under the standard contract of International Swap and Derivatives Association (ISDA).

² Netting arrangements with reference to the offers of telecommunication facility interconnection and sharing data among telecommunication companies.

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

(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
														Financial instruments				Cash collateral
Trade payables 2			78,317				—				78,317				(76,414	)			—				1,903
Total		W	78,317			W	—			W	78,317			W	(76,414	)		W	—			W	1,903

(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
														Financial instruments				Cash collateral
Derivate used for hedging 1		W	26,135			W	—			W	26,135			W	(3,284	)		W	—			W	22,851
Trade payables 2			75,283				—				75,283				(73,438	)			—				1,845
Total		W	101,418			W	—			W	101,418			W	(76,722	)		W	—			W	24,696

¹ Netting arrangements under the standard contract of International Swap and Derivatives Association (ISDA).

² Netting arrangements with reference to the offers of telecommunication facility interconnection and sharing data among telecommunication companies.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

36. Fair Value

(1) Fair Value by Financial Instruments Category

Carrying amounts and fair values of the financial assets and financial liabilities by category as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018								December 31, 2017
		Carrying amount				Fair value				Carrying amount				Fair value
Financial assets
Cash and cash equivalents		W	1,779,745					1		W	1,166,402					1
Trade and other receivables
Financial assets measured at amortized cost			2,637,732					1			3,626,267					1
Financial assets at fair value through other comprehensive income			1,097,348				1,097,348				—				—
Other financial assets
Financial assets measured at amortized cost			54,074					1			58,365					1
Financial assets at fair value through profit or loss 2			101,278				101,278				—				—
Financial assets at fair value through other comprehensive income 2			20,857				20,857				—				—
Available-for-sale financial assets 3			—				—				85				85
Derivative financial assets for hedging purpose			29,843				29,843				7,389				7,389
Total		W	5,720,877							W	4,858,508
Financial liabilities
Trade and other payables		W	5,462,470					1		W	5,069,667					1
Borrowings			6,313,537					1			6,212,934				6,267,599
Other financial liabilities
Financial liabilities at fair value through profit or loss			7,758				7,758				5,051				5,051
Derivative financial liabilities for hedging purpose			54,075				54,075				81,200				81,200
Total		W	11,837,840							W	11,368,852

¹ The Company did not conduct fair value estimation since the carrying amount is a reasonable approximation of the fair value.

²  In the prior financial year, a portion of the equity instrument was classified as available-for-sale financial assets.

³  As at December 31, 2017, equity instruments that do not have a quoted market price in an active market are measured at cost because their fair value cannot be measured reliably and excluded from the fair value disclosures.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(2) Fair Value Hierarchy

Assets measured at fair value or for which the fair value is disclosed are categorized within the fair value hierarchy, and the defined levels are as follows:

• Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

• Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, prices) or indirectly (that is, derived from prices) (Level 2).

• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

Fair value hierarchy classifications of the financial assets and financial liabilities that are measured at fair value or its fair value is disclosed as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018
		Level 1				Level 2				Level 3				Total
Assets
Trade and other receivables
Financial assets at fair value through other comprehensive income		W	—			W	1,097,348			W	—			W	1,097,348
Other financial assets
Financial assets at fair value through profit or loss 1			122				—				101,156				101,278
Financial assets at fair value through other comprehensive income 1			3,095				—				17,762				20,857
Derivative financial assets for hedging purpose			—				29,843				—				29,843
Investment in subsidiaries, associates and joint ventures			650,130				—				—				650,130
Investment properties 2			—				—				1,573,970				1,573,970
Total		W	653,347			W	1,127,191			W	1,692,888			W	3,473,426
Liabilities
Other financial liabilities
Financial liabilities at fair value through profit or loss		W	—			W	—			W	7,758			W	7,758
Derivative financial liabilities for hedging purpose			—				43,892				10,183				54,075
Total		W	—			W	43,892			W	17,941			W	61,833

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in millions of Korean won)		December 31, 2017
		Level 1				Level 2				Level 3				Total
Assets
Other financial assets
Available-for-sale financial assets		W	85			W	—			W	—			W	85
Derivative financial assets for hedging purpose			—				7,389				—				7,389
Investment in subsidiaries, associates and joint ventures			919,386				—				—				919,386
Investment properties 2			—				—				1,691,010				1,691,010
Total		W	919,471			W	7,389			W	1,691,010			W	2,617,870
Liabilities
Other financial liabilities
Other derivative financial liability		W	—			W	—			W	5,051			W	5,051
Derivative financial liabilities for hedging purpose			—				63,475				17,725				81,200
Total		W	—			W	63,475			W	22,776			W	86,251

¹  In the prior financial year, a portion of the financial instrument was classified as available-for-sale financial assets

²  The highest and best use of a non-financial asset does not differ from its current use.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(3) Transfers between Fair Value Hierarchy Levels of Recurring Fair Value Measurements

There are no transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements.

Details of changes in Level 3 of the fair value hierarchy for the recurring fair value measurements are as follows:

(in millions of Korean won)		2018
		Financial assets								Financial liabilities
		Financial assets at fair value through profit or loss 3				Financial assets at fair value through other comprehensive income 3				Financial liabilities at fair value through profit or loss 2				Derivative financial liabilities for hedging 1
Beginning balance		W	58,060			W	6,771			W	5,051			W	17,725
Changes in accounting policy			31,177				—				—				—
Amount recognized in profit or loss1,2			9,801				—				2,707				(17,255	)
Amount recognized in other comprehensive income 1			—				(1,008	)			—				9,713
Acquisition			3,049				11,999				—				—
Disposal			(931	)			—				—				—
Ending balance		W	101,156			W	17,762			W	7,758			W	10,183

¹  Amount recognized in profit or loss of derivative financial liabilities for hedging are comprised of both gain on valuation of derivatives and accumulated other comprehensive loss.

² Amount recognized in profit or loss of derivative financial liabilities for hedging are comprised of loss on valuation of derivatives.

³ In prior year, a portion of the equity instrument was classified as available-for-sale financial assets.

(in millions of Korean won)		2017
		Derivative financial liabilities for hedging				Other derivative financial liabilities
Beginning balance		W	—			W	1,973
Amount recognized in profit or loss 1,2			19,634				3,078
Amount recognized in other comprehensive income			(1,909	)			—
Ending balance		W	17,725			W	5,051

¹  Amount recognized in profit or loss of derivative financial liabilities for hedging are comprised of loss on valuation of derivatives.

²  Amount recognized in profit or loss of other derivative financial liabilities are comprised of loss on valuation.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

(4) Valuation Technique and the Inputs

Valuation techniques and inputs used in the recurring, non-recurring fair value measurements and disclosed fair values categorized within Level 2 and Level 3 of the fair value hierarchy as at December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		December 31, 2018
		Fair value				Level				Valuation techniques
Assets
Trade and other receivables
Financial assets at fair value through other comprehensive income		W	1,097,348				2			DCF Model
Other financial assets
Financial assets at fair value through profit or loss			101,156				3			DCF Model, Adjusted net asset model
Financial assets at fair value through other comprehensive income			17,762				3			DCF Model
Derivative financial assets for hedging purpose			29,843				2			DCF Model
Investment properties			1,573,970				3			DCF Model
Liabilities
Other financial liabilities
Financial liabilities at fair value through profit or loss		W	7,758				3			DCF Model, Comparable Company Analysis
Derivative financial liabilities for hedging purpose			43,892				2			DCF Model
			10,183				3			Hull-White model, DCF Model
(in millions of Korean won)		December 31, 2017
		Fair value				Level				Valuation techniques
Assets
Other financial assets
Derivative financial assets for hedging purpose		W	7,389				2			DCF Model
Investment properties			1,691,010				3			DCF Model
Liabilities
Other financial liabilities
Derivative financial liabilities for hedging purpose		W	63,475				2			DCF Model
			17,725				3			Hull-White model, DCF Model
Financial liabilities at fair value through profit or loss			5,051				3			DCF Model, Comparable Company Analysis

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(5) Valuation Processes for Fair Value Measurements Categorized Within Level 3

The Company uses external experts that perform the fair value measurements required for financial reporting purposes. External experts report directly to the chief financial officer (CFO), and discusses valuation processes and results with the CFO in line with the Company’s closing dates.

(6) Gains and Losses on Valuation at the Transaction Date

In the case that the Company values derivative financial instruments using inputs not based on observable market data, and the fair value calculated by the said valuation technique differs from the transaction price, then the fair value of the financial instruments is recognized as the transaction price. The difference between the fair value at initial recognition and the transaction price is deferred and amortized using a straight-line method by maturity of the financial instrument. However, in the case where inputs of the valuation techniques become observable in markets, the remaining deferred difference is immediately recognized in full as profit for the year.

Changes in deferred amount for the years ended December 31, 2018 and 2017, are as follows:

(in millions of Korean won)		2018								2017
		Derivatives used for hedging				Derivative held for trading				Derivatives used for hedging				Derivative held for trading
I. Beginning balance		W	6,532			W	(5,647	)		W	—			W	(8,470	)
II. New transactions			—				—				7,126				—
III. Recognized at fair value through profit or loss			(1,425	)			2,823				(594	)			2,823
IV. Ending balance (I+II+III)		W	5,107			W	(2,824	)		W	6,532			W	(5,647	)

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

37. Changes in Accounting Policies

(1) Adoption of Korean IFRS 1115 Revenue from Contracts with Customers

As explained in Note 2, the Company has applied Korean IFRS 1115 Revenue from Contracts with Customers from January 1, 2018. In accordance with the transitional provisions in Korean IFRS 1115, comparative figures have not been restated. Financial statement line items affected by the adoption of the new rules in the current period are as follows:

The impact on the financial statements due to the application of Korean IFRS 1115 at the date of initial application (January 1, 2018) is as follows:

(in millions of Korean won)		Before application of Korean IFRS 1115 (*)				Adjustment				After application of Korean IFRS 1115
Current assets		W	4,529,850			W	1,272,676			W	5,802,526
Trade and other receivables			2,890,596				(897	)			2,889,699
Other current assets 1,2			180,060				1,273,573				1,456,633
Others			1,456,194				—				1,456,194
Non-current assets			18,955,355				32,307				18,987,662
Trade and other receivables			735,671				(2,200	)			733,471
Deferred income tax assets			421,745				(367,015	)			54,730
Other non-current assets 1,2			27,952				401,522				429,474
Others			17,769,987				—				17,769,987
Total assets		W	23,485,205			W	1,304,983			W	24,790,188
Current liabilities		W	5,612,725			W	269,405			W	5,882,130
Deferred revenue			11,295				33,531				44,826
Other current liabilities 1			76,728				235,874				312,602
Others			5,524,702				—				5,524,702
Non-current liabilities			6,427,178				67,992				6,495,170
Deferred revenue			85,713				23,955				109,668
Other non-current liabilities 1			19,492				44,037				63,529
Others			6,321,973				—				6,321,973
Total liabilities		W	12,039,903			W	337,397			W	12,377,300
Retained earnings		W	9,478,730			W	967,586			W	10,446,316
Others			1,966,572				—				1,966,572
Total equity		W	11,445,302			W	967,586			W	12,412,888

(*) The amounts in this column are before the adjustments from the adoption of Korean IFRS 1109.

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Notes to the Separate Financial Statements

December 31, 2018 and 2017

The effect of adoption of Korean IFRS 1115 on the separate financial statements for the year ended December 31, 2018 is as follows.

• Statement of financial position

(in millions of Korean won)		Reported Amount (*)				Adjustments				Amount before application of Korean IFRS 1115
Current assets		W	6,861,619			W	(1,411,296	)		W	5,450,323
Trade and other receivables			2,968,764				1,820				2,970,584
Other current assets 1,2			1,572,436				(1,413,116	)			159,320
Others			2,320,419				—				2,320,419
Non-current assets			19,149,287				(437,075	)			18,712,212
Trade and other receivables			766,316				4,531				770,847
Other non-current assets 1,2			466,228				(441,606	)			24,622
Others			17,916,743				—				17,916,743
Total assets		W	26,010,906			W	(1,848,371	)		W	24,162,535
Current liabilities		W	5,908,497			W	(339,150	)		W	5,569,347
Deferred revenue			48,002				(38,059	)			9,943
Other current liabilities 1			390,402				(301,091	)			89,311
Others			5,470,093				—				5,470,093
Non-current liabilities			7,390,681				(465,267	)			6,925,414
Deferred revenue			105,241				(27,340	)			77,901
Deferred income tax liabilities			29,116				(394,253	)			(365,137	)
Other non-current liabilities 1			61,181				(43,674	)			17,507
Others			7,195,143				—				7,195,143
Total liabilities		W	13,299,178			W	(804,417	)		W	12,494,761
Retained earnings		W	10,740,042			W	(1,043,954	)		W	9,696,088
Others			1,971,686				—				1,971,686
Total equity		W	12,711,728			W	(1,043,954	)		W	11,667,774

(*) Amounts include adjustments arising from adoption of Korean IFRS 1109.

¹  Allocation the transaction price

With the implementation of Korean IFRS 1115, the Company allocates the transaction price to each performance obligation identified in the contract based on a relative stand-alone selling prices of the goods or services being provided to the customer. To allocate the transaction price to each performance obligation on a relative stand-alone price basis, the Company determines the stand-alone selling price at contract inception of the distinct goods or services underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling price. The stand-alone selling price is the price at which the Company would sell promised goods or services separately to the customer. The best evidence of a stand-alone selling price is the observable price of a goods or services when the Company sells that goods or services separately in similar circumstances and to similar customers. The Company recognizes the allocated amount as contract assets or contract liabilities, and amortizes it through the remaining period which is adjusted in operating income.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

In relation to this, as at December 31, 2018, contract assets and contract liabilities are increased by W 366,866 million (January 1, 2018: W 385,389 million) and W 344,765 million (January 1, 2018: W 279,911 million), respectively.

²  Incremental costs of obtaining a contract

The Company pays the commission fees when new customer subscribe for telecommunication services. The incremental costs of obtaining a contract are those commission fees that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.

According to Korean IFRS 1115, the Company recognizes as an asset the incremental cost of obtaining contract and amortize it through the contract period. However, as a practical expedient, the Company recognizes the incremental costs of obtaining a contracts as an expense when incurred if the amortization period of the asset is one year or less.

In relation to this, prepaid expenses are increased by W 1,487,855 million as at December 31, 2018 (January 1, 2018: W1,289,706 million).

• Statement of profit or loss

(in millions of Korean won)		Reported Amount (*)				Adjustments				Amount before application of Korean IFRS 1115
Operating revenue		W	17,356,537			W	300,789			W	17,657,326
Operating expenses			16,404,913				383,818				16,788,731
Operating profit			951,624				(83,029	)			868,595
Other income			367,783				—				367,783
Other expenses			379,797				—				379,797
Financial income			334,467				(3,717	)			330,750
Financial costs			388,401				16,860				405,261
Profit before income tax			885,676				(103,606	)			782,070
Income tax expense			324,452				(27,238	)			297,214
Profit for the year		W	561,224			W	(76,368	)		W	484,856

(*) Amounts include adjustments arising from adoption of Korean IFRS 1109.

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

• Statement of cash flows

The application of Korean IFRS 1115 has no material impact on cash flows from operating, investing and financing activities on the statements of cash flows.

(2) Adoption of Korean IFRS 1109 Financial Instruments

The Company has applied Korean IFRS 1109 Financial Instruments from January 1, 2018. In accordance with the transitional provisions in Korean IFRS 1109, comparative figures have not been adjusted.

Korean IFRS 1109 replaces Korean IFRS 1039, Financial Instruments: Recognition and Measurement, relating to the recognition of financial assets and financial liabilities, classification, measurement and elimination of financial instruments, impairment of financial assets and hedge accounting. Korean IFRS 1109 also significantly amends other standards dealing with financial instruments such as Korean IFRS 1107 Financial Instruments: Disclosures.

(a) Beginning balance of retained earnings after adjustment

Details of the beginning balance of retained earnings after adjustment due to application of Korean IFRS 1109 are as follows:

(in millions of Korean won)		January 1, 2018
Beginning balance—Korean IFRS 1039		W	9,478,730
Reclassification of available-for-sale securities to financial assets at fair value through profit or loss			31,177
Decrease in deferred income tax assets			(8,573	)
Adjustments to retained earnings from adoption of Korean IFRS 1109			22,604
Beginning balance of retained earnings—Korean IFRS 1109			9,501,334
Adjustment to retained earnings from adoption of Korean IFRS 1115			967,586
Beginning balance of retained earnings after adjustment		W	10,468,920

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(b) Classification and Measurement of Financial Instruments

On the date of initial application of Korean IFRS 1109, January 1, 2018, the Company’s management has assessed which business models apply to the financial assets held by the Company and has classified its financial instruments into the appropriate Korean IFRS 1109 categories. The main effects resulting from this reclassification are as follows:

(in millions of Korean won)		Classification in accordance with				Amount in accordance with
Account		Korean IFRS1039		Korean IFRS 1109		Korean IFRS 1039				Korean IFRS 1109				Differences
Financial assets
Cash and cash equivalent		Loans and receivables		Financial assets measured at amortized cost		W	1,166,402			W	1,166,402			W	—
Trade and other receivables		Loans and receivables		Financial assets measured at amortized cost			3,626,267				2,669,987
				Financial assets at fair value through other comprehensive income 1							980,766				24,486
Other financial assets		Loans and receivables		Financial assets measured at amortized cost			58,365				58,365				—
Other financial assets		Derivative financial assets for hedging purpose		Derivative financial assets for hedging purpose			7,389				7,389				—
Other financial assets		Financial assets available-for-sale		Financial assets measured at amortized cost			64,916				—				—
				Financial assets at fair value through profit or loss 2							89,322				31,177
				Financial assets at fair value through other comprehensive income 3							6,771				—
Financial liabilities
Trade payables and payables		Other financial liabilities measured at amortized cost		Financial assets measured at amortized cost		W	5,069,667			W	5,069,667			W	—
Borrowing		Other financial liabilities measured at amortized cost		Financial assets measured at amortized cost			6,212,934				6,212,934				—
Other financial liabilities		Financial liabilities at fair value through profit or loss		Financial liabilities at fair value through profit or loss			5,051				5,051				—
Other financial liabilities		Derivative financial liabilities for hedging purpose		Derivative financial liabilities for hedging purpose			81,200				81,200				—

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

¹ Reclassification from loans and receivables to fair value through other comprehensive income

The business model for trade receivables related to handset sales classified as loans and receivables is considered both to collect contractual cash flows and sell these assets, and because their cash flows do not represent solely payments of principal and interest, those were reclassified as financial assets at fair value through other comprehensive income.

²  Reclassification from available-for-sale to fair value through profit or loss

Debt instruments classified as available-for-sale financial assets were reclassified to financial assets at fair value through profit or loss because their cash flows do not represent solely payments of principal and interest.

Equity instruments which were not reclassified as financial assets at fair value through other comprehensive income were reclassified as financial assets at fair value through profit or loss.

³  Reclassification from available-for-sale to fair value through other comprehensive income

The Company elected to present changes in the fair value of all its equity investments previously classified as available-for-sale in other comprehensive income, because these investments are held as long-term strategic investments that are not expected to be sold in the short to medium term.

The impact on these changes on the Company’s equity as at January 1, 2018, is as follows:

(in millions of Korean won)		Accumulated other comprehensive income				Retained earnings
Reclassification from loans and receivables to financial assets at fair value through other comprehensive income, and fair value assessment		W	24,486			W	—
Reclassification from available-for-sale financial assets to financial assets at fair value through profit or loss, and fair value assessment			—				31,177
Income tax effect			(6,734	)			(8,573	)
Total adjustments from application of Korean IFRS 1109		W	17,752			W	22,604

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

38. Events after Reporting Period

Subsequent to the reporting period, public bonds issued are as follow:

(in millions of Korean won)		Issue date				Carrying amount				Interest rate				Redemption date
The 191-1st Public bond			2019.01.15			W	220,000				2.048	%			2022.01.14
The 191-2nd Public bond			2019.01.15				80,000				2.088	%			2024.01.15
The 191-3rd Public bond			2019.01.15				110,000				2.160	%			2029.01.15
The 191-4th Public bond			2019.01.15				90,000				2.213	%			2039.01.14

39. Revision of prior period financial statements

The Company revised the prior period financial statements to correct errors in relation to the under-statement of revenue due to omission of data transferring from billing system to finance system, and the details are as follows:

Statements of financial position

(in millions of Korean won)		December 31, 2017												January 1, 2017
		Before adjustment				After adjustment				Difference				Before adjustment				After adjustment				Difference
Current assets		W	4,379,568			W	4,529,850			W	150,282			W	4,851,079			W	5,001,361			W	150,282
Trade and other receivables			2,740,314				2,890,596				150,282				2,590,161				2,740,443				150,282
Total assets		W	23,334,923			W	23,485,205			W	150,282			W	24,700,337			W	24,850,619			W	150,282
Current liabilities		W	5,596,667			W	5,612,725				16,058			W	6,027,671			W	6,043,729			W	16,058
Trade and other payables			4,109,524				4,111,478				1,954				4,181,092				4,183,046				1,954
Current income tax liabilities			—				14,104				14,104				22,551				36,655				14,104
Total liabilities			12,023,845				12,039,903				16,058				13,615,818				13,631,876				16,058
Retained earnings			9,344,506				9,478,730				134,224				9,156,204				9,290,428				134,224
Total equity			11,311,078				11,445,302				134,224				11,084,519				11,218,743				134,224
Total liabilities and equity		W	23,334,923			W	23,485,205			W	150,282			W	24,700,337			W	24,850,619			W	150,282

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KT Corporation

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Statements of changes in equity

(in millions of Korean won)

Retained earnings

Before adjustment

After adjustment

Difference

Balance at January 1, 2017

W

9,156,204

W

9,290,428

W

134,224

Balance at December 31, 2017

9,344,506

9,478,730

134,224

Notes related to adjustment of statement financial position and statement of changes in equity above were revised.

The effects from adjustments of financial statements before 2017 are as follows:

(in millions of Korean won)		Before adjustment				After adjustment				Difference
2016
Revenue		W	17,028,868			W	17,072,192			W	43,324
Profit for the year			809,330				846,057				36,727
Equity			11,084,519				11,218,743				134,224
2015
Revenue			16,942,357				16,957,288				14,931
Profit for the year			770,324				781,643				11,319
Equity			10,383,956				10,481,453				97,497
2014
Revenue			17,435,803				17,442,194				6,391
Loss for the year			(1,141,889	)			(1,137,046	)			4,843
Equity			9,605,854				9,692,032				86,178
2013(*)
Revenue			17,937,079				17,950,914				13,835
Loss for the year			(392,311	)			(380,824	)			11,487
Equity			11,044,057				11,125,392				81,335

(*) The increase in retained earnings due to revision of prior period financial statements before January 1, 2013 is W 69,848 million.

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Report on Independent Auditor’s

Review of Internal Control over Financial Reporting

To the President of

KT Corporation

We have reviewed the accompanying management’s report on the effectiveness of the Internal Control over Financial Reporting (“ICFR”) of KT Corporation (the “Company”) as of December 31, 2018. The Company’s management is responsible for designing and operating ICFR and for its assessment of the effectiveness of ICFR. Our responsibility is to review the management’s report on the effectiveness of the ICFR and issue a report based on our review. The management’s report on the effectiveness of the ICFR of the Company states that “Based on the assessment results, Chief Executive Officer and ICFR Officer believe that the Company’s ICFR, as at December 31, 2018, is designed and operating effectively, in all material respects, in conformity with the Best Practice Guideline.”

Our review was conducted in accordance with the ICFR review standards established by the Korean Institute of Certified Public Accountants. Those standards require that we plan and perform, in all material respects, the review of management’s report on the effectiveness of the ICFR to obtain a lower level of assurance than an audit. A review is to obtain an understanding of a company’s ICFR and consists principally of inquiries of management and, when deemed necessary, a limited inspection of underlying documents, which is substantially less in scope than an audit.

A company’s ICFR is a system to monitor and operate those policies and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as adopted by the Republic of Korea. Because of its inherent limitations, ICFR may not prevent or detect a material misstatement of the financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Based on our review, nothing has come to our attention that causes us to believe that management’s report on the effectiveness of the ICFR, referred to above, is not presented fairly, in all material respects, in accordance with the Best Practice Guideline.

Our review is based on the Company’s ICFR as of December 31, 2018, and we did not review management’s assessment of its ICFR subsequent to December 31, 2018. This report has been prepared pursuant to the Acts on External Audit for Stock Companies, etc. in Korea and may not be appropriate for other purposes or for other users.

Samil PricewaterhouseCoopers

March 11, 2019

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Report on the Effectiveness of

the Internal Control over Financial Reporting

To the Shareholders, Audit Committee and Board of Directors of

KT Corporation

We, as the Chief Executive Officer (“CEO”) and the Internal Control over Financial Reporting (“ICFR”) Officer of KT Corporation (“the Company”), assessed the effectiveness of the design and operation of the Company’s Internal Control over Financial Reporting for the year ended December 31, 2018.

The Company’s management, including ourselves, is responsible for designing and operating ICFR.

We assessed the design and operating effectiveness of the ICFR in the prevention and detection of an error or fraud which may cause material misstatements in the preparation and disclosure of reliable financial statements.

We followed the ‘Best Practice Guideline’ which is established by the Operating Committee of Internal Control over Financial Reporting in Korea (the “ICFR Committee”) to evaluate the effectiveness of the ICFR design and operation.

Based on the assessment results, we believe that the Company’s ICFR, as at December 31, 2018, is designed and operating effectively, in all material respects, in conformity will the Best Practice Guideline.

We certify that this report does not contain any untrue statement of a fact, or omit to state a fact necessary to be presented herein. We also certify that this report does not contain or present any statement which cause material misunderstandings, and we have reviewed and verified this report with sufficient due care.

March 8, 2019

Chief Executive Officer		Chang-Gyu Hwang
Internal Control over Financial Reporting Officer		Kyung-Keun Yoon

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