As filed with the Securities and Exchange Commission on April 29, 201628, 2017

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form20-F

 

¨☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the fiscal year ended December 31, 20152016

OR

 

¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨☐SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

        Date of event requiring this shell company report                            

 

        For the transition period from                    to                    

Commission file number1-14926

KT Corporation

(Exact name of Registrant as specified in its charter)

 

KT Corporation The Republic of Korea
(Translation of Registrant’s name into English) (Jurisdiction of incorporation or organization)

KT Gwanghwamun Building East

33, Jong-ro 3-Gil, Jong-ro3-Gil,Jongno-gu

03155 Seoul, Korea

(Address of principal executive offices)

Kwang Suk Shin

KT Gwanghwamun Building East

33, Jong-ro 3-Gil, Jong-ro3-Gil,Jongno-gu

03155 Seoul, Korea

Telephone: +82-31-727-0114; +82-31-727-0114;E-mail: ks.shin@kt.com

(Name, telephone,e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

  

Name of each exchange on which registered

American Depositary Shares, each representing  New York Stock Exchange, Inc.
one-half of one share of common stockordinary share  
Common Stock,Ordinary share, par value￦5,000 per share*  New York Stock Exchange, Inc.*

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

As of December 31, 2015,2016, there were 244,849,800244,971,643 ordinary shares, of common stock, par value￦5,000 per share, outstanding

(not including 16,262,00816,140,165 ordinary shares of common stock held by the companyregistrant as treasury shares)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yesx☒No¨☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes¨☐Nox☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x☒    No  ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  ¨☐    No  ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a non-accelerated filer.an emerging growth company. See definitionthe definitions of “large accelerated filer,” “accelerated filer,” and large accelerated filer”“emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filerx☒Accelerated filer¨☐Non-accelerated filer¨☐Emerging growth company☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.U.S. GAAP  ¨☐    IFRS  x☒     Other  ¨☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨☐    Item 18  ¨☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ¨☐    No  x☒

 

*Not for trading, but only in connection with the registration of the American Depositary Shares.

 

 

 

TABLE OF CONTENTS

 

       Page 

PRESENTATION

1

PART I

   1 

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS

   1 
 

Item 1.A.

 

Directors and Senior Management

   1 
 

Item 1.B.

 

Advisers

   1 
 

Item 1.C.

 

Auditors

   1 

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

   1 
 

Item 2.A.

 

Offer Statistics

   1 
 

Item 2.B.

 

Method and Expected Timetable

   1 

ITEM 3.

 

KEY INFORMATION

   2 
 

Item 3.A.

 

Selected Financial Data

   2 
 

Item 3.B.

 

Capitalization and Indebtedness

   6 
 

Item 3.C.

 

Reasons for the Offer and Use of Proceeds

   6 
 

Item 3.D.

 

Risk Factors

   6 

ITEM 4.

 

INFORMATION ON THE COMPANY

   2124 
 

Item 4.A.

 

History and Development of the Company

   2124 
 

Item 4.B.

 

Business Overview

   2225 
 

Item 4.C.

 

Organizational Structure

   4952 
 

Item 4.D.

 

Property, Plants and Equipment

49

ITEM 4A.

UNRESOLVED STAFF COMMENTS

   52 

ITEM 4A.

UNRESOLVED STAFF COMMENTS56

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   5356 
 

Item 5.A.

 

Operating Results

   5356 
 

Item 5.B.

 

Liquidity and Capital Resources

77

Item 5.C.

Research and Development, Patents and Licenses, Etc.

81

Item 5.D.

Trend Information

   82 
 

Item 5.E.

5.C.		 

Off-balance Sheet ArrangementsResearch and Development, Patents and Licenses, Etc.

   8286 
 

Item 5.F.

5.D.		 

Tabular Disclosure of Contractual ObligationsTrend Information

82

Item 5.G.

Safe Harbor

82

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

82

Item 6.A.

Directors and Senior Management

82

Item 6.B.

Compensation

   87 
 

Item 6.C.

5.E.		 

Board PracticesOff-balance Sheet Arrangements

   87 
 

Item 6.D.

5.F.		 

EmployeesTabular Disclosure of Contractual Obligations

   8987 
 

Item 6.E.5.G.

Safe Harbor87

ITEM 6.

 

Share OwnershipDIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

87
Item 6.A.Directors and Senior Management87
Item 6.B.Compensation   91
Item 6.C.Board Practices92
Item 6.D.Employees94
Item 6.E.Share Ownership96 

 

i

TABLE OF CONTENTS

(continued)

 

       Page 

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

91

Item 7.A.

Major Shareholders

91

Item 7.B.

Related Party Transactions

91

Item 7.C.

Interests of Experts and Counsel

91

ITEM 8.

FINANCIAL INFORMATION

92

Item 8.A.

Consolidated Statements and Other Financial Information

92

Item 8.B.

Significant Changes

94

ITEM 9.

THE OFFER AND LISTING

94

Item 9.A.

Offer and Listing Details

94

Item 9.B.

Plan of Distribution

   96 
 

Item 9.C.

7.A.		 

MarketsMajor Shareholders

   96 
 

Item 9.D.7.B.

Related Party Transactions96
Item 7.C.Interests of Experts and Counsel96

ITEM 8.

 

Selling ShareholdersFINANCIAL INFORMATION

97
Item 8.A.Consolidated Statements and Other Financial Information97
Item 8.B.Significant Changes99

ITEM 9.

THE OFFER AND LISTING   100 
 

Item 9.E.

9.A.		 

DilutionOffer and Listing Details

   100 
 

Item 9.F.

9.B.		 

ExpensesPlan of the IssuerDistribution

   100

ITEM 10.

ADDITIONAL INFORMATION

100101 
 

Item 10.A.

9.C.		 

Share CapitalMarkets

   100101 
 

Item 10.B.

9.D.		 

Memorandum and Articles of AssociationSelling Shareholders

100

Item 10.C.

Material Contracts

   106 
 

Item 10.D.

9.E.		 

Exchange ControlsDilution

   107106 
 

Item 10.E.

9.F.		 

TaxationExpenses of the Issuer

   111106

ITEM 10.

ADDITIONAL INFORMATION106 
 

Item 10.F.

10.A.		 

DividendsShare Capital

106
Item 10.B.Memorandum and Paying AgentsArticles of Association

106
Item 10.C.Material Contracts112
Item 10.D.Exchange Controls113
Item 10.E.Taxation   117 
 

Item 10.G.

10.F.		 

Statements by ExpertsDividends and Paying Agents

   117123 
 

Item 10.H.

10.G.		 

Documents on DisplayStatements by Experts

   117123 
 

Item 10.I.

10.H.		 

Subsidiary InformationDocuments on Display

   117123
Item 10.I.Subsidiary Information123 

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   117123 

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

   120126 
 

Item 12.A.

 

Debt Securities

   120126 
 

Item 12.B.

 

Warrants and Rights

   120126 
 

Item 12.C.

 

Other Securities

   120126 
 

Item 12.D.

 

American Depositary Shares

   120126 

PART II

   122128 

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   122128 

 

ii

TABLE OF CONTENTS

(continued)

       Page 

ITEM 14.

 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   122128 

ITEM 15.

 CONTROLS AND PROCEDURES   122128 

ITEM 16.

 [RESERVED]   123129 
 Item 16A. Audit Committee Financial Expert   123129 
 Item 16B. Code of Ethics   123129 
 Item 16C. Principal Accountant Fees and Services   124130 
 Item 16D. Exemptions from the Listing Standards for Audit Committees   124130 
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers   125131 
 Item 16F. Change in Registrant’s Certifying Accountant   125131 
 Item 16G. Corporate Governance   125131 
 Item 16H. Mine Safety Disclosure   126132 

PART III

   127133 

ITEM 17.

 FINANCIAL STATEMENTS   127133 

ITEM 18.

 FINANCIAL STATEMENTS   127133 

ITEM 19.

 EXHIBITS   127133

SIGNATURES

135 

 

iii

PRESENTATION

All references to “Korea” or the “Republic” contained in this annual report mean the Republic of Korea. All references to the “Government” are to the government of the Republic of Korea. All references to “we,” “us” or the “Company” are to KT Corporation and, as the context may require, its subsidiaries.

All references to “Won” or “￦” in this annual report are to the currency of the Republic and all references to “Dollars,” “$,” “US$” or “U.S. dollars” are to the currency of the United States of America. Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. (the “Market Average Exchange Rate”) on the balance sheet dates, which were, for U.S. dollars,￦1,055.31,099.2 to US$1.00,￦1,099.21,172.0 to US$1.00 and￦1,172.01,208.5 to US$1.00 aton December 31, 2013, 2014, 2015 and 2015,2016, respectively. Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 20152016 have been translated into United States dollars at the rate of￦1,172.01,208.5 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2015.30, 2016.

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

All market share data contained in this annual report, unless otherwise specified, are based on the number of subscribers announced by the Korea Communications Commission (the “KCC”) or the Korea Telecommunications Operators Association.

PART I

Item 1. Identity of Directors, Senior Managers and Advisers

Item 1.A.Directors and Senior Management

Not applicable.

Item 1.B.Advisers

Not applicable.

Item 1.C.Auditors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Item 2.A.Offer Statistics

Not applicable.

Item 2.B.Method and Expected Timetable

Not applicable.

Item 3. Key Information

Item 3.A.Selected Financial Data

You should read the selected consolidated financial data below in conjunction with the consolidated financial statements (“Consolidated Financial Statements”) as of December 31, 2013, 20142015 and 20152016 and for each of the years in the three-year period ended December 31, 2015,2016, and the report of the independent registered public accounting firm on these statements included herein. These audited financial statements and the related notes have been prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The selected consolidated financial data for the three years ended December 31, 20152016 have been derived from our audited consolidated financial statements.

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with IFRS as adopted by the Republic of Korea(“K-IFRS”), which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea (“FSCMA”). English translations of such financial statements are furnished to the Securities and Exchange Commission under Form6-K. During the three years ended December 31, 2015,2016, we are required to adopt certain amendments and interpretations toK-IFRS, relating to presentation of operating profit. Additionally, underK-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. Furthermore, in connection with the exercise of early redemption rights for certain commercial paper guaranteed by KT ENGCORE Co., Ltd. (formerly known as KT ENS Corporation until April 2015) (“KT ENGCORE”), our previously consolidated subsidiary until August 2014, we recognized financial losses relating to the resulting estimation of guarantee liabilities in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB for the year ended December 31, 2013 (which were issued on April 28, 2014), which were not reflected in our financial statements prepared in accordance withK-IFRS for the year ended December 31, 2013 (which were issued on March 13, 2014) as it was not possible to make a reasonable estimate of the liabilities at the time of issuing theK-IFRS financial statements. We subsequently reflected such losses in ourK-IFRS financial statements for the year ended December 31, 2014. As a result, the presentation of operating results in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating results in our consolidated statements of operations prepared in accordance withK-IFRS. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS” for additional information.

The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our Consolidated Financial Statements and related notes included in this annual report.

Consolidated statement of operations data

 

  Year Ended December 31,   Year Ended December 31, 
      2011(1)          2012(1)          2013(1)          2014(1)          2015         2015(2)        2012     2013         2014         2015         2016         2016  (1)     
  (In billions of Won and millions of Dollars, except per share data)   (In billions of Won and millions of Dollars, except per share data) 

Continuing Operations:

              

Operating revenue

  ￦21,804   ￦24,110   ￦23,146   ￦22,613   ￦22,700   US$19,368    ￦24,110  ￦23,146  ￦22,613  ￦22,700  ￦23,121  US$19,132 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Revenue

   21,029    23,323    22,818    22,359    22,212    18,952     23,323   22,818   22,359   22,212   22,755   18,829 

Others

   775    787    328    253    488    417     787   328   253   488   366   303 

Operating expenses

   19,854    22,433    22,911    23,392    21,623    18,449     22,433   22,911   23,392   21,623   21,781   18,023 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Operating profit

   1,950    1,677    235    (779)   1,077    919     1,677   235   (779)   1,077   1,340   1,109 

Finance income

   270    498    278    253    273    233     498   278   253   273   296   245 

Finance costs

   (651)   (780)   (633)   (792)   (645)   (551)    (780)   (633)   (792)   (645)   (515)   (426) 

Income from jointly controlled entities and associates

   (5)   18    7    19    6    5     18   7   19   6   3   2 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Profit (loss) from continuing operations before income tax

   1,564    1,413    (114)   (1,299)   711    606     1,413   (114)   (1,299)   711   1,123   930 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Income tax expense (benefit)

   308    278    12    (271)   227    194     278   12   (271)   227   328   272 

Profit (loss) for the year from the continuing operations

   1,256    1,135    (126)   (1,028)   484    413     1,135   (126)   (1,028)   484   795   658 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Discontinued operations:

              

Profit (loss) from discontinued operations

   199    (30)   38    86    141    120     (30)   38   86   141   —   — 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Profit (loss) for the year

  ￦1,455   ￦1,105   ￦ (88)  ￦ (941)  ￦ 625   US$533    ￦1,105  ￦(88)  ￦(941)  ￦625  ￦795  US$658 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Profit (loss) for the year attributable to:

              

Equity holders of the parent company

  ￦1,445   ￦1,046   ￦ (190)  ￦(1,030)  ￦ 546   US$466    ￦1,046  ￦(190)  ￦(1,030)  ￦546  ￦708  US$586 

Profit (loss) from continuing operations

   1,248    1,070    (216)   (1,094)   404    345     1,070   (216)   (1,094)   404   708   586 

Profit (loss) from discontinued operations

   197    (24)   26    64    142    121     (24)   26   64   142   —   — 

Non-controlling interest

  ￦10   ￦59   ￦102   ￦89   ￦78   US$67    ￦59  ￦102  ￦89  ￦78  ￦87  US$72 

Profit from continuing operations

   8    64    90    66    80    68     64   90   66   80   87   72 

Profit (loss) from discontinued operations

   2    (5)   12    22    (1)   (1)    (5)   12   22   (1)   —   — 

Earnings per share attributable to the equity holders of the Parent Company during the period (in won):

              

Basic earnings (loss) per share

  ￦5,943   ￦4,296   ￦ (779)  ￦(4,215)  ￦ 2,231   US$2    ￦4,296  ￦(779)  ￦(4,215)  ￦2,231  ￦2,893  US$2 

From continuing operations

   5,130    4,396    (885)   (4,477)   1,650    1     4,396   (885)   (4,477)   1,650   2,893   2 

From discontinued operations

   813    (100)   106    262    581    1     (100)   106   262   581   —   — 

Diluted earnings (loss) per share

  ￦5,942   ￦4,295   ￦ (782)  ￦(4,215)  ￦ 2,231   US$2    ￦4,295  ￦(782)  ￦(4,215)  ￦2,231  ￦2,891  US$2 

From continuing operations

   5,129    4,395    (888)   (4,477)   1,650    1     4,395   (888)   (4,477)   1,650   2,891   2 

From discontinued operations

   813    (100)   106    262    581    1     (100)   106   262   581   —   — 

Consolidated statement of financial position data

 

 As of December 31,  As of December 31, 
Selected Statement of Financial Position Data     2011         2012         2013         2014         2015         2015(2)      2012         2013         2014         2015         2016         2016 (1) 
 (In billions of Won and millions of Dollars)  (In billions of Won and millions of Dollars) 

Assets:

            

Current assets:

            

Cash and cash equivalents

 ￦1,462   ￦2,058   ￦2,071   ￦1,889   ￦2,559   US$2,184   ￦2,058  ￦2,071  ￦1,889  ￦2,559  ￦2,900  US$2,400 

Trade and other receivables, net

  6,191    5,908    5,240    4,811    4,847    4,136    6,916   6,373   5,780   4,854   5,327   4,408 

Short-term loans, net

  698    668    839    710    0    0  

Current finance lease receivables, net

  249    340    294    259    6    5  

Other financial assets

  259    246    480    333    293    250    246   480   333   293   721   596 

Current income tax assets

  1    1    35    4    4    3    1   35   4   4   2   2 

Inventories, net

  676    935    674    419    617    526    935   674   419   617   455   376 

Other current assets

  311    362    340    350    317    271    362   340   350   317   311   257 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total current assets

  9,847    10,517    9,972    8,774    8,643    7,375    10,517   9,972   8,774   8,643   9,716   8,039 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Non-current assets:

            

Trade and other receivables, net

  1,725    1,073    813    849    680    580    2,108   1,739   1,759   704   709   587 

Long-term loans, net

  491    513    510    585    16    14  

Non-current finance lease receivables, net

  488    522    416    325    9    7  

Other financial assets

  622    672    673    705    658    562    672   673   705   658   665   550 

Property and equipment, net

  14,090    15,806    16,387    16,468    14,479    12,354    15,806   16,387   16,468   14,479   14,312   11,843 

Investment property, net

  1,159    1,155    1,105    1,060    1,102    940    1,155   1,105   1,060   1,102   1,148   950 

Intangible assets, net

  2,645    3,214    3,827    3,544    2,600    2,218    3,214   3,827   3,544   2,600   3,023   2,501 

Investments in jointly controlled entities and associates

  500    379    364    339    270    230    379   364   339   270   284   235 

Deferred income tax assets

  530    611    707    1,079    845    721    611   707   1,079   845   701   580 

Other non-current assets

  86    95    76    72    102    88    95   76   72   102   106   88 

Total non-current assets

  22,336    24,040    24,878    25,025    20,761    17,714    24,040   24,878   25,025   20,761   20,948   17,335 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total assets

 ￦32,183   ￦34,558   ￦34,850   ￦33,799   ￦29,404   US$ 25,089   ￦34,558  ￦34,850  ￦33,799  ￦29,404  ￦30,664  US$25,374 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Liabilities and Equity:

            

Current liabilities:

            

Trade and other payables

 ￦5,902   ￦7,221   ￦7,414   ￦6,408   ￦6,274   US$5,353   ￦7,235  ￦7,433  ￦6,428  ￦6,335  ￦7,140  US$5,908 

Current finance lease liabilities, net

  46    14    19    20    61    52  

Borrowings

  2,125    3,197    3,021    2,956    1,726    1,473    3,197   3,021   2,956   1,726   1,820   1,506 

Other financial liabilities

  8    72    64    24    44    37    72   64   24   44   1   1 

Current income tax liabilities

  187    144    100    46    81    69    144   100   46   81   89   73 

Provisions

  123    206    115    111    104    89    206   115   111   104   96   80 

Deferred income

  168    171    144    144    98    84    171   144   144   98   36   29 

Other current liabilities

  220    242    348    279    311    266    242   348   279   311   342   283 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total current liabilities

  8,780    11,267    11,224    9,987    8,699    7,423    11,267   11,224   9,987   8,699   9,524   7,880 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Non-current liabilities:

            

Trade and other payables

  652    701    1,059    909    574    490    729   1,108   944   669   1,188   983 

Non-current finance lease liabilities, net

  90    28    49    35    95    81  

Borrowings

  8,897    8,239    8,463    9,860    6,909    5,895    8,239   8,463   9,860   6,909   6,301   5,214 

Other financial liabilities

  288    70    179    191    104    88    70   179   191   104   108   90 

Retirement benefit liabilities

  426    549    586    594    524    447    549   586   594   524   378   313 

Provisions

  143    150    134    106    91    78    150   134   106   91   101   83 

Deferred income

  161    157    148    147    96    82    157   148   147   96   85   71 

Deferred income tax liabilities

  126    137    169    144    130    111    137   169   144   130   138   114 

Other non-current liabilities

  32    41    2    39    27    23    41   2   39   27   59   49 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total non-current liabilities

  10,815    10,073    10,789    12,025    8,550    7,295    10,073   10,789   12,025   8,550   8,358   6,916 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities

 ￦19,595   ￦21,340   ￦22,013   ￦22,012   ￦17,249   US$14,717   ￦21,340  ￦22,013  ￦22,012  ￦17,249  ￦17,882  US$14,796 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Equity attributable to owners of the Parent Company

            

Paid-in capital

            

Capital stock

 ￦1,564   ￦1,564   ￦1,564   ￦1,564   ￦1,564   US$1,335  

Share capital

 ￦1,564  ￦1,564  ￦1,564  ￦1,564  ￦1,564  US$1,295 

Share premium

  1,440    1,440    1,440    1,440    1,440    1,229    1,440   1,440   1,440   1,440   1,440   1,192 

Retained earnings

  10,219    10,646    10,019    8,568    9,050    7,722    10,646   10,019   8,568   9,050   9,644   7,981 

Accumulated other comprehensive income (expense)

  (23)   1    25    26    14    12    1   25   26   14   (1)   (1) 

Other components of equity

  (1,497)   (1,343)   (1,321)   (1,261)   (1,233)   (1,052)   (1,343)   (1,321)   (1,261)   (1,233)   (1,218)   (1,008) 
  11,704    12,309    11,728    10,338    10,836    9,246    12,309   11,728   10,338   10,836   11,430   9,458 

Non-controlling interest

  884    909    1,110    1,449    1,320    1,127    909   1,110   1,449   1,320   1,353   1,119 

Total equity

  12,588    13,218    12,837    11,788    12,156    10,372    13,218   12,837   11,788   12,156   12,783   10,577 

Total liabilities and equity

 ￦32,183   ￦34,558   ￦34,850   ￦33,799   ￦29,404   US$25,089   ￦34,558  ￦34,850  ￦33,799  ￦29,404  ￦30,664  US$25,374 

Consolidated statement of cash flow data

 

  Year Ended December 31,   Year Ended December 31, 
  2011 2012 2013 2014 2015 2015(2)   2012 2013 2014 2015 2016 2016 (1) 
  (In billions of Won and millions of Dollars)   (In billions of Won and millions of Dollars) 

Net cash generated from operating activities

  ￦2,164   ￦5,725   ￦4,111   ￦1,916   ￦4,230   US$3,609    ￦5,725  ￦4,111  ￦1,916  ￦4,230  ￦4,771  US$3,948 

Net cash provided by (used in) investing activities

   (2,666)   (3,851)   (3,783)   (3,171)   (2,402)   (2,049)    (3,851)   (3,783)   (3,171)   (2,402)   (3,485)   (2,884) 

Net cash provided by (used in) financing activities

   772    (1,278)   (312)   1,072    (1,164)   (993)    (1,278)   (312)   1,072   (1,164)   (943)   (781) 

Operating Data

 

  As of December 31,   As of December 31, 
  2011   2012   2013   2014   2015   2012   2013   2014   2015   2016 

Lines installed (thousands)(3)(2)

   23,925     25,242     24,264     23,930     23,607     25,242    24,264    23,930    23,607    24,858 

Lines in service (thousands)(3)(2)

   15,900     15,121     14,032     13,713     12,440     15,121    14,032    13,713    12,440    11,871 

Lines in service per 100 inhabitants(3)(2)

   30.8     30.2     27.4     26.7     24.1     29.7    27.4    26.7    24.6    23.0 

Mobile subscribers (thousands)

   16,563     16,502     16,454     17,300     18,038     16,502    16,454    17,300    18,038    18,892 

Broadband Internet subscribers (thousands)

   7,823     8,037     8,067     8,129     8,328     8,037    8,067    8,129    8,328    8,516 

 

 

(1)The comparative 2011, 2012, 2013 and 2014 consolidated statement of operations data were retrospectively restated because KT Rental Co., Ltd. and KT Capital Co., Ltd. were classified as discontinued operations in accordance with paragraph 32 in IFRS 5 during the year ended December 31, 2015. See Note 39 of the Consolidated Financial Statements.

(2)For convenience, the Won amounts are expressed in U.S. dollars at the rate of￦1,172.01,208.5 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2015.30, 2016. This translation should not be construed as a representation that the Won amounts represent, have been or could be converted into U.S. dollars at that rate or any other rate.

 

(3)(2)Including public telephones.

Exchange Rate Information

The following table sets out information concerning the Market Average Exchange Rate for the periods and dates indicated:

 

Period

  At End
of Period		   Average
Rate(1)		   High   Low   At End
of Period		   Average
Rate  (1)		   High   Low 
  (Won per US$1.00)   (Won per US$1.00) 

2009

   1,167.6     1,276.4     1,573.6     1,152.8  

2010

   1,138.9     1,156.3     1,261.5     1,104.0     1,138.9    1,156.3    1,261.5    1,104.0 

2011

   1,153.3     1,108.1     1,199.5     1,049.5     1,153.3    1,108.1    1,199.5    1,049.5 

2012

   1,071.1     1,126.9     1,181.8     1,071.1     1,071.1    1,126.9    1,181.8    1,071.1 

2013

   1,055.3     1,095.0     1,159.1     1,051.5     1,055.3    1,095.0    1,159.1    1,051.5 

2014

   1,099.2     1,053.2     1,118.3     1,008.9     1,099.2    1,053.2    1,118.3    1,008.9 

2015

   1,172.0     1,131.5     1,203.1     1,068.1     1,172.0    1,131.5    1,203.1    1,068.1 

2016

   1,208.5    1,160.5    1,240.9    1,093.2 

November

   1,150.4     1,152.0     1,173.4     1,129.5     1,168.5    1,161.6    1,183.6    1,137.5 

December

   1,172.0     1,172.2     1,186.1     1,156.8     1,208.5    1,182.3    1,208.5    1,159.1 

2016 (through April 25)

   1,141.1     1,190.1     1,240.9     1,132.3  

2017 (through April 25)

   1,131.7    1,149.8    1,208.5    1,112.5 

January

   1,208.4     1,201.7     1,212.7     1,172.0     1,157.8    1,185.1    1,208.5    1,157.8 

February

   1,235.4     1,217.4     1,236.1     1,195.1     1,132.1    1,144.9    1,165.5    1,131.0 

March

   1,153.5     1,188.2     1,240.9     1,153.5     1,116.1    1,134.8    1,158.2    1,112.5 

April (through April 25)

   1,141.1     1,147.6     1,156.5     1,132.3     1,131.7    1,133.5    1,145.8    1,113.8 

 

Source:Seoul Money Brokerage Services, Ltd.

 

(1)Represents the average of the Market Average Exchange Rates on each business day during the relevant period (or portion thereof).

Our monetary assets and liabilities denominated in foreign currency are translated into Won at the Market Average Exchange Rate on the balance sheet dates, which were, for U.S. dollars,￦1,055.31,099.2 to US$1.00,￦1,099.21,172.0 to US$1.00 and￦1,172.01,208.5 to US$1.00, at December 31, 2013, 2014, 2015 and 2015,2016, respectively.

Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 20152016 have been translated into United States dollars at the rate of￦1,172.01,208.5 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2015.30, 2016.

We make no representation that the Won or Dollar amounts contained in this annual report could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.

Item 3.B.   Capitalization and Indebtedness

Not applicable.

Item 3.C.   Reasons for the Offer and Use of Proceeds

Not applicable.

Item 3.D.   Risk Factors

You should carefully consider the following factors.

Risks Relating to Our Company and Business

Competition in the Korean telecommunications industry is intense.

Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom Co., Ltd. (“SK Telecom”) acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband Co., Ltd. (“SK Broadband”). The acquisition enabled SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet Protocol Television (“IPTV”) services together with its mobile telecommunications services. In January 2010, LG Dacom Corporation (“LG Dacom”) and LG Powercom Co., Ltd. (“LG Powercom”) merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enabled LG U+ to provide a similar range of services as SK Telecom and us. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.

In addition to our competition with integrated telecommunications service providers, we face increasing competition from specific service providers, such as Internet phone service providers, Internet text message service providers, voice resellers and call-back service providers. In recent years, the increasing popularity of Internet phone and free text message services, such as Skype and Kakao Talk, has had a negative impact on demand for our telecommunications and text message services while creating additional data transmission usage by our Internet and mobile subscribers. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.

Mobile Service. We provide mobile services based on Wideband Code Division Multiple Access(“W-CDMA”) technology and Long-Term Evolution (“LTE”) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG U+. We had a market share of 30.6% as of December 31, 2015,2016, making us the second largest mobile telecommunications service provider in Korea. SK Telecom had a market share of 49.1% as of December 31, 2015.2016. Mobile subscribers are allowed to switch their service provider while retaining the same mobile phone number. Mobile service providers also grant subsidies to subscribers who purchase new handsets and agree to a minimum subscription period. Such mobile number portability and handset subsidies previously

intensified competition among the mobile service providers and increased their marketing expenses. In addition, wide variation in subsidy amounts paid to subscribers led to concerns relating to consumer discrimination over time. Consequently, in order to enhance transparency in subsidy amounts paid to

subscribers, the Act on Improvement of Mobile Telecommunication Device Distribution System (the “Handset Distribution Reform Act”), which limits the amount of handset subsidies offered by service providers, was enacted in October 2014. As a result, price competition through handset subsidies has become less prevalent. However, if regulations are amended to allow a greater amount of subsidies and mobile service providers adopt a strategy of expanding market share through price competition, it could lead to a decrease in our net profit margins.

Since 2011, SK Telecom, LG U+ and we have launched fourth-generation (“4G”) mobile telecommunications services based on LTE technology, which has further intensified competition among the three companies and resulted in an increase in marketing expenses and capital expenditures related to implementing and providing 4G LTE services. Furthermore, as SK Telecom, LG U+ and we continue to compete to improve network quality in order to accommodate increased data usage of subscribers, we may incur significant expenses to acquire additional bandwidth spectrums and various fixed assets. We believe that the continuing intense competition among major telecommunications operators in Korea may have a material adverse impact on our results of operations.

Fixed-line Telephone Services. Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. Since then, various competitors have entered the local, domestic long-distance and international long-distance telephone service markets in Korea, which have eroded our market shares. LG U+ and SK Broadband currently provide local, domestic long-distance and international long-distance telephone services. In addition, Sejong Telecom, Inc. (formerly, Onse Telecom Corporation) and SK Telink, Inc. currently provide domestic long-distance and international long-distance telephone services. We also compete with specific service providers, such as Internet phone service providers, voice resellers and call-back service providers that offer international long-distance service in Korea. While we offer our own Internet phone service, the entry of these and other potential competitors into the local, domestic long-distance and international long-distance telephone service markets has had and may continue to have a material adverse effect on our revenues and profitability from these services. As of December 31, 2015,2016, we had a market share in local telephone service of 80.6% and a market share in domestic long distancelong-distance service of 78.9%.Further. Further increase in competition may decrease our market shares in such businesses.services. As part of our efforts to improve our operational efficiencies, we transferred all operations relating to fixed-line sales activities (includingon-site sales, line activation, after service, and customer center operations) to our subsidiaries in 2014.

Internet Services. The Korean broadband Internet access service market has experienced significant growth in the past decade. SK Broadband (formerly Hanarotelecom) entered the broadband market in 1999 offering both Hybrid Fiber Coaxial (“HFC”) and Asymmetric Digital Subscriber Line (“ADSL”) services. We also began offering broadband Internet access service in 1999, followed by Dreamline, Sejong and LG U+. In recent years, numerous cable television operators have also begun to offerHFC-based services at rates lower than ours. We had a market share of 41.6%41.4% as of December 31, 2015.In November 2015, SK Broadband announced its plan to acquire a majority stake in CJ HelloVision Co., Ltd. (“CJ HelloVision”), the largest cable multiple system operator with a market share of 14.4% of the paid TV services market in Korea as of 2015. CJ HelloVision provides Internet access service, Internet phone service and wireless communications services. The merger proposal is currently being reviewed by the Government due to anti-trust concerns, among others. If the merger is approved as currently proposed, SK Telecom is expected to further increase its market share of various businesses such as Internet access service, IPTV and wireless communications markets.2016. As a result of having to compete with a number of competitors and the maturing of the Internet access service market, we currently encounter, and we expect to encounter, pressure to increase marketing expenses in the future.

The market for other Internet-related services in Korea, including IPTV and Internet phone services, is also very competitive. We anticipate that competition will continue to intensify as the usage and popularity of the Internet grows and as new domestic and international competitors newly enter the Internet industry in Korea.Korea or expand product offerings such as gigabit Internet service. The substantial growth of the Internet industry in Korea has attracted many competitors and as a result may lead to increasing price competition to provide Internet-related services. Increased competition in the Internet industry could have a material adverse effect on the number of subscribers of our Internet-related service and on our results of operations.

Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to a service provider. We currently use 40 MHz of bandwidth in the 2.1 GHz spectrum, of which 20 MHz is used for our 4G LTE services and the remaining 20 MHz of bandwidth for ourIMT-2000 services based onW-CDMA wireless network standards. We also use 20 MHz of bandwidth in the 900 MHz spectrum and 35 MHz of bandwidth in the 1.8 GHz spectrum for our 4G LTE services. We also use 20 MHz of bandwidth in the 1.8 GHz spectrum, which we acquired in May 2016 for our WidebandLTE-A services. For more information on our licenses to bandwidth spectrum, see “Item 4. Information on the Company—Item 4.D. Property, Plants and Equipment—Mobile Networks.”

The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia contents are likely to put additional strain on the bandwidth capacity of mobile service providers. In the event we are unable to maintain sufficient bandwidth capacity by renewing existing bandwidth spectrum, receiving additional bandwidth allocation, or cost-effectively implementing technologies that enhance bandwidth usage efficiency, our subscribers may perceive a general decrease in quality of mobile telecommunications services. No assurance can be given that bandwidth constraints will not adversely affect the growth of our mobile telecommunications business. Furthermore, we may be required to pay a substantial amount to acquire bandwidth capacity in order to meet increasing bandwidth demand, which may adversely affect our financial condition and results of operations.

Introduction of new services, including our 4G LTE services, poses challenges and risks to us.

The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, in March 2005, we acquired a license to provide wireless broadband Internet access (“WiBro”) service for￦126 billion, and commercially launched our service in June 2006. We completed the upgrade of our 4G WiBro network and expanded our WiBro service coverage to 84 cities nationwide and major highways in March 2011, which we believe allows us to provide WiBro services at speeds that are approximately three times faster than our previous 3G network at a lower cost, and had 685,081approximately 506,000 subscribers as of December 31, 2015.2016. The number of our WiBro subscribers decreased in 20152016 compared to 2014,2015, as more WiBro subscribers chose to access the internetInternet using our 4G LTE network rather than WiBro following the proliferation of 4G LTE services since 2013. Furthermore, we focused our subscriber retention efforts during 20152016 on our mobile subscribers rather than our WiBro subscribers. We are also continually upgrading our broadband network to enable betterfiber-to-the-home (“FTTH”) connection, which enhances data transmission speed and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or

office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH also enables us to deliver digital media content, such as IPTV, with higher stability.

In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to as 4G technology, and commenced providing

commercial 4G LTE services in the Seoul metropolitan area in January 2012. We completed the expansion of our 4G LTE service coverage nationwide in October 2012. Several wireless carriers in the United States, Europe and Asia commenced LTE services in recent years and LTE technology is currently widely accepted as the standard 4G technology. LTE technology enables data to be transmitted faster thanW-CDMA, generally providing a downloading speed of 75 Mbps per 10 MHz. Our LTE services provides a downloading speed of up to 300 Mbps for downloading (for which 40 MHz of bandwidth is used) by utilizing inter-band carrier aggregation technology. We introduced the GiGA LTE service in June 2015, linking “WidebandLTE-A X4” and wireless LAN service (“WiFi”) signals and thereby increasing data transmission speed to up to 1.17 Gbps for downloading. In addition, our use of 20 MHz of bandwidth in the 1.8 GHZ spectrum, acquired in May 2016, further enhances the quality of our LTE services through intra-band carrier aggregation technology. We believe that the faster data transmission speed of the LTE network allows us to offer significantly improved wireless data transmission services with faster wireless access to multimedia content. Accordingly, we have made extensive efforts to develop advanced technologies as well as to provide a variety of services with enhanced speed, latency and connectivity. However, no assurance can be given that our new services will gain broad market acceptance such that we will be able to derive revenues from such services to justify the license fee, capital expenditures and other investments required to provide such services.

We may not be able to successfully pursue our strategy to acquire businesses and enter into joint ventures that complement or diversify our current business, and we may need to incur additional debt to finance such expansion activities.

One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business. In March 2014, the investment business division of KT Capital Co., Ltd., including 3,059,560 common shares of BC Card Co., Ltd. that KT Capital Co., Ltd. held, was spun off and merged into KT Corporation. On August 20, 2015, we and our consolidated subsidiary, KT Hitel Co., Ltd., sold the entire 100% stake of KT Capital Co., Ltd. to JCF III K Holdings LLC for a total of￦299 billion. In January 2011, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd. (“KT Skylife”), a provider of satellite TV service which may also be packaged with our IPTV services, from Dutch Savings Holdings B.V. for approximately￦246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 49.9%50.3% interest in KT Skylife as of December 31, 2015.2016. In March 2015, KT Media Hub Co., Ltd. was merged into KT Corporation to increase management efficiency and promote synergy among our existing businesses.

While we plan to continue our search for other suitable acquisition and joint venture opportunities, we cannot provide assurance that we will be able to identify additional attractive opportunities or that we will successfully complete the transactions, without encountering administrative, technical, political, financial or other difficulties, or at all. Even if we were to successfully complete the transactions, success of an acquisition or a joint venture depends largely on our ability to achieve the anticipated synergies, cost savings and growth opportunities from integrating the business of the acquired company or the joint venture with our business. There can be no assurance that we will achieve the anticipated benefits of the transaction, which may adversely affect our business, financial condition and results of operations.

Pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital through incurring loans or through issuances of bonds or other securities in the international capital markets.

Disputes with our labor union may disrupt our business operations.

In the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing ofnon-core businesses and

reducing our employee base. Although we have not experienced any significant labor disputes or unrests in recent years,there can be no assurance that we will not experience labor disputes or unrests in the future, including expandedextended protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operations.

We also negotiate collective bargaining agreements every two years with our labor union and annually negotiate a wage agreement. Our current collective bargaining agreement expires on November 15, 2017. Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrests resulting from disagreements with the labor union in the future.

The Korean telecommunications and Internet protocol broadcasting industries are subject to extensive Government regulations, and changes in Government policy relating to these industries could have a material adverse effect on our operations and financial condition.

The Government, primarily through the Ministry of Science, ICT & Future Planning (the “MSIP”) (ICT standing for Information & Communication Technology) and the KCC, has authority to regulate the telecommunications industry. Until March 2013, regulation of the telecommunications industry had mainly been the responsibility of the KCC. With the establishment of the newly created MSIP on March 23, 2013, however, such regulatory responsibility has mostly been transferred to the MSIP. The MSIP’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors.

Under current Government regulations, if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the MSIP, it must obtain prior approval from the MSIP for the rates and the general terms for that service. Each year, the MSIP designates service providers whose rates and general terms of service must be approved by the MSIP. In recent years, the MSIP had designated us for local telephone service and SK Telecom for mobile service, and the MSIP, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us and SK Telecom for such services.

The MSIP currently does not regulate our domestic long-distance, international long-distance, broadband Internet access and mobile service rates, but the inability to freely set our local telephone service rates may hurt profits from such business and impede our ability to compete effectively against our competitors. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation—Rates.” The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers are also subject to approval by the MSIP. In addition, the MSIP may periodically announce public policy guidelines or suggestions that we take into consideration in setting our tariffs fornon-regulated services. As a result of discussions with the MSIP, after a series of reductions, we completely abolished our activation fee relating to our mobile services completely in March 2015. In December 2015, we decided to lower our early termination fee to 25.1% of the existing fees relating to our broadband internetInternet access service, internetInternet phone or IPTV or such products bundled with our fixed-line telephone service. We expectimplemented such policy to be in effect by the first

half ofJuly 2016. There can be no assurance that we will not adopt other tariff-reducing measures in the future to comply with the Government’s public policy guidelines or suggestions.

The MSIP may revoke our licenses or suspend any of our businesses if we fail to comply with its rules, regulations and corrective orders, including the rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the MSIP may levy a monetary penalty of up to 3.0% of the average of our annual revenue

for the preceding three fiscal years. For example, in December 2013, the KCC imposed a combined fine of approximately￦106 billion on SK Telecom, LG U+ and us (our fine being approximately￦30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. In March 2014, the MSIP imposed a45-day suspension on each of us, SK Telecom and LG U+ from accepting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. Additionally, the MSIP announced that it plans to bring criminal charges with fines of up to￦150 million and imprisonment of less than three years against any carrier and responsible personnel that fails to adhere to the suspension or continues to offer illegal subsidies after the suspension is completed. In August 2014, the KCC again imposed a combined fine of approximately￦58 billion on SK Telecom, LG U+ and us (our fine being approximately￦11 billion) for providing excessive handset subsidies, and also imposed temporary suspensions on accepting new subscribers for seven days on SK Telecom and LG U+. In December 2014, the KCC further imposed a fine of approximately￦8 billion on each of SK Telecom, LG U+ and us for providing excessive handset subsidies and in March 2015, the KCC again imposed a combined fine of approximately￦34 billion on SK Telecom, LG U+ and us (our fine being approximately￦9 billion) for violation of regulations relating to handset sales, in connection with a used handset buyback program that we and the other telecommunications operators were promoting. On March 12, 2015, the KCC imposed a fine of￦870 million for violation of restrictions on handset subsidies relating to our compensation program for used handsets. On June 24, 2015, the KCC imposed a fine of￦52 million for violating privacy related regulations and undermining consumer interests. On July 31, 2015 and January 19, 2016, the KCC imposed a fine of￦350 million and￦560 million, respectively, on us for infringing upon consumer interests by advertising false and exaggerated information about bundled products. On March 8, 2016, the KCC imposed a fine of￦32 million on us for offering excessively reduced rates and waivers to certain customers. On December 6, 2016, the KCC imposed a combined fine of approximately￦10.7 billion on SK Telecom, LG U+, SK Broadband,t-broad, D’live, CJ HelloVision and us (our fine being approximately￦2.3 billion) and ordered to take corrective measures for providing excessive promotional gifts to bundled products customers. For more information about the penalties imposed for violating Government regulations, see “Item 8. Financial Information—Item 8.A.Consolidated Statements and Other Financial Information—Legal Proceedings.” The revocation of our licenses, suspension of our business or imposition of monetary penalties by the MSIP could have a material adverse effect on our business.

On October 1, 2014, the Handset Distribution Reform Act went into effect. The Handset Distribution Reform Act regulates, among other matters, the sale and subsidies of mobile devices such as smartphones, with one of its purposes being to induce telecommunication operators to compete in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not be discriminated in terms of subsidies based on their age, place of residence or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either a handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 20%, effective as ofsince April 24, 2015). The maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer is determined by Korean telecommunication regulators (such limit to be determined between￦250,000 and￦350,000, and may be adjusted every six months, with the current limit set at￦330,000, effective as ofsince April 8, 2015). Telecommunications operators are also required to publicly announce the amount of handset subsidy that they offer, which may not be readjusted within one week after such announcement. In addition, telecommunications operators are prohibited from using misleading or exaggerated advertisements, such as advertisements that mobile phones are free without adequately explaining that it is preconditioned on signing up for high-priced monthly subscription plans.

The Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications by an auction process or by a planned allocation. For a discussion of the Government’s recent policies and practices on bandwidth spectrum allocation, see “—Item 3.D. Risk Factors—Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.” The new allocations of bandwidth could increase competition among wireless service providers, which may have an adverse effect on our business.

We also plan to put more focus on the Internet protocol (“IP”) media market, and we began offering IPTV services in November 2008. IPTV is a service which combinesvideo-on-demand services with real-time high definition broadcasting via broadband networks. The MSIP and the KCC have the authority to regulate IPTV services. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IPTV services business must first obtain a license from the MSIP. Moreover, anyone intending to provide linear channel programs focused on news or contents that generally combine news, culture entertainment, and any other similar contents with IPTV providers, must obtain approval from the KCC. Furthermore, anyone intending to provide contents relating to the introduction of consumer products and other similar marketing linear channel programs with IPTV providers must obtain additional approval from the MSIP. In addition, KT Skylife (formerly Korea Digital Satellite Broadcasting Co., Ltd.), which became our consolidated subsidiary starting in January 2011, offers satellite TV services, which may also be packaged with our IPTV services. KT Skylife is also subject to regulation by the MSIP and the KCC pursuant to the Korea Broadcasting Act. In March 2015, amendments to the Internet Multimedia Broadcasting Business Act were promulgated. Under such amendments, a single pay TV operator (including its affiliates) may not have more thanone-third of the market share of all pay TV subscribers in Korea. The restriction on market share is in effect until June 27, 2018.

Government policies and regulations relating to the above as well as other regulations involving the Korean telecommunications and IP broadcasting industries (including as a result of the implementation of free trade agreements between Korea and other countries, including the United States and the European Union) may change,could impose restrictions on our business operations, which could have a material adverse effect on our operations and financial condition.condition, and may also change in ways that could materially and adversely affect us. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.”

The pending legal cases against Mr. Suk-chae Lee, our former chief executive officer, and other former executive officers or directors—and related adverse publicity—could have a material adverse effect on our business, reputation and stock price.

In April 2014, the Seoul Central District prosecutor’s office charged Mr. Suk-chae Lee, our former chief executive officer who resigned in November 2013, with embezzlement and breach of fiduciary duty. Mr. Il Yung Kim, our former standing director and former president of the KT Corporate Center, was charged as a co-conspirator in the breach of fiduciary duty by Mr. Lee, and Mr. Yu-yeol Seo, our former president of Home Business Group, was charged as a co-conspirator in Mr. Lee’s embezzlement. On September 24, 2015, the Seoul District Court acquitted Mr. Lee of the charges of embezzlement and breach of fiduciary duty. Mr. Kim and Mr. Seo were also acquitted of the conspiracy charges. The prosecution has appealed the judgments and on May 27, 2016, the Seoul High Court found Mr. Lee and Mr. Seo guilty of embezzlement and sentenced them to 18 months of prison term, to be suspended for 2 years, for having embezzled and created off-the-books funds of￦1.1 billion between 2009 and 2013, using such funds for personal purposes such as payments at weddings and funerals of Mr. Lee’s friends and acquaintances and Mr. Seo’s living and entertainment expenses. However, Mr. Lee and Mr. Kim were acquitted on the charge of breach of fiduciary duty. All of these

judgments have been appealed by the prosecution as well as Mr. Lee and Mr. Seo, and are currently pending before the Supreme Court of Korea.

The legal cases against Mr. Lee, Mr. Seo, and Mr. Kim do not involve charges of wrongdoing by us. Nevertheless, an adverse determination in any such case or proceeding may harm our reputation and adversely affect the trading price of our shares. The outcome of any related claims, investigations and proceedings is inherently uncertain and there can be no assurance that any further developments in the legal proceedings against Mr. Lee, Mr. Seo, and Mr. Kim, including adverse publicity, will not adversely affect our business, reputation or stock price.

Our charitable donations, employment of certain individuals and engagement of an advertising agency connected to a scandal involving Ms. Soon-sil Choi, a confidante of former President Geun-hye Park, could have a material adverse effect on our business, reputation and stock price.

In March 2017, the Constitutional Court of Korea found that many Korean corporations, including the Company, made donations to two non-profit foundations, Mir Foundation and K-Sports Foundation, at former President Park’s request. Our contributions comprised￦1.1 billion of the total￦48.6 billion given to Mir Foundation and￦700 million of the total￦28.8 billion given to K-Sports Foundation. The Constitutional Court also found that, at the requests of an aide of former President Park, we hired (and later promoted) two individuals, Mr. Dong-Soo Lee and Ms. Hye-Sung Shin: Mr. Lee as the head of a business unit in charge of our marketing and advertisement campaigns and Ms. Shin to another position in the same business unit. Subsequently, the same aide of former President Park also requested Mr. Lee and our other officers to award advertising contracts to Playground Communications Co., Ltd. (“Playground”), an advertising agency over which Ms. Soon-sil Choi, a confidante of former President Park, effectively owns 70% equity interest, according to the Constitutional Court. Playground was awarded seven advertising contracts for a total of approximately￦6.8 billion in 2016, amounting to approximately 3.7% of our annual advertising spending in 2016. In 2016, our payments to Playground amounted to approximately￦517 million. We have not awarded additional advertising contract to Playground since September 2016, and Mr. Lee and Ms. Shin resigned from the Company in November 2016 and March 2016, respectively.

In April 2017, the Korean prosecution indicted former President Park on charges of bribery and coercion, among others. The coercion charge against former President Park includes, among other matters, charges relating to the: (i) employment and promotions of Mr. Lee and Ms. Shin at KT Corporation, (ii) entry into advertising contracts with Playground and (iii) donations to Mir Foundation and K-Sports Foundation by us and other Korean corporations. We cannot be certain at this time how the above-described matters and the publicity around them will develop. While we have not been charged with wrongdoing in connection with the above-mentioned matters, related allegations, claims, investigations and proceedings remain a possibility, and we cannot provide any assurances as to likely outcomes. There can be no assurance that any further developments relating to the above-mentioned matters, including adverse publicity, will not adversely affect our business, reputation or stock price.

The reported investigation, insolvency proceedings of and any adverse publicity associated with our previous subsidiary, KT ENGCORE, could have a material adverse effect on our business, reputation and stock price.

An employee of KT ENGCORE, our consolidated subsidiary until August 2014, and several companies, some of which are KT ENGCORE’s subcontractors, allegedly worked together to forge documents, including a forged proof of accounts receivable, to incur borrowings, of which￦290 billion remains unpaid, from 16 Korean banks since 2008 in over 460 transactions, which were allegedly secured by the forged accounts receivable and endorsed by KT ENGCORE. KT ENGCORE’s management neither had knowledge of nor approved such transactions. On February 11, 2014, police

raided the offices of the subcontractors in connection with their investigation of the loans. Upon discovery of the incident, KT ENGCORE immediately suspended the employee in question without pay, pending the results of the investigations for any further disciplinary actions. The employee and several other persons involved in the incident were sentenced to prison terms by the Seoul Central District Court in August 2014 and by the appellate court subsequently.

In March 2014, KT ENGCORE filed for court receivership with the Seoul Central District Court, based on its inability to pay approximately￦49 billion in commercial paper that became due after early redemption rights were exercised. The commercial paper had been issued in connection with construction of a solar power plant by a contractor of the project and guaranteed by KT ENGCORE. KT ENGCORE faced difficulties in preventing such exercise of redemption rights following the above incident, and we declined to provide additional financial support to KT ENGCORE to repay the redeemed commercial paper. In August 2014, the Seoul Central District Court approved KT ENGCORE’s restructuring plan, and determined that KT ENGCORE is only responsible for 15% to 20% of the borrowings which remain unpaid, or approximately￦46 billion. Pursuant to the plan, KT ENGCORE is expected to repay all of its currently outstanding obligations. The banks had appealed the decision of the Seoul Central District Court, and it was determined that KT ENGCORE is responsible for 30% to 40% of the borrowings which remain unpaid. The court decision was appealed and in February 2017, the Seoul High Court found that KT ENGCORE is responsible for 40% of the borrowings which remain unpaid. The appellate court decision was appealed to the Supreme Court of Korea. While KT ENGCORE’s restructuring is unlikely to have a material impact on our results of operations or financial condition on a consolidated basis, as KT ENGCORE has not been our consolidated subsidiary since 2014 due to its filing for court receivership, and our interest in KT ENGCORE was classified asavailable-for-sale securities, any future legal proceedings against KT ENGCORE and/or us may lead to significant losses. Such losses, as well as any adverse publicity associated with the incident, could have a material adverse effect on our business, reputation and stock price.

The data breach incidents involving us in recent years have resulted in government investigations and civil litigation, and if our efforts to protect personal information of our subscribers are unsuccessful, future issues may result in further government enforcement actions and civil litigation and may significantly impact our results of operation and reputation.

The nature of our business involves the receipt and storage of personal information of our subscribers. The uninterrupted operation of our information systems and confidentiality of the customer information that resides in such systems are critical to our successful operations. As such, we have a program in place to detect and respond to data security incidents. However, even though we may take all steps we believe are necessary to protect personal information, hardware, software or applications we develop or procure from third parties may contain defects in design, manufacturing defects or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to circumvent our security measures to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. In addition, because the techniques used to obtain unauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.

For example, in July 2012, the police arrested two third-party individuals in connection with the alleged theft of personal information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program(“N-STEP”), our mobile customer information system. Since the incident, approximately 29,800 of our mobile phone

subscribers filed a total of 16 lawsuits against us in connection with theN-STEP hackings, alleging that we failed to protect their personal information, and are seeking total damages of approximately￦15 billion. From August 2014 to October 2016, various district courts have awarded damages of￦100,000 per plaintiff for 14 of the cases involving a total of approximately 29,000 of the subscribers, resulting in damages of approximately￦3 billion to us, while the remaining trials are currently ongoing at various district courts. We have appealed the district courts’ decisions. In January 2017, we won one of the appeals and such appellate court decision was appealed to the Supreme Court. The other appeals are currently ongoing at the Seoul High Court.

Furthermore, in March 2014, the police arrested three third-party individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. Since the incident, approximately 15,000 subscribers filed 22 lawsuits against us in connection with the information theft, seeking total damages of approximately￦7 billion. From November 2016 to February 2017, we won 14 trials, lost two trials and the remaining six trials are currently ongoing at various district courts. The plaintiffs of 10 of the 14 cases have appealed the district courts’ decisions to the Seoul High Court. We appealed the district courts’ decisions of the two trials where we lost. In June 2014, we were fined￦85 million by the KCC and were ordered to take corrective measures in connection with the most recent hacking incident. We filed an administrative appeal in August 2014 in connection with the KCC fine and prevailed. The KCC appealed the administrative decision and the appeal is currently ongoing at the Seoul High Court.

We are unable to predict with any meaningful degree of certainty the outcome of these incidents at this time, including the scope of investigations or the maximum potential exposure. However, if we experience additional significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be subject to additional government enforcement actions, regulatory sanctions and litigation in the future. In addition, our mobile phone subscribers could lose confidence in our ability to protect their information, which could cause them to discontinue using our services altogether. Furthermore, adverse final determinations, decisions or resolutions regarding such matters could encourage other parties to bring related claims and actions against us. Accordingly, the outcome of these incidents may materially and adversely impact our business, reputation, results of operations and financial condition.

We are subject to various laws and regulations underin Korea and other jurisdictions, including the Monopoly Regulation and Fair Trade Act.Act of Korea and other laws and regulations governing our business activities and acts of our management and employees.

Our business operations and acts of our management, employees and other relevant parties are subject to various laws and regulations in and outside Korea. These laws are complicated and sometimes conflicting and our efforts to comply with these laws could increase our cost of doing business, restrict our business activities and expose us or our employees to legal sanctions and liabilities.

The Monopoly Regulation and Fair Trade Act provides for various regulations and restrictions on large business groups enforced by the Korea Fair Trade Commission. The Korea Fair Trade Commission designated us as a large business group under the Monopoly Regulation and Fair Trade Act on April 1, 2002. Our business relationships and transactions with our subsidiaries, affiliates and other companies within the KT group are subject to ongoing scrutiny by the Fair Trade Commission as to, among other things, whether such relationships and transactions constitute undue financial support among companies of the same business group. We are also subject to the fair trade regulations limiting debt guarantees for other domestic member companies of the same group and cross-shareholdings among domestic member companies of the same group.group, as well as requiring disclosure of the status of such cross-shareholdings. Additionally, we are subject to a prohibition, in effect since July 25, 2014, against circular shareholding among any three or more entities within our business

group. For example, in 2015, we were fined￦2 billion by the Korea Fair Trade Commission for using monopolistic status to exclude competitors in the corporate messaging business. In 2016, we were issued consent orders by the Korea Fair Trade Commission for unfairly comparative advertisements on quality and coverage of our LTE service. Any future determination by the Korea Fair Trade Commission that we have engaged in transactions that violate the fair trade laws and regulations may result in fines or other punitive measures and may have a material adverse effect on our reputation and our business.

The reportedCertain of our business activities or acts of our management, employees or other relevant parties, including, without limitation, investigations, of and any adverse publicity associated with Mr. Suk-Chae Lee,claims or legal proceedings involving our former chief executive officer and our other former executive officers or directors could have a material adverse effect on our business, reputation and stock price.

On November 12, 2013, Mr. Suk-Chae Lee resigned from his position as the president and chief executive officer of KT Corporation following the investigation by prosecutors for alleged embezzlement and breach of fiduciary duty. A warrant for Mr. Lee’s arrest and detainment was submitted for approval to the Seoul Central District Court in January 2014, but was denied due to lack of ascertainable evidence for his arrest. In April 2014, the Seoul Central District prosecutor’s office charged Mr. Lee with embezzlement and breach of fiduciary duty, and also charged Mr. Il Yung Kim, our former standing director and former president of the KT Corporate Center, as a co-conspirator in the breach of fiduciary duty by Mr. Lee and Mr. Yu-Yeol Seo,incidents relating to the employment of certain executives and execution of certain advertising contracts described above, may raise concerns about compliance with laws of Korea and other relevant jurisdictions, including the United States. These various and sometimes conflicting laws and regulations include the U.S. Foreign Corrupt Practices Act and other laws prohibiting corrupt payments to governmental officials and commercial counterparties. Compliance with complex Korean and foreign laws and regulations that apply to our former presidentoperations increases our cost of Home Business Group, asdoing business. Failure to comply with these laws and regulations could also result in fines, penalties and criminal sanctions against us, our officers, or our employees, prohibitions on conduct of our business, and damage to our reputation. Criminal or civil investigation by Korean or other authorities may result in a co-conspiratormaterial impact to our business or reputation, which in Mr. Lee’s embezzlement. On September 24, 2015, the Seoul District Court acquitted Mr. Leeturn could impact our relationships with certain of theour customers and business partners, and which potentially could give rise to additional regulatory inquiries in Korea or elsewhere. Defending us against any allegations or charges of embezzlementwrongdoing also could be both costly and breachtime-consuming, and could significantly divert the efforts and resources of fiduciary duty. Mr. Kimour management and Mr. Seo were also acquitted of the conspiracy charges. The prosecution has appealed the judgments. The appeals are still ongoing, and we cannot be certain at this time what the outcome will be. However, thereother personnel. There can be no assurance that any furtherwe or our employees and other relevant parties will always be in full compliance with these laws and regulations, or that future legal or regulatory developments in the trialsapplicable to us will not adversely affect our business or cause our stock price to decline.

The reported investigation of and anyhave an adverse publicity associated with our previous subsidiary, KT ENGCORE, could have a material adverse effectimpact on our business, reputation andor stock price.

An employee of KT ENGCORE, our consolidated subsidiary until August 2014, and several companies, some of which are KT ENGCORE’s subcontractors, allegedly worked together to forge documents, including a forged proof of accounts receivable, to incur borrowings, of which￦290 billion remains unpaid, from 16 Korean banks since 2008 in over 460 transactions, which were allegedly secured by the forged accounts receivable and endorsed by KT ENGCORE. KT ENGCORE’s management neither had knowledge of nor approved such transactions. On February 11, 2014, police raided the offices of the subcontractors in connection with their investigation of the loans. Upon discovery of the incident, KT ENGCORE immediately suspended the employee in question without pay, pending the results of the investigations for any further disciplinary actions. The employee and several other persons involved in the incident were sentenced to prison terms by the Seoul Central District Court in August 2014 and by the appellate court subsequently.

In March 2014, KT ENGCORE filed for court receivership with the Seoul Central District Court, based on its inability to pay approximately￦49 billion in commercial paper that became due after early redemption rights were exercised. The commercial paper had been issued in connection with construction of a solar power plant by a contractor of the project and guaranteed by KT ENGCORE. KT ENGCORE faced difficulties in preventing such exercise of redemption rights following the above incident, and we declined to provide additional financial support to KT ENGCORE to repay the redeemed commercial paper. In August 2014, the Seoul Central District Court approved KT ENGCORE’s restructuring plan, and determined that KT ENGCORE is only responsible for 15% of the borrowings which remain unpaid, or approximately￦46 billion. Pursuant to the plan, KT ENGCORE is expected to repay all of its currently outstanding obligations. The banks have appealed the decision of the Seoul Central District Court, and the trial over the appeal is currently ongoing. While KT ENGCORE’s restructuring is unlikely to have a material impact on our results of operations or financial condition on a consolidated basis, as KT ENGCORE has not been our consolidated subsidiary since 2014 due to its filing for court receivership, and our interest in KT ENGCORE was classified as available-for-sale securities, any future legal proceedings against KT ENGCORE and/or us may lead to significant losses. Such losses, as well as any adverse publicity associated with the incident, could have a material adverse effect on our business, reputation and stock price.

The data breach incidents involving us in recent years have resulted in government investigations and private litigation, and if our efforts to protect the personal information of our subscribers are unsuccessful, future issues may result in further government enforcement actions and private litigation and may significantly impact our results of operation and reputation.

The nature of our business involves the receipt and storage of personal information of our subscribers. The uninterrupted operation of our information systems and confidentiality of the customer information that resides in such systems are critical to our successful operations. As such, we have a program in place to detect and respond to data security incidents. However, even though we may take all steps we believe are necessary to protect personal information, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to circumvent our security measures to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. In addition, because the techniques used to obtain unauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.

For example, in July 2012, the police arrested two individuals in connection with the alleged theft of personal information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program (“N-STEP”), our mobile customer information system. Since the incident, approximately 29,800 of our mobile phone subscribers filed a total of 16 lawsuits against us in connection with the N-STEP hackings, alleging that we failed to protect their personal information, and are seeking total damages of approximately￦15 billion. From August 2014 to October 2015, various district courts have awarded damages of￦100,000 per plaintiff for 13 of the cases involving a total of approximately 29,000 of the subscribers, resulting in damages of approximately￦3 billion to us, while the remaining trials are currently ongoing at various district courts. We have appealed the district courts’ decisions and the appeals are currently ongoing at the Seoul High Court.

Furthermore, in March 2014, the police arrested three individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. Since the incident, approximately 13,450 subscribers filed 19 lawsuits against us in connection with the information theft, seeking total damages of approximately￦7 billion. The trials are currently ongoing at various district courts. In June 2014, we were fined￦85 million by the KCC and were ordered to take corrective measures in connection with the most recent hacking incident. We filed an administrative appeal in August 2014 in connection with the KCC fine, and the appeal is currently ongoing at the Seoul Administrative Court.

We are unable to predict with any degree of certainty the outcome of these incidents at this time, including the scope of investigations or the maximum potential exposure. However, if we experience additional significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be subject to additional government enforcement actions, regulatory sanctions and litigation in the future. In addition, our mobile phone subscribers could lose confidence in our ability to protect their information, which could cause them to discontinue using our services altogether. Furthermore, adverse final determinations, decisions or resolutions in such matters could encourage other parties to bring related claims and actions against us. Accordingly, the outcome of these incidents may materially and adversely impact our business, reputation, results of operations and financial condition.

Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.

In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected share prices of some wireless telecommunications companies in the United States. In May 2011, the International Agency for Research on Cancer (“IARC”) announced that it has classified radiofrequency electromagnetic fields associated with wireless phone use as possibly carcinogenic to humans, based on an increased risk for glioma, a malignant type of brain cancer. The IARC is part of the World Health Organization that conducts research on the causes of human cancer and the mechanisms of carcinogenesis, and aims to develop scientific strategies for cancer control. We cannot assure you that such health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. In addition, to protectpre-school and elementary school children, the Office of Education inGyeonggi-do, one of Korea’s highly populated provinces, implemented an ordinance named “Protective Ordinance for Social Groups Vulnerable to Electromagnetic Radiation” in April 2016. The ordinance prohibits installation of cellular towers nearpre-schools and elementary schools inGyeonggi-do. In December 2016, the minister of the MSIP filed a petition with the Supreme Court to invalidate the ordinance. Certain legislators ofGyeonggi-do announced a plan to file a criminal complaint against the minister of the MSIP. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on us by reducing our number of subscribers or our usage per subscriber.

Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the prices of our securities.

Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes an increase in the amount of Won required by us to make interest and principal payments on our foreign-currency-denominated debt, the costs of telecommunications equipment that we purchase from overseas sources, net settlement payments to foreign carriers and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the￦8,6358,121 billion total principal amountbook value of debentures and borrowings outstanding as of December 31, 2015,2016,￦2,6743,072 billion was denominated in foreign currencies with a weighted average interest rate of 3.62%.currencies. The interest rates of such debt denominated in foreign currencies ranged from 0.48% (Japanese Yen 15 billion bond issued in 2015) to 6.50% (US$100 million fixed rate notes due 2034 issued under our medium-term note program). Upon identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such strategies, our results of operations have historically been affected by exchange rate fluctuations and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. See “—Item 3.A. Selected Financial Data—Exchange Rate Information”, “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Exchange Rate Risk.”

Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of theour ordinary shares of our common stock on the KRX Korea Composite Stock Price Index (“KOSPI”) Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRsAmerican Depositary Receipts (“ADRs”) of cash dividends, if any, paid in Won on our ordinary shares of common stock represented by the ADSs.

We may be exposed to potential claims for unpaid wages and become subject to additional labor costs arising from the Supreme Court of Korea’s interpretation of ordinary wages.

Under the Labor Standards Act, an employee’s “ordinary wage” is a key legal construct used to calculate many statutory benefits and entitlements in Korea. Increasing or decreasing the amount of compensation included in employees’ ordinary wages has the effect of increasing or decreasing the amounts of various statutory entitlements that are calculated based on “ordinary wage,” such as overtime premium pay. Under guidelines previously issued by the Ministry of Employment and Labor, prior to the Supreme Court decision described below, an employee’s ordinary wage included base salary and certain fixed monthly allowances for work performed overtime during night shifts and holidays. Prior to the Supreme Court of Korea’s decision described below, companies in Korea had typically interpreted these guidelines as excluding from the scope of ordinary wages fixed bonuses that are paid other than on a monthly basis, namely on abi-monthly, quarterly or biannual basis.

On December 18, 2013, the Supreme Court of Korea ruled that regular bonuses (including those that are paid other than on a monthly basis) shall be deemed ordinary wages if these bonuses are paid “regularly” and “uniformly” on a “fixed basis” notwithstanding differential amounts based on seniority. Under this decision, any collective bargaining agreement or labor-management agreement which attempts to exclude such regular bonuses from employees’ ordinary wages will be deemed void for violation of the mandatory provisions of Korean law. However, the Supreme Court of Korea further ruled that, in certain limited situations, an employee’s claim of underpayment under the expanded scope of ordinary wages for the past three years may be denied based on the principles of good faith, even though the claim is raised within the statute of limitations period. Following this Supreme Court Decision,

decision, the Ministry of Employment and Labor issued a Guideline for Labor and Management on Ordinary Wages on January 23, 2014. A bill for amendment to the Labor Standard Act, which includes a definition of “ordinary wages” as “entire money and valuables determined in advance to be provided to the employee by the employer as wages, regardless of its name, in exchange of the prescribed or total work of the employee,” is currently pending at thesub-committee level of the National Assembly.

While we currently are not subject to any claims of underpayment from our current or former employees, the Supreme Court decision may result in additional labor costs for us in the form of additional payments required under the expanded scope of ordinary wages, both those incurred during the past three years and those to be incurred in the future. Any such additional payments may have an adverse effect on our financial condition and results of operation.

Risks Relating to Korea

Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic or political conditions in Korea deteriorate.

Substantially all of our operations, customers and assets are located in Korea. Accordingly, the performance and successful fulfillment of our operational strategies are necessarily dependent on the overall Korean economy and the resulting impact on the demand for telecommunications services. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the Korean economy is subject to many factors beyond our control, including developments in the global economy.economy and domestic political scandals.

In recent years, adverse conditionsThe Korean economy is closely integrated with, and volatilityis significantly affected by, developments in the worldwideglobal economy and financial markets,markets. Substantial uncertainties remain for the global and Korean economy in the form of anticipated tightening of the U.S. monetary policy, continued fiscal and financial challenges for the European, U.S. and global economies, fluctuations in oil and commodity prices, and the general weaknesssigns of cooling of the Chinese economy and a rise of military and political tension in the Middle East, the Eastern Europe and former members of the Soviet Union. Accordingly, the overall prospects for the Korean and global economy have contributed to the uncertainty of global economic prospects in general2017 and have adversely affected, and may continue to adversely affect, the Korean economy. The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has also fluctuated widely. See “—Item 3.A. Selected Financial Data—Exchange Rate Information.” A depreciation of the Won increases the

cost of imported goods and services and the Won revenue needed by Korean companies to service foreign currency denominated debt. An appreciation of the Won, on the other hand, causes export products of Korean companies to be less competitive by raising their prices in terms of the relevant foreign currency and reduces the Won value of such export sales. Furthermore, as a result of adverse global and Korean economic conditions, there has been volatility in the stock prices of Korean companies in recent years. Future declines in the KOSPI and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital.beyond remain uncertain. Any future deterioration of the Korean or global economy may have an adverse impact on the Korean economy, which in turn could adversely affect our business, financial condition and results of operations. As Korea’s economy is highly dependent on the health and direction of the global economy, investors’ reactions to developments in one country can have adverse effects on the securities price of companies in other countries. Factors that determine economic and business cycles of the Korean or global economy are for the most part beyond our control and inherently uncertain. In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on the our business and profitability.

In November 2016, the prosecutor’s office indicted a confidante of former PresidentGeun-hye Park,Ms. Soon-sil Choi, who had allegedly used her ties with the former President to extort donations from Korean conglomerates for twonon-profit foundations over which she is purported to have substantial influence, and a number of current and former presidential aides on charges of, among others, abuse of power, coercion and leaking classified documents. On November 30, 2016, a special independent prosecutor was appointed to conduct an investigation of the extent of the former President’s involvement. On December 9, 2016, the National Assembly voted in favor of impeaching former President Park for a number of alleged constitutional and criminal violations including violation of the Constitution and abuse of power by allowing her confidante to exert influence on state affairs and letting senior presidential aides help her extort from companies.

On March 10, 2017, the Constitutional Court of Korea upheld the constitutionality of the impeachment, removing former President Park from office. One of the findings of the Constitutional Court was that the former President, through her aides and Ms. Choi, coerced major Korean corporations, including us, to make donations to Mir Foundation andK-Sports Foundation. According to the Constitutional Court, such corporations contributed a total of￦48.6 billion to Mir Foundation between November 2015 and December 2015 and a total of￦28.8 billion toK-Sports Foundation between February 2016 and August 2016. Former President Park, Ms. Choi, and other associated government officials are currently awaiting trials under charges of bribery, abuse of power or extortion, among other offenses.

A special presidential election is scheduled to be held on May 9, 2017. There is no assurance that such political development as well as ongoing trials and investigations of former President Park and other individuals will not have a material adverse effect on the Korean economy and us.

Developments that could have an adverse impact on Korea’s economy in the future also include:

 

continued volatility or deterioration in Korea’s credit and capital markets;

 

difficulties in the financial sectors in Europe, China and elsewhere and increased sovereign default risks in selected countries and the resulting adverse effects on the global financial markets;

global market volatility in connection with “Brexit,” the United Kingdom’s vote to leave the European Union in a referendum held in June 2016 and the subsequent decision by the Prime Minister of the United Kingdom to initiate atwo-year process to complete the United Kingdom’s exit bymid-2019;

 

adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar, the Euro or Japanese Yen exchange rates or revaluation of the Chinese Renminbi), interest rates, inflation rates or stock markets;

 

increasing levels of household debt;

 

continuing adverse conditions in the economies of countries and regions that are important export markets for Korea, such as the United States, Europe, Japan and China, or in emerging market economies in Asia or elsewhere;

 

further decreases in the market prices of Korean real estate;

 

increasing delinquencies and credit defaults by consumer and small- andmedium-sized enterprise borrowers;

 

declines in consumer confidence and a slowdown in consumer spending;

 

social and labor unrest;

 

increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

 

the economic impact of any pending or future free trade agreements;

geo-political uncertainty and risk of further attacks by terrorist groups around the world;

 

the occurrence of severe health epidemics in Korea or other parts of the world, including the recent Ebola, Middle East Respiratory Syndrome and Zika virus outbreaks;

 

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy;policy and the recent diplomatic tension between Korea and China with respect to the deployment of the Terminal High Altitude Area Defense (THAAD) system in Korea;

political uncertainty or increasing strife among or within political parties in Korea, and political gridlock within the Government or in the legislature, which preventsprevent or disruptsdisrupt timely and effective policy making;

 

natural disasters that have a significant adverse economic or other impact on Korea or its major trading partners;

 

hostilities or political or social tensions involving countries in the Middle East and North Africa and any material disruption in the supply of oil or significant decrease or increase in the price of oil; and

 

an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.

Escalations in tensions with North Korea could have an adverse effect on us.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, there continues to be uncertainty regarding the long-term stability of North Korea’s political leadership since the succession of KimJong-un to power following the death of his father in December 2011, which has raised concerns with respect to the political and economic future of the region.

In addition, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-range missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:

 

On February 7, 2016, North Korea launched a rocket, claimed by themrenounced its obligations under the NuclearNon-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to be carrying a satellite intended for scientific observation. The launch was widely suspected byFebruary 2013, which increased tensions in the international community to be a cover for testing a long-range missile capable of carrying a nuclear warhead. On February 18, 2016, U.S. President Barack Obama signed into law mandatory sanctions onregion and elicited strong objections worldwide. Subsequently, North Korea continued to punish it for its recent nuclear and missile tests, human rights violations and cyber crimes. The bill, which marks the first measure by the United States to exclusively target North Korea, is intended to seize the assets of anyone engaging in business related to North Korea’s weapons program, and authorizes US$50 million over five years to transmit radio broadcasts into the country and support humanitarian assistance projects. On March 2, 2016, the United Nations Security Council voted unanimously to adopt a resolution to impose sanctions against North Korea, which include inspection of all cargo going to and from North Korea, a ban on all weapons trade and the expulsion of North Korean diplomats who engage in “illicit activities.” Also, on March 4, 2016, the European Union announced that it would expand its sanctions on North Korea, adding additional companies and individuals to its list of sanction targets.

Onprovocative behaviors. In January 6, 2016, North Korea announced that it had successfully conducted its firsttested a hydrogen bomb, its fourth nuclear test hours after international monitors detected a 5.1 magnitude earthquake near a known nuclear testing site in the country. The claims have not been verified independently. The allegedand allegedly first test followed a statement made in the previous month by Kim Jong-un, who claimed thatusing hydrogen, which is more explosive than plutonium. In February 2016, North Korea tested its intercontinental ballistic missile technology and launched a long-range missile, which it claimed to have launched a satellite into orbit. In response, the Government condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions and withdrew Korean personnel from the inter-Korea Kaesong industrial complex (the “Complex”) and announced its closing. In March 2016, the United Nations Security Council unanimously passed a resolution condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea. In September 2016, North Korea announced that it had developedsuccessfully tested a hydrogen bomb.nuclear warhead that could be mounted on ballistic

missiles. In response, the Government condemned the test, and in November 2016, the United Nations Security Council unanimously passed a resolution imposing additional sanctions on North Korea. In March 2017, North Korea launched four midrange missiles aimed at the U.S. military bases in Japan, which landed off the east coast of the Korean peninsula. In late March 2017, the United States sanctioned 11 North Korean individuals and one North Korean coal company for their ties to North Korea’s nuclear weapons program. In April 2017, North Korea launched two ballistic missiles which landed off the east coast of the Korean peninsula. In response to the missile launches, representatives of the Government, the United States and China expressed their plans to impose stronger sanctions on North Korea.

 

In August 2015, two Korean soldiers were injured in a landmine explosion near the South Korean demilitarized zone. Claiming the landmines were set by North Koreans, the South Korean armyre-initiated its propaganda program toward North Korea utilizing loudspeakers near the demilitarized zone. In retaliation, the North Korean army fired artillery rounds on the loudspeakers, resulting in the highest level of military readiness for both Koreas. High-ranking officials from the Government and North Korea subsequently met for discussions intending to diffuse military tensions and released a joint statement whereby, among other things, North Korea expressed regret over the landmine explosions that wounded the Korean soldiers.

artillery rounds on the loudspeakers, resulting in the highest level of military readiness for both Koreas. High-ranking officials from North and South Korea subsequently met for discussions and entered into an agreement on August 25, 2015 intending to deflate military tensions.

 

From time to time,In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea hasof causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired short- to medium-range missiles frommore than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, into the sea. Most recently in March 2015,causing casualties and significant property damage. The Government condemned North Korea fired seven surface-to-air missiles into waters off its east coast in apparent protest of annual joint military exercises being held by Koreafor the attack and the United States.vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges, which may further aggravate social and political pressure within North Korea. There can be no assurance that the level of tension affecting the Korean peninsula will not escalate in the future. Any further increase in tensions which may occur, for example, ifsuch as North Korea experiences a leadership crisis,Korea’s belligerent tactics, dissolution of high level contacts between Korea and North Korea break down or occurrence of military hostilities, occur, could have a material adverse effect on our business, results of operations and financial condition.

In addition, since 2005, we have provided fixed-line telephone services, through various fixed-line telephone equipment that we installed, to certain South Korean companies located at the Complex, which was established pursuant to an agreement made during the summit meeting of the two Koreas in June 2000. The Complex was the largest economic project between the two Koreas and was designed to combine the Republic’s capital and entrepreneurial expertise with the availability of land and labor of North Korea.

For the year ended December 31, 2015, our revenue from the services provided for the Complex was approximately US$1.0 million. We had no revenue from such services for the year ended December 31, 2016. Our investment in the Complex was approximately US$1.6 million as of December 31, 2015 and we have not made additional investments since the closure of the Complex. However, our services have been suspended since February 11, 2016 following the Government’s decision to halt operations of the Complex to impede North Korea’s utilization of funds from the Complex to finance its nuclear and missile programs. No assurance can be given that we will not experience any material losses as a result of the suspension of this project or failure of the project as a result of a breakdown or escalation of hostilities in the relationship between the Republic and North Korea.

Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.

The Securities-related Class Action Act of Korea enacted in January 2004 allows class action suits to be brought by shareholders of companies (including us) listed on the KRX KOSPI Market for losses incurred in connection with purchases and sales of securities and other securities transactions arising from (1) false or inaccurate statements provided in the registration statements, prospectuses, business reports, audit reports, semi-annual or quarterly reports and material fact reports and omission of material information in such documents, (2) insider trading, (3) market manipulation and (4) unfair trading. This law permits 50 or more shareholders who collectively hold 0.01% of the shares of a company to bring a class action suit against, among others, the issuer and its directors and officers. Because of the relatively recent enactment of the act, there is not enough judicial precedent to predict how the courts will apply the law. Litigation can be time-consuming and expensive to resolve, and can divert management time and attention from the operation of a business.business operation. We are not aware of any basis upon which such suit may be brought against us, nor are any such suits pending or threatened. Any such litigation brought against us could have a material adverse effect on our business, financial condition and results of operations.

We are generally subject to Korean corporate governance and disclosure standards, which differ in significant respects from those in other countries.

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which differ in some respects from standards applicable in other countries, including the United States. As a reporting company registered with the Securities and Exchange Commission and listed on the New York Stock Exchange, we are, and will continue to be, subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002, as amended. However, foreign private issuers, including us, are exempt from certain corporate governance standards required under the Sarbanes-Oxley Act or the rules of the New York Stock Exchange. For a description of significant differences in corporate governance standards, see “Item 16G. Corporate Governance.” There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public ornon-public companies in other countries.

Risks Relating to the Securities

If an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs.

Korean law currently limits foreign ownership of the ADSs and our shares. In addition, under our deposit agreement, the depositary bank cannot accept deposits of shares and deliver ADSs representing those shares unless (1) we have consented to such deposit or (2) Korean counsel has advised the depositary bank that the consent required under (1) is no longer required under Korean laws and regulations. Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with our consent for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. The depositary bank has informed us that, at a time it considers to be appropriate, the depositary bank plans to start accepting deposits of shares without our consent and to deliver ADSs representing those shares up to the amount allowed under current Korean laws and regulations. Until such time, however, the depositary bank will continue to obtain our consent for such deposits of shares and delivery of ADSs,

which we may not provide. Consequently, if an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”

A foreign investor may not be able to exercise voting rights with respect to common shares exceeding the number of common shares held by our largest domestic shareholder.

Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. Under the Telecommunications Business Act, the MSIP may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our shares with voting rights. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, such foreign shareholder may not be able to exercise voting rights with respect to common shares exceeding such threshold. The MSIP may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”

Holders of ADSs will not be able to exercise appraisal rights unless they have withdrawn the underlying common stockordinary shares and become our direct shareholders.

In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their shares under Korean law. A holder of ADSs will not be able to exercise appraisal rights unless he has withdrawn the underlying common stockordinary shares and become our direct shareholder. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”

An investor may not be able to exercise preemptive rights for additional shares and may suffer dilution of his equity interest in us.

The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional ordinary shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The depositary bank, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

 

a registration statement filed by us under the Securities Act of 1933, as amended, is in effect with respect to those shares; or

 

the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.

We are under no obligation to file any registration statement. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his preemptive rights for additional shares. As a result, the ADS holder may suffer dilution of his equity interest in us.

Forward-looking statements may prove to be inaccurate.

This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our companyus and our industry.the industries in which we operate. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

Item 4.   Information on the Company

IItemtem 4.A.   History and Development of the Company

In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government exercised substantial control over our business and affairs. Effective October 1, 1997, the Korea Telecom Act was repealed and the Government-Invested Enterprises Management Basic Act became inapplicable to us. As a result, we became a corporation under the Commercial Code, and our corporate

organization and shareholders’ rights were governed by the Privatization Law and the Commercial Code. Among other things, we began to exercise greater autonomy in setting our annual budget and making investments in the telecommunications industry, and our shareholders began electing our directors, who had previously been appointed by the Government under the Korea Telecom Act.

Prior to 1993, the Government owned all of the issued shares of our common stock. From 1993 through May 2002, the Government disposed of all of its equity interest in us, and the Privatization Law ceased to apply to us in August 2002. We amended our legal name from Korea Telecom Corp. to KT Corporation in March 2002.

Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. The Government began to introduce competition in the telecommunications services market in the early 1990’s.1990s. As a result, including ourselves, there are currently three local telephone service providers, five domestic long-distance carriers and numerous international long-distance carriers (including voice resellers) in Korea. In addition, the Government awarded licenses to several service providers to promote competition in other telecommunications business areas such as mobile telephone services and data network services. In June 2009, KTF, a subsidiary providing mobile telephone services, merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. See “Item 4. Information on the Company—Item 4.B. Business Overview—Competition.”

Our legal and commercial name is KT Corporation. Our principal executive offices are located at KT Gwanghwamun Building East, 33, Jong-ro 3-gil, Jong-ro3-gil,Jongno-gu, 03155, Seoul, Korea and our telephone number is(8231) 727-0114.

Item 4.B.  Business Overview

We are the leading telecommunications service provider in Korea and one of the largest and most advanced in Asia. As an integrated telecommunications service provider, our principal services include:

 

mobile voice and data telecommunications services based on 3GW-CDMA technology and 4G LTE technology;

 

fixed-line services, which include:

 

 Ø 

telephone services, including local, domestic long-distance and international long-distance fixed-line and VoIPVoice over Internet Protocol (“VoIP”) telephone services (i.e., provision of communication services over the Internet, and not over the fixed-line network) and interconnection services to other telecommunications companies;

 

 Ø 

broadband Internet access service and other Internet-related services, including IPTV services; and

 

 Ø 

data communication service,services, including leased line service and dedicated broadband internetInternet connection service to institutional customers;

 

credit card processing and other financial services through BC Card Co., Ltd.; and

 

various other services, including satellite service (through KT Sat Co., Ltd.) and information technology, real estate business (through KT Estate Inc.), satellite TV service (through KT Skylife), media contents business and network services such as cloud computing services.

Leveraging on our dominant position in the fixed-line telephone services market and our established customer base in Korea, we have successfully pursued new growth opportunities during the past decade and obtained strong market positions in each of our principal lines of business. In particular:

 

in the mobile services market in Korea, we achieved a market share of 30.6% with approximately 1818.9 million subscribers as of December 31, 2015;2016;

 

in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 23.924.9 million installed lines, of which 13.7approximately 11.9 million lines were in service as of December 31, 2015.2016. As of such date, our market share of the local market was 80.6% and our market share of the domestic long-distance market was 78.9%;

 

we are Korea’s largest broadband Internet access provider with 8.3approximately 8.5 million subscribers(excluding WiBro and ollehWiFi subscribers)as of December 31, 2015,2016, representing a market share of 41.6%41.4%; and

 

we are also the leading provider of data communication services in Korea.

For the year ended December 31, 2015,2016, our operating revenues were￦22,70023,121 billion, our profit for the period was￦484795 billion and our basic profit per share was￦2,231.2,893. As of December 31, 2015,2016, our total assets were￦29,40530,664 billion, total liabilities were￦17,24917,882 billion and total equity was￦12,15612,783 billion.

Business Strategy

We believe the telecommunications market in Korea is nearing saturation, despite certain areas of growth remaining due to Korea’s growing economy, consumers’ willingness to adopt new technologies, relatively high income and a relatively large middle class. To maintain our competitiveness, we believe we need to pursue growth in other areas, while maintaining our strength in existing businesses. In order to enhance the management efficiencies of our mobile and fixed-line telecommunications operations as well as more effectively respond to the convergence trends in the telecommunications industry, KTF merged into KT Corporation in June 2009, with KT Corporation surviving the merger. As part of our efforts to improve our operational efficiencies, we transferred all operations relating to fixed-line sales activities (includingon-site sales, line activation, after service, and customer center operations) to our subsidiaries in 2014.

Since 2016, our main strategical focus was on promotion of services that converge information & communication technology with other fields such as energy, security, media, healthcare and transportation, utilizing our fixed-line and wireless infrastructure installed for our olleh GiGA Internet Service and LTE mobile services. In addition, we have focused on artificial intelligence and big data and plan to leverage our platforms like IPTV and network assets to introduce innovative convergence services. For example, we launched “GiGA Genie” using an artificial-intelligence based IPTV set-top box that allows users to voice-command to watch TV, use the Internet and control other Internet-connected appliances. In addition, the first Internet-only bank in Korea, called K bank, over which we own a minority interest, began operation in April 2017 and seeks to operate as a virtual bank whose operation is based on its mobile application and the Internet, while promoting greater user accessibility through the convenience stores of one of our other consortium members. K bank also plans to differentiate itself from other conventional banks by utilizing big data and offering competitive products and interest rates. Our strategical focus on convergence services builds on our “GiGAtopia” corporate vision, which refers to our goal to create a world where humans and all things are connected through ultra-fast “GiGA” infrastructure and ICTeco-system, enhanced by convergence services, industrial development and innovation. We launched our olleh GiGA Internet service, which provides transmission speed of up to 1 Gbps, in October 2014 (“olleh GiGA Internet Service”). In June 2015, we also announced the mobile data service known as “GiGA LTE,” which utilizes multipath transmission control protocol (MPTCP) technology. We continue to expand GiGA coverage, initially focusing on metropolitan areas, and further expand to other regions in Korea. By promoting our convergence services, we aim to contribute in changing the current subsidy-based Korean telecommunication market competition to one based on innovative technology, products and enhanced services.

We believe development of fifth-generation (“5G”) technology will be a key driver for future innovations, fueled also by the increasing importance of big data. With our leadership in providing highly advanced 4G LTE services, we have made extensive efforts to develop and present various further advanced technologies. At the PyeongChang 2018 Winter Olympics, our goal is to unveil the world’s first 5G services at apre-commercial level. We are planning to showcase a variety of services with enhanced speed, latency, and connectivity, such as broadcasting from the viewpoint of players with a360-degree panoramic view or broadcasting from multiple viewpoints. As an official telecommunications services partner of the PyeongChang 2018 Winter Olympics, we will make our utmost efforts to realize the vision of 5G and capture truly memorable moments of the Olympics. In this effort, we announced our plan to commercialize the 5G services by 2019, one year ahead of our initial plan.

In 2016, we restructuredorganized our organizationbusiness into six business groups, the Marketing Group, the Customer Group, the Enterprise Business Group, the Global Business Group, the Future Convergence Business Group and the Platform Business Group, so that we may achieve higher synergies, more effectively address differing needs of our customer segments, as well as strengthen our competitiveness and discover new growth opportunities. As part of our efforts to improve our operational efficiencies, we transferred all operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries in 2014.

We also established subsidiaries to oversee our satellite and real estate operations, and expanded the number of specialized employees for each business, to further strengthen such operations and to pursue strategic alliances with other global corporates. In May 2014, we announced our “GiGAtopia” corporate vision, which refers to our goal to create a world where humans and all things are connected through ultra-fast “GiGA” infrastructure and ICT eco-system, enhanced by convergence services, industrial development and innovation. We launched our olleh GiGA Internet service, which provides transmission speed of up to 1 Gbps, in October 2014 (“olleh GiGA Internet Service”). In June 2015, we also announced the mobile data service known as “GiGA LTE” which we believe provides the world’s fastest smartphone data service utilizing multipath transmission control protocol (MPTCP) technology. We continue to expand GiGA coverage, initially focusing on metropolitan areas, and further expand to other regions in Korea. We also seek to provide other

services that converge information & communication technology with other fields such as energy, security, media, healthcare and transportation, utilizing our fixed-line and wireless infrastructure based on our olleh GiGA Internet Service and LTE mobile services. By promoting our convergence services, we aim to contribute in changing the current subsidy-based Korean telecommunication market competition to one based on innovative technology, products and enhanced services. We also plan to transform how our customers perceive us. We believe that positive changes in our customers’ perception of our product and services will help us to achieve the top position in the telecommunications and ICT business in Korea.

We believe development of 5G technology will be a key driver for future innovations. With our leadership in providing highly advanced 4G LTE services, we have made extensive efforts to develop various further advanced technologies. At the PyeongChang 2018 Winter Olympics, our goal is to unveil the world’s first 5G services at a pre-commercial level. We are planning to showcase a variety of services with enhanced speed, latency, and connectivity, such as broadcasting from the viewpoint of players with a 360-degree panoramic view and multi-dimensional service (i.e., broadcasting from multiple viewpoints). As an official telecommunications services partner of the PyeongChang 2018 Winter Olympics, we will give our utmost efforts to realize the vision of 5G and capture truly memorable moments of the Olympics.

Consistent with our overall goals, we aim to pursue the following strategystrategies for our business groups:

 

 • 

Marketing Group. Through our Marketing Group, we aim to expand our telecommunication and convergence operations by (i) improving our fixed-line and wireless telecommunication market shares and average revenue per user, (ii) developing business strategies and plans specifically related to telecommunications and convergence, (iii) strengthening our competitiveness over products, customer service and other related services and (iv) developing and executing efficient marketing strategies. We also focus on expanding our wireless data communication business to meet the rising demand for broadband Internet access using advanced wireless data communications devices such as smartphones. We are working closely with handset manufacturers to expand our offerings of smartphones and handsets designed to promote convergence of fixed-line and mobile telecommunications services, as well as to promote development of various applications for such devices.

In line with this strategy, we began offering Apple’s iPhone for the first time in Korea in November 2009 and have expanded our offerings of smartphones from other mobile handset manufacturers. We plan to take advantage of our industry-leading network infrastructure to attract more customers as this market further develops. In addition, we aim to further enhance our position in the mobile telecommunications market by leveraging on our strong brand, nationwide marketing network, competitive data usage rates, call centers dedicated to smartphone users, creative marketing strategies that address our potential customers’ needs and ability to bundle various mobile and fixed-line services. We also plan to further expand our contents and applications for smartphone users and mobile data users by cooperating with application developers in Korea and abroad, in order to further solidify our position as a leader in the convergence market.

In 2010,2016, we launched a new brand “olleh” to promote our bundled products,Y24 plans which include broadband Internet access service, IPTV service, Internet phone serviceoffer discounted fees and fixed-line telephone service.tailored data offerings for customers of age 24 or younger. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed FTTH connection and offering Internet phone service with value-added features such as video communication, short message service and phone banking. We also began offering real-time broadcasting

service on our IPTV service starting in November 2008. In addition,2008 and we are making extensive effortswere the first in the IPTV industry to develop various further advanced technologies such as 5G technologies.achieve 7 million subscribers in 2016.

We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technologicalknow-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so that they may create additional contents and convenience solutions such as electronic commerce and digital transaction applications that can be utilized anywhere using various media and communications devices.

 

 • 

Customer Group. Through our Customer Group, we aim to improve our marketing and customer service efforts for all of our products and services by (i) planning and executing strategy for each product that we offer and our marketing efforts, (ii) contributing to expanding our market share by strengthening our marketing and customer service efforts, and (iii) maximizing customer satisfaction by providing high quality customer service.

 • 

Enterprise Business Group. Through our Enterprise Business Group, we aim to provide our large corporate, small- andmedium-sized enterprise and government agency customers withone-stop solution services, including designing data communications and information technology infrastructure and overseeing theirday-to-day operations with the objective of achieving operational efficiencies and cost savings, as well as establishing and executing business plans for our global operations. Furthermore, in conjunction with our Future Convergence Business Group, we seek to expand our operations in the fields of smart energy, unified security systems and oversized data management.

 

 • 

Global Business Group. Through our Global Business Group, we are expanding our global operations by designing, developing and optimizing mobile virtual network operation,ICT services, cloud computing, data centers, our GiGA solutions and other global network services, in conjunction with overseas network operators and other global telecommunications companies. To this end, we have established or acquired overseas branches or subsidiaries in target countries to design and construct telecommunication networks and develop information & communication technology convergence products, as well as seeking further overseas opportunities working with quality Korean small- andmedium-sized enterprises.

 

 • 

Future Convergence Business Group. Due to the saturation within the Korean telecommunication market and limitations on growth in the traditional telecommunications services market, through our Future Convergence StrategyBusiness Group, we aim to concentrate our existing business capabilities in achieving new synergies by converging information & communication technology with other fields, such as smart energy, unified security systems, next-generation media, healthcare and intelligent traffic control. In the field of smart energy, through our convergence energy optimization project named “KT Micro-Energy Grid System,” we seek to contribute in preventing energy crisis and to increase energy efficiency. In the field of unified security systems, we seek to contribute to the establishment of national response systems for natural and other disasters, as well as enhancing personal and corporate security. For example, we plan to launch an artificial-intelligence based security system, called “GiGAeyes”, which analyzes surveillance video and autonomously detects suspicious activities. In the field of next-generation media, we seek to contribute to the development of next-generation media contents and new media technology, thereby supporting the expansion of Korean media contents to overseas markets. We are also seeking ways to develop personalized treatment systems to provide enhanced healthcare, as well as creating intelligent traffic control systems to reduce traffic.

 • 

Platform Business Group. Through our Platform Business Group, we strive to transform into a platform-based business focusing ononline-to-offline commerce, financial technology (“Fintech”) and Internet of Things (“IoT”). As part of our Fintech business initiatives, in 2016, we are developinglaunched an online payment application, which provides a method of online authentication that uses biometric data such as finger prints or voice instead of complex passwords. With regard to IoT, we will continue to deploy the Industrial IoT business model, which explores opportunities to converge services with other industries. We also plan to strengthen our IoT service relating to household goods.

The Telecommunications Industry in Korea

The Korean telecommunications industry is one of the most developed in Asia. According to the MSIP, the number of mobile subscribers in Korea was 58.961.3 million and the number of broadband Internet access subscribers in Korea was 20.020.5 million as of December 31, 2015.2016. As of December 31, 2015,2016, the mobile penetration rate, which is calculated by dividing the number of mobile subscriber accounts (including multiple counting of those who subscribe to more than one mobile service) by the

population of Korea, was 116.4%118.6%, and the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscriber accounts (including multiple counting of those who subscribe to more than one broadband Internet access service) by the number of households in Korea, was 107.0%108.5%.

Mobile Telecommunications Service Market

The Korean cellular market was formally established in 1984 when SK Telecom, formerly Korea Mobile Telecom, became the first mobile telephone operator in Korea. SK Telecom remained the only cellular operator in Korea until Shinsegi Telecom began service in 1994. In order to encourage further market growth and competition, the Government awarded three 2G licenses in June 1996. KTF was awarded a license alongside LG U+ and Hansol M.com, and commercial 2G service was launched in October 1997.

Since the introduction of three new operators in 1997, the Korean mobile market has undergone consolidation and significant growth. Following SK Telecom’s purchase of a controlling stake in Shinsegi, we acquired a 47.9% interest in Hansol M.com in 2000 and renamed the company KT M.com. KT M.com merged into KTF in May 2001 and Shinsegi merged into SK Telecom in January 2002. In June 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. KT Corporation and SK Telecom offer third-generation, high-capacity HSDPA-basedIMT-2000 wireless Internet and video multimedia communications services that use significantly greater bandwidth capacity. In July 2011, SK Telecom and LG U+ began offering 4G communications services based on LTE technology, which enables data transmission at a speed faster thanW-CDMA or WiBro networks, and we began our 4G LTE services in January 2012. Additionally, in September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidths in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps (for downloading), twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. We expanded our wideband LTE services to all of Korea in July 2014. Furthermore, in March 2014, we commercialized WidebandLTE-A services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps (for downloading), and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps (for downloading) under the “Wideband“Wideband LTE-A X4” X4” service. In June 2015, we commercialized GiGA LTE services which link “WidebandLTE-A X4” and our WiFi network to provide a faster WiFi connection in June 2015. In 2016, we won various awards for our GiGA LTE services and agreed to provide GiGA LTE technology to Turk Telekom Group, a leading telecommunications provider in Turkey. As of December 31, 2015,2016, the number of our LTE subscribers in Korea exceeded 41.746 million. Due to the high mobile penetration rate in Korea, we expect the growth of new subscribers to be limited.

In April 2014, LG U+, SK Telecom and we began offering various unlimited mobile service packages, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data. We believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees may have a material adverse impact on our results of operations.

The table below gives the subscription and penetration information of the mobile telecommunications industry for the periods indicated:

 

  As of December 31,   As of December 31, 
  2011 2012 2013 2014 2015   2012 2013 2014 2015 2016 

Total Korean Population(1)

   50,734    50,948    51,141    51,328    51,529  

Mobile Subscribers(2)

   52,507    53,624    54,681    56,310    57,937  

Total Korean Population (thousands)(1)

   50,948   51,141   51,328   51,529   51,696 

Mobile Subscribers (thousands)(2)

   53,624   54,681   57,290   58,935   61,296 

Mobile Subscriber Growth Rate

   3.4%   2.1%   2.0%   3.0%   2.9%    2.1%   2.0%   4.8%   2.9%   4.0% 

Mobile Penetration(3)

   103.5%   105.3%   106.9%   109.7%   112.4%    105.3%   106.9%   111.6%   114.4%   118.6% 

 

 

(1)In thousands, basedBased on the number of registered residents as published by the Ministry of Government Administration and Home Affairs of Korea.

 

(2)In thousands, basedBased on information announced by the KCC and MSIP.

 

(3)Penetration is determined by dividing mobile subscribers by total Korean population.

Broadband Internet Access Market

With the advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. The principal technologies used in providing high speed Internet access services are xDSL, HFC and fiber optic LAN. xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. xDSL offers an access solution over existing telephone lines using a specialized modem while HFC service involves the use oftwo-way cable networks. Fiber optic LAN is a technology that combines fiber optic cables and Unshielded Twisted Pair (“UTP”) cables. Fiber optic cables are connected to residential and commercial buildings with UTP cable-based LAN capabilities. While xDSL and HFC are more widely used technologies because of their relative reliability, ease of provisioning and cost effectiveness, fiber optic LAN usage in Korea has been steadily increasing in recent years.

Since the subscribers oftwo-way cable networks share a limited bandwidth, the downstream speed tends to slow down as the number of subscribers increases, thereby decreasing the quality ofHFC-based service. While xDSL technology was commercially introduced after HFC technology, it has surpassed HFC to become the prevalent broadband access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in 2002. Some of the service providers have upgraded their broadband network to provide fiber opticLAN-based service to their subscribers, which further enhances data transmission speed up to 1 Gbps as well as improves connection quality, and enables such service providers to offervideo-on-demand services withreal-time high definition broadcasting.

In recent years, broadband Internet access service providers and mobile telecommunications service providers have focused their attention on providing wireless Internet connection capabilities. They have introduced WiFi with speed of up to 1.3 Gbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops PDAs and smartphones inhot-spot zones and at home. In addition, we expect our competitors would focus their attention on upgrading data transmission capacity of their Internet services as we continue our efforts to enhance transmission capacity of our Internet services in 2017. See “—Our Services—Fixed-line Services—Internet Services.”

Our Services

Mobile Service

We provide mobile services based onW-CDMA technology and LTE technology. Prior to the merger of KTF into KT Corporation, we provided such services through KTF, which was formerly a

consolidated subsidiary. KTF obtained one of the three licenses to provide nationwide 2G service in June 1996 and began offering 2G service in October 1997. In June 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. We currently offer HSDPA-basedIMT-2000 services, which are third-generation, high-capacity wireless Internet and video multimedia communications services based onW-CDMA wireless network standards. In January 2012, we also began offering 4G LTE services following the termination of our 2G services. We completed the expansion of our 4G LTE service coverage nationwide in October 2012 and commenced providing wideband LTE services in September 2013, and commercialized WidebandLTE-A services in March 2014. We began offering “WidebandLTE-A X4” services in January 2015 and also launched “GIGA“GiGA LTE” services which links “WidebandLTE-A X4” and our WiFi network to provide a faster WiFi connection in June 2015.

Revenues related to mobile service accounted for 32.0%31.9% of our operating revenues in 2015.2016. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 12.1% of our operating revenues in 2015.The2016.The following table shows selected information concerning the usage of our network during the periods indicated and the number of our subscribers as of the end of such periods:

 

   As of or for the Year Ended December 31, 
           2013                   2014                   2015         

Average Monthly Outgoing Minutes per Subscriber(1)

   182     202     216  

Average Monthly Revenue per Subscriber(2)

  ￦35,236    ￦35,043    ￦36,049  

Number of Subscribers (in thousands)

   16,454     16,895     17,620  
   As of or for the Year Ended December 31, 
           2014                   2015                   2016         

Average Monthly Revenue per Subscriber(1)

  ￦35,043   ￦35,308   ￦35,524 

Number of Subscribers (in thousands)

   17,300    18,038    18,892 

 

 

(1)The average monthly outgoing minutes per subscriber is computed by dividing the total minutes of usage for the period by the weighted average number of subscribers for the period and dividing the quotient by the number of months in the period. The weighted average number of subscribers is the sum of the total number of subscribers at the end of each month divided by the number of months in the period.

(2)The average monthly revenue per subscriber is computed by dividing initial activation fees, total monthly fees, usage charges, interconnection fees and value-added service fees for the period by the weighted average number of subscribers and dividing the quotient by the number of months in the period.

We compete with SK Telecom, a mobile service provider that has a longer operating history than us, and LG U+ which began its service at around the same time as KTF. As of December 31, 2015,2016, we had approximately 1818.9 million subscribers, or a market share of 30.6%, which was the second largest among the three mobile service providers.

We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2015,2016, there were approximately 2,8002,700 shops managed by our independent exclusive dealers. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to our database and are able to assist customers with their account information. Although most of these dealers sell exclusively our products and services,sub-dealers hired by exclusive dealers may sell products and services offered by other mobile telecommunications service providers. Authorized dealers are entitled to a commission for each new subscriber registered, as well as ongoing commissions for the first five years based primarily on the subscriber’s monthly fee, usage charges and length of subscription. The handsets sold by us to the

dealers cannot be returned to us unless they are defective. If a handset is defective, it may be exchanged for a new one within 14 days from the date of purchase. On October 1, 2014, the Handset Distribution Reform Act, which regulates the sale and subsidies of mobile telecommunication devices, went into effect. See “—Regulation—Rates”.

In response to the diversification of our customers’ demands and their increasing sophistication, we have also selectively engaged in opportunities to expand our internal sales channels in recent years. In 2007, we established a wholly-owned subsidiary, KT M&S Co., Ltd., that operates approximately 252260 customer plazas that engage in mobile service sales activities as well as provide aone-stop shop for a wide range of other services and products that we offer. We also operate a website to promote and advertise our products and services to the general public and in particular to younger customers who are more familiar with the Internet.

We conduct the screening process for new subscribers with great caution. A potential subscriber must meet all minimum credit criteria before receiving mobile service. The procedure includes checking the history ofnon-payment and credit information from banks and credit agencies such as the National Information and Credit Evaluation Corporation. Applicants who do not meet the minimum criteria can only subscribe to the mobile service by using apre-paid card.

Fixed-line Services

We provide a variety of fixed-line communication services, including various telephone services, broadband and other internetInternet services and data communication services.

Fixed-line Telephone Services

We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance, international long-distance services andland-to-mobile interconnection services. These fixed-line telephone services accounted for 10.2%8.9% of our operating revenues in 2015.2016. Our telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. The following table gives some basic measures of the development of our telephone system. In recent years, the proliferation of mobile phones, as well as the availability of increasingly lower wireless pricing plans, some of which include unlimited voice minutes, havehas led to significant decreases in our domestic long-distance call minutes and local call pulses.

 

  As of or for the Year Ended December 31,   As of or for the Year Ended December 31, 
  2011   2012   2013   2014   2015   2012   2013   2014   2015   2016 

Total Korean population (thousands)(1)

   50,734     50,948     51,141     51,328     51,529     50,948    51,141    51,328    51,529    51,696 

Lines installed (thousands)(2)

   23,925     25,242     24,264     23,930     23,607     25,242    24,264    23,930    23,607    24,858 

Lines in service (thousands)(2)

   15,900     15,121     14,032     13,713     12,440     15,121    14,032    13,713    12,440    11,871 

Lines in service per 100 inhabitants(3)

   31.3     29.7     27.4     26.7     24.1     29.7    27.4    26.7    24.6    23.0 

Fiber optic cable (kilometers)

   527,188     584,932     636,347     673,783     559,352     584,932    636,347    673,783    695,546    732,873 

Number of public telephones installed (thousands)

   111     101     94     88     83     101    94    88    83    74 

Domestic long-distance call minutes (millions)(4)

   6,574     6,067     4,842     3,512     2,114     4,857    3,803    2,743    2,113    1,507 

Local call pulses (millions)(4)

   6,697     6,071     4,895     3,969     2,409     6,720    5,765    4,038    3,034    2,161 

 

 

(1)Based on the number of registered residents as published by the Ministry of Government Administration and Home Affairs of Korea.

 

(2)Including lines used for public telephones but excluding lines dedicated to centralized extension system services for corporate subscribers.

 

(3)Determined based on lines in service and total Korean population.

 

(4)Excluding calls placed from public telephones.

Our domestic long-distance cable network is entirely made up of fiber optic cable and can carry both voice and data transmissions. Compared to conventional materials such as coaxial cable, fiber optic cable provides significantly greater transmission capacity with less signal fading, thus requiring less frequent amplification. All of our lines are connected to exchanges capable of handling digital signal technology. A principal limitation of the older analog technology is that applications other than voice communications, such as the transmission of text and computer data, require either separate networks or conversion equipment. Digital systems permit a range of voice, text and data applications to be transmitted simultaneously on the same network.

The following table shows the number of minutes of international long-distance calls recorded by us and specific service providers utilizing our international long-distance network in each specified category for each year in the five-year period ended December 31, 2015:2016:

 

  Year Ended December 31,   Year Ended December 31, 
  2011   2012   2013   2014   2015   2012   2013   2014   2015   2016 
  (In millions of billed minutes)   (In millions of billed minutes) 

Incoming international long-distance calls

   541.6     520.3     628.4     549.4     390.5     520.3    628.4    549.4    390.5    352.3 

Outgoing international long-distance calls

   332.1     289.7     244.2     212.2     179.0     289.7    244.2    212.2    179.0    155.1 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   873.7     810.0     872.6     761.6     569.5     810.0    872.6    761.6    569.5    507.4 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Japan (30.9%), China (21.1%(23.4%) and the United States (9.3%(9.1%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2015.2016. In recent years, the volume of our incoming calls has exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment.

Interconnection. Under the Telecommunications Business Act, we are required to permit other service providers to interconnect to our fixed-line network. Currently, the principal users of this interconnection capacity include SK Broadband and LG U+ (offering local, domestic long-distance and international long-distance services)services, and transmitting calls to and from their mobile networks), Sejong and SK Telink (offering international and domestic long-distance services), and SK Telecom and LG U+ (transmitting calls to and from their mobile networks).Telecom. We recognize asland-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as an expense the amount of interconnection charge paid to the mobile service provider.

Internet phone servicesPhone Services. The volume of calls made through Internet phone services has significantly increased since Internet phone service was first introduced in Korea in 1998. We provide Internet phone services that enable VoIP phone devices with broadband connection to make domestic and international calls. In order to differentiate our Internet phone services from our competitors’ services, we provide value-added services such as video communication, short message service, phone banking and a variety of traffic and local news information. As of December 31, 2015,2016, we had approximately 3.4 million subscribers.

Internet Services

Broadband Internet Access Service. Leveraging on our nationwide network of over 695,000730,000 kilometers of fiber optic cable network, we have achieved a leading market position in the broadband Internet access market in Korea. We believe we have a competitive advantage over other broadband Internet access service providers because, unlike our competitors, we can utilize our existing networks nationwide to provide broadband Internet access service. Our broadband Internet access service accounted for 8.3%8.8% of our operating revenues in 2015.Our2016.Our principal Internet access services include:

 

ADSL, VDSL, Ethernet and FTTH services under the “olleh Internet” and “olleh GiGA Internet” brand name;names;

WiFi under the “ollehWiFi” brand name, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops PDAs and smartphones inhot-spot zones and olleh Internet service in fixed-line environments. OllehWiFi enables subscribers to access the Internet at a speed of up to 1.3 Gbps. We sponsored approximately 100,000 107,000hot-spot zones nationwide for wireless connection as of December 31, 2015;2016; and

olleh 4G WiBro Internet access service, which enablestwo-way WiBro Internet access to portable computers, mobile phones and other portable devices at a speed averaging 6 Mbps per user.

We had approximately 8.38.5 million fixed-line ollehbroadband Internet subscribers and approximately 99,6001.5 million ollehWiFi service subscribers as of December 31, 2015.2016. We commercially launched our WiBro service in June 2006, and we had approximately 680,000506,000 subscribers as of December 31, 2015.2016. We launched our olleh GiGA Internet Service, which provides transmission speed of up to 1 Gbps, and had approximately 1.02.4 million subscribers as of December 31, 2015.2016. We also bundle our WiBro service with olleh Internet and ollehWiFi services at a discount in order to attract additional subscribers.

Our olleh Internet service utilizes ADSL technology, which is a technology that converts existing copper twisted-pair telephone lines into access paths for multimedia and high-speed data communications. ADSL transforms the existing public telephone network from one limited to voice, text andlow-resolution graphics to a system capable of bringing multimedia to subscriber premises without new cabling. The asymmetric design optimizes the bandwidth by maximizing the downstream speed for downloading information from the Internet. While ADSL technology was commercially introduced afterHFC-based technology, it has surpassed HFC to become the prevalent access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July 2002. We are continually upgrading our broadband network to enable better FTTH connection, which further enhances data transmission speed of up to 1 Gbps and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IPTV, and other digital media content with higher stability.

The high-speed downstream rates can reach up to 8 Mbps for ADSL, 100 Mbps for VDSL and 1 Gbps for FTTH. We plan to offer data transmission speed of up to 1 Gbps, regardless of medium, by the end of 2017. In October 2016, we commercialized GiGA Wire 2.0 Internet service solutions on copper wires to provide data transmission speed of up to 1 Gbps. We plan to launch an Internet service based on UTP with data transmission speed of up to 1 Gbps. Downstream rates depend on a number of factors. For a constant wire gauge,gage, the data rate decreases as the length of the copper wire increases. Generally, if the separation between the telephone office and the subscriber is greater than four kilometers, line attenuation is so severe that broadband speeds can no longer be achieved. Approximately 95% of the households subscribing to our basic local telephone service are located within a four kilometer radius of our telephone offices, making our olleh Internet service available to most of the Korean population. Fiber-optic cable used by FTTH, on the other hand, uses laser light to carry signals that travel long distances inside fiber optic cable without degradation.

Other Internet-related Services. Our other Internet-related services focus primarily on providing infrastructure and solutions for business enterprises, as well as IPTV and network portal services. Our other Internet-related services accounted for 6.5%7.8% of our operating revenues in 2015.2016.

We operate ten10 data centers located throughout Korea and provide a wide range of computing services to companies which need servers, storage and leased lines. Data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and other network content, such as web pages, applications and data. Our data centers are designed to meet international standards, and are equipped with temperature and humidity control systems, regulated

and reliable power supplies, mechanical equipment, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Data centers allow corporations to outsource their application and server hardware management.

Our data centers offer network outsourcing services, server operation services and system support services. Our network outsourcing services includeco-location, which is the installation of our

customers’ network equipment at our data centers.Co-location is designed to increase customers’ Internet connection speed and reduce connection time and costs by directly connecting the customers’ server to the Internet backbone switch at our data centers. Our server operation services include optimal server management service and technical support service we provide with respect to the leased servers that are linked directly to our Internet backbone switch. We also lease servers and network equipment for a fixed monthly fee. Our system support services include providing system resources for a wide range of Internet computing services, such as application transfer, network storage, video streaming and application download, as well as sending short text messages and messages containing multimedia objects, such as images, audio and video.

We also offer a service called Bizmeka to develop and commercializebusiness-to-business solutions targeting small- andmedium-sized business enterprises in Korea. Bizmeka is an applied application service provider which provides industry standard and specialized business solutions, including integrated business administration solutions and intranet collaboration solutions.

We also offer high definitionvideo-on-demand and real-time broadcasting IPTV services under the brand name “olleh TV,” and began offering ultra-high-definition (“UHD”) IPTV services, which offer resolutions up to four times those offered under high-definition television services, under the brand name “olleh GiGA UHD TV” starting in September 2014. Our IPTV service offers access to an array of digital media contents, including movies, sports, news, educational programs and TV replay, for a fixed monthly fee or on apay-per-view basis. Through a digitalset-top box that we rent to our customers, our customers are able to browse the catalog of digital media contents and view selected media streams on their television. Aset-top box providestwo-way communications on an IP network and decodes video streaming data. We had 6.6approximately 7 million olleh TV subscribers as of December 31, 2015.2016. In December 2015, amendments to the Internet Multimedia Broadcasting Business Act were promulgated. Under such amendments, a single broadcasting operator, together with its affiliates, may not have more thanone-third of the market share of all paid broadcasting subscribers in Korea. The market share restriction will be in effect until June 27, 2018.

Data Communications ServiceCommunication Services

Our data communications service involvescommunication services involve offering exclusive lines that allowpoint-to-point connection for voice and data traffic between two or more geographically separate points. As of December 31, 2013, 2014 and 2015,2016, we leased over 235,100 lines, 231,400 lines and 216,700249,817 lines to domestic and international businesses. The data communication service accounted for 4.7%4.4% of our operating revenues in 2015.2016.

We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection up to 10.0 Gbps connected to our internetInternet backbone network with capacity of 9.0 Tbps, as well as rent to our customers and install necessary routers to ensure reliable Internet connection and enhanced security. We provide discount rates to qualified customers, including small- andmedium-sized enterprises, businesses engaging in Internet access services and government agencies.

Financial Services

Our financial services accounted for 15.4% of our operating revenues in 2016. To further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, we, through our former subsidiary KT Capital Co.,

Ltd., acquired 1,622,520 additional shares of common stock of BC Card Co., Ltd. from Woori Bank, Busan Bank and Shinhan Card for approximately￦252 billion in October 2011. As we were deemed to have control over BC Card Co., Ltd., it became our consolidated subsidiary starting in October 2011. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately

￦287 billion, and owned a 69.5 % interest in BC Card Co., Ltd. as of December 31, 2015.2016. BC Card Co., Ltd. offers various credit card and related financial services. BC Card Co., Ltd. had consolidated operating revenues of￦3,5043,568 billion and net income of￦219163 billion for the year ended December 31, 20152016 and consolidated assets of￦2,964 3,651 billion and liabilities of￦1,9462,602 billion as of December 31, 2015.2016. In March 2014, the investment business division of KT Capital Co., Ltd., including 3,059,560 common shares of BC Card Co., Ltd. that KT Capital Co., Ltd. held, was spun off and merged into KT Corporation, to further strengthen the synergy between telecommunication and finance operations within the KT group and increase shareholder value. Financial Services accounted for 15.3% of our operating revenues in 2015. To focus on our core telecommunications business, we and our consolidated subsidiary, KT Hitel Co., Ltd., disposed of the entire 100% stake in KT Capital Co., Ltd. in August 2015 for a total of￦299 billion.

In November 2015, the Government awardedannounced plans to introduce Internet-only banks and granted preliminary approvalsapproval to two consortiums, (one inK bank consortium and Kakao Bank consortium. The K bank consortium, over which we holdown a minority interest as one of 20 shareholding companies including Woori Bank, NH Investment & Securities, Co., Ltd., GS Retail Co., Ltd. and another in which Kakao Corp.Hanwha Life Insurance Co., Ltd., received the operator of Korea’s popular messaging platform, participates)final approval from the Government to startoperate the first Internet-only banksbank in Korea.Korea in December 2016. The two consortiums are expectedKakao Bank consortium, K bank’s competitor, received the final approval from the Government in April 2017. K bank began its operation in April 2017 and seeks to apply for final approvals in 2016 after obtaining requisite systemsoperate as a virtual bank whose operation is based on its mobile application and facilities.the Internet, banks are expectedwhile promoting greater user accessibility through the convenience stores of one of our other consortium members. K bank also plans to engage in the business ofdifferentiate itself from other conventional banks such as processing deposits, loansby utilizing big data and wiring money, but without physical locations.offering competitive products and interest rates. Under the current Korean law, as anon-financial institution, we are not allowed to own in excess of 4% voting interest in the InternetK bank, and our combined voting andnon-voting interest may not exceed 10%. In December 2015,2016, the National Assembly did not adopt a pending bill which would have allowednon-financial institutions to own up to 50%more than 4% interest in Internet banks.

MiscellaneousOther Businesses

We also engage in various business activities that extend beyond telephone services and data communicationscommunication services, including satellite services, information technology and network services, satellite TV services, with the consolidation of KT Skylife starting in January 2011, and media contents business with the establishment of KT Media Hub Co., Ltd. in December 2012. We merged KT Media Hub Co., Ltd. into KT Corporation in March 2015, to enhance shareholder value by increasing management efficiency and promoting synergy among our existing businesses. Our miscellaneousother businesses accounted for 10.8%10.6% of our operating revenues for 2015.2016.

We provide transponder leasing, broadcasting, video distribution and data communicationscommunication services through Koreasat 5, Koreasat 6 (also known as olleh 1) and Koreasat 8 (also known asABS-2). We also lease satellite capacity from other satellite operators to offer satellite services to both domestic and international customers.

In August 2006, we launched Koreasat 5, a combined civil and governmental communications satellite with a design life of 15 years, to replace Koreasat 2 (launched in 1996 with a design life of ten years). In December 2010, we launched Koreasat 6, with a design life of 15 years, to replace Koreasat 3 (originally launched in 1999, with a design life of 12 years). Koreasat 6 began its commercial operation in February 2011 and carries transponders that are mainly used fordirect-to-home satellite broadcasting, video distributions and data communicationscommunication services. Most of thedirect-to-home satellite broadcasting transponders are utilized by KT Skylife. In August 2010, we procured from Asia Broadcast Satellite Holdings, Ltd. (“ABS”), a Hong Kong-based satellite operator, four transponders onABS-1 satellite and eight additional transponders onABS-2 satellite in order to

provide satellite services with a broader global scope. In the second half of 2014, we exchanged our

ownership rights of four transponders onABS-1 with ownership rights of four transponders onABS-2 satellite. As a result, we own 12 transponders onABS-2 satellite (also called Koreasat 8).

Two additional satellites, one to expand satellite services in various regions and the other to replace Koreasat 5, are expected to be launched in 2016 and 2017, respectively.2017.

We entered into an agreement with ABS to sell Koreasat 3 to ABS, as Koreasat 3 was expected to reach the end of its design life. In December 2013, the MSIP declared the sales contract regarding Koreasat 3 null and void on the ground that the said contract was made without prior government approval. Shortly after, ABS filed a request for arbitration against us and KT SAT Co., Ltd. and we, together with KT SAT Co., Ltd., have been involved in the International Chamber of Commerce arbitration against ABS.

In December 2012, we spun off our satellite service business by establishing KT Sat Co., Ltd., in an effort to enhance operational specialization and to foster management efficiency, enabling us to respond more promptly to the changing market environments and increasing competitiveness.

We offer a broad array of integrated information technology and network services to our business customers. Our range of services includes consulting, designing, building and maintaining systems and communication networks that satisfy the individual needs of our customers in the public and private sectors.

We own land and real estate in various locations nationwide. Technological developments have enhanced the coverage area of individual telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. In recent years, we have engaged in the planning and development of commercial and office buildings and condominiums on our unused sites, as well as in the leasing of buildings we own. We established KT Estate Inc. in August 2010 to oversee the planning, development and operation of our real estate assets, and established KT AMC, an asset management company, in September 2011 as a subsidiary of KT Estate Inc. to create additional synergies with our real estate assets. We made a contributionin-kind of￦1,254 billion to KT Estate Inc. in December 2012 to further strengthen KT Estate Inc.’s competitiveness and to better utilize our assets. KT Estate Inc. had consolidated net income of￦34 billion for the year ended December 31, 2015.

To respond to the trend of convergence in the telecommunications and broadcasting industries, and to seek additional synergies with our existing operations, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife from Dutch Savings Holdings B.V. in January 2011 for approximately￦246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 49.9%50.3% interest in KT Skylife as of December 31, 2015.2016. KT Skylife offers satellite TV services, which may also be packaged with our IPTV services as further described below, and had consolidated net income of￦73 billion for the year ended December 31, 2015.below.

Revenues and Rates

The table below shows the percentage of our revenues derived from each category of services for each of the years from 20132014 to 2015:2016:

 

  Year Ended December 31,   Year Ended December 31, 
  2013 2014 2015   2014 2015 2016 

Mobile services

   29.0%   31.4%   32.0%    31.4%   32.0%   31.9% 

Fixed-line services

   31.0    30.3    29.8     30.3   29.8   29.9 

Fixed-line telephone services:

        

Monthly basic charges

   3.2    3.1    2.9     3.1   2.9   2.7 

Monthly usage charges

   6.3    5.5    4.5     5.5   4.5   3.7 

Others

   3.3    3.0    2.8     3.0   2.8   2.5 
  

 

  

 

  

 

   

 

  

 

  

 

 

Sub-total

   12.9    11.5    10.2     11.5   10.2   8.9 
  

 

  

 

  

 

   

 

  

 

  

 

 

Internet services:

        

Broadband Internet access service

   8.7    8.6    8.3     8.6   8.3   8.8 

Other Internet-related services(1)

   4.3    5.1    6.5     5.1   6.5   7.8 
  

 

  

 

  

 

   

 

  

 

  

 

 

Sub-total

   12.9    13.7    14.8     13.7   14.8   16.6 
  

 

  

 

  

 

   

 

  

 

  

 

 

Data communications service(2)

   5.2    5.1    4.7  

Data communication services(2)

   5.1   4.7   4.4 

Goods sold(3)

   17.0    14.4    12.1     14.4   12.1   12.1 

Financial services

   13.3    14.5    15.3     14.5   15.3   15.4 

Miscellaneous businesses(4)

   9.7    9.4    10.8  

Other businesses(4)

   9.4   10.8   10.6 
  

 

  

 

  

 

   

 

  

 

  

 

 

Operating revenues

   100.0%   100.0%   100.0%    100.0%   100.0%   100.0% 
  

 

  

 

  

 

   

 

  

 

  

 

 

 

 

(1)Includes revenues from services provided by our data centers, Bizmeka and olleh TV.

 

(2)Includes revenues from Kornet Internet connection service and satellite services.

 

(3)Includes mobile handset sales.

 

(4)Includes revenues from satellite services, information technology and network services and security services.

Mobile Services

We derive revenues from mobile services principally from:

 

monthly fees;

 

usage charges for outgoing calls;

 

usage charges for wireless data transmission;

 

contents download fees;

 

value-added monthly service fees; and

 

mobile-to-mobile interconnection charges.

We offer various rate plans, including those that offer a specified amount of free data transmission per month in return for a higher monthly fee and thosefees as well as plans that are geared toward business customers. We completely abolished our activation fee completely in March 2015.

We introduced rate plans specifically for smartphone users starting in September 2009. We also introduced new rate plans specifically for LTE phone users in connection with the rollout of our 4G LTE services in January 2012. In June 2013, we introduced the Everyone olleh rate plan, which

permits users to make unlimited voice calls within our wireless network, and the Fixed-Line and Wireless Unlimited rate plan, which permits users to make unlimited voice calls within both our

fixed-line and wireless networks. We began offering LTE unlimited data plans in March 2014, which allows unlimited LTE data usage within certain transmission speeds after the monthly quota at the highest LTE data transmission speed has been exhausted. Starting from November 2014, we began offering our major smartphone plans at discounted rates which were previously offered only to subscribers who signed on for mandatory subscription periods ranging from one to two years, thereby eliminating the need to sign on for any mandatory subscription period to benefit from our discounted plans and removing any early termination penalties. We believe such changes allow our subscribers a wider flexibility in choosing their mobile plans based on their needs. In May 2015, we began offering the LTE data choice plan, through which users choose a 300MB to unlimited monthly quota for data transmission and enjoy unlimited voice calls and messages. With the LTE data choice plan, we also introduced the “Push-and-Pull”“Push-and-Pull” service, which allows users to carry over unused data to the following month or pull up additional data from the following month’s allotment. In March 2016, we began offering the Y24 plans for customers under the age of 24. Many of the Y24 plans offer free data transmission for three hours a day and additional data service at discounted rates.

The following table summarizes the charges associated with our representative LTE smartphone service plans:

 

  Free Airtime Minutes          Free Airtime Minutes        
  Voice Calls   Video Calls and
Voice Calls to
Special Numbers		   Free Data
Transmission (1)		 Additional Service  Monthly
Fee		   Voice Calls   Video Calls and
Voice Calls to
Special Numbers		   Free Data
Transmission (1)		 Additional Service  Monthly
Fee		 

LTE data choice 299

   Unlimited     50    300MB mobile TV  ￦29,900     Unlimited    50   300MB mobile TV  ￦29,900 

LTE data choice 349

   50    1GB mobile TV   34,900     50   1GB mobile TV   34,900 

LTE data choice 399

   50    2GB mobile TV   39,900     50   2GB mobile TV   39,900 

LTE data choice 449

   50    3GB mobile TV   44,900     50   3GB mobile TV   44,900 

LTE data choice 499

   50    6GB mobile TV   49,900     50   6GB mobile TV   49,900 

LTE data choice 599

   200    Unlimited (2) mobile TV   59,900     200   Unlimited (2) mobile TV   59,900 

LTE data choice 699

   200     mobile TV   69,900     200    mobile TV   69,900 

LTE data choice 999

   200     VIP membership

Device insurance

   99,900     200    VIP membership

Device insurance

   99,900 

 

 

(1)We do not charge for data transmission in wireless LAN zones. We charge￦0.01 per 0.5 kilobyte for any additional data transmission exceeding the free monthly quota, up to a maximum of￦150,000.

 

(2)Provides an additional daily quota of 2GB after the free monthly quota has been exhausted, and also provides unlimited use of data with speed of up to 3 Mbps or 5 Mbps after the daily quota of 2GB has been exhausted.

We also provide plans specially designed for elderly andpre-teen subscribers as well as special discounts to subscribers with physical disabilities. Plans specialized for feature phone users such as thea standard rate plan are provided as well. Under the standard rate plan, we charge a monthly fee of￦11,000, a voice calling usage charge of￦1.8 per second and a video calling usage charge of￦3 per second, without any free voice or video call airtime minutes.

We also offer plans for new devices such as tablets and wearable devices. Since 2010, we have been offering a specialized plan for tablets which provides a 1.6GB to unlimited monthly quota of data transmission for a monthly fee of￦18,000 to￦99,900. In November 2014, we began offering a specialized plan for wearable devices, which charges a fixed monthly fee of￦8,000 for a 100MB monthly quota of data transmission and 50 minutes of voice calls. For other new devices, we also provide a data sharing service that allows users to share data provided as part of their smartphone plans with other devices.

Mobile-to-mobile Interconnection. For a call initiated by a mobile subscriber of our competitor to our mobile subscriber, the mobile service provider collects from its subscriber its normal rate and

remits to us amobile-to-mobile interconnection charge. In addition, for a call initiated by our mobile subscriber to a mobile subscriber of our competitor, we collect from our subscriber our normal rate and remit to the mobile service provider amobile-to-mobile interconnection charge.

The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators, and the charges received per minute (exclusive of value-added taxes) from mobile operators for mobile to mobile calls:

 

  Effective Starting   Effective Starting 
  January 1, 2013   January 1, 2014   January 1, 2015   January 1, 2014   January 1, 2015   January 1, 2016 

SK Telecom

  ￦26.3    ￦22.2    ￦19.5    ￦22.2   ￦19.5   ￦17.1 

LG U+

   27.0     22.8     20.0     22.8    20.0    17.0 

KT

   27.0     22.7     19.9     22.7    19.9    17.2 

We recognize asmobile-to-mobile interconnection revenue the entire amount of the usage charge collected from the mobile user and recognize as expense the amount of interconnection charge paid to the mobile service provider.

Fixed-line Services

Fixed-line Telephone Services

Local Telephone Service. Our revenues from local telephone service consist primarily of:

 

service initiation fees for new lines;

 

monthly basic charges; and

 

monthly usage charges based on the number of call pulses.

The rates we charge for local calls are currently subject to approval by the MSIP after consultation with the Ministry of Strategy and Finance. The rates are identical for residential and commercial customers. All calls are currently measured by call pulses. Each pulse is determined by the duration of the call and the time of the day at which the call is made. Our current local usage rates, which have been in effect since May 2002, are￦39 per pulse for regular service and￦70 per pulse for public telephones. For local calls, a pulse is triggered at the beginning of each local call and every three minutes thereafter from 8:00 a.m. to 9:00 p.m. on weekdays and every 258 seconds thereafter on holidays and from 9:00 p.m. to 8:00 a.m. on weekdays.

We also charge a monthly basic charge ranging from￦3,000 to￦5,200, depending on location, and anon-refundable service initiation fee of￦60,000 to new subscribers. Thenon-refundable service initiation fee is waived for the new subscribers who subscribe to our local service through our online application process. Until April 2001, we charged refundable service initiation deposits, which were refunded upon termination of service. As of December 31, 2015,2016, we had￦401368 billion in refundable service initiation deposits outstanding and 1,878 thousand1.7 million subscribers who are enrolled under the mandatory deposit plan and are eligible to switch to the no deposit plan and receive their service initiation deposit back (less thenon-refundable service initialinitiation fees).

Domestic Long-distance Telephone Service. Our revenues from domestic long-distance service consist of charges for calls placed, charged for the duration, time of day and day of the week a call is placed, and the distance covered by the call. We are able to set our own rates for domestic long-distance service without approval from the MSIP.

Our current basic domestic long-distance rates, which have been in effect since November 2001, are￦39 per three minutes for distances of up to 30 kilometers and￦14.5 per ten seconds (equivalent to￦261 per three minutes) for distances in excess of 30 kilometers. For domestic long-distance calls for distances of up to 30 kilometers, a pulse is triggered at the beginning of each call and

every three minutes thereafter. For domestic long-distance calls for distances in excess of 30 kilometers, a pulse is triggered at the beginning of each call and every 10 seconds thereafter. Rates for domestic long-distance calls for distances up to 30 kilometers are currently discounted by an adjustment in the period between pulses, by approximately 11% (utilizing a pulse rate of 200 seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 43% (utilizing a pulse rate of 258 seconds) from midnight to 6:00 a.m. every day. Rates for domestic long-distance calls for distances in excess of 30 kilometers are currently discounted by approximately 10% (utilizing a rate of￦13.1 per ten seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 30% (utilizing a rate of￦10.2 per ten seconds) from midnight to 6:00 a.m. every day.

In recent years, we have begun to offer optional flat rate plans, discount plans and bundled product plans in order to mitigate the impact from lower usage of local and domestic long-distance calls and stabilize our revenues from fixed-line telephone services. For a discussion of our bundled products, see “—Bundled Products.” Some of our flat rate and discount plans that we currently offer include the following:

 

a subscriber who elects to pay a monthly flat rate of￦12,500 is able to make free local and domestic long-distance calls after 9 p.m. on weekdays or at any time on weekends. Each month, the subscriber also receives a free movie ticket and free 60 minutes ofland-to-mobile calls. The subscriber is also eligible to receive a discount of up to 20%, subject to the length of the mandatory subscription period;

 

a subscriber who elects to subscribe to our fixed-line phone service for a three year mandatory subscription period is able to make local and domestic long-distance calls at a flat rate of￦39 per three minutes;

 

a subscriber who elects to subscribe to our broadband Internet access service or HSDPA-based mobile service for a three year mandatory subscription period is able to make local, domestic long-distance andland-to-mobile calls of up to￦150,000 with a flat rate payment of￦50,000 or such calls up to￦50,000 with a flat rate payment of￦10,000. Standard rates apply to calls that exceed the capped amounts; and

 

a subscriber who elects to pay a monthly flat rate ranging from￦7,500 to￦15,000, depending on the types of calls the subscriber wishes to make, is able to use 3,000 minutes per month of local, domestic long-distance,land-to-VoIP andland-to-KT mobile calls.

International Long-distance Service. Our revenues from international long-distance service consist of:

 

amounts we bill to customers for outgoing calls made to foreign countries (including customers who make calls to Korea from foreign countries under our home country direct-dial service);

 

amounts we bill to foreign telecommunications carriers for connection to the Korean telephone network in respect of incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service); and

 

other revenues, including revenues from international calls placed from public telephones.

We bill outgoing calls made by customers in Korea (and calls made to Korea from foreign countries under our home country direct-dial service) in accordance with our international long-distance rate schedule for the country called. These rates vary depending on the time of day at which a call is

placed. We bill outgoing international calls on the basis ofone-second increments. We are able to set our own rates for international long-distance service without approval from the MSIP.

For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service), we receive settlement payments from the relevant foreign carrier at the applicable settlement rate specified under the agreement with the foreign carrier. We have entered into numerous bilateral agreements with foreign carriers. We negotiate the settlement rates under these agreements with each foreign carrier, subject to the MSIP’s approval. It is the practice among international carriers for the carrier in the country in which the call is billed to collect payments due in respect of the use of overseas networks. Although we record the gross amounts due to and from us in our financial statements, we make settlements with most carriers monthly or quarterly on a net basis.

Land-to-mobile Interconnection. We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user theland-to-mobile usage charge and remit to the mobile service provider aland-to-mobile interconnection charge. The MSIP periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. The MSIP determines the land to mobile interconnection charge by calculating the long run incremental cost of mobile service providers, taking into consideration technology development and future expected costs.

The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators for landline to mobile calls:

 

  Effective Starting   Effective Starting 
  January 1, 2013   January 1, 2014   January 1, 2015   January 1, 2014   January 1, 2015   January 1, 2016 

SK Telecom

  ￦26.3    ￦22.2    ￦19.5    ￦22.2   ￦19.5   ￦17.0 

LG U+

   27.0     22.8     20.0     22.8    20.0    17.2 

Since September 2004, the usage charges per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber are￦87.0 during weekdays,￦82.0 during weekends and￦77.2 during evenings (defined as 12:00 a.m. to 6:00 a.m. every day). We recognize asland-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider.

Land-to-land andMobile-to-land Interconnection. For a call initiated by a landline subscriber of our competitor to our fixed-line user, the landline service provider collects from its subscriber its normal rate and remits to us aland-to-land interconnection charge. In addition, for a call initiated by a mobile service subscriber to our landline user, the mobile service provider collects from its subscriber its normal rate and remits to us amobile-to-land interconnection charge.

The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the MSIP:

 

  Effective Starting   Effective Starting 
  January 1, 2013   January 1, 2014   January 1, 2015   January 1, 2014   January 1, 2015   January 1, 2016 

Local access(1)

  ￦14.6    ￦13.3    ￦11.9    ￦13.3   ￦11.9   ￦10.9 

Single toll access(2)

   16.7     14.7     13.4     14.7    13.4    12.0 

Double toll access(3)

   19.9     17.1     16.0     17.1    16.0    15.5 

 

 

Source:The MSIP.

 

(1)Interconnection between local switching center and local access line.

 

(2)Interconnection involving access to single long-distance switching center.

 

(3)Interconnection involving access to two long-distance switching centers.

Internet Services

Broadband Internet Access Service. We offer broadband Internet access service that primarily uses existing telephone lines to provide both voice and data transmission. We charge monthly fixed fees to customers of broadband Internet service. In addition, we charge customers aone-time installation fee per site of￦20,000 and modem rental fee of up to￦8,000 on a monthly basis. Our fixed-line broadband internet service plans range from￦30,000 to￦50,000 per month and our wireless broadband internetInternet service plans range from￦10,000 to￦30,000 per month.

olleh TV Services. We charge our subscribers an installation fee per site of￦24,000, which is waived with a three-year contract, aset-top box rental fee ranging from￦2,000 to￦9,000 on a monthly basis and a monthly subscription fee. The rates we charge for olleh TV services are subject to approval by the MSIP. Our olleh TV service plans range from￦10,00015,000 to￦34,00050,000 per month.

Data Communication ServiceServices

We charge customers of domestic leased-lines on a monthly fixed-cost basis, based on the distance of the leased line, the capacity of the line measured in bits per second, the type of the line provided and whether the service site is local or long-distance. In addition, we charge customers aone-time installation fee per line, ranging from￦56,000 to￦1,940,000, depending on the capacity of the line.

Bundled Products

We utilize our extensive customer relationships and market knowledge to expand our revenue base by cross-selling our telecommunications products and services. In order to attract additional subscribers to our new services, we bundle our services, such as our broadband Internet access service with IPTV, Internet phone, fixed-line telephone service and mobile services, at a discount.

The following table summarizes our various basic bundled packages that we currently offer. The packages require subscribers to agree to a subscription period of three years:

 

   Monthly Rates
   Flat Rate   

Mobile Monthly Fee

Internet / Internet Phone / Mobile

  ￦21,000   Discounts are between￦1,5003,000 and￦10,000,25,100 per account (excluding￦5,000 for the Internet discount), depending on type of the Internet services and total amount of bundled mobile fee planplans (up to 5 mobile numbers)(2)

Internet / Fixed-Line Phone / Mobile

   24,000   

Internet / IPTV / Mobile(1)

   30,000   

Internet / Fixed-Line Phone / IPTV / Mobile(1)

   31,000   

 

 

(1)Assuming selection of olleh Internet and olleh TV Live 10 package.

 

(2)Bundled rate plans are available only for olleh 3G, LTE subscribers and some specific wearable device plan subscribers.

We believe that subscribers who sign up for bundled products are less likely to cancel our services than subscribers who subscribe to individual services. Subscription fees paid for our bundled products are allocated to each service in proportion to their fair value and the allocated amount is recognized as revenue according to the revenue recognition policy for each service.

Competition

Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband. The acquisition enabled SK Telecom to provide fixed-line telecommunications, broadband Internet access and IPTV services

together with its mobile telecommunications services. In January 2010, LG Dacom and LG Powercom merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enabled LG U+ to provide a similar range of services as SK Telecom and us. In November 2015, SK Broadband announced its plan to acquire a majority stake in CJ HelloVision, the largest cable multiple system operator with a market share of 14.4% of the paid TV services market in Korea as of 2015. CJ HelloVision also provides Internet access service, Internet phone service and wireless communications services. The merger proposal is currently being reviewed by the Government due to anti-trust concerns, among others. If the merger is approved as currently proposed, SK Telecom is expected to further increase its market share of various businesses such as Internet access service, TV services and wireless communications markets.Furthermore,Furthermore, telecommunications providers are competing to be the first to introduce innovative services such as those based on 5G technologies.

Under the Framework Act of Telecommunications and the Telecommunications Business Act, telecommunications service providers in Korea are currently classified into network service providers, value-added service providers and specific service providers. See “—Regulation.”

Network Service Providers

All network service providers in Korea are permitted to set the rates for international or domestic long-distance services on their own without the MSIP’s approval. Many of our competitors have set their rates lower than ours. Currently, we can compete freely with other providers on the basis of rates in all services except for rates we charge for local calls, which require advance approval from the MSIP. In all service areas, we compete by endeavoring to provide superior customer service and superior technical quality, taking advantage of our broad customer base and our ability to provide various telecommunication services.

We and SK Telecom have been designated as market-dominating business entities in the local telephone service and cellular service markets, respectively, under the Telecommunications Business Act. Under this Act, a market-dominating business entity may not engage in any act of abuse, such as unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers. The KCC has also issued guidelines on fair competition of the telecommunications companies. If any telecommunications service provider breaches the guidelines, the KCC may take necessary corrective measures against it after a hearing at which the service provider may defend its action.

Mobile Service. Competition in the mobile telecommunications industry in Korea is intense among SK Telecom, LG U+ and us. Such competition has intensified in recent years due to the implementation of mobile number portability, which enabled mobile subscribers to switch their service provider while retaining the same mobile phone number, as well as payments of handset subsidies to purchasers of new handsets who agree to minimum subscription periods and the recent rollout of 4G mobile services based on LTE technology by SK Telecom, LG U+ and us. The price competition through handset subsidies has become less prevalent since the enactment of the Handset Distribution Reform Act in October 2014, which limits the maximum amount of handset subsidies.

The following table shows the market shares in the mobile telecommunications market as of the dates indicated:

 

  Market Share (%)   Market Share (%) 
  KT
Corporation		   SK Telecom   LG U+   KT
Corporation		   SK Telecom   LG U+ 

December 31, 2013

   30.1     50.0     19.9  

December 31, 2014

   30.0     50.2     19.8     30.0    50.2    19.8 

December 31, 2015

   30.6     49.1     20.3     30.4    49.4    20.2 

December 31, 2016

   30.6    49.1    20.3 

 

 

Source:The MSIP.

We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. Our competitors also offer similar plans at competitive rates.

Local Telephone Service. We compete with SK Broadband and LG U+ in the local telephone service business. SK Broadband began providing local telephone service in 1999, followed by LG U+ in 2004. In addition, the services provided by mobile service providers have had a material adverse effect on us in terms of our revenues from fixed-line telephone services. We expect this trend to continue.

The following table shows the market shares in the local telephone service market as of the dates indicated:

 

  Market Share (%)   Market Share (%) 
  KT
Corporation		   SK Broadband   LG U+   KT
Corporation		   SK Broadband   LG U+ 

December 31, 2013

   81.5     15.6     2.9  

December 31, 2014

   81.0     16.1     2.9     81.0    16.1    2.9 

December 31, 2015

   80.6     16.3     3.1     80.6    16.3    3.1 

December 31, 2016

   80.6    16.2    3.2 

 

 

Source:The MSIP.

Although the local usage charge of our competitors and us is the same at￦39 per pulse (generally three minutes), our competitors’non-refundable telephone service initiation charges are lower than ours. Our customers pay anon-refundable telephone service initiation charge of￦60,000 while customers of our competitors pay anon-refundable telephone service initiation charge of￦30,000. Also, the basic monthly charge of our competitors is￦4,500 compared to our basic charge of￦5,200.

Domestic Long-distance Telephone Service. We compete with SK Broadband, LG U+, Sejong and SK Telink in the domestic long-distance market. LG U+ began offering domestic long-distance service in 1996, followed by Sejong in 1999 and SK Broadband and SK Telink in 2004. The following table shows the market shares in the domestic long-distance market as of the dates indicated:

 

  Market Share (%)   Market Share (%) 
  KT
Corporation		   SK Broadband   LG U+   Sejong   SK Telink   KT
Corporation		   SK Broadband   LG U+   Sejong   SK Telink 

December 31, 2013

   78.7     14.5     3.0     1.0     2.8  

December 31, 2014

   78.9     14.9     2.7     0.9     2.7     78.9    14.9    2.7    0.9    2.7 

December 31, 2015

   78.9     15.0     2.7     0.9     2.6     78.9    15.0    2.7    0.9    2.6 

December 31, 2016

   78.9    15.0    2.7    0.8    2.6 

 

 

Source:Korea Telecommunications Operators Association.

Our competitors and we charge￦39 per three minutes for domestic long-distance calls up to 30 kilometers. For domestic long-distance calls greater than 30 kilometers, our competitors typically charge between 3% to 5% less than us. The following table is a comparison of our standard long-distance usage charges per 10 seconds with the standard rates of our competitors as of December 31, 2015:2016:

 

   KT
Corporation		   SK
Broadband		   LG U+   Sejong   SK Telink 

30 kilometers or longer

  ￦14.5   ￦13.9   ￦14.1   ￦13.8   ￦13.8 

 

 

Source:The KCC.

International Long-Distance Telephone Service. Four companies, SK Broadband, LG U+, Sejong and SK Telink, directly compete with us in the international long-distance market. LG U+ began

offering international long-distance service in 1991, followed by Sejong in 1997 and SK Broadband in 2004. SK Telink, which only provides Internet phone service, entered the international long-distance market in 2003 and offers its services at rates lower than those for network-based international long-distance telephone services. The entry of Internet phone service providers and other telecommunications service providers, such as voice resellers, that can offer telecommunications services at rates lower than ours has increased competition in the international long-distance market and adversely affected our revenues and profitability from international long-distance services. See “—Specific Service Providers.”

Our competitors generally charge less than us for international long-distance calls. The following table is a comparison of our standard long-distance usage charges per one minute with the standard rates of our competitors as of December 31, 2015:2016:

 

  KT
Corporation		   SK
Broadband		   LG U+   Sejong   SK Telink   KT
Corporation		   SK
Broadband		   LG U+   Sejong   SK Telink 

United States

  ￦282    ￦276    ￦288    ￦276    ￦180    ￦282   ￦276   ￦288   ￦276   ￦180 

Japan

   696     672     678     672     612     696    672    678    672    612 

China

   990     984     996     984     990     990    984    996    984    990 

Australia

   1,086     1,044     1,086     1,044     810     1,086    1,044    1,086    1,044    810 

Great Britain

   1,008     966     996     966     900     1,008    966    996    966    900 

Germany

   948     912     942     912     900     948    912    942    912    900 

 

 

Source:KT Corporation.

Broadband Internet Access Service. The Korean broadband Internet access market has experienced significant growth in the past decade. SK Broadband entered the broadband market in 1999 offering both HFC and ADSL services, and we entered the market with our ADSL services in 1999, followed by Dreamline, Sejong and LG U+. In addition, the entry of cable television providers that offerHFC-based broadband Internet access services at rates lower than ours has increased competition in the broadband Internet access market. We expect industry consolidation among our competitors in the near future, and smaller competitors in the broadband market today may become larger competitors.

The following table shows the market share in the broadband Internet access market as of the dates indicated:

 

  Market Share (%)   Market Share (%) 
  KT
Corporation		   SK
Broadband		   LG U+   Others   KT
Corporation		   SK
Broadband		   LG U+   Others 

December 31, 2013

   43.1     24.4     15.6     16.9  

December 31, 2014

   42.3     25.1     15.7     16.9     42.3    25.1    15.7    16.9 

December 31, 2015

   41.6     25.1     17.4     15.9     41.6    25.1    17.4    15.9 

December 31, 2016

   41.4    25.3    17.6    15.7 

 

 

Source:The MSIP.

Our competitors generally charge less than us for broadband Internet access service. The following table is a comparison of fees for our olleh Internet Lite service with three year mandatory subscription period with fees of our competitors for comparable services as of December 31, 2015:2016:

 

  KT
Corporation		   SK
Broadband		   LG U+   Cable
Providers (1)		   KT
Corporation		   SK
Broadband		   LG U+   Cable
Providers (1)		 

Monthly subscription fee

  ￦25,500    ￦25,000    ￦25,000    ￦20,000    ￦25,500   ￦25,000   ￦25,000   ￦20,000 

Monthly modem rental fee

   None     None     None     1,000     None    None    None    1,000 

Additional installation fee upon moving

   10,000     10,000     20,000     20,000     10,000    10,000    20,000    20,000 

 

 

Source:KT Corporation.

 

(1)These are typical fees charged by cable providers.

Data Communication Service. We had a monopoly in domestic data communication service until 1994, when LG U+ was authorized to provide the leased-line service. The data communications serviceservices market has become more competitive with limited growth during the past decade, and we primarily compete with SK Broadband and LG U+.

Value-Added Service Providers

Value-added service providers may commence operations following filing of a report to the MSIP. The scope of business of a value-added service provider includes specific value-added telecommunications activities (other than services reserved for network service providers), such as data communications utilizing telecommunications facilities leased from network service providers.

Specific Service Providers

Specific service providers, such as Internet phone service providers and voice resellers, started operations in Korea in 1998. We began providing Internet phone service for international long-distance calls in May 1998. Our Internet phone service also competes with international long-distance services provided by voice resellers who have also seen sharp increases in demand for their services.

In November 2015, the Government announced plans to introduce Internet-only banks and granted preliminary approval to two consortiums, K bank consortium and Kakao Bank consortium. The K bank consortium, over which we own a minority interest as one of 20 shareholding companies including Woori Bank, NH Investment & Securities, Co., Ltd., GS Retail Co., Ltd. and Hanwha Life Insurance Co., Ltd., received the final approval from the Government to operate the first Internet-only bank in Korea in December 2016. The Kakao Bank consortium, K bank’s competitor, received the final approval from the Government in April 2017. K bank began its operation in April 2017 and seeks to operate as a virtual bank whose operation is based on its mobile application and the Internet, while promoting greater user accessibility through the convenience stores of one of our other consortium members. K bank also plans to differentiate itself from other conventional banks by utilizing big data and offering competitive products and interest rates.

Regulation

With the establishment of the MSIP in March 2013, many of the regulatory responsibilities formerly handled by the KCC have been transferred to the MSIP. Under the Framework Act of Telecommunications and the Telecommunications Business Act, the MSIP now has comprehensive regulatory authority over the telecommunications industry and all network service providers.

The MSIP has assumed primary policy and regulatory responsibility for matters such as: (i) licensing of network service providers (the MSIP authorizes the licensing of IPTV service providers and, with the consent of the KCC, authorizes the licensing of satellite broadcasting companies); (ii) regulation of mergers and acquisitions, as well as license suspension and termination of network

service providers; (iii) providing oversight on foreign ownership ratios in network service providers; and (iv) reviewing telecommunication matters as they relate to the public interest and approving ancillary telecommunication business activities. Additionally, the MSIP is responsible for a broad range of other policy and regulatory matters, including the administration and supervision of regulatory reporting by telecommunications companies, examination and analysis of accounting and business management practices in the industry, establishment and administration of policies governing telecommunications service fees, value-added service providers and specific service providers, as well as supervision of reporting requirements of standard telecommunications service/user contracts.

Under the revised supervisory framework, a network service provider must be licensed by the MSIP. Our license as a network service provider permits us to engage in a wide range of telecommunications services.

The KCC’s overall policy role is to play a key role in regulatory activities aimed at protecting service users in the broadcast and telecommunications market and it continues to be responsible for investigations and sanctions regarding violations by telecommunications companies, as well as for mediating disputes between service providers and users. The KCC is established under the direct jurisdiction of the President of Korea and is comprised of five standing commissioners. Commissioners of the KCC are appointed by the President, and the appointment of the Chairperson must be approved at a confirmation hearing at the National Assembly.

Under the Act on Promotion of Information and Communications Network Utilization and Information Protection, etc., telecommunications service providers are also required to protect personal information of their customers. Generally, when a telecommunications service provider intends to collect or use its customer’s personal information, such telecommunications service provider, with certain exceptions, must notify and receive the customers’ consent in relation to the purpose of collection, the use of the collected personal information, types of personal information collected and period during which the personal information will be possessed and used. Korean telecommunications providers may not use their customers’ personal information for any purpose other than the purpose their customers have consented to. In addition, there are various internal processes that the telecommunications providers are mandated to install in order to collect and handle personal information of their customers.

The MSIP also has the authority to regulate the IP media market, including IPTV services. We began offering IPTV services with real-time high definition broadcasting in November 2008. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the MSIP. The ownership of the shares of an IP media broadcasting company by a newspaper, a news agency or a foreigner is limited. In March 2015, amendments to the Internet Multimedia Broadcasting Business Act were promulgated. Under such amendments, a single broadcasting operator together with their affiliates may not have more thanone-third of the market share of all paid broadcasting subscribers in Korea. The restriction on market share will be in effect until June 27, 2018.

Rates

Under current regulations implementing the Telecommunications Business Act, a network service provider may set its rates at its discretion, although it must report to the MSIP the rates and the general terms and conditions for each type of network service provided by it. There is, however, one exception to this general rule: if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the MSIP, it must obtain prior approval from the MSIP for the rates and the general terms for that service. Each year the MSIP designates the service providers and the types of services

for which the rates and the general terms must be approved by the MSIP. In 2013, the MSIP designated us for local telephone service and SK Telecom for mobile service, which currently remains in effect. The MSIP, in consultation with the Ministry of Strategy and Finance, is required to approve the rates proposed by a network service provider if (1) the proposed rates are appropriate, fair and reasonable and (2) the calculation method for the rates are appropriate and transparent.

On October 1, 2014, the Handset Distribution Reform Act, which seeks to lower the cost of communication for the general public and reduce handset factory prices by establishing fair and transparent order in the distribution of mobile telecommunication devices, went into effect. The Handset Distribution Reform Act regulates, among other matters, the sale and subsidies of mobile devices such as smartphones, with one of its purposes being to induce telecommunication operators to compete in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not be discriminated in terms of subsidies based on their age, place of residence or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either a handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 20%, effective as ofsince April 24, 2015). The maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer is determined by Korean telecommunication regulators (such limit to be determined between￦250,000 and￦350,000, and may be adjusted every six months, with the current limit set at￦330,000, effective as ofsince April 8, 2015).

Telecommunications operators are also required to publicly announce the amount of handset subsidy that they offer, which may not be readjusted within one week after such announcement. In addition, telecommunications operators are prohibited from using misleading or exaggerated advertisements, such as advertisements that mobile phones are free without adequately explaining that it is preconditioned on signing up for high-priced monthly subscription plans.

Other Activities

A network service provider, such as us, must obtain the permission of the MSIP in order to:

 

engage in certain businesses specified under the Telecommunications Business Act, such as the telecommunications equipment manufacturing business and the telecommunications network construction business;

 

change the conditions for its licenses;

 

transfer, terminate, suspend or spin off all or a part of the business for which it is licensed;

 

acquire all or a part of the business of another network service provider; or

 

enter into a merger with another network service provider.

By submitting a report to the MSIP, a network service provider may enter into arrangements for services to be furnished to its customers by a different telecommunications service provider and, in connection therewith, may provide its telecommunications services to, or authorize the use of all or a portion of its telecommunications facilities by, such other telecommunications service provider. The MSIP can revoke our licenses or order the suspension of any of our businesses if we do not comply with the regulations of the MSIP under the Telecommunications Business Act.

In May 2010, the KCC issued a guideline that limits the marketing expenditure amounts of telecommunication service providers in Korea to 20% of their revenues, with the restrictions applicable to fixed-line and mobile segments to be calculated separately. However, as of October 2013, up to￦100 billion of the marketing expenditures may be applied to either segment at the discretion of the

service provider. The calculation of marketing expenditure amounts under the guideline excludes advertising expenses and the calculation of revenue amounts excludes revenues from handset sales. The MSIP may adjust the guideline to accommodate changes in market conditions.

The responsibilities of the MSIP include:

 

drafting and implementing plans for developing telecommunications technology;

 

fostering and providing guidance to institutions and entities that conduct research relating to telecommunications; and

 

recommending to network service providers that they invest in research and development or that they contribute to telecommunications research institutes in Korea.

In addition, all network service providers (other than regional paging service providers) are obligated to contribute toward the supply of “universal” telecommunications services in Korea. Telecommunications service providers designated as “universal service providers” by the MSIP are required to provide universal telecommunications services such as local services, local public telephone services, discount services for persons with disabilities and for certainlow-income persons, telecommunications services for remote islands and wireless communication services for ships. We have been designated as a universal service provider. The costs and losses recognized by universal

service providers in connection with providing these universal telecommunications services, except for discount services for persons with disabilities and for certainlow-income persons, will be shared on an annual basis by all network service providers (other than regional paging service providers), including us, on a pro rata basis based on their respective net annual revenue calculated pursuant to a formula set by the MSIP. As for the costs and losses recognized by a universal service provider in connection with providing discount services for persons with disabilities and for certainlow-income persons, such costs and losses will be borne by such universal service provider.

A network service provider must permit other network service providers, as designated by the MSIP, toco-use wirelines connecting the switching equipment toend-users, upon the request of such other network service providers. In addition, a network service provider may permit other network service providers toco-use its wireless communication systems upon the request of any of such other network service providers. The compensation method for theco-use must be determined by the MSIP and be settled, by fair and proper methods.

In addition, we are required to lease to other companies our fixed-lines that connect subscribers to our network. This system, which is called local loop unbundling, is intended to prevent excessive investment in local loops. This system requires us to lease the portion of our copper lines that represent our excess capacity to other companies upon their request at rates that are determined by the MSIP based on our cost, and taking into consideration an appropriate rate of return, to enable them to provide voice and broadband services. Revenues from local loop unbundling, if any, are recognized as revenues from miscellaneousother businesses.

Foreign Investment

The Telecommunications Business Act restricts the ownership and control of network service providers by foreign shareholders. Foreigners, foreign governments and “foreign invested companies” may not own more than 49.0% of the issued shares with voting rights of a network service provider, including us, and a foreign shareholder may not become our largest shareholder if such shareholder holds 5.0% or more of our shares. For purposes of the Telecommunications Business Act, the term “foreign invested company” means a company in which foreigners and foreign governments hold

15.0% or more shares with voting rights in the aggregate and a foreigner or a foreign government is the largest shareholder, provided, however, that such company will not be counted as a foreign shareholder for the purposes of the above-referenced 49.0% limit if (1) it holds less than 1.0% of our total issued and outstanding shares with voting rights or (2) if the largest shareholder of such company is a government or foreign entity of a country that is a counterparty to a free trade agreement with Korea, as publicly announced by the MSIP, and the MSIP determines that the fact that such foreign government or entity holds a 15.0% or greater shareholding in such company does not present a risk of harm to the public interest. (However, the calculation of the above-referenced 49% ceiling will apply to: (x) any foreign entities that have entered into any major management-related agreement with a network service provider or the shareholder(s) thereof; and (y) foreign entities that have entered into any agreement pertaining to the settlement of fees relating to the handling of international electronic telecommunications services). As of December 31, 2015, 48.4%2016, 49.0% of our common shares were owned by foreign investors. In the event that a network service provider violates the shareholding restrictions, its foreign shareholders cannot exercise voting rights for their shares in excess of such limitation, and the MSIP may require corrective measures be taken to comply with the ownership restrictions. There is no restriction on foreign ownership for specific service providers and value-added service providers.

Individual Shareholding Limit

Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign

shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. In addition, under the Telecommunications Business Act, the MSIP may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, the Telecommunications Business Act restricts such foreign shareholder from exercising his or her voting rights with respect to common shares exceeding such threshold. The MSIP may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.

Customers and Customer Billing

We typically charge residential subscribers and business subscribers similar rates for services provided. On acase-by-case basis, we also provide discount rates for some of our high-volume business subscribers. We bill all of our customers on a monthly basis. Our customers may make payment at either payment points such as local post offices, banks or our service offices, through a direct-debit service that automatically deducts the monthly payment from a subscriber’s designated bank account, or through a direct-charge service that automatically charges the monthly payment to a subscriber’s designated credit card account. Approximately 82%83% of our subscribers as of December 31, 20152016 pay through the direct-debit service. Accounts of subscribers who fail to pay our invoice are transferred to a collection agency, which sends out a notice of payment. If such charges are not paid after notice, we cease to provide outgoing service to such subscribers after a period of time determined by the type of subscribed service. If charges are still not paid two to three months after outgoing service is cut off, we cease all services to such subscribers. After service is ceased, the overdue charges that are not collected by the collection agency are written off.

Insurance

We carry insurance against loss or damage to all significant buildings and automobiles. Except for our insurance coverage of our satellites and data centers, we do not carry insurance covering losses to outside plants or to equipment because we believe the cost of such insurance is excessive

and the risk of material loss or damage is insignificant. We do not have any provisions or reserves against such loss or damage. We do not carry any business interruption insurance.

We provideco-location and a variety of value-added services including server-hosting services to a number of corporations whose business largely depends on critical data operated on our servers or on their servers located at our data centers. Any disruptions, interruptions, physical or electronic data loss, delays or slowdowns in communication connections could expose us to potential liabilities for losses relating to the disrupted businesses of our customers relying on our services.

Information Technology and Operational Systems

Enhancement of our information technology and operational systems and efficient utilization of such systems are important in effectively promoting our core strategies. We are committed to continually investing in and enhancing our information technology systems, which provide support to many aspects of our businesses. In order to respond more effectively to a changing business environment, a new enterprise resource planning system (the “New ERP System”) was completed and implemented during the second half of 2012. The New ERP System has contributed to enhancing various aspects of our internal processes and control systems, and we are establishing various plans to effectively utilize the New ERP System and to stabilize our internal control processes in connection with the New ERP System.

Patents and Licensed Technology

The ability to obtain and protect intellectual property rights to the latest telecommunications technology is important for our business. We own or have licenses to various patents and trademarks in Korea and overseas, and have applications for patents pending in Korea and other select countries such as the United States, Europe, China and Japan. A majority of our patents registered in Korea and overseas relate to our wireless and fixed-line telecommunications, media and IoT technologies. In addition, we operate several research and development (“R&D&D”) laboratories to develop latest technology and additional platforms, as described in “Item 5.C. Research and Development, Patents and Licenses, Etc.” We license our intellectual property rights to third parties in return for periodic royal payments. We currently do not license any material technologies or patents from third parties.

Seasonality of the Business

Our main business generally does not experience significant seasonality.

Item4.C.  Organizational Structure

These matters are discussed under Item 4.B. where relevant.

Item 4.D.  Property, Plants and Equipment

Our principal fixed asset is our integrated telecommunications networks. In addition, we own buildings and real estate throughout Korea. As of December 31, 2015,2016, the net book value of our property and equipment was￦14,47914,312 billion, of which￦3,3873,434 billion is accounted for the net book value of our land, buildings and structures. As of December 31, 2015,2016, the net book value of investment property, which is accounted for separately from our property and equipment was￦1,1021,148 billion. Other than described in this annual report, no significant amount of our properties is leased. There are no material encumbrances on our properties including the fixed assets below.

Our fixed-line equipment vendors and mobile equipment suppliers include well-known international and local suppliers such as Samsung Electronics, LG Electronics, Cisco Systems and Apple Inc.

Mobile Networks

Our mobile network architecture includes the following components:

 

cell sites, which are physical locations equipped with base transceiver stations consisting of transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile telephone handsets within the range of a cell;

 

base station controllers, which connect to and control, the base transceiver stations;

 

mobile switching centers, which in turn control the base station controllers and the routing of telephone calls; and

 

transmission lines, which connect the mobile switching centers, base station controllers, base transceiver stations and the public switched telephone network.

The following table lists selected information regarding our mobile networks as of December 31, 2015:

   W-CDMA   LTE 

Mobile switching centers

   64     58  

Base station controllers

   492     —  

Base transceiver stations

   31,981     24,728  

Indoor and outdoor repeaters

   269,932     281,600  

We have a license to use 40 MHz of bandwidth in the 2.1 GHz spectrum, of which 20 MHZ is used to provideIMT-2000 services based onW-CDMA wireless network standards and the remaining 20 MHZ for our 4G LTE services. Such license expireswas renewed in December 2016, and we are required to pay approximately￦1.3 trillion569 billion for use of such bandwidth during the license period of 155 years. In April 2010, the KCC announced its decision to allocate 20 MHz of bandwidth in the 900 MHz spectrum to us, which became effective in July 2011, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation. In June 2011, our right to use 40 MHz of bandwidth in the 1.8 GHz spectrum expired, and the KCC allocated back to us the right to use 20 MHz of such bandwidth in the 1.8 GHz spectrum upon expiration pursuant to our application, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 1.8 GHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation. We began using the 20 MHz of bandwidth in the 1.8 GHz spectrum, which became available upon termination of our 2G services, to provide our 4G LTE services starting in January 2012.

In August 2011, the KCC auctioned the right to use the remaining 20 MHz of bandwidth in the 1.8 GHz spectrum that we relinquished, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. We acquired the right to use the 10 MHz of bandwidth in the 800 MHz spectrum, for which we are required to pay a total usage fee of￦261 billion during the license period of 10 years, SK Telecom acquired the right to use the 20 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use the 20 MHz of bandwidth in the 2.1 GHz spectrum. We have not utilized 10 MHz of bandwidth in the 800 MHz spectrum due to the unavailability of requisite technologies and have recorded impairment for thenon-usage.

In August 2013, MSIP further auctioned 50 MHz of bandwidth in the 1.8 GHz spectrum, which had been used by governmental entities such as the military, and 80 MHz of bandwidth in the 2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to use 15 MHz of bandwidth in the 1.8 GHz spectrum, for which we are required to pay a total usage fee of approximately￦878900 billion during a license period of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. Acquiring the right to use additional bandwidth in the 1.8 GHz spectrum has enabled us to provide wideband LTE services beginning in September 2013, as 15 MHz of the newly acquired bandwidth in the 1.8 GHz spectrum was adjacent to our existing 20 MHz of bandwidth in the 1.8 GHz spectrum.

In May 2016, the MSIP auctioned 40 MHz of bandwidth in the 700 MHz spectrum, 20 MHz of bandwidth in the 1.8 GHz spectrum, 20 MHz of bandwidth in the 2.1 GHz spectrum, 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum. We acquired the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum for which we are required to pay a total usage fee of approximately￦470 billion during a license period of 10 years. SK Telecom acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum and LG U+ acquired the right to use 20 MHz of bandwidth in the 2.1 GHz spectrum. The right to use 40 MHz of bandwidth in the 700 MHz spectrum was not purchased by any company. We currently use 20 MHz of bandwidth in the 1.8 GHz spectrum to provide WidebandLTE-A services.

Exchanges

Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 23.625 million lines connected to local exchanges and 1.52.2 million lines connected to toll exchanges as of December 31, 2015.2016.

All of our exchanges are fully automatic. We completed replacement of all electromechanical analog exchanges with digital exchanges in June 2003 in order to provide higher speed and larger

volume services. Starting in 2006, we also began conversion of our exchanges to be compatible to IP platform in preparation for building our next generation broadband convergence network by 2021. As of December 31, 2015,2016, 100% of our lines connected to toll exchanges are compatible to IP platform.

Internet Backbone

Our Internet backbone network, called KORNET, has the capacity to handle aggregate traffic of our broadband Internet access subscribers, data centers and Internet exchange system at any given moment of up to 8.18.9 Tbps as of December 31, 2015.2016. We have set up contingent plans to prepare against various incidents that could affect reliable Internet access service. Starting in 2005, we have also begun deploying our IP premium network that enables us to more reliably support olleh TV, WiBro, Internet Phone, upgraded VoIP services and other IP services. As of December 31, 2015,2016, our IP premium network had 2,3922,941 lines installed to provide 3G and LTE mobile data services, 2,6983,147 lines installed to provide IPTV services and a total capacity to handle up to 1.742.8 Tbps of IPTV, voice, mobile data, virtual private network (VPN) and WiBro service traffic.

Access Lines

As of December 31, 2015,2016, we had 18.519.3 million access lines installed, which allow us to reach virtually all homes and businesses in Korea. As part of our broadband deployment strategy, we have upgraded many of our access lines by equipping them with broadband capability using xDSL and FTTH technology. As of December 31, 2015,2016, we had approximately 17.818.9 million broadband lines with speed of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia content to our customers.

Transmission Network

Our domestic fiber optic cable network consisted of over 695,000730,000 kilometers of fiber optic cables as of December 31, 20152016 of which 118,425approximately 116,000 kilometers of fiber optic cables are used to connect our backbone network and 581,120approximately 616,000 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes 64 Tbp Long-haul Reconfigurable Optical Add Drop Multiplexer (“ROADM”) technology for connecting cities. ROADM technology improves bandwidth efficiency by enabling data to be transmitted from multiple signals across one fiber

strand in a cable and carrying each signal on a separate wavelength. We enhanced our backbone network connecting six major cities in Korea by implementing an optical cross-connector (OXC) and access network by implementing multi-service provisioning platform (MSPP) architecture in 2008. During 2013, we completed the construction of our next generation broadband convergence network by installing carrier ethernet architecture.

Our extensive domestic long-distance network is supplemented by our fully digital domestic microwave network, which consisted of 55 relay sites as of December 31, 2015.2016.

International Network

Our international network infrastructure consists of both submarine cables and satellite transmission systems, including two submarine cable-landing stations in Busan and Keoje and two satellite teleports in Kumsan and Boeun. Data services such as international private lease circuits, IP and very small aperture terminals are provided through submarine cables and satellite transmission. In order to guarantee high quality services to our end customers, our submarine cables and satellite transmission systems are linked to variouspoints-of-presence in the United States, Asia and Europe. In addition, our international telecommunications networks are directly linked to approximately 210 telecommunications service providers in various international destinations and are routed through our three international switching centers in Seoul, Daejeon and Busan.

Our international Internet backbone with capacity of 752879 Gbps is connected to approximately 180200 Internet service providers through our two Internet gateways in Hyehwa and Guro. In addition, we operate a video backbone with capacity of 1.5 Gbps to transmit video signals from Korea to the rest of the world.

Satellites

Koreasat 5 (launched in 2006), Koreasat 6 (launched in 2010), and Koreasat 8 (launched in 2014 and of which we own 12 transponders) are all in operation, providing broadcasting, video distribution and broadband data services in selected areas. Two additional satellites (provisionally called Koreasat 5A and Koreasat 7) are expected to be launched in 2016 and 2017, respectively.2017. If launched successfully, Koreasat 5A will replace Koreasat 5. The rights and interests regarding Koreasat 3 are currently subject to an International Chamber of Commerce arbitration. Seearbitration.See “—Item 4.B. Business Overview—Our Services—MiscellaneousOther Businesses” and “Item 8. Financial Information—Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”

International Submarine Cable Networks

International traffic is handled by telecommunications satellites and submarine cables. Because of the high cost of laying a submarine cable, the usual practice is for multiple carriers to jointly commission a new cable and share the costs and the capacity. We own interests in several international fiber optic submarine cable networks, including:

 

a 1.4% interest in the29,000-kilometer FLAG Europe-Asia network connecting Korea, Southeast Asia, the Middle East and Europe, activated since April 1997;

 

a 1.7% interest in the39,000-kilometer Southeast Asia-Middle East-Western Europe 3 Cable Network linking 34 countries, activated since December 1999;

 

a 6.7% interest in the 30,444-kilometer China-U.S. Cable Network linking Korea, China, Japan, Taiwan and the United States, activated since January 2000;

a 4.0% interest in the19,000-kilometer Asia Pacific Cable Network 2 connecting Korea, China, Japan, Taiwan, Hong Kong, Philippines, Singapore and Malaysia, activated since December 2001;

a 20.0% interest in the500-kilometer Korea-Japan Cable Network linking Korea and Japan, activated since March 2002;

 

a 13.1% interest in the16,500-kilometer Trans Pacific Express Cable Network linking Korea, China, Taiwan and the United States, activated since September 2008; and

 

a 8.53%8.5% interest in the11,000-kilometer Asia Pacific Gateway linking Korea, China, Japan, Thailand, Taiwan, Hong Kong, Vietnam, Singapore and Malaysia, activated since October 2016; and

a 16.7% interest in the14,000-kilometer New Cross Pacific linking Korea, China, Japan, Taiwan and the United States, which is expected to be activated in the fourth quarter of 2016.2017.

We have also invested in four other international fiber optic submarine cables around the world.

Item 4A. Unresolved Staff Comments

We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.

Item 5. Operating and Financial Review and Prospects

Item 5.A.Operating Results

The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB.

Overview

We are an integrated provider of telecommunications services. Our principal services include mobile service and fixed-line services, including fixed-line telephone services, broadband Internet access service and data communication service. The principal factors affecting our revenues from these services have been our rates for, and the usage volume of, these services, as well as the number of subscribers. For information on rates we charge for our services, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.” In addition, we derive revenues from handset sales andnon-telecommunications services, including financial services.

In 2015, for the purposes of placing conventional telecommunications services for individuals and corporations under an integrated management within one segment, the Customer/Marketing Group, and various strategic businesses into the Others Group,2016, we determined our operating segments for financial reporting purposes as the following:

 

the Customer/Marketing Group, which engages in providing various telecommunication services to individual/home/corporate customers and the convergence business,

 

the Finance Business Group, which engages in providing various financial services such as credit card services,

the Satellite TV Group, which engages in satellite TV services, and

 

the Others Group, which includes security services, satellite service, information technology and network services, satellite TV services as well as global business services that provides global network services to multinational or domestic corporate customers and telecommunications companies.companies and other services provided by our subsidiaries.

Prior to 2015,2016, we had fourthree operating segmentssegments: (i) Customer/Marketing Group, (ii) Enterprise Sales Group, (iii) Finance/Rental BusinessFinance Group and (iv)(iii) Others Group. In 2015,2016, our satellite TV services was classified as a new segment, the Enterprise SalesSatellite TV Group, was split into two different segments. The mobile/fixed-line services for corporate customers became partin accordance with the requirements of the Customer/Marketing Group. The global business services as well as the real estate business became part of the Others Group.IFRS 8 (Operating Segments). The segment results for 2013, 2014, 2015 and 20152016 are reported in accordance with the current segment classification of threefour operating segments. See Note 3332 to the Consolidated Financial Statements.

We disposed of our interests in two of our subsidiaries, KT Rental Co., Ltd. and KT Capital Co., Ltd., in June 2015 and August 2015, respectively. The profit and loss on the related operations of KT Rental Co., Ltd. and KT Capital Co., Ltd. are presented as discontinued operations. See Note 39 to the Consolidated Financial Statements.

One of the major factors contributing to our historical performance was the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic or political conditions in Korea deteriorate.” A number of other developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:

 

acquisitions and disposals of interests in subsidiaries and joint ventures;

employee reductions and changes in severance and retirement benefits;

 

acquisition of new bandwidths and usage fees for such bandwidths;

 

changes in the rate structure for our services;

 

handset subsidies; and

 

researching and implementing technology upgrades and additional telecommunication services such as 5G technologies.

As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.

Acquisitions and Disposals of Interests in Subsidiaries and Joint Ventures

One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business, as well as disposal or termination of such businesses from time to time. The following summarizes our recent acquisitions and disposals:

 

in October 2011, we, through our former subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank, Busan Bank and Shinhan Card for approximately￦252 billion, to further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, thereby increasing our ownership interest in BC Card Co., Ltd. to 38.9%, making it our consolidated subsidiary as a result of deemed control starting in October 2011. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately￦287 billion, and owned a 69.5% interest in BC Card Co., Ltd. as of December 31, 2015.2016. The profit and loss on the related operations of KT Capital Co. Ltd. are presented as discontinued operations. See Note 39 to the Consolidated Financial Statements.

in October 2014, we acquired 4,000,000 treasury shares of ktis Corporation, an equity-method investee which provides telephone number directory services, for approximately￦14 billion (and the book value of the company being￦36 billion at the time of the consolidation), thereby increasing our ownership interestpercentage to 30.0% of all issued and outstanding capital as of December 31, 2015 and making it our consolidated subsidiary as a result of deemed control starting from October 2014. See Note 1 to the Consolidated Financial Statements.

 

in October 2014, we, through our subsidiary KT Hitel Co., Ltd., acquired 4,800,000 treasury shares of ktcs Corporation, an equity-method investee which provides telephone number directory services, for approximately￦14 billion (and the book value of the company being￦37 billion at the time of consolidation), thereby increasing our ownership interestpercentage to 30.9% of all issued and outstanding capital as of December 31, 2015 and making it our consolidated subsidiary as a result of deemed control starting from October 2014. See Note 1 to the Consolidated Financial Statements.

 

starting in July 2012, KT Rental Co., Ltd., ourthen-58.0% owned subsidiary, became our consolidated subsidiary as a result of the acquisition of KT Rental’sRental Co., Ltd.’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the then-second largest shareholder in July 2012, and the restriction on our control over KT Rental Co., Ltd. pursuant to a shareholders’ agreement being resolved as a result. The sale of KT Rental Co., Ltd. to the Lotte Group for￦1.01 trillion (with proceeds to KT Corporation being approximately￦763 billion) was completed in June 2015. The profit and loss on the related operations of KT Rental Co. Ltd. are presented as discontinued operations. See Note 39 to the Consolidated Financial Statements.

Our financial condition and results of operations may be affected as a result of such acquisitions, disposals or consolidation. Furthermore, pursuing acquisitions, joint venture and certain investment transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital by incurring loans or through the issuances of bonds or other securities in the international capital markets, which may lead to increased levels of debt and debt servicing costs in the future.

Employee Reductions and Changes in Severance and Retirement Benefits

We regularly sponsor voluntary early retirement plans where we provide additional financial incentives for our employees to retire early, as part of our efforts to improve operational efficiencies. In 2013, 2014, 2015 and 2015, 269,2016, 41, 33 and 335 employees, respectively, retired under our voluntary early retirement plan. In April 2014, in addition to our usual voluntary early retirement plan, we held a special voluntary early retirement program where we provided employees who had been employed by us for more than 15 years with additional financial incentives to retire early or employment for two years at certain of our subsidiaries or affiliates. The special voluntary early retirement program resulted in the early retirement of 8,304 employees in 2014. Our payments of severance benefits amounted to￦371 billion in 2013,￦1,427 billion in 2014, and￦118 billion in 2015.2015 and￦122 billion in 2016. In 2014, our severance payments were particularly high due to the special voluntary early retirement program. There was no such special retirement program in 2015.2015 and 2016.

Acquisition of New Bandwidth and Usage Fees for Such Bandwidths

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to a service provider. The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant

factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia content is likely to put additional strain on the bandwidth capacity of mobile service providers. We have acquired various licenses in recent years to secure additional bandwidth capacity to provide our broad range of services, for which we typically pay a portion of the actual sales generated from using the bandwidth during the license period as a usage fee, as well as a portion of expected sales as determined by the KCC at the time of allocation.

In August 2013, the MSIP further auctioned 50 MHz of bandwidth in the 1.8 GHz spectrum, which had been used by governmental entities such as the military, and 80 MHz of bandwidth in the 2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to use 15 MHz of bandwidth in the 1.8 GHz spectrum, for which we are required to pay a total usage fee of approximately￦900 billion during a license period of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. In September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidth in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. In March 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expanded our wideband LTE services to all of Korea in July 2014. Furthermore, in March 2014, we commercialized WidebandLTE-A services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps, and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps under the “WidebandLTE-A X4” service.

In May 2016, the MSIP auctioned 40 MHz of bandwidth in the 700 MHz spectrum, 20 MHz of bandwidth in the 1.8 GHz spectrum, 20 MHz of bandwidth in the 2.1 GHz spectrum, 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum. We acquired the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum for which we are required to pay a total usage fee of approximately￦470 billion during a license period of 10 years. SK Telecom acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum and LG U+ acquired the right to use 20 MHz of bandwidth in the 2.1 GHz spectrum. The right to use 40 MHz of bandwidth in the 700 MHz spectrum was not purchased by any company. We currently use 20 MHz of bandwidth in the 1.8 GHz spectrum to provide WidebandLTE-A services.

Changes in the Rate Structure for Our Services

Periodically, we adjust our rate structure for our services. For example, we completely abolished our mobile activation fee in March 2015 in line with government policy objectives. In order to mitigate the impact from lower usage charges of local and domestic long-distance calls, we have increased our basic monthly charges and offer various optional flat rate plans for our fixed-line subscribers. Such adjustments in the rate structure have increased the portion of fixed income and stabilized our cash flow. In addition, because the growing use of mobile telecommunications services has decreased the usage of our fixed-line telephone services, we believe we are able to maximize our revenues from fixed-line telephone services by adjusting the rate structure so as to increase our basic monthly charges. We also provide bundled packages of our various services at a discount in order to attract additional subscribers to our new services. We currently bundle our broadband Internet access service with IPTV, Internet phone, fixed-line telephone service, WiBro, and mobile services, at a discount.

The MSIP, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us for local telephone service. In addition, the MSIP currently does not regulate our domestic long-distance, international long-distance, broadband internetInternet access and mobile service rates, but it periodically announces public policy guidelines or suggestions on tariffs fornon-regulated services, which we have followed in the past. For a discussion of adjustments in our rate structure, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.”

Handset Subsidies

In March 2008, the Government removed a prohibition on the provision of handset subsidies and allowed mobile service providers to subsidize the purchase of new handsets by certain qualifying customers. In order to compete more effectively, weWe began providing such handset subsidies, which increased, and may in the future increase, our marketing expenses. We provide handset subsidies to subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. Generally, handset subsidies may be provided to any subscriber that uses our service and purchases handsets either directly from us or through third parties. Since we do not recognize revenues from sales of handsets by third parties, the trends between our handset sales and our provision for handset subsidies are not necessarily correlated. The amount recognized as a provision for handset subsidies is our best estimate of the expenditure required to settle current obligations to relevant subscribers at the end of the reporting period, whichperiod. This subsidy amount is calculated as the sum of the present values of the monthly balances for handset subsidies over the relevant service periods, taking into account the customer retention rate for relevant subscribers. In May 2010, the KCC announced a guideline recommending that telecommunication service providers limit their marketing expenses to 22.0% of their annual sales, and the limit was subsequently lowered to 20.0% of their annual sales for the years 2013, 2012 and 2011. Such marketing expenses includeincluded initial commissions, monthly commissions and retention commissions paid to our authorized dealers and subscribers, including handset subsidies, but dodid not include advertising expenses. This guideline remains effective. While the guideline iswas not binding, we, as well as our competitors, nonetheless trytried to adhere to such guideline when feasible, which may have a material adverse effect on our businesses and results of operations.feasible. Furthermore, failure to comply with rules, regulations and corrective orders may lead to suspension of our business or imposition of monetary penalties.

For example, based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately￦12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately￦3 billion), for providing subsidies that were higher than those allowed under current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from accepting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately￦5 billion on SK Telecom, LG U+ and

us (our fine being approximately￦2 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately￦67 billion on SK Telecom, LG U+ and us (our fine being approximately￦20 billion) and also imposed a seven day suspension on us from accepting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately￦106 billion on SK Telecom, LG U+ and us (our fine being approximately￦30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. In March 2014, the MSIP imposed a45-day suspension on each of us, SK Telecom and LG U+ from accepting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. In August 2014, the KCC again imposed a combined fine of approximately￦58 billion on SK Telecom, LG U+ and us (our fine being approximately￦11 billion) for providing excessive handset subsidies, and also imposed temporary suspensions on accepting new subscribers for seven days on SK Telecom and LG U+. In December 2014, the KCC further imposed a fine of approximately￦8 billion on each of SK Telecom, LG U+ and us for providing excessive handset subsidies and insubsidies. In March 2015, the KCC againalso imposed a combined fine of approximately￦34 billion on SK Telecom, LG U+ and us (our fine being approximately￦9 billion) for violation of regulations relating to handset sales, in connection with a used handset buyback program that we and the other telecommunications operators were promoting. On March 12, 2015, the KCC imposed a fine of￦870 million for violation of restrictions on handset subsidies relating to our compensation program for used handsets. Any further suspension of our business or imposition of monetary penalties by the Government could have a material adverse effect on our business.

Furthermore, on October 1, 2014, the Handset Distribution Reform Act, which seeks to lower the cost of communication for the general public and reduce handset factory prices by establishing fair and transparent order in the distribution of mobile telecommunication devices, went into effect. The

Handset Distribution Reform Act regulates, among other matters, the sale and subsidies of mobile devices such as smartphones, with one of its purposes being to induce telecommunication operators to compete in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not be discriminated in terms of subsidies based on their age, place of residence or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either a handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 20%, effective as ofsince April 24, 2015). The maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer is determined by Korean telecommunication regulators (such limit to be determined between￦250,000 and￦350,000, and may be adjusted every six months, with the current limit set at￦330,000, effective as ofsince April 8, 2015). Telecommunications operators are also required to publicly announce the amount of handset subsidy that they offer, which may not be readjusted within one week after such announcement. In addition, telecommunications operators are prohibited from using misleading or exaggerated advertisements, such as advertisements that mobile phones are free without adequately explaining that it is preconditioned on signing up for high-priced monthly subscription plans.

Researching and Implementing Technology Upgrades and Additional Telecommunication Services

The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, we are continually upgrading our broadband network to enable better FTTH connection, which provides speed of up to 1 Gbps and better connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber

optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IPTV, and other digital media content with stronger stability.

In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to as 4G technology, and commenced providing commercial 4G LTE services in the Seoul metropolitan area in January 2012. We completed the expansion of our 4G LTE service coverage nationwide in October 2012. We commenced providing wideband LTE services in September 2013, which we expanded nationwide in July 2014, and commercialized WidebandLTE-A services in March 2014, and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps under the “WidebandLTE-A X4” service, as discussed above.

Critical Accounting Policies

We have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB. These accounting principles require our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the years reported. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. On anon-going basis, management evaluates its estimates. Actual results may differ from those estimates under different assumptions and conditions.

The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, our management has identified “critical accounting estimates.” These estimates have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

These critical accounting estimates include:

 

allowances for doubtful accounts;

 

useful lives of property, equipment, intangible assets and investment property;

 

impairment of long-lived assets, including goodwill;

 

valuation and impairment of investment securities;

 

income taxes;

 

deferred revenue relating to service installation fees and initial subscription fees;

 

post-employment benefit liabilities; and

 

provisions.

Allowances for Doubtful Accounts

Allowance for doubtful accounts is our best estimate of the amount of impairment losses incurred on our existing notes and accounts receivable. We determine the allowance for doubtful notes

and accounts receivable based on an aging analysis of balances, historicalwrite-off experience, customer’s or counterparty’s credit ratings and changes in payment terms. Account balances are charged off against the allowance when all means of collection have been exhausted and the potential for recovery is considered remote. Our past experience shows that the possibility of collection is remote after three years of collection effort.

Changes in the allowances for doubtful accounts for our trade and other receivables in the three-year period ended December 31, 20152016 are summarized as follows:

 

   Year Ended December 31, 
   2013  2014  2015 
   (In millions of Won) 

Balance at beginning of year

  ￦644,058   ￦678,262   ￦738,263  

Provision

   160,166    199,135    139,109  

Reversal or written-off

   (127,206)   (141,194)   (147,717) 

Changes in the scope of consolidation

   2,687    3,425    (22,153) 

Others

   (1,443)   (1,365)   (1,530) 
  

 

 

  

 

 

  

 

 

 

Balance at end of year

  ￦678,262   ￦738,263   ￦705,972  
  

 

 

  

 

 

  

 

 

 

Changes in the allowances for doubtful accounts for our loans receivables in the three-year period ended December 31, 2015 are summarized as follows:

  Year Ended December 31,   Year Ended December 31, 
  2013 2014 2015   2014 2015 2016 
  (In millions of Won)   (In millions of Won) 

Balance at beginning of year

  ￦65,196   ￦73,075   ￦79,103    ￦771,527  ￦838,699  ￦719,583 

Provision

   40,743    31,656    2,446     230,791   141,555   92,711 

Reversal or written-off

   (30,448)   (23,618)   —     (163,669)   (168,663)   (189,156) 

Changes in the scope of consolidation

   —    —    (64,331)    3,425   (86,484)   271 

Others

   (2,416)   (2,010)   (3,994)    (3,375)   (5,524)   (10,922) 
  

 

  

 

  

 

   

 

  

 

  

 

 

Balance at end of year

  ￦73,075   ￦79,103   ￦13,224    ￦838,699  ￦719,583  ￦612,487 
  

 

  

 

  

 

   

 

  

 

  

 

 

If economic or specific industry trends change, we would adjust our allowances for doubtful accounts by recording additional expense or benefit.

Useful Lives of Property, Equipment, Intangible Assets and Investment Property

Property and equipment, intangible assets and investment properties (excluding land, condominium memberships, golf club memberships and broadcasting concession) are depreciated

using the straight-line method over their useful lives as disclosed in Note 3.8 to the Consolidated Financial Statements. An asset’s residual value and useful lives are reviewed and adjusted at the end of each financial reporting period, and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. A decrease of remaining estimated useful life by one year of our property and equipment would result in an increase of depreciation expense of approximately￦250208 billion in 2015.2016.

Impairment of Long-Lived Assets, including Goodwill

Long-lived assets generally consist of property and equipment and intangible assets, including goodwill. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, we evaluate our long-lived assets for impairment each year as part of our annual forecasting process. An impairment

loss would be recognized when the asset’s recoverable amount is less than its carrying amount. The recoverable amount of a long-lived asset is the greater of an asset’s fair value less costs to sell and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amounts of cash-generating units are based on their value in use calculated by applying the annual discount rate ranging from 4.97%4.36% to 11.42%12.72% (depending on the segment) to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 0.0% was applied for the cash flows expected to be incurred after five years. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated recovery value. For example, in 2015, we recognized￦185 billion of impairment loss in connection with thenon-usage of 10 MHz of bandwidth in the 800 MHz spectrum. We also recognized￦33 billion of impairment loss on inventory and tangible and intangible assets in connection with the close of the trunk radio system business of KT Powertel Co., Ltd. in 2015.

Goodwill represents the excess of purchase price paid over the fair value assigned to the identifiable net assets of acquired businesses. The determination of the fair values of goodwill is based on management’s judgment on the expected cash flows of the cash-generating units to which the goodwill is allocated, taking market demand, competition and other economic factors into consideration. The determination of impairments of goodwill involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, a decline in our expected future cash flows, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs and prices paid in comparable transactions. For example, in 2015,2016, we recognized an impairment losses of￦97132 billion on goodwill allocated to KT Skylife primarily due to a decrease in the expected recoverable amount resulting from a decrease in KT Skylife’s market value in 2015.2016. See Note 1312 of the Consolidated Financial Statements.

Valuation and Impairment of Financial Assets

The fair value of financial instruments, including derivative instruments, thatwhich are not traded in an active market, is determined by using valuation techniques. Our management 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.

We record rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. Gains and losses that result from a change in the fair value of derivative

instruments are recognized in current earnings. However, for derivative instruments that qualify for cash flow hedge accounting, the effective portion of the gain or loss on the derivative instruments are recorded as gain or loss on valuation of derivatives for cash flow hedge included in accumulated other comprehensive income or loss, as applicable.

For financial assets, including assets carried at amortized cost and those classified asavailable-for-sale, we make an annual assessment at the end of each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. For financial assets carried at amortized cost andavailable-for-sale debt assets, such asset is considered impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events (a “loss event”) that occurred after the initial recognition of the financial asset, which had an impact on the estimated future cash flows of the financial asset that can reliably be estimated. For equity investments classified asavailable-for-sale, a significant or prolonged decline in the fair value of the security below its cost, in addition to circumstances described below, may be considered as evidence that the asset is impaired.

For assets carried at amortized cost, the amount of impairment is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the asset’s original effective interest rate, and the carrying amount of the asset is reduced and the amount of loss is recognized in the statement of income. Loss on such asset may also be measured based on observable market price if there is an active market for the asset. For assets classified asavailable-for-sale, the cumulative loss, measured as the difference between the acquisition cost and the current fair value and recognized as accumulated other comprehensive income, less any impairment loss on such financial asset previously recognized in profit or loss, is removed from equity and recognized in the statement of income.

Significant management judgment is involved in evaluating whether a loss event has occurred. The estimates and assumptions used by management to evaluate whether a loss event has occurred can be impacted by many factors, such as the financial condition, earnings capacity and near-term prospects of the company in which we have invested, breach of contract such as default or delinquency in payments, disappearance of an active market for the financial asset and other adverse changes in the payment status of borrowers in the portfolio. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets.

Income Taxes

We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law or unpredicted results from the final determination of each year’s liability by taxing authorities.

We believe that the accounting estimate related to assessing the reliabilityrealizability of deferred tax assets is a “critical accounting estimate” because: (1) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities, and (2) the impact that changes in actual performance versus these estimates could have on the realization of tax benefits as reported in our results of operations could be material. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so.

Deferred Revenue relating to Service Installation Fees and Initial Subscription Fees

We charge service installation fees and initial subscription fees related to activation of many of our services, which are deferred and recognized as revenue over the expected terms of customer relationships. Our estimate of expected terms of customer relationship is based on the historical rate, which may differ in the future. If the management’s estimation is amended, it may cause significant differences in the timing of revenue recognition and amount recognized.

Post-employment Benefit Liabilities

Our accounting of post-employment benefits, which mainly consist of a defined benefit plan (we began offering a defined contribution plan in December 2012), involves judgments about uncertain events including discount rates, life expectancy and future pay inflation. Any changes in these assumptions will impact the carrying amount of the defined benefit liability. The discount rates used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit liability, are determined at the end of each reporting period by reference to the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of our benefits obligations and that are denominated in the same currency in which the benefits are

expected to be paid. Other key assumptions for defined benefit liability are based in part on current market conditions. For defined contribution plans, we pay contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis, and we have no further payment obligations once the contributions have been paid.

Provisions

We recognize provisions at the end of the reporting period when we have a present legal or constructive obligation, such as litigation or assets requirementretirement obligations, as a result of past events and an outflow of resources required to settle the obligation is probable and can be reliably estimated. We measure provisions at the present value of the expenditures expected to be required to settle the obligation, which are estimated based on factors such as historical experience. We do not recognize provisions for future operating losses and recognize as interest expense any increase in the provisions due to passage of time. See Notes 2.22, 3.7 and 1716 to the Consolidated Financial Statements.

Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance withK-IFRS, which we are required to file with the Financial Services Commission and the Korea Exchange under the FSCMA.

During the three years ended December 31, 2015, we are required to adopt certain amendments and interpretations to K-IFRS, relatingIn relation to presentation of operating profit.profit, certain accounts or transactions which are included in operating income or expenses under IFRS as issued by the IASB, are excluded from operating income or expenses underK-IFRS. Additionally, underK-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. Furthermore, in connection with the exercise of early redemption rights for certain commercial paper guaranteed by KT ENGCORE, our previously consolidated subsidiary, we recognized financial losses relating to the resulting estimation of guarantee liabilities in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB for the year ended December 31, 2013 (which were issued on April 28, 2014), which were not reflected in our financial statements prepared in accordance withK-IFRS for the year ended December 31, 2013 (which were issued on March 13, 2014) as it was

not possible to make a reasonable estimate of the liabilities at the time of issuing theK-IFRS financial statements. We subsequently reflected such losses in ourK-IFRS financial statements for the year ended December 31, 2014. As a result, the presentation of operating results in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating results in our consolidated statements of operations prepared in accordance withK-IFRS. The table below sets forth a reconciliation of our operating profit and net income or loss as presented in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB for each of the years ended December 31, 2013, 2014, 2015 and 20152016 to our operating profit and net income or loss in our consolidated statements of operations prepared in accordance withK-IFRS, for each of the corresponding years, taking into account such differences:

 

  For the Year Ended December 31,   For the Year Ended December 31, 
          2013                   2014                 2015                   2014                 2015                   2016         
  (In millions of Won)   (In millions of Won) 

Operating profit (loss) under IFRS as issued by the IASB

  ￦234,585    ￦(778,840)  ￦1,077,068    ￦(778,840)  ￦1,077,068   ￦1,339,780 

Effect of changes in operating income presentation

   489,652     391,016    207,165     391,016   207,165    96,602 

Revenue recognition of development and sale of real estate

   22,370     (18,767)   8,711     (18,767)   8,711    3,597 
  

 

   

 

  

 

   

 

  

 

   

 

 

Operating profit (loss) under K-IFRS

  ￦746,607    ￦(406,591)  ￦1,292,944    ￦(406,591)  ￦1,292,944   ￦1,439,979 
  

 

   

 

  

 

   

 

  

 

   

 

 

  For the Year Ended December 31,   For the Year Ended December 31, 
          2013                 2014                 2015                   2014                 2015                 2016         
  (In millions of Won)   (In millions of Won) 

Net income (loss) under IFRS as issued by the IASB

  ￦(87,745)  ￦(941,413)  ￦624,685    ￦(941,413)  ￦624,685  ￦795,117 

Profit before income tax

        

Revenue recognition of development and sale of real estate

   22,370    (18,767)   8,711     (18,767)   8,711   3,597 

Guarantee liabilities and loss (KT ENGCORE)

   10,538    (10,538)   —     (10,538)   —   — 

Income tax

   (5,414)   4,542    (2.108)    4,542   (2,108)   (870) 
  

 

  

 

  

 

   

 

  

 

  

 

 

Net income (loss) under K-IFRS

  ￦(60,251)  ￦(966,176)  ￦631,288    ￦(966,176)  ￦631,288  ￦797,844 
  

 

  

 

  

 

   

 

  

 

  

 

 

Recent Accounting Pronouncements under IFRS

For a summary of new standards, amendments and interpretations issued under IFRS as issued by the IASB but not effective for 2015,2016, and which have not been adopted early by us, see Note 2.2 to the Consolidated Financial Statements.

Operating Revenues and Operating Expenses

Operating Revenues

Our operating revenues primarily consist of:

 

fees related to our mobile services, including initial subscription fees, monthly fees, usage charges for outgoing calls, usage charges for wireless data transmission, contents download fees,mobile-to-mobile interconnection revenues and value-added monthly service fees;

 

fees from our fixed-line services, including:

 

 Ø 

fees from our fixed-line telephone services, which include:

 

 Ø 

monthly basic charges, which areone-time or monthly fixed charges primarily consisting of(i) non-refundable installation fees; and (ii) basic monthly charges from local telephone services (or fixed monthly charges for discount plans);

 Ø 

monthly usage charges, which are usage fees based on the amount of services used, primarily consisting of (i) monthly usage charges for local telephone and domestic long distance services; (ii) international long-distance service revenues, (primarily (a) amounts we bill to our customers for outgoing calls made to foreign countries, (b) amounts we bill to foreign telecommunications carriers for connection to the domestic telephone network in respect of incoming calls at the applicable settlement rate, and (c) other revenues, including revenues from international leased lines);(iii) land-to-mobile andland-to-land interconnection revenues; (iv) interconnection fees we charge to fixed-line and mobile service providers and voice resellers for their use of our local, domestic long-distance and international networks in providing their services; and

 

 Ø 

other revenues from (i) value-added services, including “1588” intelligent network call services, local telephone directory assistance, call waiting and caller identification services; and (ii) local, domestic long-distance and international calls placed from public telephones.

 Ø 

Internet service revenues which consist of:

 

 Ø 

broadband Internet access service revenues, primarily consisting of installation fees and basic monthly charges; and

 

 Ø 

other Internet-related service revenues related to our infrastructure and solution services for business enterprises, IPTV and network portal services;

 

 Ø 

data communicationscommunication service revenues, primarily consisting of installation fees and basic monthly charges for our leased line services and Kornet Internet connection service and revenues from our satellite services;

 

revenues from goods sold that are generated primarily throughby sale of mobile handsets and specially designed phones for fixed-line and mobile convergence services, net of any subsidies paid directly to customers;customers, as well as certain sales by our consolidated subsidiaries, such as sale of real estate properties relating to real estate developments by KT Estate Inc.;

 

financial service revenues, primarily consisting of fees from credit card services provided by BC Card Co., Ltd., our consolidated subsidiary; and

 

miscellaneousother revenues that are primarily derived from information technology and network services, satellite services and security services.

Operating Expenses

Our operating expenses primarily include:

 

salaries and wages, including post-employment benefits, termination benefits (including severance benefits for voluntary and special early retirements) and share-based payments;

 

depreciation expenses incurred primarily in connection with our telecommunications network facilities;

purchase of inventories, primarily consisting of inventories purchased for our sale of mobile handsets and specially designed phones for fixed-line mobile convergence services, and changechanges of inventories, which reflects increases or decreases of inventories during the applicable period;

 

card service costs, primarily consisting of costs in connection with credit card services provided by BC Card Co., Ltd., including fees paid to member credit card companies in our network for marketing expenses and for costs associated with the present value and default risks of installment card charges which are borne by such member companies;

 

sales commissions, primarily consisting of sales commissions to third-party dealers related to procurement of mobile subscribers and mobile handset sales;

 

commissions, primarily consisting of commission-based payments for certain third-party outsourcing services, including commissions to the outsourced call center staff;

 

service cost, primarily consisting of payments for certain third-party outsourcing services, including payments for software development and design, data analysis and processing, and installment and maintenance of IT and satellite equipment; and

 

interconnection charges, which are interconnection payments to telecommunication service providers for calls from landline users and our mobile subscribers to our competitors’ subscribers.

Operating Results—2015 Compared to 2016

The following table presents selected income statement data and changes therein for 2015 and 2016:

   For the Year Ended
December  31,		  Changes 
   2015 vs. 2016 
   2015  2016  Amount  % 
   (In billions of Won) 

Operating revenues

  ￦22,700  ￦23,121  ￦421   1.9% 

Revenue

   22,212   22,755   543   2.4 

Others

   488   366   (122)   (25.0) 

Operating expenses

   21,623   21,781   158   0.7 
  

 

 

  

 

 

  

 

 

  

Operating profit (loss)

   1,077   1,340   263   24.4 

Finance income

   273   296   23   8.4 

Finance costs

   (645)   (515)   130   (20.2) 

Income from joint ventures and associates

   6   3   (3)   (50.0) 
  

 

 

  

 

 

  

 

 

  

Profit (loss) from continuing operations before income tax

   711   1,123   412   57.9 

Income tax expense (benefit)

   227   328   101   44.5 

Profit (loss) for the period from continuing operations

   484   795   311   64.3 

Profit from discontinued operations

   141   —   (141)   N.M. 
  

 

 

  

 

 

  

 

 

  

Profit (Loss) for the period

  ￦625  ￦795  ￦170   27.2 
  

 

 

  

 

 

  

 

 

  

N.M. means not meaningful.

Operating Revenues

The following table presents a breakdown of our operating revenues and changes therein for 2015 and 2016:

   For the Year Ended
December  31,		   Changes 
     2015 vs. 2016 
   2015   2016   Amount  % 
   (In billions of Won) 

Mobile services

  ￦7,260   ￦7,366   ￦106   1.5% 

Fixed-line services

   6,755    6,917    162   2.4 

Fixed-line telephone services:

       

Monthly Basic Charges

   650    616    (34)   (5.2) 

Monthly Usage Charges

   1,022    855    (167)   (16.3) 

Others

   646    581    (65)   (10.1) 
  

 

 

   

 

 

   

 

 

  

Sub-total

   2,318    2,053    (265)   (11.4) 

Internet services:

       

Broadband Internet access service

   1,882    2,040    158   8.4 

Other Internet-related services

   1,479    1,799    320   21.6 
  

 

 

   

 

 

   

 

 

  

Sub-total

   3,361    3,829    478   14.2 

Data communication services

   1,076    1,025    (51)   (4.7) 

Sale of goods

   2,756    2,808    52   1.9 

Financial services

   3,483    3,568    85   2.4 

Other

   2,446    2,462    16   0.7 
  

 

 

   

 

 

   

 

 

  

Total operating revenues

  ￦22,700   ￦23,121   ￦421   1.9% 
  

 

 

   

 

 

   

 

 

  

Total operating revenues increased by 1.9%, or￦421 billion, from￦22,700 billion in 2015 to￦23,121 billion in 2016 primarily due to increases in the revenues from our Internet services and mobile services, the impact of which was offset in part by a decrease in the revenues from our fixed-line telephone services.

Mobile Services

Our mobile services revenues increased by 1.5%, or￦106 billion, from￦7,260 billion in 2015 to￦7,366 billion in 2016 primarily due to a 4.7% increase in our mobile subscribers from approximately 18,038,000 as of December 31, 2015 to approximately 18,892,000 as of December 31, 2016. Such increase in our mobile subscribers was slightly enhanced by an increase in our average revenue per user. However, the magnitude of the increase in our average revenue per user in 2016 was smaller, as compared to 2015 because many of our new mobile subscribers in 2016 purchased economical rate plans for their secondary mobile devices. Accordingly, although the increase in our mobile subscribers in 2016 was larger, as compared to 2015, the increase in our mobile services revenues in 2016 was smaller than the increase in our mobile services revenues in 2015 primarily due to a decrease in the magnitude of the increase in our average revenue per user in 2016, as compared to 2015.

Fixed-line Services

Our fixed-line services revenues in the aggregate increased by 2.4%, or￦162 billion, from￦6,755 billion in 2015 to￦6,917 billion in 2016 primarily due to an increase in Internet services revenues, the impact of which was partially offset by decreases in our fixed-line telephone services revenues and data communication services revenues.

Fixed-line Telephone Services. Our fixed-line telephone services revenues decreased by 11.4%, or￦265 billion, from￦2,318 billion in 2015 to￦2,053 billion in 2016 due to decreases in monthly usage charges, other fixed-line telephone services revenues and monthly basic charges. Specifically:

Monthly usage charges decreased by 16.3%, or￦167 billion, from￦1,022 billion in 2015 to￦855 billion in 2016 primarily due to the continuing decrease in the usage of fixed-line services resulting from the continuing increase in the usage of mobile telephone services, Internet phone services and other VoIP services such as Kakao Talk, Line and Skype, which led to a decrease in domestic long-distance call minutes from 2.1 billion in 2015 to 1.5 billion in 2016 and a decrease in local call pulses from 3.0 billion in 2015 to 2.2 billion in 2016.

Other fixed-line telephone service revenue decreased by 10.1%, or￦65 billion, from￦646 billion in 2015 to￦581 billion in 2016 primarily due to the continuing erosion of fixed-line services, including public telephones, by mobile telephone services, Internet phone services and other VoIP services, as well as a decrease in the number of lines in service from 2015 to 2016.

Monthly basic charges decreased by 5.2%, or￦34 billion, from￦650 billion in 2015 to￦616 billion in 2016 primarily due to a decrease in the number of our telephone lines in service from 12.4 million in 2015 to 11.9 million in 2016.

Internet Services. Our Internet service revenues increased by 14.2%, or￦478 billion, from￦3,361 billion in 2015 to￦3,829 billion in 2016 primarily due to an increase in the number of IPTV subscribers from approximately 6.6 million as of December 31, 2015 to approximately 7.0 million as of December 31, 2016 and an increase in the number of our olleh GiGA Internet Service subscribers from approximately 1.0 million as of December 31, 2015 to approximately 2.4 million as of December 31, 2016.

Data Communication Services. Our data communication services revenues decreased by 4.7%, or￦51 billion, from￦1,076 billion in 2015 to￦1,025 billion in 2016 primarily due to a decrease in revenues from our leased lines, resulting from increased competition in the data communications market in Korea.

Sale of Goods

Revenues from sale of goods increased by 1.9%, or￦52 billion, from￦2,756 billion in 2015 to￦2,808 billion in 2016 primarily due to an increase in revenues from development and sale of real estate by KT Estate Inc. which was partially offset by a decrease in the sale of mobile handsets in 2016 compared to 2015. The number of mobile handsets sold in 2016 decreased largely due to order cancellation and customer returns of Samsung Galaxy Note 7 handsets, caused by the handsets’ explosive battery issue.

Financial Services

Financial services revenues increased by 2.4%, or￦85 billion, from￦3,483 billion in 2015 to￦3,568 billion in 2016 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., primarily as a result of increased usage of credit cards.

Others

Other operating revenues increased by 0.7%, or￦16 billion, from￦2,446 billion in 2015 to￦2,462 billion in 2016 primarily due to increases in revenues from our real estate lease business and systems integration business.

Operating Expenses

The following table presents a breakdown of our operating expenses and changes therein for 2015 and 2016:

   For the Year Ended
December  31,		   Changes 
     2015 vs. 2016 
   2015  2016   Amount  % 
   (In billions of Won) 

Salaries and wages

  ￦3,303  ￦3,478   ￦175   5.3% 

Depreciation

   2,756   2,763    7   0.3 

Commissions

   1,037   1,099    62   6.0 

Interconnection charges

   689   690    1   0.1 

Purchase of inventories

   3,963   3,407    (556)   (14.0) 

Changes of inventories

   (198)   162    360   N.M. 

Sales commission

   1,857   1,968    111   6.0 

Service cost

   1,164   1,322    158   13.6 

Card service costs

   2,960   3,050    90   3.0 

Others(1)

   4,092   3,842    (250)   (6.1) 
  

 

 

  

 

 

   

 

 

  

Total operating expenses

  ￦21,623  ￦21,781   ￦158   0.7% 
  

 

 

  

 

 

   

 

 

  

N.M. means not meaningful.

(1)Including other operating expenses (which include other expenses) amortization of intangible assets, rent, insurance premium, utilities, international interconnection fee, installation fee, taxes and dues, research and development expenses and advertising expenses.

Total operating expenses increased by 0.7%, or￦158 billion, from￦21,623 billion in 2015 to￦21,781 billion in 2016 primarily due to increases in changes of inventories, salaries and wages and service cost, the impact of which was largely offset by decreases in purchase of inventories and certain other operating expenses described below. Specifically:

Changes of inventories, which reflects inventory changes during a period by calculating inventories at the beginning of period minus those at the end of period, amounted to￦(198) billion in 2015 and￦162 billion in 2016, which means inventories decreased by￦162 billion in 2016 while they increased by￦198 billion in 2015. This was primarily due to a decrease in purchase of handsets in 2016 compared to 2015 as described below, which was offset in large part by a decrease in the sale of handsets in 2016 compared to 2015. Cost of sale of goods (which is the sum of changes of inventories and purchase of inventories) in 2016 decreased by 5.2% to￦3,569 billion from￦3,765 billion in 2015, primarily reflecting a decrease in the cost of handsets and the decreased handset sales, in each case in 2016 compared to 2015. The decreases in the cost of handsets and handset sales were primarily due to a decrease in sales of new handset models (which generally have higher prices than older models) such as Galaxy Note 7 due to the models’ mechanical defects as explained below in connection with the decrease in purchase of inventories in 2016 compared to 2015.

Salaries and wages increased by 5.3%, or￦175 billion, from￦3,303 billion in 2015 to￦3,478 billion in 2016 primarily due to an increase in salaries and wages based on seniority and promotions.

Service cost, increased by 13.6%, or￦158 billion, from￦1,164 billion in 2015 to￦1,322 billion in 2016, primarily due to an increase in service costs relating to our IPTV and mobile services such as purchases of contents to meet increased and diversified

demand from customers and an increase in installation fees as more sophisticated technologies and corresponding higher fees were required for the installation of certain new equipment and facilities.

These factors were partially offset by the following:

Purchase of inventories decreased by 14.0%, or￦556 billion, from￦3,963 billion in 2015 to￦3,407 billion in 2016 primarily due to a decrease in the total number of mobile handsets (mostly smartphones) purchased, which was largely attributable to the returns of Samsung Galaxy Note 7 handsets, which had an explosive battery issue, to the manufacturer. We purchased Galaxy Note 7 handsets for sale to customers but when our customers returned the handsets or cancelled orders, we returned those handsets to the manufacturer resulting in the reduction in purchase of inventories.We recognize the purchase of mobile handsets as operating expenses during the period when such handsets are purchased regardless of whether they are actually sold during that period. As a result, the periods when purchase of inventories is recognized and when the revenue from their sales is recognized could be different.

Other operating expenses decreased by 6.1%, or￦250 billion, from￦4,092 billion in 2015 to￦3,842 billion in 2016, primarily due to decreases in installation fees of and insurance premiums. Installation fees decreased by 37.2%, or￦93 billion, from￦249 billion in 2015 to￦157 billion in 2016, primarily due to the consolidation of KT Service Bukbu Co., Ltd. and KT Service Nambu Co., Ltd. in August 2015. The installation fees that we previously paid to the two subsidiaries before consolidation were no longer recognized as installation fees upon consolidation; instead, installation expenses incurred by the subsidiaries have been classified as other expenses such as salaries and wages. Insurance premiums decreased by 15.6%, or￦33 billion, from￦211 billion in 2015 to￦178 billion in 2016, primarily due to a decrease in insurance premium rates for our handsets.

Operating Profit

Due to the factors described above, our operating profit increased by 24.4%, or￦263 billion, from￦1,077 billion in 2015 to￦1,340 billion in 2016. Our operating margin, which is operating profit as a percentage of operating revenues, was 4.7% in 2015 and 5.8% in 2016.

Finance Income (Costs)

The following table presents a breakdown of our finance income and costs and changes therein for 2015 and 2016:

   For the Year Ended
December  31,		  Changes 
    2015 vs. 2016 
     2015      2016    Amount  % 
   (In billions of Won) 

Interest income

  ￦70  ￦116  ￦46   65.7% 

Interest expense

   (386)   (337)   49   (12.7) 

Net foreign currency transaction gain (loss)

   (24)   (13)   11   (45.8) 

Net foreign currency translation gain (loss)

   (164)   (110)   54   (32.9) 

Net gain (loss) on settlement of derivatives

   (6)   8   14   N.M. 

Net gain on valuation of derivatives

   140   109   (31)   (22.1) 

Net other finance costs(1)

   (2)   8   10   N.M. 
  

 

 

  

 

 

  

 

 

  

Net finance costs

  ￦(372)  ￦(219)  ￦153   (41.1)% 
  

 

 

  

 

 

  

 

 

  

N.M. means not meaningful.

(1)Including net other finance income and expenses, loss on disposal of trade receivables and impairment loss onavailable-for-sale financial assets.

Our net finance costs decreased by 41.1%, or￦153 billion, from￦372 billion in 2015 to￦219 billion in 2016, primarily due to decreases in net foreign currency translation loss and interest expense and an increase in interest income, the impact of which was partially offset by a decrease in net gain on valuation of derivatives. Specifically:

Our net foreign currency translation loss decreased by 32.9%, or￦54 billion, from￦164 billion in 2015 to￦110 billion in 2016, primarily due to smaller depreciation of the Won against the U.S. dollar and the Japanese Yen in 2016 compared to 2015. The Market Average Exchange Rate of the Won against the U.S. dollar depreciated from￦1,099.2 to US$1.00 as of December 31, 2014 to￦1,172.0 to US$1.00 as of December 31, 2015 and￦1,208.5 to US$1.00 as of December 30, 2016. In general, we recognize net foreign currency translation loss when the Won depreciates against foreign currencies, especially the U.S. dollar, primarily because of our foreign currency-denominated debt and foreign currency-denominated payables to overseas equipment sellers and foreign carriers. In 2016, the impact of such net foreign currency translation loss was largely offset by the decrease in net gain on valuation of derivatives discussed below.

Our interest expense decreased by 12.7%, or￦49 billion, from￦386 billion in 2015 to￦337 billion in 2016 primarily due to a decrease in borrowings and, to a lesser extent, decreased interest rates.

Our interest income increased by 65.7%, or￦46 billion, from￦70 billion in 2015 to￦116 billion in 2016 primarily due to an increase in the average balance of interest-bearing financial assets we held, including as a result of an increase in interest rate payment received in connection with reimbursement of certain value added tax in 2016.

These factors were partially offset by the following:

Our net gain on valuation of derivatives decreased by 22.1%, or￦31 billion, from￦140 billion in 2015 to￦109 billion in 2016, primarily due to a decrease in gains from our currency swap contracts as a result of smaller depreciation of the Won against the Japanese Yen and the U.S. dollar in 2016 compared to 2015. We entered into derivative instruments for foreign exchange risk hedging purposes and generally recognize net gain on valuation of derivatives when the Won depreciates against foreign currencies as described above in the explanation of foreign currency translation loss.

Income from Joint Ventures and Associates

Income from joint ventures and associates decreased by 50.0%, or￦3 billion, from￦6 billion in 2015 to￦3 billion in 2016, primarily due to a loss from joint ventures and associates recognized in connection with a sale of certain real estate by our wholly-owned subsidiary KT Estate Inc. to one of our associates and joint ventures,K-Realty Rental Housing REIT 2.

Income Tax Expense

Income tax expense increased by 44.5%, or￦101 billion, from￦227 billion in 2015 to￦328 billion in 2016, primarily due to an increase in profit before income tax, which increased by￦412 billion, from￦711 billion in 2015 and￦1,123 billion in 2016. See Note 28 to the Consolidated Financial Statements.

Profit from Discontinued Operations

We did not have any profit from discontinued operations in 2016, whereas our profit from discontinued operations in 2015 was￦141 billion, primarily due to recognition of net proceeds from the sale of capital stock of KT Rental Co., Ltd and KT Capital Co., Ltd. as profit from discontinued operations in 2015.

Profit (Loss) for the Period

Due to the factors described above, our profit for the period increased by 27.2%, or￦170 billion, from￦625 billion of profit in 2015 to￦795 billion of profit in 2016. Our net profit margin, which is net profit for the period as a percentage of operating revenues was 2.8% in 2015 and 3.5% in 2016.

Segment Results—Customer/Marketing Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased slightly by 0.1%, or￦14 billion, from￦16,130 billion in 2015 to￦16,144 billion in 2016 primarily due to increase in revenues from our Internet services and mobile services, primarily due to an increase in subscribers, which was partially offset by a decrease in the fixed-line services revenues, all as described above.

Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 28.6%, or￦233 billion, from￦817 billion in 2015 to￦1,050 billion in 2016, as the segment’s operating expenses decreased by￦219 billion while the segment’s operating revenue increased by￦14 billion as described above. For this segment, operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-segment transactions, was 5.1% in 2015 and 6.5% in 2016.

Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 1.0%, or￦28 billion, from￦2,898 billion in 2015 to￦2,870 billion in 2016.

Segment Results—Finance Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 1.9%, or￦65 billion, from￦3,513 billion in 2015 to￦3,578 billion in 2016 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd, as described above.

Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 25.6%, or￦72 billion, from￦281 billion in 2015 to￦209 billion in 2016, as the￦137 billion increase in operating expenses outpaced the￦65 billion increase in the segment’s operating revenues. Operating margin for this segment decreased from 8.0% in 2015 to 5.8% in 2016.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 16.0%, or￦4 billion, from￦25 billion in 2015 to￦29 billion in 2016.

Segment Results—Satellite TV Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, slightly increased by 0.1%, or￦0.4 billion, from￦668.5 billion in 2015 to￦668.9 billion in 2016, primarily due to an increase in revenues from an increase in the number of TV shopping channels and otherfee-generating platforms.

Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 18.1%, or￦18 billion, from￦98 billion in 2015 to￦80 billion in 2016, as the￦18 billion increase in operating expenses outpaced the￦0.4 billion increase in the segment’s operating revenues. Operating margin for this segment decreased from 14.6% in 2015 to 12.0% in 2016.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 3.1%, or￦3 billion, from￦96 billion in 2015 to￦99 billion in 2016.

Segment Results—Others

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 3.1%, or￦192 billion, from￦6,116 billion in 2015 to￦6,308 billion in 2016, primarily due to increases in revenues of KT Estate Inc. from the development and sale of real estate.

For this segment, prior to adjusting for inter-segment transactions, we recorded an operating loss of￦100 billion in 2015, compared to an operating income of￦40 billion in 2016, as the￦192 billion increase in operating revenues outpaced the￦52 billion increase in the segment’s operating expenses in 2016. For this segment, operating loss margin (operating loss as a percentage of total operating revenues prior to adjusting for inter-segment transactions) was 1.6% in 2015 and the operating margin was 0.6% in 2016.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 7.6%, or￦24 billion, from￦315 billion in 2015 to￦339 billion in 2016.

Operating Results—2014 Compared to 2015

The following table presents selected income statement data and changes therein for 2014 and 2015:

 

  For the Year Ended
December 31,		  Changes   For the Year Ended
December  31,		  Changes 
 2014 vs. 2015    2014 vs. 2015 
  2014 2015 Amount %   2014 2015 Amount % 
  (In billions of Won)   (In billions of Won) 

Operating revenues

  ￦22,613   ￦22,700   ￦87    0.4%   ￦22,613  ￦22,700  ￦87   0.4% 

Revenue

   22,359    22,212    (147)   (0.7)    22,359   22,212   (147)   (0.7) 

Others

   253    488    235    92.9     253   488   235   92.9 

Operating expenses

   23,392    21,623    (1,769)   (7.6)    23,392   21,623   (1,769)   (7.6) 
  

 

  

 

  

 

    

 

  

 

  

 

  

Operating profit (loss)

   (779)   1,077    1,856    238.3     (779)   1,077   1,856   N.M. 

Finance income

   253    273    20    7.9     253   273   20   7.9 

Finance costs

   (792)   (645)   147    (18.6)    (792)   (645)   147   (18.6) 

Income from jointly controlled entities and associates

   19    6    (13)   (68.4) 

Income from joint ventures and associates

   19   6   (13)   (68.4) 
  

 

  

 

  

 

    

 

  

 

  

 

  

Profit (loss) from continuing operations before income tax

   (1,299)   711    2,010    154.7     (1,299)   711   2,010   N.M. 

Income tax expense (benefit)

   (271)   227    498    183.8     (271)   227   498   N.M. 

Profit (loss) for the period from continuing operations

   (1,028)   484    1,512    147.1     (1,028)   484   1,512   N.M. 

Profit from discontinued operations

   86    141    55    64.0     86   141   55   64.0 
  

 

  

 

  

 

    

 

  

 

  

 

  

Loss for the period

  ￦(941)  ￦625   ￦1,566    166.4% 

Profit (loss) for the period

  ￦(941)  ￦625  ￦1,566   N.M. 
  

 

  

 

  

 

    

 

  

 

  

 

  

N.M. means not meaningful.

Operating Revenues

The following table presents a breakdown of our operating revenues and changes therein for 2014 and 2015:

 

  For the Year Ended
December 31,		   Changes   For the Year Ended
December  31,		   Changes 
  2014 vs. 2015   2014 vs. 2015 
  2014   2015   Amount %   2014   2015   Amount % 
  (In billions of Won)   (In billions of Won) 

Mobile services

  ￦7,104    ￦7,260    ￦156    2.2%   ￦7,104   ￦7,260   ￦156   2.2% 

Fixed-line services

   6,855     6,755     (100)   (1.5)    6,855    6,755    (100)   (1.5) 

Fixed-line telephone services:

              

Monthly Basic Charges

   695     650     (45)   (6.5)    695    650    (45)   (6.5) 

Monthly Usage Charges

   1,238     1,022     (216)   (17.4)    1,238    1,022    (216)   (17.4) 

Others

   678     646     (32)   (4.7)    678    646    (32)   (4.7) 
  

 

   

 

   

 

    

 

   

 

   

 

  

Sub-total

   2,611     2,318     (293)   (11.2)    2,611    2,318    (293)   (11.2) 

Internet services:

              

Broadband internet access service

   1,934     1,882     (52)   (2.7) 

Broadband Internet access service

   1,934    1,882    (52)   (2.7) 

Other Internet-related services

   1,161     1,479     318    27.4     1,161    1,479    318   27.4 
  

 

   

 

   

 

    

 

   

 

   

 

  

Sub-total

   3,095     3,361     266    8.6     3,095    3,361    266   8.6 

Data communication services

   1,149     1,076     (73)   (6.4)    1,149    1,076    (73)   (6.4) 

Sale of goods

   3,252     2,756     (496)   (15.3)    3,252    2,756    (496)   (15.3) 

Financial services

   3,272     3,483     211    6.4     3,272    3,483    211   6.4 

Other

   2,130     2,446     316    14.8     2,130    2,446    316   14.8 
  

 

   

 

   

 

    

 

   

 

   

 

  

Total operating revenues

  ￦22,613    ￦ 22,700    ￦87    0.4%   ￦22,613   ￦22,700   ￦87   0.4% 
  

 

   

 

   

 

    

 

   

 

   

 

  

Total operating revenues increased by 0.4%, or￦87 billion, from￦22,613 billion in 2014 to￦22,700 billion in 2015 primarily due to increases in our internetInternet services revenues, financial services revenues and other service revenues, the impact of which was largely offset by decreases in sale of goods revenues and fixed-line telephone serviceservices revenues.

Mobile Services

Our mobile serviceservices revenues increased by 2.2%, or￦156 billion, from￦7,104 billion in 2014 to￦7,260 billion in 2015 primarily due to a 4.1% increase in our mobile subscribers from approximately 17,328,00017,300,000 as of December 31, 2014 to approximately 18,038,000 as of December 31, 2015. Such increase in our mobile subscribers was further enhanced by an increase in our average revenue per user, resulting from the increase of LTE users and increased sale of higher rate plans.

Fixed-line Services

Our fixed-line serviceservices revenues decreased by 1.5%, or￦100 billion, from￦6,855 billion in 2014 to￦6,755 billion in 2015 primarily due to decreases in fixed-line telephone serviceservices revenues and, to a lesser extent, data communication serviceservices revenues, the impact of which was partially offset by an increase in our internet serviceInternet services revenues.

Fixed-line Telephone Services. Our fixed-line telephone serviceservices revenues decreased by 11.2%, or￦293 billion, from￦2,611 billion in 2014 to￦2,318 billion in 2015 primarily due to decreases in monthly usage charges, monthly basic charges and other fixed-line telephone serviceservices revenues. Specifically:

 

Monthly usage charges decreased by 17.4%, or￦216 billion, from￦1,238 billion in 2014 to￦1,022 billion in 2015 primarily due to the continuing decrease in the usage of fixed-line services resulting from the increased usage of mobile telephone services, Internet phone services and other VoIP services such as Kakao Talk, Line and Skype, which led to a 40.0% decrease in domestic long-distance call minutes from 3.5 million in 2014 to 2.1 million in 2015 and a 40.0% decrease in local call pulses from 4.0 million in 2014 to 2.4 million in 2015.

services and other VoIP services such as Kakao Talk, Line and Skype, which led to a decrease in domestic long-distance call minutes from 2.7 billion in 2014 to 2.1 billion in 2015 and a decrease in local call pulses from 4.0 billion in 2014 to 3.0 billion in 2015.

 

Monthly basic charges decreased by 6.5%, or￦45 billion, from￦695 billion in 2014 to￦650 billion in 2015 primarily due to a 9.5% decrease in the number of our telephone lines in service from 13.7 million in 2014 to 12.4 million in 2015.

 

Other fixed-line telephone serviceservices revenue decreased by 4.7%, or￦32 billion, from￦678 billion in 2014 to￦646 billion in 2015 primarily due to the continuing erosion of fixed-line services, including public telephones, by mobile telephone services, Internet phone services and other VoIP services, as well as a decrease in the number of lines in service from 2014 to 2015.

Internet Services. Our Internet serviceservices revenues increased by 8.6%, or￦266 billion, from￦3,095 billion in 2014 to￦3,361 billion in 2015 primarily due to an increase in the number of IPTV subscribers from 5.9 million as of December 31, 2014 to 6.6 million as of December 31, 2015 and an increase in the number of our olleh GiGA Internet Service subscribers from approximately 117,000 as of December 31, 2014 to approximately 1.0 million as of December 31, 2015.

Data Communication Services. Our data communications servicecommunication services revenues decreased by 6.4%, or￦73 billion, from￦1,149 billion in 2014 to from￦1,076 billion in 2015 primarily due to a decrease in revenues from our leased lines, resulting from increased competition in the data communications market in Korea.

Sale of Goods

Revenues from sale of goods decreased by 15.3%, or￦496 billion, from￦3,252 billion in 2014 to￦2,756 billion in 2015 primarily due to a decrease in the number of handsets sold in 2015 as well as a difference in how we have paid handset subsidies since October 2014. The Handset Distribution Reform Act, which became effective October 2014, requires mobile service providers,

including us, to pay handset subsidies directly to subscribers and disclose such subsidy amounts to the public. Prior to the enactment of the Handset Distribution Reform Act, we and other mobile service providers provided sales commissions to third-party vendors who then provided subscribers handset subsidies as well as other marketing and promotional activities at such vendors’ own discretion. However, since October 2014, we and other mobile service providers have provided handset subsidies provided directly to customers. Handset subsidies provided directly to customers are not recognized as part of handset sales revenue (revenue is recognized net of such subsidy amount), whereas handset subsidies paid through third-party vendors were recognized as revenue and also as operating expense (sales commissions). As a result, revenues from sale of goods decreased in 2015 compared to 2014 as handset subsidies were not recognized as revenue. The revenue decrease in 2015 was also attributable to a decrease in the total number of mobile handsets (primarily smartphones) sold, as well as reduced price of mobile handsets.sold.

Financial Services

Financial serviceservices revenues increased by 6.4%, or￦211 billion, from￦3,272 billion in 2014 to￦3,483 billion in 2015 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., resulting primarily from an increase in commissions received by BC Card Co., Ltd. as a result of increased usage of credit cards, by customers, as well as an increase in disposal ofavailable-for-sale financial assets, primarily related to the sale of capital stock in MasterCard, previously owned by BC Card Co., Ltd.

Others

Other operating revenues increased by 14.8%, or￦316 billion, from￦2,130 billion in 2014 to￦2,446 billion in 2015 primarily due to the inclusion of the full-year revenues in 2015 of ktcs Corporation and ktis Corporation, which became our consolidated subsidiaries as of October 2014. Both ktcs Corporation and ktis Corporation derive revenue mainly from operation of customer service centers for our mobile and fixed-line customers.

Operating Expenses

The following table presents a breakdown of our operating expenses and changes therein for 2014 and 2015:

 

  For the Year Ended
December 31,		  Changes   For the Year  Ended
December 31,		  Changes 
   2014 vs. 2015   2014 vs. 2015 
  2014   2015 Amount %   2014   2015 Amount % 
  (In billions of Won)   (In billions of Won) 

Salaries and wages

  ￦3,919    ￦3,303   ￦(616)   (15.7)%   ￦3,919   ￦3,303  ￦(616)   (15.7)% 

Depreciation

   3,326     3,339    13    0.4     2,761    2,756   (5)   (0.2) 

Commissions

   1,355     1,037    (318)   (23.5)    1,355    1,037   (318)   (23.5) 

Interconnection charges

   797     689    (108)   (13.6)    797    689   (108)   (13.6) 

Purchase of inventories

   3,509     3,963    454    12.9     3,509    3,963   454   12.9 

Changes of inventories

   255     (198)   (453)   (177.6)    255    (198)   (453)   N.M. 

Sales commission

   2,629     1,857    (772)   (29.4)    2,629    1,857   (772)   (29.4) 

Service cost

   1,281     1,164    (117)   (9.1)    1,281    1,164   (117)   (9.1) 

Card service costs

   2,883     2,960    77    2.7     2,883    2,960   77   2.7 

Others(1)

   3,438     3,509    71    2.1     4,003    4,092   89   2.2 
  

 

   

 

  

 

    

 

   

 

  

 

  

Total operating expenses

  ￦23,392    ￦21,623   ￦(1,769)   (7.6)%   ￦23,392   ￦21,623  ￦(1,769)   (7.6)% 
  

 

   

 

  

 

    

 

   

 

  

 

  

 

N.M. means not meaningful.

 

(1)Including other operating expenses (which include miscellaneous expenses, loss on disposal of property and equipment, impairment loss on property and equipment, loss on disposal of intangible assets, loss on disposal of investments in associates and joint ventures, impairment loss on investments in associates and joint ventures and donations)other expenses), amortization of intangible assets, rent, insurance premium, utilities, international interconnection fee, installation fee, taxes and dues, research and development expenses, provision and advertising expenses.

Total operating expenses decreased by 7.6%, or￦1,769 billion, from￦23,392 billion in 2014 to￦21,623 billion in 2015 primarily due to decreases in sales commissions, salaries and wages, and changes of inventories, the impact of which was partially offset by increases in purchase of inventories and commissions. Specifically:

 

Sales commissions, which primarily relate to commissions paid to third-party vendors for procurement of subscribers and other promotions as well as sales of mobile handsets and mobile and fixed-line service products, decreased by 29.4%, or￦772 billion, from￦2,629 billion in 2014 to￦1,857 billion in 2015, primarily due to a decrease in the number of mobile subscribers that third-party vendors procured and a decrease in the number of mobile handsets sold.

 

Salaries and wages decreased by 15.7%, or￦616 billion, from￦3,919 billion in 2014 to￦3,303 billion in 2015 primarily due to an increase in severance benefits relating to the special voluntary early retirement program in 2014 while there was no such special retirement program in 2015, as well as a decrease in the number of employees resulting from the 2014 special retirement program as described in “—Overview—Employee Reductions and Changes in Severance and Retirement Benefits” above. Such decrease in salaries and wages was partially offset by an increase in salaries in 2015 resulting from the inclusion of ktis Corporation and ktcs Corporation as consolidated subsidiaries in October 2014.

Changes of inventories, which reflects inventory changes during a period by calculating inventories at the beginning of period minus those at the end of period, decreased by 177.6%, or￦453 billion, fromamounted to￦255 billion in 2014 toand￦(198) billion in 2015, which means inventories at the end of period increased by￦198 billion compared to the beginning of period in 2015 while they decreased by￦255 billion in 2014. This was primarily due to decreasesa decrease in both the number of handset units sold and the average unit price in 2015 compared to 2014, as well as an increase in purchase of handsets in 2015 compared to 2014 as described below. AsCost of sale of goods (which is the sum of changes of inventories and purchase of inventories) amounted to￦3,764 billion and￦3,765 billion in 2014 and 2015, respectively, reflecting an increase in cost of sale of goods for certain equipment and other goods sold by our subsidiaries, which was mostly offset by a combined result of the decrease in cost of sale of goods resulting from the decreased handset sales, and the increase in purchase of inventorieseach case in 2015 our inventories increasedcompared to￦617 billion as of December 31, 2015 from￦419 billion as of December 31, 2014.

These factors were partially offset by the following:

 

Purchase of inventories increased by 12.9%, or￦454 billion, from￦3,509 billion in 2014 to￦3,963 billion in 2015 primarily due to an increase in the total number of smartphones purchased, which was primarily attributable to handset makers’ introduction of new products, including iPhone 6S and Galaxy S6 in 2015, and also mobile handsets needed for the business of kt M mobile, which was newly established in April 2015. We recognize the purchase of mobile handsets as operating expenses during the period when such handsets are purchased regardless of whether they are actually sold during that period. As a result, the periods when purchase of inventories is recognized and when the revenue from their sales is recognized could be different.

 

Commissions, primarily consisting of commission-based payments for certain third-party outsourcing services, including commissions to the outsourced call center staff, decreased by 23.5%, or￦318 billion, from￦1,355 billion in 2014 to￦1,037 billion in 2015, primarily due to elimination of commission amounts, as adjustments on consolidation, paid to ktis Corporation and ktcs Corporation, which provide call center services, as they became consolidated subsidiaries in October 2014.

Operating Profit

Due to the factors described above, we recorded an operating loss of￦779 billion in 2014, compared to an operating profit of￦1,077 billion in 2015. Our operating margin, which is operating profit as a percentage of operating revenues, was (3.4)% in 2014 and 4.7% in 2015.

Finance Income (Costs)

The following table presents a breakdown of our finance income and costs and changes therein for 2014 and 2015:

 

  For the Year Ended
December 31,		  Changes   For the Year  Ended
December 31,		  Changes 
   2014 vs. 2015    2014 vs. 2015 
    2014     2015   Amount %      2014     2015     Amount % 
  (In billions of Won)   (In billions of Won) 

Interest income

  ￦80   ￦70   ￦(10)   (12.5)%   ￦80  ￦70  ￦(10)   (12.5)% 

Interest expense

   (475)   (386)   89    (18.7)    (475)   (386)   89   (18.7) 

Net foreign currency transaction gain (loss)

   11    (24)   (35)   (318.2)    11   (24)   (35)   N.M. 

Net foreign currency translation gain (loss)

   (91)   (164)   (73)   80.2     (91)   (164)   (73)   80.2 

Net loss on settlement of derivatives

   (33)   (6)   27    (81.8)    (33)   (6)   27   (81.8) 

Net gain (loss) on valuation of derivatives

   68    140    72    105.9     68   140   72   105.9 

Net other finance costs(1)

   (99)   (2)   97    (98.0)    (99)   (2)   97   (98.0) 
  

 

  

 

  

 

    

 

  

 

  

 

  

Net finance costs

  ￦(539)  ￦(372)  ￦167    (31.0)%   ￦(539)  ￦(372)  ￦167   (31.0)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

 

N.M. means not meaningful.

 

(1)Including net other finance income and expenses, loss on disposal of trade receivables and impairment loss onavailable-for-sale financial assets.

Our net finance costs decreased by 31.0%, or￦167 billion, from￦539 billion in 2014 to￦372 billion in 2015, primarily due to decreases in interest expense and net other finance costs and an increase in net gain on valuation of derivatives, the impact of which was partially offset by an increase in net foreign currency translation loss. Specifically:

 

Our interest expense decreased by 18.7%, or￦89 billion, from￦475 billion in 2014 to￦386 billion in 2015 primarily due to a decrease in borrowings and, to a lesser extent, decreased interest rates.

 

Our net other finance costs decreased by 98.0%, or￦97 billion, from￦99 billion in 2014 to￦2 billion in 2015 primarily due to￦83 billion reduction in impairment loss onavailable-for sale financial assets, as a loss was recognized for the equity securities of KT ENGCORE and Ustream Korea Inc. in 2014 while there was no such loss in 2015, and a decrease in the cost of securitization of receivables due to lower interest rates in 2015.

 

Our net gain on valuation of derivatives increased by 105.9%, or￦72 billion, from￦68 billion in 2014 to￦140 billion in 2015, primarily due to an increase in gains from our currency swap contracts due toas a result of larger depreciation of the exchange rates of the Won against the U.S. dollar and the Japanese Yen in 2015 compared to 2014. We entered into derivative instruments for foreign exchange risk hedging purposes and generally recognize net gain on valuation of derivatives when the Won depreciates against foreign currencies as described below in the explanation of reasons for the change in net foreign currency translation loss in 2015 compared to 2014.

These factors were partially offset by the following:

 

Our net foreign currency translation loss increased by 80.2%, or￦73 billion, from￦91 billion in 2014 to￦164 billion in 2015, primarily due to larger depreciation of the Won against the U.S. dollar and the Japanese Yen in 2015 compared to 2014. The Market Average Exchange Rate of the Won against the U.S. dollar depreciated from￦1,055.3 to US$1.00 as of December 31, 2013 to￦1,099.2 to US$1.00 as of December 31, 2014 and￦1,172.0 to US$1.00 as of December 31, 2015. In general, we recognize net foreign currency translation loss when the Won depreciates against foreign currencies, especially the U.S. dollar, primarily because of our foreign currency-denominated debt and foreign currency-denominated payables to overseas equipment sellers and foreign carriers. In 2015, the impact of such net foreign currency translation loss was largely offset by the net gain on valuation of derivatives discussed above.

currency-denominated payables to overseas equipment sellers and foreign carriers. In 2015, the impact of such net foreign currency translation loss was largely offset by the net gain on valuation of derivatives discussed above.

Income (Loss) from Jointly Controlled EntitiesJoint Ventures and Associates

Income from jointly controlled entitiesjoint ventures and associates decreased by 68.4%, or￦13 billion, from￦19 billion in 2014 to￦6 billion in 2015, primarily due to a decrease in net income ofKT-SB Venture Investment, which resulted in the corresponding decrease in our share of such net income.

Income Tax Expense

We recognized an income tax expense of￦227 billion in 2015, compared to an income tax benefit of￦271 billion in 2014, primarily due to the recognition of profit from continuing operations before income tax of￦711 billion in 2015, compared to the recognition of loss from continuing operations before income tax of￦1,299 billion in 2014. See Note 2928 to the Consolidated Financial Statements. We had net deferred income tax assets of￦935 billion as of December 31, 2014 and￦716 billion as of December 31, 2015.

Profit from Discontinued Operations

Our profit from discontinued operations increased by 63.3%64.0%, or￦55 billion, from￦86 billion in 2014 to￦141 billion in 2015, primarily due to classificationrecognition of net proceeds from the sale of capital stock inof KT Rental Co., Ltd and KT Capital Co., Ltd. as profit from discontinued operations in 2015. The revenue and expenses of discontinued operations decreased by 51.0% and 47.8%, or￦570 billion and￦490 billion, respectively, as KT Rental Co., Ltd. and KT Capital Co., Ltd. were excluded from discontinued operations subsequent to their sales in May and August 2015, respectively.

Profit (Loss) for the Period

Due to the factors described above, our profit for the period increased by 166.4%, or￦1,566 billion, from￦941 billion of loss in 2014 to￦625 billion of profit in 2015. Our net loss margin, which is loss for the period as a percentage of operating revenues, was 4.2% in 2014. Our net profit margin, which is net profit for the period as a percentage of operating revenues was 2.8% in 2015.

Segment Results—Customer/Marketing Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 3.9%, or￦655 billion, from￦16,785 billion in 2014 to￦16,130 billion in 2015 primarily due to a decrease in revenues from sales of mobile handsets as a result of decreases in both the number of handset units sold and the average unit price, as well as the impact of handset subsidies directly provided to subscribers, resulting in a decrease in operating revenues starting from October 2014 as described above.

We recorded operating loss for this segment of￦427 billion in 2014 and operating income for this segment of￦817 billion in 2015 (in each case, prior to adjusting for inter-segment transactions), as the segment’s operating expenses decreased by￦1,899 billion which was partiallyoff-set by the￦655 billion decrease in the segment’s operating revenue, primarily due to the reasons discussed above. OperatingFor this segment, operating loss margin, which is operating loss as a percentage of total operating revenues prior to adjusting for inter-company sales,inter-segment transactions, was 2.5% in 2014 and operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-company sales,inter-segment transactions, was 5.1% in 2015.

Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 0.5%, or￦15 billion, from￦2,913 billion in 2014 to￦2,898 billion in 2015.

Segment Results—Finance Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 6.6%, or￦217 billion, from￦3,296 billion in 2014 to￦3,513 billion in 2015 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd, as discussed above.

Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 69.3%, or￦115 billion, from￦166 billion in 2014 to￦281 billion in 2015, as the￦217 billion increase in the segment’s operating revenues outpaced￦102 billion increase in operating expenses primarily due to the reasons discussed above.earlier. Operating margin for this segment increased from 5.0% in 2014 to 8.0% in 2015.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 4.2%, or￦1 billion, from￦24 billion in 2014 to￦25 billion in 2015.

Segment Results—Satellite TV Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 2.0%, or￦13 billion, from￦656 billion in 2014 to￦669 billion in 2015, primarily due to an increase in revenues from TV shopping channels.

Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 42.0%, or￦29 billion, from￦69 billion in 2014 to￦98 billion in 2015, as the￦16 billion decrease in operating expenses outpaced the￦13 billion increase in the segment’s operating revenues. Operating margin for this segment increased from 10.5% in 2014 to 14.6% in 2015.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 12.9%, or￦11 billion, from￦85 billion in 2014 to￦96 billion in 2015.

Segment Results—Others

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 23.0%25.9%, or￦1,2701,259 billion, from￦5,5144,857 billion in 2014 to￦6,7846,116 billion in 2015, primarily due to the inclusion of the global business services to this segment. The Enterprise Business Segment, of which the global business services were part prior to 2015, was split into two segments: the Customer/Marketing Group and the Others Group. See “—Overview.”

We recorded anOur operating loss for this segment, ofprior to adjusting for inter-segment transactions, decreased from￦489558 billion in 2014 compared to an operating loss for this segment of￦2100 billion in 2015, as the￦1,270 billion increasein the segment’s operating revenues outpaced￦7831,259 billion increase in operating expenses. Operatingrevenues outpaced the￦801 billion increase in the segment’s operating expenses in 2015. For this segment, the operating loss margin (operating loss as a percentage of total operating revenues prior to adjusting for inter-segment transactions) was 8.9%11.5% in 2014 and operating margin was 0.03%1.6% in 2015.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 7.3%5.7%, or￦2817 billion, from￦383298 billion in 2014 to￦411315 billion in 2015.

Operating Results—2013 Compared to 2014

The following table presents selected income statement data and changes therein for 2013 and 2014:

   For the Year Ended
December 31,		  Changes 
    2013 vs. 2014 
   2013  2014  Amount  % 
   (In billions of Won) 

Operating revenues

  ￦23,146   ￦22,613   ￦(553)   (2.3)% 

Revenue

   22,818    22,359    (459)   (20.1) 

Others

   328    253    (75)   (22.9) 

Operating expenses

   22,911    23,392    481    21.0  
  

 

 

  

 

 

  

 

 

  

Operating profit (loss)

   235    (779)   (1,014)   N.M.  

Finance income

   278    253    (25)   (9.0) 

Finance costs

   (633)   (792)   (159)   25.1  

Income from jointly controlled entities and associates

   7    19    12    171.4  
  

 

 

  

 

 

  

 

 

  

Loss from continuing operations before income tax

   (114)   (1,299)   (1,185)   1,039.5  

Income tax expense (benefit)

   12    (271)   (283)   N.M.  

Loss for the period from continuing operations

   (126)   (1028)   (902)   715.9  

Loss for the period from discontinued operations

   38    86    (48)   126.3  
  

 

 

  

 

 

  

 

 

  

Loss for the period

   (88)   (941)   (853)   969.3% 
  

 

 

  

 

 

  

 

 

  

N.M. means not meaningful.

Operating Revenues

The following table presents a breakdown of our operating revenues and changes therein for 2013 and 2014:

   For the Year Ended
December 31,		   Changes 
     2013 vs. 2014 
   2013   2014   Amount  % 
   (In billions of Won) 

Mobile services

  ￦6,712    ￦7,104    ￦392    5.8% 

Fixed-line services

   7,180     6,855     (325)   (4.5) 

Fixed-line telephone services:

       

Monthly Basic Charges

   749     695     (54)   (7.2) 

Monthly Usage Charges

   1,462     1,238     (224)   (15.3) 

Others

   773     678     (95)   (12.3) 
  

 

 

   

 

 

   

 

 

  

Sub-total

   2,984     2,611     (373)   (12.5) 

Internet services:

       

Broadband internet access service

   2,011     1,934     (77)   (3.8) 

Other Internet-related services

   986     1,161     175    17.7  
  

 

 

   

 

 

   

 

 

  

Sub-total

   2,997     3,095     98    3.3  

Data communication services

   1,199     1,149     (50)   (4.2) 

Sale of goods

   3,940     3,252     (688)   (17.5) 

Financial services

   3,079     3,272     193    6.3  

Other

   2,235     2,130     (105)   (4.7) 
  

 

 

   

 

 

   

 

 

  

Total operating revenues

  ￦23,146    ￦22,613    ￦(533)   (2.3) 
  

 

 

   

 

 

   

 

 

  

Total operating revenues decreased by 2.3%, or￦533 billion, from￦23,146 billion in 2013 to￦22,613 billion in 2014 primarily due to decreases in sale of goods and fixed-line telephone service revenues, the impact of which was partially offset by increases in our mobile service revenues and internet services.

Mobile Services

Our mobile service revenues increased by 5.8%, or￦392 billion, from￦6,712 billion in 2013 to￦7,104 billion in 2014 primarily due to a 5.3% increase in our mobile subscribers from approximately 16,454,000 as of December 31, 2013 to approximately 17,328,000 as of December 31, 2014. Such increase in our mobile subscribers was further enhanced by an increase in our average revenue per user, resulting from the launching of our wideband LTE services in September 2013 and Wideband LTE-A services in March 2014, as wideband LTE and Wideband LTE-A service products generally have higher rates due to the greater amount of data included in such rates.

Fixed-line Services

Our fixed-line service revenues decreased by 4.5%, or￦325 billion, from￦7,180 billion in 2013 to￦6,855 billion in 2014 primarily due to decreases in fixed-line telephone service revenues and data communication service revenues, the impact of which was partially offset by an increase in our internet service revenues.

Fixed-line Telephone Services. Our fixed-line telephone service revenues decreased by 12.5%, or￦373 billion, from￦2,984 billion in 2013 to￦2,611 billion in 2014 primarily due to decreases in monthly usage charges, monthly basic charges and other fixed-line telephone service revenues. Specifically:

Monthly basic charges decreased by 7.2%, or￦54 billion, from￦749 billion in 2013 to￦695 billion in 2014 primarily due to a 2.1% decrease in the number of our telephone lines

in service from 14.0 million in 2013 to 13.7 million in 2014 and an increase in the number of our fixed-line subscribers who participate in our bundled products that offer discounts when subscribing to our other services.

Monthly usage charges decreased by 15.3%, or￦224 billion, from￦1,462 billion in 2013 to￦1,238 billion in 2014 primarily due to the continuing decrease in the usage of fixed-line services resulting from the increased usage of mobile telephone services, Internet phone services and other VoIP services such as Kakao Talk, Line and Skype, which led to a 27.1% decrease in domestic long-distance call minutes from 4.8 million in 2013 to 3.5 million in 2014 and an 18.4% decrease in local call pulses from 4.9 million in 2013 to 4.0 million in 2014.

Other fixed-line telephone service revenue decreased by 12.3%, or￦95 billion, from￦773 billion in 2013 to￦678 billion in 2014 primarily due to the continuing erosion of fixed-line services by mobile telephone services, Internet phone services and other VoIP services, as well as a decrease in the number of lines in service from 2013 to 2014.

Internet Services. Our Internet service revenues increased by 3.3%, or￦98 billion, from￦2,997 billion in 2013 to￦3,095 billion in 2014 primarily due to an increase in the number of IPTV subscribers from 5.0 million as of December 31, 2013 to 5.9 million as of December 31, 2014, the impact of which was offset in part by an increase in our broadband and IPTV subscribers who participate in bundled products that offer discounts when subscribing to our other services, and an increase in discounts offered to our broadband internet subscribers during 2014.

Data Communication Services. Our data communications service revenues decreased by 4.2%, or￦50 billion, from￦1,199 billion in 2013 to￦1,149 billion in 2014 primarily due to a decrease in revenues from our leased lines, resulting from increased competition in the data communications market in Korea.

Sale of Goods

Revenues from sale of goods decreased by 17.5%, or￦688 billion, from￦3,940 billion in 2013 to￦3,252 billion in 2014 primarily due to decreases in the number of mobile handsets sold and the average unit prices. The revenue decrease in 2014 was also attributable to a decrease in revenues from sale of goods resulting from a different way of handset subsidy payments since October 2014, as described above. See “—Operating Results—2014 Compared to 2015—Operating Revenues—Sale of Goods.”

Financial Services

Financial service revenues increased by 6.3%, or￦193 billion, from￦3,079 billion in 2013 to￦3,272 billion in 2014 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., resulting in part from an increase in the number of tourists in Korea using overseas credit cards through the credit card network owned and operated by BC Card Co., Ltd., for which it receives commission fees.

Others

Other operating revenues decreased by 4.7%, or￦105 billion, from￦2,235 billion in 2013 to￦2,130 billion in 2014 primarily due to decreases in revenues from sale of real estate, as well as from our information technology solution services and subsidiaries such as KTDS Co., Ltd. (which provides system integration and maintenance services).

Operating Expenses

The following table presents a breakdown of our operating expenses and changes therein for 2013 and 2014:

   For the Year Ended
December 31,		   Changes 
    2013 vs. 2014 
   2013   2014   Amount  % 
   (In billions of Won) 

Salaries and wages

  ￦3,220    ￦3,919    ￦699    21.7% 

Depreciation

   3,204     3,326     122    3.8  

Commissions

   1,222     1,355     133    10.9  

Interconnection charges

   885     797     (88)   (9.9) 

Purchase of inventories

   3,504     3,509     5    0.1  

Changes of inventories

   261     255     (6)   (2.3) 

Sales commission

   2,314     2,629     315    13.6  

Service cost

   1,834     1,281     (553)   (30.2) 

Card service costs

   2,702     2,883     181    6.7  

Others(1)

   3,765     3,438     (327)   (8.7) 
  

 

 

   

 

 

   

 

 

  

Total operating expenses

  ￦22,911    ￦23,392    ￦481    2.1% 
  

 

 

   

 

 

   

 

 

  

(1)Including other operating expenses (which include miscellaneous expenses, loss on disposal of property and equipment, impairment loss on property and equipment, loss on disposal of intangible assets, loss on disposal of investments in associates and joint ventures, impairment loss on investments in associates and joint ventures and donations), amortization of intangible assets, rent, insurance premium, utilities, international interconnection fee, installation fee, taxes and dues, research and development expenses, provision and advertising expenses.

Total operating expenses increased by 2.1%, or￦481 billion, from￦22,911 billion in 2013 to￦23,392 billion in 2014 primarily due to increases in salaries and wages and sales commission, the impact of which was partially offset by decreases in service cost and purchase of inventories. Specifically:

Salaries and wages increased by 21.7%, or￦699 billion, from￦3,220 billion in 2013 to￦3,919 billion in 2014 primarily due to an increase in severance payments relating to the special retirement program described in “—Overview—Employee Reductions and Change in Severance and Retirement Benefits” above. The special voluntary early retirement program resulted in the early retirement of 8,304 additional employees.

Sales commissions, which primarily relate to commissions paid to our third-party vendors for procurement of subscribers and other promotions as well as sales of mobile handsets and mobile and fixed-line service products, increased by 13.6%, or￦315 billion, from￦2,314 billion in 2013 to￦2,629 billion in 2014, primarily due to increases in sales of our LTE mobile service products by such third-party vendors, as a result of an increase in our total mobile subscribers during 2014, as well as an increase in fixed-line sales commission and installation outsourcing service fees due to our special voluntary early retirement program. Such increases were offset in part by a decrease in commissions paid relating to official handset subsidies as discussed above.

These factors were partially offset by the following:

Service cost decreased by 30.2%, or￦553 billion, from￦1,834 billion in 2013 to￦1,281 billion in 2014 as a result of the corresponding decreases in revenues from sale of real estate, as well as from our information technology solution services as discussed above.

Our operating expenses related to purchase of inventories increased by 0.1%, or￦5 billion, from￦3,504 billion in 2013 to￦3,509 billion in 2014 primarily due to our decision

to manage inventories conservatively in connection with a decrease in the number of mobile handsets sold, the increased competition in the mobile handset market, as well as business suspensions imposed on us by the KCC during 2014 in connection with excessive handset subsidies as discussed above.

Operating Profit

Due to the factors described above, we recorded an operating profit of￦235 billion in 2013, compared to an operating loss of￦779 billion in 2014. Our operating margin, which is operating loss as a percentage of operating revenues, was 1.0% in 2013 and our operating loss margin, which is operating loss as a percentage of operating revenues, was 3.4% in 2014.

Finance Income (Costs)

The following table presents a breakdown of our finance income and costs and changes therein for 2013 and 2014:

   For the Year Ended
December 31,		  Changes 
    2013 vs. 2014 
      2013          2014      Amount  % 
   (In billions of Won) 

Interest income

  ￦108   ￦80   ￦(28)   (25.9)% 

Interest expense

   (436)   (475)   (39)   8.9  

Net foreign currency transaction gain (loss)

   6    11    5    83.3  

Net foreign currency translation gain (loss)

   89    (91)   (180)   (202.2) 

Net loss on settlement of derivatives

   (3)   (33)   (30)   1,000.0  

Net gain (loss) on valuation of derivatives

   (105)   68    173    (164.8) 

Net other finance costs(1)

   (14)   (99)   (85)   607.1  
  

 

 

  

 

 

  

 

 

  

Net finance costs

  ￦(355)  ￦(539)  ￦(184)   51.8% 
  

 

 

  

 

 

  

 

 

  

(1)Including net other finance income and expenses, loss on disposal of trade receivables and impairment loss on available-for-sale financial assets.

Our net finance costs increased by 51.8%, or￦184 billion, from￦355 billion in 2013 to￦539 billion in 2014 primarily due to our recognition of net foreign currency translation gain in 2013 compared to a net loss in 2014 and an increase in net other finance costs, the impact of which was partially offset by the net gain on valuation of derivatives in 2014 compared to a net loss in 2013. Specifically:

We recorded net foreign currency translation gain of￦89 billion in 2013 compared to net foreign currency translation loss of￦91 billion in 2014, as the Market Average Exchange Rate of the Won against the U.S. dollar appreciated from￦1,071.1 to US$1.00 as of December 31, 2012 to￦1,055.3 to US$1.00 as of December 31, 2013, but depreciated to￦1,099.2 to US$1.00 as of December 31, 2014. The impact of such net foreign currency translation loss in 2014 was partially offset by the net gain on valuation of derivatives discussed below.

Our net other finance costs increased significantly, or￦85 billion, from￦14 billion in 2013 to￦99 billion in 2014 primarily due to a￦65 billion increase in impairment loss on available-for-sale financial assets from￦5 billion in 2013 to￦70 billion in 2014, mainly resulting from an impairment loss of￦49 billion recognized on our interests in KT ENGCORE, which was classified as available-for-sale financial securities for 2014 due to KT ENGCORE filing for court receivership in 2014, whereas it was a consolidated subsidiary for 2013.

These factors were partially offset by the following:

We recorded net loss on valuation of derivatives of￦105 billion in 2013, compared to net gain on valuation of derivatives of￦68 billion in 2014, primarily due to an increase in gains from our currency swap contracts due to the depreciation of the exchange rates of the Won against the Japanese Yen and the U.S. dollar from December 31, 2013 to December 31, 2014.

Income (Loss) from Jointly Controlled Entities and Associates

Income from jointly controlled entities and associates increased by 171.4%, or￦12 billion, from￦7 billion in 2013 to￦19 billion in 2014, primarily due to an increase in net income of KT-SB Venture Investment, and the corresponding increase in our share of such net income.

Income Tax Expense

We recognized an income tax expense of￦12 billion in 2013, compared to an income tax benefit of￦271 billion in 2014, primarily due to a significant increase in our loss from continuing operations before income tax from￦114 billion in 2013 to￦1,299 billion in 2014. We incurred a tax expense despite incurring a loss before income tax in 2013, as we, in preparing our consolidated financial statements, aggregate the tax results of ourselves and our subsidiaries, some of which had taxable income. See Note 29 to the Consolidated Financial Statements. We had net deferred income tax assets of￦537 billion as of December 31, 2013 and￦935 billion as of December 31, 2014.

Profit from Discontinued Operations

Our profit from discontinued operations increased by 126.3%, or￦48 billion, from￦38 billion in 2013 to￦86 billion in 2014, primarily due to increases in profits of KT Rental Co., Ltd. and KT Capital Co., Ltd. Income tax expense for discontinued operations decreased by 86.5%, or￦33 billion, primarily due to a￦12 billion tax refund received by KT Rental Co., Ltd. and a lower taxable income of KT Capital Co., Ltd., from which BC Card Co., Ltd. was separated and merged into KT Corporation in 2014.

Loss for the Period

Due to the factors described above, our loss for the period increased by 969.3%, or￦853 billion, from￦88 billion in 2013 to￦941 billion in 2014. Our net loss margin, which is loss for the period as a percentage of operating revenues, was 0.4% in 2013 and 4.2% in 2014.

Segment Results—Customer/Marketing Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 2.0%, or￦344 billion, from￦17,129 billion in 2013 to￦16,785 billion in 2014 primarily due to a decrease in revenues from individual fixed-line telephone subscribers.

We recorded operating income for this segment of￦261 billion in 2013, compared to operating loss for this segment of￦427 billion in 2014 (in each case, prior to adjusting for inter-segment transactions) due to a combined result of￦344 billion increase in the segment’s operating expenses and￦344 billion decrease in the segment’s operating revenues primarily due to the reasons discussed above.

Operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-company sales, was 1.5% in 2013, and operating loss margin, which is operating loss as a percentage of total operating revenues prior to adjusting for inter-company sales, was 2.5% in 2014.

Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 3.2%, or￦91 billion, from￦2,822 billion in 2013 to￦2,913 billion in 2014.

Segment Results—Finance Group

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 6.2%, or￦193 billion, from￦3,103 billion in 2013 to￦3,296 billion in 2014 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., in part resulting from an increase in the number of tourists in Korea using overseas credit cards through the credit card network owned and operated by BC Card Co., Ltd., for which it receives commission fees.

Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 7.1%, or￦11 billion, from￦155 billion in 2013 to￦166 billion in 2014, as￦193 billion increase in the segment’s operating revenues outpaced￦182 billion increase in the segment’s operating expenses primarily due to the reasons discussed above. Operating margin increased from 4.3% in 2013 to 5.0% in 2014.

Depreciation and amortization, prior to adjusting for inter-segment transactions, remained at￦24 billion in 2013 and in 2014.

Segment Results—Others

Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 19.9%, or￦1,366 billion, from￦6,880 billion in 2013 to￦5,514 billion in 2014 primarily due to the classification of our interest in KT ENGCORE as available-for-sale securities starting 2014 and the disposal of certain subsidiaries in 2014 when KT ENGCORE was excluded from our consolidated subsidiaries, whose revenues used to be recognized under this segment.

We recorded an operating income for this segment of￦483 billion in 2013, compared to an operating loss for this segment of￦489 billion in 2014, as￦1,366 billion decrease in the segment’s operating revenues outpaced￦394 billion decrease in the segment’s operating expenses primarily due to the reasons discussed above. Operating margin was 6.0% in 2013 and operating loss margin was 8.9% in 2014.

Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 46.7%, or￦336 billion, from￦719 billion in 2013 to￦383 billion in 2014.

Item 5.B.  Liquidity and Capital Resources

The following table sets forth the summary of our cash flows for the periods indicated:

 

   For the Years Ended December 31, 
       2013          2014          2015     
   (In billions of Won) 

Net cash provided by operating activities

  ￦4,111   ￦1,916   ￦4,230  

Net cash used in investing activities

   (3,783)   (3,171)   (2,402) 

Net cash provided by (used in) financing activities

   (312)   1,072    (1,164) 

Cash and cash equivalents at beginning of period

   2,058    2,071    1,889  

Cash and cash equivalents at end of period

   2,071    1,889    2,559  

Net increase (decrease) in cash and cash equivalents

   13    (182)   670  

   For the Years Ended December 31, 
       2014          2015          2016     
   (In billions of Won) 

Net cash provided by operating activities

  ￦1,916  ￦4,230  ￦4,771 

Net cash used in investing activities

   (3,171)   (2,402)   (3,485) 

Net cash provided by (used in) financing activities

   1,072   (1,164)   (943) 

Cash and cash equivalents at beginning of period

   2,071   1,889   2,559 

Cash and cash equivalents at end of period

   1,889   2,559   2,900 

Net increase (decrease) in cash and cash equivalents

   (182)   670   341 

Capital Requirements

Historically, our capital requirements consisted principally of purchases of property and equipment and other assets and repayments of borrowings. In our investing activities, we used cash of￦3,088 billion in 2013,￦2,853 billion in 2014, and￦3,116 billion in 2015 and￦2,764 billion in 2016 for the acquisition of property and equipment and investment property,properties, primarilyconstruction-in-progress. In our financing activities, we used cash of￦5,956 billion in 2013,￦8,757 billion in 2014, and￦6,648 billion in 2015 and￦1,769 billion in 2016 for repayment of borrowings and bonds.debentures.

In recent years, we have also required capital for payments of retirement and severance benefits related to our early retirement programs. We recorded cash outflows from payments of severance benefits of￦371 billion in 2013,￦1,427 billion in 2014, and￦118 billion in 2015.2015 and￦122 billion in 2016. In 2014,

our payments were particularly high due to the special voluntary early retirement program held in April 2014 described in “—Overview—Employee Reductions and Changes in Severance and Retirement Benefits” above.

From time to time, we may also require capital for investments involving acquisitions, including shares of our affiliates, and strategic relationships. For example, in October 2011, we, through our former subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank, Busan Bank and Shinhan Card for approximately￦252 billion. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately￦287 billion, and owned 69.5% interest in BC Card Co., Ltd. as of December 31, 2015.2016. Any such additional investments or acquisitions may require significant capital.

Our cash dividends paid to shareholders andnon-controlling interests amounted to￦511 billion in 2013,￦223 billion in 2014, and￦42 billion in 2015.2015 and￦184 billion in 2016.

We anticipate that capital expenditures and repayment of outstanding contractual obligations and commitments will represent the most significant use of funds for the next several years. We may also require capital for purchase of shares of our affiliates as well as investments involving acquisitions and strategic relationships. We compete in the telecommunications sector in Korea, which is rapidly evolving. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. We may need to incur additional capital expenditures to keep up with unexpected developments in rapidly evolving telecommunications technology. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources that are sufficient for our unanticipated needs.

Payments of contractual obligations and commitments will also require considerable resources. In our ordinary course of business, we routinely enter into commercial commitments for various aspects of our operations, including repair and maintenance. We have also provided guarantees to our affiliates. See Note 2019 to the Consolidated Financial Statements for a disclosure of the guarantees provided.

The following table sets forth selected information regarding our contractual obligations to make future payments as of December 31, 2015:2016:

 

   Payments Due by Period 

Contractual Obligations(1)

  Total   Less than
1 Year		   1-3
Years		   4-5
Years		   After 5
Years		 
   (In billions of Won) 

Long-term debt obligations (including current portion of long-term debt)

  ￦8,480    ￦1,552    ￦3,098    ￦1,639    ￦2,191  

Capital lease obligations (including any interests)

   184     79     89     16     —  

Operating lease obligations

   486     111     168     129     78  

Severance payment obligations(2)

   4,445     114     245     279     3,807  

Asset retirement obligations

   92     10     34     17     31  

Long-term accounts payable—others

   546     17     204     204     121  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦14,233    ￦1,883    ￦3,838    ￦2,284    ￦6,228  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimate of interest payment based on contractual interest rates effective as of December 31, 2015

  ￦1,310    ￦264    ￦384    ￦228    ￦434  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Payments Due by Period 

Contractual Obligations(1)

  Total   Less than
1 Year		   1-3
Years		   4-5
Years		   After 5
Years		 
   (In billions of Won) 

Long-term debt obligations (including current portion of long-term debt)

  ￦7,988   ￦1,668   ￦2,817   ￦1,507   ￦1,996 

Capital lease obligations (including any interests)

   212    80    99    33    — 

Operating lease obligations

   389    102    153    117    17 

Severance payment obligations(2)

   4,093    127    324    361    3,281 

Asset retirement obligations

   114    6    36    13    59 

Long-term accounts payable—others

   1,344    263    440    445    196 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦14,140   ￦2,246   ￦3,869   ￦2,476   ￦5,549 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimate of interest payment based on contractual interest rates effective as of December 31, 2016

  ￦1,244   ￦230   ￦339   ￦210   ￦465 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)Contractual obligations represent contractual liabilities as of the consolidated balance sheet date excluding refundable deposits for telephone installation and accruals for customer call bonus points, which do not have definitive payment schedules.

 

(2)The weighted average durationamount represents undiscounted pension benefit as of the defined benefit obligations is 9.8 years.December 31, 2016.

Capital Resources

We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through debt financing. From time to time, we have also disposed of our treasury shares to meet our capital requirements.

Our major sources of cash have been net cash provided by operating activities, including profits for the period, expenses not involving cash payments such as depreciation and amortization, and proceeds from issuance of bonds and borrowings. We expect that these sources will continue to be our principal sources of cash in the future. We recorded a loss for the period of￦88 billion in 2013 and￦941 billion in 2014, and a profit for the period of￦625 billion in 2015 and a profit for the period of￦795 billion in 2016 due to the reasons discussed in Item 5.A. Operating Results.Non-cash expense adjustments in our statement of cash flows from depreciation and amortization of intangible assets was￦3,621 billion in 2013,￦3,855 billion in 2014, and￦3,640 billion in 2015 and￦3,422 billion in 2016, primarily reflecting our capital investment activities during the recent years, including our purchase of bandwidths for our operations, investments inLTE-related structures and acquisition of real estate. Cash proceeds from issuance of bondsborrowings and borrowingsdebentures were￦6,200 billion in 2013,￦10,037 billion in 2014, and￦5,675 billion in 2015.2015 and￦1,123 billion in 2016. As of December 31, 2015,2016, we held 16,262,00816,140,165 treasury shares.

In 2013,Since 2012, we spun offhave disposed a portion of our trade receivables relating to handset sales to several special purpose companies, as part of our efforts to improve our cash and asset management. We also entered into asset management agreements with each of these special purpose companies, and will be receiving management fees from such companies. See Note 2019 to the Consolidated Financial Statements.

We believe that we have sufficient working capital available to us for our current requirements and that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt securities and bank borrowings denominated in Won and various foreign currencies. For example, we successfully issued (i) three series of notes for an aggregate amount of Japanese Yen 30 billion in

January 2013, (ii) three series of notes for an aggregate amount of￦410 billion in April 2013, (iii) US$300 million floating rate notes due 2018 in August 2013, (iv) ￦300 billion of commercial paper due 2019 in February 2014, (v) US$650 million of 1.750% notes due 2017 and US$350 million of 2.625% notes due 2019 in April 2014, (vi) three series of notes for an aggregate amount of￦450 billion in January 2015, and (vii) Japanese Yen 15 billion of 0.48% notes due 2018 in February 2015.2015 and (viii) US$400 million of 2.500% notes due 2026 in July 2016. See Note 1615 to the Consolidated Financial Statements. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and the global financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings. Other factors which could materially affect our liquidity in the future include unanticipated increase in capital expenditures and decrease in cash provided by operations resulting from a significant decrease in demand for our services. We may also need to raise additional capital sooner than we expect in order to fund unanticipated investments and acquisitions.

Our total equity was￦12,837 billion as of December 31, 2013,￦11,788 billion as of December 31, 2014, and￦12,156 billion as of December 31, 2015.2015 and￦12,783 billion as of December 31, 2016.

Liquidity

We had a working capital (current assets minus current liabilities) deficit of￦1,252 billion as of December 31, 2013,￦1,213 billion as of December 31, 2014 and￦56 billion as of December 31, 2015.2015 and a working capital surplus of￦193 billion as of December 31, 2016. The following table sets forth the summary of our significant current assets for the periods indicated:

 

  As of December 31,   As of December 31, 
  2013   2014   2015   2014   2015   2016 
  (In billions of Won)   (In billions of Won) 

Cash and cash equivalents

  ￦2,071    ￦1,889    ￦2,559    ￦1,889   ￦2,559   ￦2,900 

Short-term loans receivables, net

   839     710     —  

Trade and other receivables, net

   5,240     4,811     4,848     5,780    4,854    5,327 

Inventories, net

   674     419     617     419    617    455 

Other financial assets

   333    293    721 

Our cash and cash equivalents and net short-term loans receivable maturing within one year totaled￦2,9101,889 billion as of December 31, 2013,￦2,599 billion as of December 31, 2014, and￦2,559 billion as of December 31, 2015.2015 and￦2,900 billion as of December 31, 2016. Under IFRS as issued by IASB, bank deposits held at call and all other highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Short-term loans receivablesOther current financial assets primarily consist of loans and other non-derivativefinancial instruments,available-for-sale financial assets with fixed or determinable payments that are not quoted in an active market with maturities of twelve months or less.and derivatives used for hedge.

The following table sets forth the summary of our significant current liabilities for the periods indicated:

 

  As of December 31,   As of December 31, 
  2013   2014   2015   2014   2015   2016 
  (In billions of Won)   (In billions of Won) 

Trade and other payables

  ￦7,414    ￦6,408    ￦6,274    ￦6,428   ￦6,335   ￦7,140 

Borrowings

   3,021     2,956     1,726     2,956    1,726    1,820 

As of December 31, 2015,2016, we entered into various commitments with financial institutions totaling￦3,5163,418 billion and US$12251 million. See Note 2019 to the Consolidated Financial Statements. As of December 31, 2015,2016,￦438563 billion and US$205 million was used under these facilities. We have not had, and do not believe that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements.

Capital Expenditures

We used cash of￦3,088 billion in 2013,￦2,853 billion in 2014, and￦3,116 billion in 2015 and￦2,764 billion in 2016 for the acquisition of property, plant and equipment and investment property, primarilyconstruction-in-progress.

Our current capital expenditure plan, on a non-consolidatedseparate basis, calls for the expenditure of approximately￦2,5002,400 billion in 2016,2017, which may be adjusted depending on market conditions and our results of operations. The principal components of our capital investment plans are:

 

approximately￦1,0911,155 billion in capital investments for our access network;

 

approximately￦465515 billion in capital investments for our backbone network;

 

approximately￦548360 billion in capital investments for our business-to-business services; and

 

approximately￦396370 billion in capital investments for other services including R&D costs.

Inflation

We do not consider that inflation in Korea has had a material impact on our results of operations in recent years. According to data published by the Bank of Korea, annual inflation in Korea was 1.3% in 2013, 1.3% in 2014, and 0.7% in 2015.2015 and 1.0% in 2016. See “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic or political conditions in Korea deteriorate.”

Item 5.C.Research and Development, Patents and Licenses, Etc.

In order to maintain our leadership in the converging telecommunications business environment and develop additional platforms, services and applications, we operate:

 

a new business development and incubation center;

 

an infrastructure R&D laboratory;

 

a service R&D laboratory; and

 

a convergence R&D laboratory.

As of December 31, 2015,2016, KT Corporation had 4,9225,037 registered patents domestically and 9291,074 registered patents internationally.

The MSIP has the authority to recommend to network service providers that they provide funds for national research and development of telecommunications technology and related projects. The required annual contribution is 0.5% (0.75% for market dominant service providers like us) of revenues attributable to key communications services (excluding revenues from telecommunications service using an allotted frequency if the consideration for such allotted frequency has been paid) from wireless subscribers for the previous year, and is applicable only to those network service providers who have at least￦30 billion in total sales for the previous year and have recorded no net loss in the current period. Under the policy, the maximum amount of the annual contribution to be made cannot exceed 70.0% of the net profit for the corresponding period of each company. Including such contributions, total expenditures (which include capitalized expenses) on research and development were￦476 billion in 2012,￦309 billion in 2013,￦479 billion in 2014, and￦225 billion in 2015.2015 and￦204 billion in 2016.

In recent years, we have focused our research and development efforts in the following areas:

 

simplifying complex core networks and reducing costs;

integration of integratingin-building management solutions for fixed-line and wireless networks;

 

aggregating heterogeneous wireless access for double network throughput;

 

a broadband internetInternet solution that is 10 times faster using legacy copper and fiber lines;

 

a telecommunication cloud solution which combines network resource virtualization with cloud computing resource;

 

finding solutions for ultra-definition television set top box and additional solutions for smart IPTV;

smart home networking solutions for multiple devices, such as smartphones, tablets, computers and IPTV, as well as electric home appliances;

 

environment-friendly energy technologies including a smart-grid platform;

 

core technologies for convergence services such as IoT, big data, security, networked automobiles, healthcare andbio-informatics; and

 

creating a new convergence business model based on ICT and incubating new businesses.

Item 5.D. Trend Information

These matters are discussed under Item 5.A. above where relevant.

Item 5.E.Off-balance Sheet Arrangements

These matters are discussed under Item 5.B. above where relevant.

Item 5.F. Tabular Disclosure of Contractual Obligations

These matters are discussed under Item 5.B. above where relevant.

Item 5.G. Safe Harbor

See “Item 3. Key Information—Item 3.D. Risk Factors—Forward-looking statements may prove to be inaccurate.”

Item 6. Directors, Senior Management and Employees

Item 6.A. Directors and Senior Management

Directors

Our board of directors has the ultimate responsibility for the administration of our affairs. Our articles of incorporation provide for a board of directors consisting of:

 

up to three standing directors, including the chief executive officer; and

 

up to eight outside directors.

All of our directors are elected at the general shareholders’ meeting. If the total assets of a company listed on the KRX KOSPI Market exceed￦2,000 billion as of the end of the preceding year, which is the case with us, the Commercial Code of Korea requires such company to have more than three outside directors, with outside directors being the majority of the board of directors. The term of office for a director is up to three years, but the term is extended to the close of the annual shareholders’ meeting convened with respect to the last full fiscal year of a director’s term of office. If the term of office for a director is not completed and ends before the close of the annual general shareholders’ meeting and a new director is appointed in his or her place, the term of office for such replacement director will coincide with the uncompleted remaining term of office of his or her predecessor.

Under the Commercial Code of Korea, we must establish a committee to nominate candidates for outside directors within the board of directors, and outside directors must make up more than half of the total members of the outside director candidate nominating committee. According to our articles of incorporation, such committee must consist of one standing director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. Our Outside Director Candidate Nominating Committee nominates outside director candidates for appointment at the general shareholders’ meeting.

Upon the request of any director (to the extent that the board of directors does not separately authorize only a particular director to make such request), a meeting of the board of directors will be assembled. The chairperson of the board of directors is elected from among the outside directors by a resolution of the board of directors. The term of office of the chairperson is one year.

Our current directors are as follows:

 

Name

  

Position

 Director
Since		 Date of Birth  Expiration
of
Term  of
Office		 

Standing Directors(1)

     

Chang-Gyu Hwang

  

Chief Executive Officer

 January 2014 January 23, 1953   20172020 

Heon Moon Lim

  

President

 March 2014 November 15, 1960   20172018 

Hyeon Mo Ku

  

Senior executive vice presidentPresident, Chief Operating Officer

 March 2016 January 13, 1964   20172018 

Outside Directors(1)

     

Do Kyun Song

  

Senior Advisor, Bae, Kim & Lee LLC

 March 2013 September 20, 1943   2019 

Sang Kyun Cha

  

Professor, Department of Electrical and Computer Engineering, Seoul National University

 March 2012 February 19, 1958   2019 

Jong-Gu Kim

  

Corporate lawyer, New Dimension Law Group

 March 2014 July 7, 1941   20172020 

Suk-Gwon Chang

  

Professor, Department of MIS & Telecommunications,Dean, School of Business, Hanyang University

 March 2014 February 21, 1956   2018 

Dae-Geun Park

  

Professor, Department of Economics and Finance, Hanyang University

 March 2014 March 15, 1958   20172018 

Dong-Wook Chung

  

Senior Counsel, Law Firm Kim, Choi & Lim

 March 2015 August 22, 1949   2018

Daiwon Hyun

Professor, Department of Mass Communication, Sogang University

March 2015August 1, 1964 2018 

Daeho KimGae-Min Lee

FormerEditor-in-Chief, The Korea Economic Daily

March 2017November 1, 19462020

Il Im

  

Professor, Department of Communications and Information, InhaBusiness Administration, Yonsei University

 March 2016 March 18, 19602017   2017March 20, 19662020 

 

 

(1)All of our standing and outside directors beneficially own less than one percent of the issued shares of KT Corporation in the aggregate.

Chang-Gyu Hwang is ahas served as our standing director since 2014 and has served as our chief executive officer since January 2014. Prior to joining us, he served as a Distinguished Chair Professor at Sungkyunkwan University, president and National Chief Technology Officer of the Office of Strategic Research and Development Planning at the former Ministry of Knowledge and Economy, president and chief technology officer of the Corporate Technology Office at Samsung Electronics Co., Ltd. and as president and chief executive officer of the Semiconductor Business at Samsung

Electronics Co., Ltd. Mr. Hwang holds a bachelor’s degree and a master’s degree in electric engineering from Seoul National University and a Ph.D. in electronic and computer engineering from the University of Massachusetts, Amherst.

Heon Moon Lim is ahas served as our standing director since 2014 and has served as our president and KT’s chief marketing officer since December 2015. He has previously served as a senior executive vice president of KT’sour Customer Business Group and an executive vice president of KT’sour Telecom & Convergence Business Group and Home Business Group. Mr. Lim holds a bachelor’s degree in business administration from Yonsei University and a Ph.D. in business administration from Seoul National University.

Hyeon Mo Ku is ahas served as our standing director since March 2016 and has served as senior executive viceour president and KT’s chief operating officer since December 2015. He has previously served as chief secretary to KT’sour chief executive officer since 2014. Before that, he served as chief operating officer of the Telecom &

Convergence Business department. Mr. Ku holds a bachelor’s degree in Industrial Engineering from Seoul National University and a Ph. D. in Management Engineering from Korea Advanced Institute of Science and Technology.

Do Kyun Songhas served as our outside director since March 2013. He is currently ana senior advisor to the law firm of Bae, Kim & Lee LLC. He was formerly a standing member of the KCC and the chief executive officer of Seoul Broadcasting System Co., Ltd. Mr. Song holds a bachelor’s degree in Spanish literature from HangukHankuk University of Foreign Studies.

Sang Kyun Cha has served as our outside director since March 2012. He is currently a professor of electrical and computer engineering at Seoul National University. Previously, he founded Transact In Memory, Inc., a next-generation memory database management system development company in the United States which was acquired by SAP AG in 2005, and was subsequently transformed into SAP Labs Korea, Inc. Mr. Cha holds a bachelor’s degree in electronic engineering from Seoul National University and a Ph.D. in database systems from Stanford University.

Jong-Gu Kimhas served as our outside director since March 2014. He is currently a corporate lawyer at the New Dimension Law Group. Previously, he served as the minister of the Ministry of Justice and as the head of the Seoul Supreme Prosecutors’ Office. Mr. Kim holds both a bachelor’s degree in law from Seoul National University and a Ph.D. in law from Dongguk University.

Suk-Gwon Chang has served as our outside director since March 2014. He is currently a professorthe dean of business administrationthe School of Business at Hanyang University. Mr. Chang was formerly the dean of Hanyang Cyber University Graduate School and the president of the Korea Association for Telecommunication Policy and Korea Media Management Association. Mr. Chang holds a bachelor’s degree in industrial engineering from Seoul National University and a Ph.D. in management science from Korea Advanced Institute of Science and Technology.

Dae-Geun Park has served as our outside director since March 2014. He is currently a professor of economics and finance at Hanyang University a member of the Financial Development Review Committee at the Financial Services Commission and the director of Hanyang Economic Research Institute. Mr. Park was formerly a vice president of the Korea Finance and Money Association and a member of the Steering Committee at the Korea Finance Corporation. Mr. Park holds a bachelor’s degree in economics from Seoul National University and a Ph.D. in economics from Harvard University.

Dong-Wook Chung has served as our outside director since March 2015. He is currently a Senior Counselsenior counsel to the law firm of Kim, Choi & Lim. Mr. Chung was formerly a prosecutor at the Seoul High Prosecutor’s Office and the chief prosecutor at the Bucheon Branch of the Incheon District Prosecutor’s Office. Mr. Chung holds a bachelor’s degree and a master’s degree in law from Seoul National University.

Daiwon HyunGae-Min Lee has served as our outside director since March 2015.2017. He is currently a professor of mass communication at Sogang University and the chairperson ofwas formerly an advisor to the Korea Digital Content Industry Forum.News Editors’ Association Fund,editor-in-chief of The Korea Economic Daily and chief executive officer of Hankyung.com. Mr. Hyun was formerly the chairperson of the Internet-based Broadcasting Service Promotion Forum and the ‘Beautiful Internet World’ Forum. Mr. HyunLee holds a bachelor’s degree in journalism and broadcasting from Sogang University and a Ph.D. in telecommunications and mass mediaEconomics from TempleKyung Hee University.

Daeho KimIl Im has served as our outside director since March 2016.2017. He is currently a professor of Communicationsbusiness administration at Yonsei University and Information at Inha University, a member of the Administration ReviewFall Committee of the KCC and an outside directorChair of the Korea Internet and Security Agency.Society of Management Information System. Mr. KimIm was formerly a professor of Information Systems Department at New Jersey Institute of Technology. Mr. Im holds a bachelor’s degree in Mass Communication and Informationbusiness administration from Seoul National University and a Ph. D in Cultural Studiesinformation systems from the University of Birmingham.Southern California.

For the purposes of the Korean Commercial Code, our chief executive officer is deemed to be the “representative director” who is authorized to perform all judicial and extra-judicial acts relating to our business. Our shareholders elect the chief executive officer in accordance with the provisions of the Commercial Code and our articles of incorporation. A candidate for chief executive officer is nominated by a committee formed for that purpose. The Chief Executive Officer Candidate Nominating Committee consists of:

 

all of our outside directors; and

 

one standing director who is not a candidate.

Under our articles of incorporation, the Chief Executive Officer Candidate Nominating Committee must submit a draft management contract between the companyKT Corporation and the candidate covering theour management objectives of the company to the shareholders’ meeting at the time of candidate nomination to the meeting. When the draft management contract has been approved at the shareholders’ meeting, the company enterswe enter into such management contract with the chief executive officer. In such case, the chairperson of the Chief Executive Officer Candidate Nominating Committee, on our behalf, of the company, signs the management contract.

The board of directors may conduct performance review discussions to determine if the new chief executive officer performed his or her duties under the management contract, or hire a professional evaluation agency for such purpose. If the board of directors determines, based on the results of the performance review, that the new chief executive officer has failed to achieve the management goals, it may propose to dismiss the chief executive officer at a shareholders’ meeting.

Senior Management

Our executive officers consist of Senior Executive Vice Presidents.presidents and senior executive vice presidents. The executive officers other than the standing directors are appointed by the chief executive officer.

The current executive officers are as follows:

 

Name(1)

  

Title and Responsibilities

  Current
Position Held
Since		  Years
with the
Company(2)		   Date of Birth

Seong-Mok Oh

President, Network GroupDecember 201231August 20, 1960

Soo-Ho Maeng

President, Corporate Relationship GroupDecember 201521October 16, 1959

Cheol-Soo Kim

  Senior Executive Vice President, Chief of Marketing Office, Customer Business Group  December 2015   23   February 7, 1963

Mun-Whan Lee

Senior Executive Vice President, Enterprise Business GroupDecember 201528October 1, 1963

Dong-Myun Lee

  Senior Executive Vice President, Institute of Convergence Technology  January 2014   2425   October 15, 1962

In-Hoe Kim

Senior Executive Vice President, CEO OfficeDecember 20152June 25, 1964

Kyoung-Lim Yun

  Senior Executive Vice President, Future Convergence Strategy Office  December 2014   67   June 14, 1963

Sang-Bong Nam

Senior Executive Vice President, Chief Operating Office, Strategy & Planning Group, Legal OfficeJanuary 20144October 19, 1963

Dae-San Lee

Senior Executive Vice President, Chief Operating Office, Corporate Management GroupJanuary 201530January 10, 1961

In-Hoe Kim

Senior Executive Vice President, CEO OfficeDecember 20153June 25, 1964

Kyu-Taek Nam

  Senior Executive Vice President, Chief Operating Office, Corporate Management Group, Human Resources Office  December 2015   3031   February 6, 1961

Mun-Whan Lee

Senior Executive Vice President, Enterprise Business GroupDecember 201527October 1, 1963

Seong-Mook Oh

Senior Executive Vice President, Network GroupDecember 201230August 20, 1960

Soo-Ho Maeng

Senior Executive Vice President, Corporate Relationship GroupDecember 201520October 16, 1959

 

 

(1)All of our executive officers beneficially own less than one percent of the issued shares of KT Corporation in the aggregate.

 

(2)Does not include period of employment by KT Corporation’s affiliates.

Item 6.B.Compensation

Compensation of Directors

In 2015,2016, the total amount of salaries, bonuses (including long-term performance-based incentives for directors) and allowances paid to all directors of KT Corporation for services in all capacities was approximately￦34.1 billion, which were paid on a cash basis.

Until February 2010, we had no incentive based compensation program for outside directors. Instead, compensation was paid to outside directors in fixed amounts as an allowance for any expenses they incurred in executing their duties. The board of directors introduced a new compensation program for outside directors in March 2010, which consists of cash and stock grants and requires a one yearlock-up period, at a ratio of 3 to 1. The total cash basis remuneration for outside directors for 20152016 was recorded at￦650642 million.

The compensation of our directors and executive officers who received total annual compensation exceeding￦500 million in 2015 were2016 was as follows:

 

Name

  

Position

  Total Compensation
in 20152016		  

Composition of Total
Compensation

      (In millions of Won)

Chang-Gyu Hwang

  Chief Executive Officer  ￦1,2292,436  ￦573 (salary);￦6511,858 (bonus);￦5 (benefits)

Heon Moon Lim

  President  ￦535900  ￦319367 (salary);￦205518 (bonus);￦1115 (benefits)

Hyun Mo Ku

President￦672￦239 (salary);￦413 (bonus);￦20 (benefits)

The chairperson of the Chief Executive Officer Candidate Nominating Committee enters into an employment agreement on our behalf with our chief executive officer. The employment agreement

sets certain management targets to be achieved by the chief executive officer, including a target for the amount of “EBITDA” to be achieved in each year. EBITDA is defined as earnings before interest, tax, depreciation and amortization. Failure to achieve certain thresholds below the targets will allow the board of directors to take actions with respect to the chief executive officer’s employment, including proposing toat the shareholders’ meeting an early termination of his employment. In addition, the head of each of our functional departments, the president of each of our subsidiaries and the heads of each regional head office have entered into employment agreements with the chief executive officer that provide for similar management targets to be achieved by each of our departments, subsidiaries and regional head offices.

Item 6.C.Board Practices

As of December 31, 2015,2016, none of our standing or outside directors maintained directors’ service contracts with us or with any of our subsidiaries providing for benefits upon termination of employment.

Corporate Governance Committee

The Corporate Governance Committee is comprised of four outside directors and one standing director,Suk-Gwon Chang, Do Kyun Song, Dae-Geun Park, DaehoJong-Gu Kim,Gae-Min Lee and Hyeon Mo Ku. The chairperson isSuk-Gwon Chang. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.

Outside Director Candidate Nominating Committee

The Outside Director Candidate Nominating Committee consists of one standing director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. The committee’s duties include reviewing the qualifications of potential candidates and proposing nominees to serve as outside directors on our board of directors to the shareholders at the general shareholders’ meeting. The committee members’ terms expire immediately after the adjournment of the shareholders’ meeting where the outside directors are elected.

Evaluation and Compensation Committee

The Evaluation and Compensation Committee is currently comprised of four outside directors, Sang Kyun Cha,Dong-Wook Chung, Do Kyun Song,Suk-Gwon Chang and Daiwon Hyun.Il Im. The chairperson is Sang Kyun Cha.Dong-Wook Chung. The committee’s duties include prior review of the chief executive officer’s management goals, terms and conditions proposed for inclusion in the management contract of the chief executive officer, including, but not limited to, determining whether the chief executive officer has achieved the management goals, and the determination of compensation for the chief executive officer and the standing directors. The committee members are elected by the board after the closing of the annual meeting, and the term of the committee members is one year.

Executive Committee

The Executive Committee is currently comprised of all of the standing directors.Chung-Gyu Hwang, Heon Moon Lim and Hyeon Mo Ku. The chairperson isChang-Gyu Hwang. The committee’s duties include the establishment and management of branch offices, the acquisition and disposal of real estate having market value between￦15 billion to￦30 billion, making investments and providing guarantees between￦15 billion to￦30 billion, the disposal and sale of stocks of our subsidiaries, which have a market value between￦15 billion and￦30 billion, provided that no change of control

with respect to such subsidiary occurs as a result of such disposal or sale for stocks with market value of￦10 billion or more, making investments and providing guarantees between￦15 billion to￦30 billion, the acquisition and disposal of real estate having market value between￦15 billion to￦30 billion, the authorization of charitable contributions between￦100 million to￦1 billion and the issuance of certain debt securities.

Related-Party Transactions Committee

The Related-Party Transactions Committee is currently comprised of four outside directors, Dong-Wook Chung, Jong-Gu Kim, Daiwon HyunDae-Geun Park, Do Kyun Song,Gae-Min Lee and Daeho Kim.Il Im. The chairperson is Dong-Wook Chung.Dae-Geun Park. This committeecommittee’s duties include reviews of transactions between KT Corporation and its subsidiaries and ensures compliance with applicable antitrust laws. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.

Sustainability Management Committee

The Sustainability Management Committee is currently comprised of four outside directors and one standing director, Sang Kyun Cha, Dong-Wook Chung,Suk-Gwon Chang, Il Im and Heon Moon Lim. The chairperson is Sang Kyun Cha. The committee’s duties include reviews of sustainable management results, establishment of medium- and long-term sustainable management strategies and regular reporting and risk management of sustainable management activities. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.

Audit Committee

Under the Commercial Code of Korea and our articles of incorporation, we are required to establish an audit committee comprised of three or more outside directors and at leasttwo-thirds of the audit committee members are required to be outside directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. The committee is currently comprised ofJong-Gu Kim, Sang Kyun Cha, Dae-Geun Park and Dong-Wook Chung. The chairperson isJong-Gu Kim and the financial expert is Dae-Geun Park. Members of the committee are elected by our shareholders at the shareholders’ meeting. Our internal and external auditors report directly to the committee.

The duties of the committee include:

 

appointing independent auditors;

approving the appointment and recommending the dismissal of the internal auditor;

 

evaluating performance of independent auditors;

 

approving services to be provided by the independent auditors;

 

reviewing annual financial statements;

 

reviewing audit results and reports;

 

reviewing and evaluating our system of internal controls and policies; and

 

examining improprieties or suspected improprieties.

In addition, regarding the shareholders’ meeting, the committee may examine the agenda, financial statement and other reports to be submitted by the board of directors at each shareholders’ meeting.

Item 6.D.Employees

On anon-consolidated basis, we had 23,575 employees as of December 31, 2016, compared to 23,531 employees as of December 31, 2015 compared toand 23,371 employees as of December 31, 2014 and 32,451 employees as of December 31, 2013.2014.

Voluntary Early Retirement Plans

We regularly sponsor voluntary early retirement plans where we provide additional financial incentives for our employees to retire early, as part of our efforts to improve operational efficiencies. In 2013, 2014, 2015, and 2015, 269,2016, 41, 33 and 335 employees, respectively, retired under this program.

In April 2014, we announced the commencement of a special early retirement program for employees who have been employed by us for more than 15 years. This special early retirement program providesprovided our employees with incentives to retire early as part of our efforts to improve operational efficiencies. Our employees were offered the option of either receiving additional severance payment or employment for two years at certain of our subsidiaries or affiliates as part of the special retirement scheme.program. The special voluntary early retirement program resulted in the early retirement of 8,304 employees in 2014. We paid￦1.3 trillion1,215 billion as severance benefits in connection with our early retirement programs during 2014, which was financed through cash on hand and bond issuances.

Labor Relations

We consider our current relations with our work force to be good. However, in the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing ofnon-core businesses and reducing our employee base.

As of December 31, 2015,2016, about 75.6%78% of the employees of KT Corporation were members of the KT Trade Union. On behalf of its members, the Unionunion negotiates with us a collective bargaining agreement every two years, and our current collective bargaining agreement expires on November 15, 2017. The current collective bargaining agreement provides that even in the event of a strike, the minimum number of employees necessary to operate the telecommunications business must continue to work.

The Unionunion also negotiates with us an annual agreement on wages on behalf of its members. Under the Act of the Promotion of Worker’s Participation and Cooperation, our Employee-Employer Cooperation Committees, which are composed of representatives of management and labor for each business unit and regional office, meet quarterly to discuss employee grievances, working conditions and potential employee-initiated improvements in service or management.

Recent amendments to theThe Trade Union and Labor Relations Adjustment Act (“Labor Act”), which became effective on July 1, 2011, allow multiple labor unions to be formed within one company. Therefore, additional labor unions may be formed by our employees. Pursuant to such amendments, our employees formed a new labor union called “KT New Union” in AugustJuly 2011. The amended Labor Act also requires such multiple unions to consolidate themselves into a single channel when negotiating with the company on behalf of their members and to enter into a single collective bargaining agreement with the company. As a result of the recent consolidation of labor unions, KT Trade Union was selected as the bargaining representative of the labor unions. Its term as the bargaining representative will last for two years from January 1, 2016, and will expire on December 31, 2017.

Employee Stock Ownership and Benefits

We have an employee stock ownership association, which may purchase on behalf of its members up to 20.0% of any of our shares offered publicly in Korea. The employee stock ownership association owned 0.6%0.53% of our issued shares as of December 31, 2015.2016.

In accordance with the National Pension Act of Korea, we contribute an amount equal to 4.5% of an employee’s standard monthly wages, and each employee contributes 4.5% of his or her standard monthly wages, into his or her personal pension account. Our employees, including executive officers as well asnon-executive employees, are subject to a pension insurance system, under which we make monthly contributions to the pension accounts of the employees, and upon retirement, such employees are paid the pension amount due from their pension accounts. Prior to April 2011, our executive andnon-executive employees were subject to alump-sum severance payment system, under which they were entitled to receive alump-sum severance payment upon termination of their employment, based on their length of service and salary level at the time of termination. Starting in April 2011, in accordance with the Korean Employee Retirement Income Security Act, we replaced suchlump-sum severance payment system with our current pension insurance system in the form of a defined benefit plan, and also introduced a defined contribution plan in December 2012, with a total combined unfunded portion of approximately￦8261,414 billion as of December 31, 2015. 2016.Lump-sum severance amounts previously accrued prior to our adoption of the current pension insurance system continue to remain payable. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company-provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, cultural and athletic facilities, physical education grants, meal allowances, medical examinations and training and resort centers. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results.”

Employee Training

The objective of our training program is to develop information and technology specialists who are able to create value for our customers. In order to develop skills of our employees, we require 5076 hours of training per year from most of our employees, using individually-tailored curriculums based on individual assessments. We also operate Cyber Academy to provide online classes to our employees, as well as offer various foreign language classes to our employees. In addition, we provide tuition and living expense reimbursements to our high potential individualsemployees who pursue graduate programs in Korea and abroad, as well as provide financial assistance to those who pursue work-related professional licenses or participate in after-work study programs.

Item 6.E.Share Ownership

Common StockOrdinary Shares

The persons who are currently serve as our directors held, as a group, 20,808 common47,615 ordinary shares as of March 31, 2016,April 25, 2017, the most recent date for which this information is available. The table below shows the ownership of our commonordinary shares by directors:

 

Shareholders

  Number of CommonOrdinary
Shares Owned		 

Chang-Gyu Hwang

   5,00022,961 

Heon Moon Lim

   3,0916,718 

Hyun Mo Ku

   5,3877,796 

Do Kyun Song

   7131,178

Dong-Wook Chung

465 

Sang Kyun Cha

   5,5095,974 

Jong-Gu Kim

   376841 

Suk-Gwon Chang

   376841 

Dae-Geun Park

   376841 

Dong-Wook ChungGae-Min Lee

   — 

Daiwon Hyun

—

Daeho KimIl Im

   — 

Stock Options

We have not granted any stock options to our current directors and executive officers.

Item 7. Major Shareholders and Related Party Transactions

Item 7.A.Major Shareholders

The following table sets forth certain information relating to the shareholders of our common stockordinary shares as of December 31, 2015:2016:

 

Shareholders

  Number of
Shares		   Percent of
Total
Shares Issued		   Number of
Shares		   Percent of
Total
Shares Issued		 

National Pension Corporation

   19,150,489     7.33%    26,994,170    10.34% 

NTTDoCoMo, Inc.

   14,257,813     5.46%    14,257,813    5.46% 

Silchester International Investors LLP

   13,848,391     5.30%    12,907,232    4.94% 

Employee stock ownership association

   1,484,611     0.57%    1,387,655    0.53% 

Directors as a group

   20,359     0.01%    47,615    0.02% 

Public

   196,008,137     75.1%    189,377,158    75.53% 

KT Corporation (held in the form of treasury stock)

   16,262,008     6.23%    16,140,165    6.18% 
  

 

   

 

   

 

   

 

 

Total issued shares

   261,111,808     100.00%    261,111,808    100.00% 
  

 

   

 

   

 

   

 

 

Item 7.B.Related Party Transactions

We have engaged in various transactions with our subsidiaries and affiliated companies. See Note 3433 to the Consolidated Financial Statements. We have not issued any guarantees in favor of our consolidated subsidiaries.

Item 7.C.Interests of Experts and Counsel

Not applicable.

Item 8. Financial Information

Item 8.A.Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pagesF-1 through F-106.F- 98.

Legal Proceedings

In July 2012, the Fair Trade Commission issued to us an administrative fine of approximately￦5 billion as well as certain corrective orders, after investigating certain pricing and subsidy practices of mobile service carriers and handset manufacturers. Samsung Electronics Co., Ltd., LG Electronics Co., Ltd., Pantech Curitel Co., Ltd., SK Telecom and LG U+ were also issued administrative fines as a result of the investigation. We filed for a stay of execution of the Fair Trade Commission’s decision, and in September 2012, the Seoul High Court granted a stay of execution with respect to the corrective order, and denied the stay of execution with respect to the administrative fine. We paid the entire fine in September 2012. In September 2012, we filed a lawsuit with the Seoul High Court against the Fair Trade Commission to appeal the administrative fine and the corrective order, and on February 6, 2014, the Seoul High Court ruled against us on our appeal. In February 2014, we filed another appeal with respect to the administrative fine with the Supreme Court of Korea and filed for a stay of execution with respect to the corrective order in March 2014, which was accepted and became effective in April 2014. The appeal is currently ongoing. The outcome of this case will not result in any fine in addition to the fine we already paid in September 2012.

Based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately￦12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately￦3 billion), for providing subsidies that were higher than those allowed under current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from accepting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately￦5 billion on SK Telecom, LG U+ and us (our fine being approximately￦2 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately￦67 billion on SK Telecom, LG U+ and us (our fine being approximately￦20 billion) and also imposed a seven day suspension on us from accepting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately￦106 billion on SK Telecom, LG U+ and us (our fine being approximately￦30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from accepting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. Additionally, the MSIP announced that it plans to bring criminal charges with fines of up to￦150 million and imprisonment of less than three years against any carrier and responsible personnel that fails to adhere to the suspension or continues to offer illegal subsidies after the suspension is completed. In August 2014, the KCC imposed a fine of approximately￦58 billion on SK Telecom, LG U+ and us (our fine being approximately￦11 billion) for continuing to provide excessive subsidies to new subscribers. In December 2014, the KCC further imposed a fine of approximately￦8 billion on each of SK Telecom, LG U+ and us for providing excessive handset subsidies and insubsidies. In March 2015, the KCC againalso imposed a combined fine of approximately￦34 billion on SK Telecom, LG U+ and us (our fine being approximately￦9 billion) for violation of regulations relating to handset sales, in connection with a used handset buyback program that we and the other telecommunications operators were promoting. On June 24, 2015, the KCC imposed a fine of￦52 million for violating privacy related regulations and undermining consumer interests. On July 31, 2015 and January 19, 2016, the KCC imposed a fine of￦350 million and￦560 million, respectively, on us for infringing upon consumer interests by advertising false and exaggerated information about bundled products. On March 8, 2016, the KCC imposed a fine of￦32 million on us for offering excessively reduced rates and waivers to certain customers. On December 6, 2016, the KCC imposed a combined fine of approximately￦10.7 billion on SK Telecom, LG U+, SK Broadband,t-broad, D’live, CJ HelloVision and us (our fine being approximately￦2.3 million) and ordered to take corrective measures for providing excessive promotional gifts to bundled products customers. We have paid all of such fines as of the date hereof.

In July 2012, the police arrested two third-party individuals in connection with the alleged theft of personal information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into ourN-STEP. Since the incident, approximately 29,800 of our mobile phone subscribers filed a total of 16 lawsuits against us in connection with theN-STEP hackings, alleging that we failed to protect their personal information, and are seeking total damages of approximately￦15 billion. From August 2014 to October 2015,2016, various district courts have awarded damages of￦100,000 per plaintiff for 1314 of the cases involving a total of approximately 29,000 of the subscribers, resulting in damages of approximately￦3 billion to us, while the remaining trials are currently ongoing at various district courts. We have appealed the district courts’ decisionsdecisions. In January 2017, we won one of the appeals and such appellate court decision was appealed to the Supreme Court. The other appeals are currently ongoing at the Seoul High Court.

Furthermore, in March 2014, the police arrested three third-party individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. Since the incident, approximately 13,45015,000 subscribers filed 1922 lawsuits against us in connection with the information theft, seeking total damages of approximately￦7 billion. The trials are currently ongoing at various district courts. From November 2016 to February 2017, we won 14 trials, lost two trials and the remaining six trials are currently ongoing at various district courts. The plaintiffs of 10 of the 14 cases have appealed the district courts’ decisions to the Seoul High Court. We appealed the district courts’ decisions of the two trials where we lost. In June 2014, we were fined￦85 million by the KCC and were ordered to take corrective measures in connection with the most recent hacking incident. We filed an administrative appeal in August 2014 in connection with the KCC fine and prevailed. The KCC appealed the administrative decision and the appeal is currently ongoing at the Seoul AdministrativeHigh Court.

In December 2013, the MSIP declared that the contracts over our sale of Koreasat 3 waswere null and void, on the grounds that the satellite was sold without obtaining proper government approval. We are currently involved in an arbitration proceeding against ABS pursuant to the Rules of the International Chamber of Commerce arbitration against ABS over the Koreasat 3 satellite ownership and contract violation claims.

In 2009, we entered into a contract with Enspert, Co., Ltd.(“Enspert”), a consumer electronics manufacturer, to purchase approximately 200,000 tablet PCs. Due to defects with the tablet PCs, we cancelled our contract and the outstanding order for approximately 170,000 tablet PCs, for which we would have paid approximately￦51 billion. In June 2014, the Korea Fair Trade Commission imposed a fine of approximately￦2 billion on us, finding that we cancelled our contract with Enspert without cause. We appealed such decision but the decision was confirmed by the Seoul High Court and the Supreme Court in May 2016 and September 2016, respectively. Due to the absence of relevant lawsuits, it has not been determined whether the contract cancellation was in violation of other applicable laws, including the Fair Transactions in Subcontracting Act. We plan to vigorously defend ourselves in case of lawsuits, but we may incur additional damages and losses which are difficult to predict at this time.

We are a defendant in various other court proceedings involving claims for civil damages arising in the ordinary course of our business. We are a defendant in an ongoing court proceeding filed by the Industrial Bank of Korea on March 18, 2015. In connection with the filing of court receivership by KT ENGCORE, Industrial Bank of Korea claims that we are liable for￦10 billion of the￦65.8 billion asset-backed commercial papers of a renewable energy project for which KT ENGCORE was a contractor and guarantor.

As of December 31, 2015,2016, we have established provisions relating to litigations of￦18 billion, of which￦3.6 billion related to the litigations involving the hacking incidents.19 billion. See Note 1719 to the Consolidated Financial Statements. While we are unable to predict the ultimate

disposition of these claims, in the opinion of our management, the ultimate disposition of these claims will not have a material adverse effect on our business, financial condition and results of operations.

Dividends

The table below sets out the annual dividends declared on the outstanding common stockordinary shares to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding common stockordinary shares to shareholders of record on June 30 of the years indicated:

 

Year

  Annual Dividend per
Common Stock		   Interim Dividend per
Common Stock		   Average Total
Dividend per Common
Stock		 
   (In Won)   (In Won)   (In Won) 

2011

   2,000     —     2,000  

2012

   2,000     —     2,000  

2013

   2,000     —     2,000  

2014

   800     —     800  

2015

   500     —     500  

Year

  Annual Dividend per
Ordinary Share		   Interim Dividend per
Ordinary Share		   Average Total
Dividend per Ordinary
Share		 
   (In Won)   (In Won)   (In Won) 

2012

   2,000    —    2,000 

2013

   800    —    800 

2014

   0    —    0 

2015

   500    —    500 

2016

   800    —    800 

If sufficient profits are available, the Boardboard of Directorsdirectors may propose annual dividends on the outstanding common stock,ordinary shares, which our shareholders must approve by a resolution at the ordinary general meeting of shareholders. This meeting is generally held in March of the following year and if our shareholders at such ordinary general meeting of shareholders approve the annual dividend, we must pay such dividend within one month following the date of such resolution. Typically, we pay such dividends shortly after the meeting. The declaration of annual dividends is subject to the vote of our shareholders, and consequently, there can be no assurance as to the amount of dividends per common stockordinary share or that any such dividends will be declared. Interim dividends paid in cash can be declared by a resolution of the board of directors. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” and “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”

The Commercial Code provides that shares of a company of the same class must receive equal treatment. However, major shareholders may consent to receive dividend distributions at a lesser rate than minor shareholders. Previously, the Government consented to receiving a smaller dividend compared to other shareholders. The Government no longer holds any interest in us.

Any cash dividends relating to the shares held in the form of ADSs will be paid to the depositary bank in Won. The deposit agreement provides that, except in certain circumstances, cash dividends received by the depositary bank will be converted by the depositary bank into Dollars and distributed to the holders of the ADRs, less withholding tax, other governmental charges and the depositary bank’s fees and expenses. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”

Item 8.B.Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

Item 9. The Offer and Listing

Item 9.A.Offer and Listing Details

Market Price Information

Common StockOrdinary Shares

Our shares were listed on the KRX KOSPI Market on December 23, 1998. The price of the shares on the KRX KOSPI Market as of the close of trading on April 25, 20162017 was￦30,20031,450 per share. The table below shows the high and low closing prices and the average daily volume of trading activity on the KRX KOSPI Market for the shares since January 2010:2012:

 

   Price   Average Daily
Trading Volume		 
   High   Low   
   (In Won)   (Number of shares) 

2010

   50,600     39,150     1,343,486  

2011

   45,500     34,200     1,063,506  

2012

   39,750     27,700     1,067,315  

2013

   40,850     29,950     1,149,143  

2014

   36,800     28,300     1,051,396  

First quarter

   31,900     28,300     981,580  

Second quarter

   32,800     28,700     1,240,382  

Third quarter

   36,800     29,650     1,121,896  

Fourth quarter

   35,250     30,700     866,696  

  Price   Average Daily
Trading Volume		   Price   Average Daily
Trading Volume		 
  High   Low     High   Low   
  (In Won)   (Number of shares)   (In Won)   (Number of shares) 

2012

   39,750    27,700    1,067,315 

2013

   40,850    29,950    1,149,143 

2014

   36,800    28,300    1,051,396 

2015

   32,250     28,250     963,825     32,250    28,250    963,825 

First quarter

   31,900     28,500     1,042,068     31,900    28,500    1,032,769 

Second quarter

   32,250     28,400     1,032,769     32,250    28,400    1,082,244 

Third quarter

   32,250     28,400     1,082,244     31,000    28,400    957,396 

Fourth quarter

   31,000     28,400     957,396     30,700    28,250    788,055 

2016 (through April 25)

   30,950     26,350     603,122  

2016

   33,250    26,350    547,426 

First quarter

   29,800    26,350    619,422 

Second quarter

   32,550    29,150    654,800 

Third quarter

   32,750    29,850    454,623 

Fourth quarter

   33,250    29,400    466,237 

November

   33,250    29,800    615,186 

December

   30,350    29,400    411,936 

2017 (through April 25)

   33,250    28,900    549,994 

First quarter

   29,800     26,350     619,422     33,250    28,900    567,549 

January

   28,200     26,350     652,213     29,650    28,900    403,823 

February

   29,050     27,750     653,490     30,650    29,200    537,745 

March

   29,800     28,500     561,738     33,250    30,750    743,486 

Second quarter (through April 25)

   30,950     29,650     541,997     32,700    31,150    485,971 

April (through April 25)

   30,950     29,650     541,997     32,700    31,150    485,971 

 

 

Source:    KRXKRX KOSPI Market.

ADSs

The outstanding ADSs, each of which representsone-half of one share of our common stock,ordinary share, have been traded on the New York Stock Exchange and the London Stock Exchange since May 25, 1999 until September 18, 2015, the date on which the ADSs were delisted from the London Stock Exchange. The ADSs, including those previously listed on the London Stock Exchange, continue to be tradable on the New York Stock Exchange.

The price of the ADSs on the New York Stock Exchange as of the close of trading on April 25, 20162017 was $13.27$16.08 per ADS. The table below shows the high and low trading prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs since January 2010:2012:

 

  Price   Average Daily
Trading Volume		   Price   Average Daily
Trading Volume		 
  High   Low     High   Low   
  (In US$)   (Number of ADSs)   (In US$)   (Number of ADSs) 

2010

   22.62     17.12     784,905  

2011

   20.86     14.49     1,124,692  

2012

   18.23     11.65     1,004,064     18.23    11.65    1,004,064 

2013

   18.16     14.33     528,291     18.16    14.33    528,291 

2014

   17.46     13.24     440,020     17.46    13.24    440,020 

First quarter

   14,75     13.24     515,373  

Second quarter

   16.07     13.45     410,942  

Third quarter

   17.46     14.31     380,780  

Fourth quarter

   16.31     14.05     456,065  

2015

   14.85     11.83     336,711     14.85    11.83    336,711 

First quarter

   14.17     12.87     378,464     14.17    12.87    378,464 

Second quarter

   14.85     12.49     306,958     14.85    12.49    306,958 

Third quarter

   13.10     11.83     266,449     13.10    11.83    266,449 

Fourth quarter

   14.03     11.91     396,465     14.03    11.91    396,465 

2016 (through April 25)

   13.88     11.03     476,410  

2016

   16.73    11.03    608,543 

First quarter

   13.54    11.03    505,970 

Second quarter

   14.71    13.22    591,603 

Third quarter

   16.73    14.17    674,686 

Fourth quarter

   16.31    13.66    657,875 

November

   15.99    13.87    785,746 

December

   14.59    13.66    655,145 

2017 (through April 25)

   17.11    13.84    864,768 

First quarter

   13.54     11.03     505,970     17.10    13.84    840,494 

January

   12.32     11.03     386,645     14.87    13.84    756,237 

February

   12.09     11.72     501,078     16.00    14.84    892,169 

March

   13.54     12.01     613,529     17.10    15.92    871,073 

Second quarter (through April 25)

   13.88     13.22     370,345     17.11    16.05    958,830 

April (through April 25)

   13.88     13.22     370,345  

April (through April 25))

   17.11    16.05    958,830 

 

 

Source:    NewNew York Stock Exchange.

Item 9.B.Plan of Distribution

Not applicable.

Item 9.C.Markets

The KRX KOSPI Market

On January 27, 2005, the Korea Exchange was established pursuant to the Korea Securities and Futures Exchange Act through the consolidation of the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc. (the “KOSDAQ”) and the KOSDAQ Committee within the Korea Securities Dealers Association, which was in charge of the management of the KOSDAQ. There are four different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, the KRX KONEX Market and the KRX Derivatives Market. The Korea Exchange has three trading floors located in Seoul, one for the KRX KOSPI Market, one for the KRX KOSDAQ Market, one for the KRX KONEX Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a limited liability company, the shares of which are held by (i) securities companies and futures companies that were formerly members of the Korea Stock Exchange or the Korea Futures Exchange, (ii) the Small & Medium Business Corporation, (iii) the Korea Securities Finance Corporation and (iv) the Korea Financial Investment Association. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members most of the Korean securities companies and some Korean branches of foreign securities companies.

The KRX KOSPI Market has the power in some circumstances to suspend trading in the shares of a given company or tode-list a security. The KRX KOSPI Market also restricts share price movements. All listed companies are required to file accounting reports annually and quarterly and to release immediately all information that may affect trading in a security.

The KRX KOSPI Market publishes the KOSPI every ten seconds, which is an index of all equity securities listed on the KRX KOSPI Market. The KOSPI is calculated using the aggregate value method, in which the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

Movements in KOSPI are set out in the following table together with the associated dividend yields and price earnings ratios:

 

                   Period Average 

Year

  Opening   High   Low   Closing   Dividend
Yield (1)(2)
(Percent)		   Price
Earnings
Ratio (2)(3)		 

1985

   139.53     163.37     131.40     163.37     5.3     5.2  

1986

   161.40     279.67     153.85     272.61     4.3     7.6  

1987

   264.82     525.11     264.82     525.11     2.6     10.9  

1988

   532.04     922.56     527.89     907.20     2.4     11.2  

1989

   919.61     1,007.77     844.75     909.72     2.0     13.9  

1990

   908.59     928.82     566.27     696.11     2.2     12.8  

1991

   679.75     763.10     586.51     610.92     2.6     11.2  

1992

   624.23     691.48     459.07     678.44     2.2     10.9  

1993

   697.41     874.10     605.93     866.18     1.6     12.7  

1994

   879.32     1,138.75     855.37     1,027.37     1.2     16.2  

1995

   1,027.45     1,016.77     847.09     882.94     1.2     16.4  

1996

   882.29     986.84     651.22     651.22     1.3     17.8  

1997

   647.67     792.29     350.68     376.31     1.5     17.0  

1998

   374.41     579.86     280.00     562.46     1.9     10.8  

                  Period Average                   Period Average 

Year

  Opening   High   Low   Closing   Dividend
Yield (1)(2)
(Percent)		   Price
Earnings
Ratio (2)(3)		   Opening   High   Low   Closing   Dividend
Yield  (1)(2)
(Percent)		   Price
Earnings
Ratio (2)(3)		 

1985

   139.53    163.37    131.40    163.37    5.3    5.2 

1986

   161.40    279.67    153.85    272.61    4.3    7.6 

1987

   264.82    525.11    264.82    525.11    2.6    10.9 

1988

   532.04    922.56    527.89    907.20    2.4    11.2 

1989

   919.61    1,007.77    844.75    909.72    2.0    13.9 

1990

   908.59    928.82    566.27    696.11    2.2    12.8 

1991

   679.75    763.10    586.51    610.92    2.6    11.2 

1992

   624.23    691.48    459.07    678.44    2.2    10.9 

1993

   697.41    874.10    605.93    866.18    1.6    12.7 

1994

   879.32    1,138.75    855.37    1,027.37    1.2    16.2 

1995

   1,027.45    1,016.77    847.09    882.94    1.2    16.4 

1996

   882.29    986.84    651.22    651.22    1.3    17.8 

1997

   647.67    792.29    350.68    376.31    1.5    17.0 

1998

   374.41    579.86    280.00    562.46    1.9    10.8 

1999

   565.10     1,028.07     498.42     1,028.07     1.1     13.5     565.10    1,028.07    498.42    1,028.07    1.1    13.5 

2000

   1,028.33     1,059.04     500.60     504.62     2.1     12.9     1,028.33    1,059.04    500.60    504.62    2.1    12.9 

2001

   503.31     704.50     468.76     693.70     1.7     16.4     503.31    704.50    468.76    693.70    1.7    16.4 

2002

   698.00     937.61     584.04     627.55     1.6     15.2     698.00    937.61    584.04    627.55    1.6    15.2 

2003

   633.03     822.16     515.24     810.71     2.0     11.8     633.03    822.16    515.24    810.71    2.0    11.8 

2004

   821.26     936.06     719.59     895.92     2.0     13.8     821.26    936.06    719.59    895.92    2.0    13.8 

2005

   896.00     1,379.37     870.84     1,379.37     1.8     10.6     896.00    1,379.37    870.84    1,379.37    1.8    10.6 

2006

   1,383.32     1,464.70     1,203.86     1,434.46     1.6     11.1     1,383.32    1,464.70    1,203.86    1,434.46    1.6    11.1 

2007

   1,438.89     2,064.85     1,355.79     1,897.13     1.4     15.8     1,438.89    2,064.85    1,355.79    1,897.13    1.4    15.8 

2008

   1,891.45     1,888.88     938.75     1,124.47     2.6     8.9     1,891.45    1,888.88    938.75    1,124.47    2.6    8.9 

2009

   1,132.87     1,718.88     1,018.81     1,682.77     1.2     22.9     1,132.87    1,718.88    1,018.81    1,682.77    1.2    22.9 

2010

   1,696.14     2,051.00     1,552.79     2,051.00     1.1     18.0     1,696.14    2,051.00    1,552.79    2,051.00    1.1    18.0 

2011

   2,078.08     2,228.96     1,652.71     1,825.74     1.5     10.5     2,078.08    2,228.96    1,652.71    1,825.74    1.5    10.5 

2012

   1,826.37     2,049.28     1,769.31     1,997.05     1.3     12.3     1,826.37    2,049.28    1,769.31    1,997.05    1.3    12.3 

2013

   2,031.10     2,059.58     1,780.63     2,011.34     1.1     12.8     2,031.10    2,059.58    1,780.63    2,011.34    1.1    12.8 

2014

   1,967.19     2,082.61     1,886.85     1,915.59     1.2     13.2     1,967.19    2,082.61    1,886.85    1,915.59    1.2    13.2 

2015

   1,926.44     2,173.41     1,829.81     1,961.31     1.4     14.4     1,926.44    2,173.41    1,829.81    1,961.31    1.4    14.4 

2016 (through April 25)

   1,918.76     2,022.10     1,835.28     2,014.55     1.4     14.3  

2016

   1,918.76    2,068.72    1,835.28    2,026.46    1.6    13.5 

2017 (through April 25)

   2,026.16    2,196.85    2,026.16    2,196.85    1.5    14.0 

 

 

Source:    TheThe KRX KOSPI Market

 

(1)Dividend yields are based on daily figures. Dividend yields after January 3, 19841985 include cash dividends only.

 

(2)Starting in April 2000, dividend yield and price earnings ratio are calculated based on KOSPI 200, an index of 200 equity securities listed on the KRX KOSPI Market. Starting in April 2000, KOSPI 200 excludes classified companies, companies which did not submit annual reports to the KRX KOSPI Market, and companies which received qualified opinion from external auditors.

 

(3)The price earnings ratio is based on figures for companies that record a profit in the preceding year.

Shares are quoted “ex-dividend”“ex-dividend” on the first trading day of the relevant company’s accounting period; since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in the KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.

With certain exceptions, principally to take account of a share being quoted “ex-dividend”“ex-dividend” and “ex-rights,“ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the KRX KOSPI Market to 30% of the previous day’s closing price of the shares, rounded down as set out below:

 

Previous Days’ Closing Price

  Rounded
Down To		 

Less than￦5,000

  ￦5 

￦5,000 to less than￦10,000

  ￦10 

￦10,000 to less than￦50,000

  ￦50 

￦50,000 to less than￦100,000

  ￦100 

￦100,000 to less than￦500,000

  ￦500 

￦500,000 or more

  ￦1,000 

As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.

Due to a deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the KRX KOSPI Market by the securities companies. In addition, a securities transaction tax will generally be imposed on the transfer of shares or certain

securities representing rights to subscribe for shares at the rate of 0.15% if such transfer is made through the KRX KOSPI Market. A special agricultural and fishery tax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the KRX KOSPI Market. See “Item 10. Additional Information—Item 10.E. Taxation—Korean Taxation.”

The number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:

 

  Market Capitalization
on the Last Day of Each Period		   Average Daily Trading Volume, Value   Market Capitalization
on the Last Day of Each Period		   Average Daily Trading Volume, Value 

Year

  Number of
Listed
Companies		   (Billions
of Won)		   (Millions of
Dollars)(1)		   Thousands
of Shares		   (Millions
of Won)		   (Thousands
of Dollars) (1)		   Number of
Listed
Companies		   (Billions
of Won)		   (Millions of
Dollars)  (1)		   Thousands
of Shares		   (Millions of
Won)		   (Thousands
of Dollars)  (1)		 

1985

   342     6,570     7,381     18,925     12,315     13,834     342    6,570    7,381    18,925    12,315    13,834 

1986

   355     11,994     13,924     31,755     32,870     38,159     355    11,994    13,924    31,755    32,870    38,159 

1987

   389     26,172     33,033     20,353     70,185     88,583     389    26,172    33,033    20,353    70,185    88,583 

1988

   502     64,544     94,348     10,367     198,364     289,963     502    64,544    94,348    10,367    198,364    289,963 

1989

   626     95,477     140,490     11,757     280,967     414,430     626    95,477    140,490    11,757    280,967    414,430 

1990

   669     79,020     110,301     10,866     183,692     256,411     669    79,020    110,301    10,866    183,692    256,411 

1991

   686     73,118     96,107     14,022     214,263     281,629     686    73,118    96,107    14,022    214,263    281,629 

1992

   688     84,712     107,448     24,028     308,246     390,977     688    84,712    107,448    24,028    308,246    390,977 

1993

   693     112,665     139,420     35,130     574,048     710,367     693    112,665    139,420    35,130    574,048    710,367 

1994

   699     151,217     191,730     36,862     776,257     984,223     699    151,217    191,730    36,862    776,257    984,223 

1995

   721     141,151     182,201     26,130     487,762     629,613     721    141,151    182,201    26,130    487,762    629,613 

1996

   760     117,370     139,031     26,571     486,834     575,680     760    117,370    139,031    26,571    486,834    575,680 

1997

   776     70,989     50,162     41,525     555,759     392,707     776    70,989    50,162    41,525    555,759    392,707 

1998

   748     137,799     114,091     97,716     660,429     546,803     748    137,799    114,091    97,716    660,429    546,803 

1999

   725     349,504     305,137     278,551     3,481,620     3,039,655     725    349,504    305,137    278,551    3,481,620    3,039,655 

2000

   704     188,042     149,275     306,163     2,602,211     2,065,739     704    188,042    149,275    306,163    2,602,211    2,065,739 

2001

   689     253,843     191,421     473,241     1,997,420     1,506,237     689    253,843    191,421    473,241    1,997,420    1,506,237 

2002

   683     258,681     215,496     857,245     3,041,598     2,533,815     683    258,681    215,496    857,245    3,041,598    2,533,815 

2003

   684     355,363     296,679     542,010     2,216,636     1,850,589     684    355,363    296,679    542,010    2,216,636    1,850,589 

2004

   683     412,588     395,275     372,895     2,232,109     2,138,445     683    412,588    395,275    372,895    2,232,109    2,138,445 

2005

   702     655,075     646,668     467,629     3,157,662     3,117,139     702    655,075    646,668    467,629    3,157,662    3,117,139 

2006

   731     704,588     757,948     279,096     3,435,180     3,695,332     731    704,588    757,948    279,096    3,435,180    3,695,332 

2007

   746     951,887     1,014,589     363,732     5,539,588     5,904,485     746    951,887    1,014,589    363,732    5,539,588    5,904,485 

2008

   765     576,888     458,757     355,205     5,189,644     4,126,953     765    576,888    458,757    355,205    5,189,644    4,126,953 

2009

   770     887,316     759,949     483,902     5,783,552     4,953,367     770    887,316    759,949    483,902    5,783,552    4,953,367 

2010

   777     1,141,885     1,002,621     380,859     5,619,768     4,934,382     777    1,141,885    1,002,621    380,859    5,619,768    4,934,382 

2011

   791     1,041,999     903,493     353,760     6,863,146     5,950,877     791    1,041,999    903,493    353,760    6,863,146    5,950,877 

2012

   784     1,154,294     1,077,672     486,480     4,823,643     4,503,448     784    1,154,294    1,077,672    486,480    4,823,643    4,503,448 

2013

   777     1,185,974     1,123,826     328,325     3,993,422     3,784,158     777    1,185,974    1,123,826    328,325    3,993,422    3,784,158 

2014

   773     1,192,253     1,084,655     278,082     3,983,580     3,624,072     773    1,192,253    1,084,655    278,082    3,983,580    3,624,072 

2015

   770     1,242,832     1,060,437     455,256     5,351,734     4,566,326     770    1,242,832    1,060,437    455,256    5,351,734    4,566,326 

2016 (through April 25)

   769     1,276,353     1,118,528     362,464     4,584,783     4,017,863  

2016

   779    1,308,440    1,082,698    376,772    4,523,044    3,742,693 

2017 (through April 25)

   770    1,308,042    1,155,820    393,676    4,513,310    3,988,080 

 

 

Source:The KRX KOSPI Market

 

(1)Converted at the Concentration Base Rate of The Bank of Korea or the Market Average Exchange Rate as announced by Seoul Money Brokerage Services Limited, as the case may be, at the end of the periods indicated.

The Korean securities markets are principally regulated by the Financial Services Commission of Korea and the Financial Investment Services and Capital Markets Act. The Securities and Exchange Act which regulated the securities markets in the past was replaced with the Financial Investment Services and Capital Markets Act on February 4, 2009. The new law, as did the Securities and Exchange Act, imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.

Further Opening of the Korean Securities Market

A stock index futures market was opened on May 3, 1996 and a stock index option market was opened on July 7, 1997, in each case at the KRX KOSPI Market. Remittance and repatriation of funds in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign investment in Korean stocks.

Foreign investors are permitted to invest in warrants representing the right to subscribe for shares of a company listed on the KRX KOSPI Market or registered on the KRX KOSDAQ Market, subject to certain investment limitations. A foreign investor may not acquire such warrants with respect to shares of a class of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.

Foreign investors are permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The Financial Services Commission sets forth procedural requirements for such investments. Foreigners are permitted to invest in certificates of deposit and repurchase agreements.

Currently, foreigners are permitted to invest in securities including shares of all Korean companies which are not listed on the KRX KOSPI Market nor registered on the KRX KOSDAQ Market and in bonds which are not listed.

Protection of Customer’s Interest in Case of Insolvency of Securities Companies

Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company.

When a customer places a sell order with a securities company which is not a member of the KRX KOSPI Market and this securities company places a sell order with another securities company which is a member of the KRX KOSPI Market, the customer is still entitled to the proceeds of the securities sold received by thenon-member company from the member company regardless of the bankruptcy or reorganization of thenon-member company.

Under the Financial Investment Services and Capital Markets Act, the KRX KOSPI Market is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a securities company which is a member of the KRX KOSPI Market breaches its obligation in connection with a buy order, the KRX KOSPI Market is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.

When a customer places a buy order with anon-member company and thenon-member company places a buy order with a member company, the customer has the legal right to the securities received by thenon-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and thenon-member company’s creditors are concerned.

As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors up to￦50 million in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Pursuant to the Financial Investment Services and Capital Markets Act, securities companies are required to deposit the cash received from its customers to the extent the amount not covered by the insurance with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange Act.

Set-off or attachment of cash deposits by securities companies is prohibited. The premiums related to this insurance are paid by securities companies.

Item 9.D.Selling Shareholders

Not applicable.

Item 9.E.Dilution

Not applicable.

Item 9.F.Expenses of the Issuer

Not applicable.

Item 10. Additional Information

Item 10.A.Share Capital

Currently, our authorized share capital is 1,000,000,000 shares, which consists of ordinary shares, of common stock, par value￦5,000 per share (“CommonOrdinary Shares”) and shares ofnon-voting preferred stock, par value￦5,000 per share (“(“Non-Voting Shares”). CommonOrdinary Shares andNon-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issueNon-Voting Shares up toone-fourth of our total issued capital stock.share capital. As of December 31, 2015,2016, 261,111,808 CommonOrdinary Shares were issued, of which 16,262,00816,140,165 shares were held by the treasury stock fund or us as treasury shares. We have never issued anyNon-Voting Shares. All of the issued CommonOrdinary Shares are fully-paid andnon-assessable and are in registered form. We issue share certificates in denominations of 1, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.

Item 10.B.Memorandum and Articles of Association

This section provides information relating to our share capital, stock, including brief summaries of material provisions of our articles of incorporation, the Financial Investment Services and Capital Markets Act, the Commercial Code and related laws of Korea, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the Financial Investment Services and Capital Markets Act and the Commercial Code. We have filed a copy of our articles of incorporation as an exhibit to registration statements under the Securities Act or the Securities Exchange Act previously filed by us.

Dividends

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. No dividends are distributed with respect to shares held by us or our treasury stock fund. The CommonOrdinary Shares represented by the ADSs have the same dividend rights as other outstanding CommonOrdinary Shares.

Holders ofNon-Voting Shares are entitled to receive dividends in priority to the holders of CommonOrdinary Shares in an amount of not less than 9% of the par value of theNon-Voting Shares as determined by the board of directors at the time of their issuance, provided that if the dividends on the CommonOrdinary Shares exceed those on theNon-Voting Shares, theNon-Voting Shares will also participate in the distribution of such excess dividend amount in the same proportion as the CommonOrdinary Shares. If the amount available for dividends is less than the aggregate amount of such minimum dividend, the holders ofNon-Voting Shares will be entitled to receive such accumulated unpaid dividend in priority to the holders of CommonOrdinary Shares from the dividends payable in respect of the next fiscal year.

We declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed at par value. If the market price of the Shares is less than their par value, dividends in Shares may not exceedone-half of the annual dividend. We may pay interim dividends in cash once a year to shareholders or registered pledgees who are registered in the registry of shareholders as of June 30 of each fiscal year by a resolution of the board of directors. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.

Under the Commercial Code, we may pay our dividend only out of the excess of our net assets, on anon-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and earned surplus reserve (the “Legal Reserve”) accumulated up to the end of the relevant dividend period. In addition, we may not pay any dividend unless we have set aside as earned surplus reserve an amount equal to at least 10% of the cash portion of the dividend or unless we have accumulated an earned surplus reserve of not less thanone-half of our stated capital. We may not use the Legal Reserve to pay cash dividends but may transfer amounts from the Legal Reserve to share capital stock or use the Legal Reserve to reduce an accumulated deficit.

Distribution of Free Shares

In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from the Legal Reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.

Preemptive Rights and Issuance of Additional Shares

We may issue authorized but unissued shares at times and, unless otherwise provided in the Commercial Code, on terms our board of directors may determine. Subject to the limitation described in “Limitation on Shareholdings” below, all our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give notice to all persons who are entitled to exercise preemptive rights regarding new Shares and

their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.

Under the Commercial Code, it is required that the new Shares, convertible bonds or bonds with warrants be issued to persons other than the existing shareholders solely for the purpose of achieving managerial objectives. Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:

 

publicly offered pursuant to Articles 4 and 119 of the Financial Investment Services and Capital Markets Act;

 

issued to members of our employee stock ownership association;

 

represented by depositary receipts;

 

issued upon exercise of stock options granted to our officers and employees;

 

issued through an offering to public investors pursuant to Article165-6 of the Financial Investment Services and Capital Markets Act, the amount of which is no more than 10% of the issued Shares;

 

issued in order to satisfy specific needs such as strategic alliance, inducement of foreign funds or new technology, improvement of financial structure or other capital raising requirement; or

 

issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.

In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of￦2,000 billion, to persons other than existing shareholders in the situations described above.

Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20.0% of the Shares publicly offered pursuant to the Financial Investment Services and Capital Markets Act. This right is exercisable only to the extent that the total number of Shares so acquired and held by members of our employee stock ownership association does not then exceed 20.0% of the total number of Shares then issued (including in such total both: (i) all issued and outstanding Shares at the time the preemptive rights are exercised; and (ii) all Shares to be newly issued in the applicable share issuance transaction in connection with which such preemptive rights are exercised). As of December 31, 2015, 0.6%2016, 0.53% of the issued Shares were held by members of our employee stock ownership association.

Limitation on Shareholdings

The Telecommunications Business Act permits maximum aggregate foreign shareholding in us to be 49.0% of our total issued and outstanding Shares with voting rights (including equivalent securities with voting rights, e.g., depositary certificates and certain other equity interests). For the purposes of the foregoing, a shareholder is a “foreign shareholder” if such shareholder is: (1) a foreign person; (2) a foreign government; or (3) a company whose largest shareholder is a foreign person (including any “specially related persons” as determined under the Financial Investment Services and Capital Markets Act) or a foreign government, in circumstances where (i) such foreign person or foreign government holds, in aggregate, 15.0% or more of such company’s total voting shares, and (ii) such company holds at least 1.0% of our total issued and outstanding Shares with voting rights. For

the avoidance of doubt, both of conditions (i) and (ii) in the foregoing item (3) must exist for such a

company to be counted as a “foreign shareholder” for the purposes of calculating whether the 49.0% foreign shareholding threshold is reached under the Telecommunications Business Act. In addition, the Telecommunications Business Act prohibits a foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our Shares with voting rights. For the purposes of this restriction, any two or more foreign persons or foreign governments who enter into an agreement to act in concert in the exercise of their voting rights will be counted together and prohibited from becoming our largest shareholder in the event that they collectively hold 5.0% or more of our Shares. For the purposes of this restriction under the Foreign Investment Promotion Act, a “foreign shareholder” is defined in the same manner as described above with respect to the foreign shareholding restriction under the Telecommunications Business Act, provided, however, that no exception is made under the Foreign Investment Promotion Act regulations for companies that own less than 1.0% of our Shares (see item (3)(ii) above in this paragraph). A foreigner who has acquired the Shares in excess of such ceiling described above may not exercise its voting rights for shares in excess of such limitation, and the MSIP may require corrective measures to comply with the ownership restrictions.

General Meeting of Shareholders

We hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:

 

as necessary;

 

at the request of shareholders of an aggregate of 3.0% or more of our issued CommonOrdinary Shares;

 

at the request of shareholders holding an aggregate of 1.5% or more of our issued Shares for at least six months; or

 

at the request of our audit committee.

We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of less than 1.0% of the total number of issued and outstanding CommonOrdinary Shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use Seoul Shinmun, Maeil Business Newspaper and The Korea Economic Daily published in Seoul for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders ofNon-Voting Shares are not entitled to receive notice of general meetings of shareholders, but may attend such meetings.

Our general meetings of shareholders are held at our head office in Seongnam,Seoul, or if necessary, may be held anywhere near our head office or in Seoul.elsewhere.

Voting Rights

Holders of our CommonOrdinary Shares are entitled to one vote for each CommonOrdinary Share, except that voting rights of CommonOrdinary Shares held by us, or by a corporate shareholder that is more than 10.0% owned by us either directly or indirectly, may not be exercised. The Commercial Code permits cumulative voting, under which voting method each shareholder has multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting

rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting at our

shareholders’ meeting. Under the Commercial Code of Korea, any shareholder holding shares equivalent to not less than 1/100 of the total number of shares issued may apply to us for selecting and appointing such directors by cumulative voting.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting, where the affirmative votes also represent at leastone-fourth of our total voting shares then outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at leasttwo-thirds of the voting shares present or represented at a meeting, where the affirmative votes also represent at leastone-third of our total voting shares then outstanding:

 

amending our articles of incorporation;

 

removing a director;

 

reduction of our capital stock;share capital;

 

effecting any dissolution, merger or consolidation of us;

 

transferring the whole or any significant part of our business;

 

effecting our acquisition of all of the business of any other company or our acquisition of a part of the business of any other company which will significantly affect our business; or

 

issuing any new Shares at a price lower than their par value.

In general, holders ofNon-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, any merger or consolidation of us, or in some other cases that affect the rights or interests of theNon-Voting Shares, approval of the holders ofNon-Voting Shares is required. We may obtain such approval by a resolution of holders of at leasttwo-thirds of theNon-Voting Shares present or represented at a class meeting of the holders ofNon-Voting Shares, where the affirmative votes also represent at leastone-third of our total outstandingNon-Voting Shares.

Shareholders may exercise their voting rights by proxy. The proxy must present a document evidencing an appropriate power of attorney prior to the start of the general meeting of shareholders. Additionally, shareholders may exercise their voting rights in absentia by submission of signedwrite-in voting forms. To make it possible for our shareholders to proceed with voting on awrite-in basis, we are required to attach the appropriatewrite-in voting form and related informational material to the notices distributed to shareholders for convening the relevant general meeting of shareholders. Any of our shareholders who desire to vote on suchwrite-in basis must submit their completed and signedwrite-in voting forms to us no later than one day prior to the date that the relevant general meeting of shareholders is convened.

Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying CommonOrdinary Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the CommonOrdinary Shares underlying their ADSs. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”

Appraisal Rights of Dissenting Shareholders

In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the

right to require us to purchase their Shares. To exercise this right, shareholders must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their Shares. We are obligated to purchase the Shares of dissenting shareholders within one month after the expiration of the20-day period. The purchase price for the Shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily Share prices on the KRX KOSPI Market for thetwo-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily Share price on the KRX KOSPI Market for the one month period before the date of the adoption of the relevant board resolution and (3) the weighted average of the daily Share price on the KRX KOSPI Market for the one week period before the date of the adoption of the relevant board resolution. However, if we or any of the dissenting shareholders do not accept the purchase price calculated using the above method, the rejecting party may request the court to determine the purchase price. Holders of ADSs will not be able to exercise appraisal rights unless they have withdrawn the underlying common stockordinary shares and become our direct shareholders.

Register of Shareholders and Record Dates

Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registers transfers of Shares on the register of shareholders on presentation of the Share certificates.

The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from the day after the record date to January 31 of the following year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.

Annual Reports

At least one week before the annual general meeting of shareholders, we must make our annual report and audited consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

Under the Financial Investment Services and Capital Markets Act, we must file with the Financial Services Commission and the KRX KOSPI Market (1) an annual report within 90 days after the end of our fiscal year and (2) interim reports with respect to the three month period, six month period and nine month period from the beginning of each fiscal year within 45 calendar days following the end of each period. Copies of these reports are or will be available for public inspection at the Financial Services Commission and the KRX KOSPI Market.

Transfer of Shares

Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his name and address

registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. Anon-Korean shareholder may file a specimen signature in

place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, anon-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.

Under current Korean regulations, Korean securities companies and banks, including licensed branches ofnon-Korean securities companies and banks, investment management companies, futures trading companies, internationally recognized foreign custodians and the Korea Securities Depository may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares bynon-residents ornon-Koreans. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”

Our transfer agent is Kookmin Bank, located at 24,Gukjegeumyung-ro,Yeongdeungpo-gu, Seoul, Korea.

Acquisition of Shares by Us

Under the Commercial Code, we may acquire our own Shares by (i) purchasing on the KRX KOSPI Market, or (ii) purchasing from shareholders on a pro rata basis in accordance with the number of shares held by each shareholder. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year. Moreover, we must acquire our own Shares from dissenting shareholders who exercise their appraisal rights.

Under the Financial Investment Services and Capital Markets Act, we may acquire Shares only by (i) purchasing on the KRX KOSPI Market, (ii) purchasing from shareholders on a pro rata basis in accordance with the number of shares held by each shareholder, or (iii) receiving Shares returned to us upon the cancellation or termination of a trust agreement with a trustee who acquired the Shares by either of the methods indicated above. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year.

In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our Shares.

As of December 31, 2015,2016, there were 16,262,00816,140,165 treasury shares including shares held by our treasury stock fund.

Liquidation Rights

In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders ofNon-Voting Shares have no preference in liquidation.

Item 10.C.Material Contracts

We have not entered into any material contracts since January 1, 2011,2012, other than in the ordinary course of our business. For information regarding our agreements and transactions with certain related parties, see “Item 7. Major Shareholders and Related Party Transactions—Item 7.B. Related Party Transactions” and Note 36 to the Consolidated Financial Statements. For a description of certain agreements entered into during the past two years related to our capital commitments and obligations, see “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources.”

Item 10.D.Exchange Controls

General

The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean securities bynon-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws,non-residents may invest in Korean securities only in compliance with the provisions of, and to the extent specifically allowed by, these laws or otherwise permitted by the Ministry of Strategy and Finance. The Financial Services Commission has also adopted, pursuant to its authority under the Korean Financial Investment Services and Capital Markets Act, regulations that control investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.

Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, the outbreak of natural calamities, wars or grave and sudden changes in domestic or foreign economies, are likely to occur, the Ministry of Strategy and Finance may temporarily suspend the transactions where Foreign Exchange Transaction Laws are applicable, or impose an obligation to deposit or sell capital to certain Korean governmental agencies or financial institutions. In addition, if the Government deems that it is confronted or is likely to be confronted with serious difficulty in movement of capital between Korea and abroad which will bring serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who performs transactions to deposit such capital to certain Korean governmental agencies or financial institutions.

Government Review of Issuance of ADSs

In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with the Ministry of Strategy and Finance if our securities and borrowings denominated in foreign currencies issued during theone-year period preceding such filing date exceed US$30 million in aggregate. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.

Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with the consent of us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.

Reporting Requirements for Holders of Substantial Interests

Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively, the “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5.0% or more of the total issued Equity Securities is required to report the status of the holdings to the Financial Services Commission and the KRX KOSPI Market within five

five business days after reaching the 5.0% ownership interest. In addition, any change in the ownership interest subsequent to the report which equals or exceeds 1.0% of the total issued Equity Securities is required to be reported to the Financial Services Commission and the KRX KOSPI Market within five business days from the date of the change. The required information to be included in the 5.0% report may be different if the acquisition of such shareholding interest is for the purpose of exercising influence over the management, as opposed to an acquisition for investment purposes. Any person reporting the holding of 5.0% or more of the total issued Equity Securities and any person reporting the change in the ownership interest which equals or exceeds 1.0% of the total issued Equity Securities pursuant to the requirements described above must also deliver a copy of such reports to us.

Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the unreported ownership of Equity Securities exceeding 5.0%. Furthermore, the Financial Services Commission may issue an order to dispose ofnon-reported Equity Securities.

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration certificate from the Financial Supervisory Service as described below. In general, the acquisition of the shares by a foreigner must be reported by the foreigner or his standing proxy in Korea immediately to the Governor of the Financial Supervisory Service; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository.

Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.

Restrictions Applicable to Shares

As a result of amendments to the Foreign Exchange Transaction Laws and Financial Services Commission regulations adopted in connection with the stock market opening from January 1992, which we refer to collectively as the Investment Rules, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including:

 

odd-lot trading of shares;

 

acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company;

 

acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded;

 

shares acquired by foreign direct investment as defined in the Foreign Investment Promotion Act;

 

disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;

 

disposal of shares in connection with a tender offer;

 

acquisition of shares by a foreign depositary in connection with the issuance of depositary receipts;

 

acquisition and disposal of shares through overseas stock exchange market if such shares are simultaneously listed on the KRX KOSPI Market or the KRX KOSDAQ Market and such overseas stock exchange;

 

acquisition and disposal of shares through alternative trading systems (ATS);

 

arm’s length transactions between foreigners, if all of such foreigners belong to an investment group managed by the same person.

Forover-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, an investment broker licensed in Korea must act as an intermediary.Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a licensed investment trader in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from a securities company with respect to shares which are subject to a foreign ownership limit.

The Investment Rules require a foreign investor who wishes to invest in shares on the KRX KOSPI Market or the KRX KOSDAQ Market (including Converted Shares) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares or who acquire the shares in anover-the-counter transaction or dispose of shares where such acquisition or disposal is a foreign direct investment as defined in the Foreign Investment Promotion Act. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration certificate that must be presented each time the foreign investor opens a brokerage account with a financial investment business entity. Foreigners eligible to obtain an investment registration certificate include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, corporations incorporated under foreign laws, international organizations, funds and associations as defined under the Financial Investment Services and Capital Markets Act. All Korean offices of a foreign corporation as a group are treated as a separate entity from the offices of the corporation outside Korea. However, a foreign corporation or depositary bank issuing depositary receipts may obtain one or more investment registration certificates in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by the investor is required because the investment registration

certificate system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor of the Financial Supervisory Service at the time of each such acquisition or sale; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository; and further provided that a foreign investor must ensure that any acquisition or sale by it of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market in the case of trades in connection with a tender offer,odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor of the Financial Supervisory Service by the investment trader, the investment broker, the Korea Securities Depository or the financial securities company engaged to facilitate such transaction. A foreign investor may appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks, including domestic branches of foreign banks, investment traders, investment brokers, the Korea Securities Depository, financial securities companies and internationally recognized custodians that satisfy all relevant requirements under the Financial Investment Services and Capital Markets Act.

Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only the Korea Securities Depository, foreign exchange banks including domestic branches of foreign banks, investment traders, investment brokers, collective investment business entities and internationally recognized custodians satisfying the relevant requirements under the Financial Investment Services and Capital Markets Act are eligible to act as a custodian of shares for anon-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate and a ceiling on the acquisition of shares by a single foreign investor pursuant to the articles of incorporation of such corporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the issued shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Act, which is, in general, subject to the report to, and acceptance, by the Ministry of Trade Industry & Energy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. A foreigner who has acquired shares of our common stockordinary shares in excess of this ceiling may not exercise his voting rights with respect to theour ordinary shares of our common stock exceeding the limit.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at an investment broker or an investment trader. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by anon-resident of Korea must be deposited either in a Won account with the investor’s investment broker or investment trader or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Investment brokers and investment traders are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these investment brokers and investment traders may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.

Item 10.E. Taxation

The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date of this annual report on Form20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the ordinary shares of common stock or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.

Korean Taxation

The following summary of Korean tax considerations applies to you as long as you are not:

 

a resident of Korea;

 

a corporation organized under Korean law; or

 

engaged in a trade or business in Korea through a permanent establishment or a fixed base.

Shares or ADSs

Dividends on Ordinary Shares of Common Stock or ADSs

Unless an applicable tax treaty provides otherwise, we will deduct Korean withholding tax from dividends paid to you either in cash or shares at a rate of 22.0% (including local income tax). If you are a resident of a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax under such a treaty. For example, if you are a qualified resident of the United States for purposes of theUS-Korea Tax Treaty (the “Treaty”) and you are the beneficial owner of a dividend, a reduced withholding tax rate of 16.5% (including local income tax) generally will apply. You will not be entitled to claim treaty benefits if you are not the beneficial owner of a dividend.

In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, an application for entitlement to a reduced tax rate. If you hold ADSs and receive the dividends through a depositary, you are not required to submit the application for entitlement to a reduced tax rate. If you are an overseas investment vehicle (an “OIV”),

which is defined as an organization established in anon-Korean jurisdiction that manages funds collected through investment solicitation by way of acquiring, disposing, or otherwise investing in any such assets and distributes the yield therefrom to investors), you must submit to us a report of the OIV and a schedule of beneficial owners together with their applications for entitlement to a reduced tax rate, which you should collect from each beneficial owner. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have tax withheld at a lower rate.

If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves intopaid-in capital, that distribution may be a deemed dividend subject to Korean tax.

Capital Gains

Capital gains from a sale of ordinary shares of common stock will generally be exempt from Korean taxation if you have owned, together with certain related parties, less than 25.0% of our total issued shares during the year of sale and the five calendar years before the year of sale, and the sale is made through the KRX KOSPI Market, and you have no permanent establishment in Korea. Capital gains earned by anon-Korean holder from a sale of ADSs outside of Korea are exempt from Korean taxation by virtue of the Special Tax Treatment Control Law of Korea (the “STTCL”), provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL.

If you are subject to Korean taxation on capital gains from a sale of ADSs, or ordinary shares of common stock that you acquired as a result of a withdrawal, your gain will be calculated based on your cost of acquiring the ADSs representing the ordinary shares, of common stock, although there are no specific Korean tax provisions or rulings on this issue. In the absence of the application of a tax treaty that exempts tax on capital gains, the amount of Korean tax imposed on such capital gains will be the lesser of 11.0% (including local income tax) of the gross realization proceeds or, subject to the production of satisfactory evidence of the acquisition cost and the transaction costs of the ADSs, 22.0% (including local income tax) of the net capital gain.

If you are subject to Korean taxation on capital gains from a sale of ADSs, or ordinary shares of common stock that you acquire as a result of a withdrawal, and you sell your ordinary shares of common stock or ADSs, the purchaser or, in the case of a sale of ordinary shares of common stock on the KRX KOSPI Market or through a licensed securities company in Korea, the licensed securities company, is required to withhold Korean tax from the sales price in an amount equal to 11% (including local income tax) of the gross realization proceeds and to make payment thereof to the Korean tax authorities, unless you establish your entitlement to an exemption from taxation under an applicable tax treaty or produce satisfactory evidence of your acquisition cost and the transaction costs for the ordinary shares of common stock or ADSs. In order to obtain the benefit of an exemption from tax pursuant to a tax treaty, you must submit to the purchaser or the securities company (or through the depositary), as the case may be, prior to the first payment, an exemption application, together with a certificate of your tax residence issued by a competent authority of your residence country. If you are an OIV, you must submit to us a report of the OIV and a schedule of beneficial owners together with their applications for exception, which you should collect from each beneficial owner. This requirement will not apply to exemptions under Korean tax law. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have taxes withheld at a lower rate.

Most tax treaties that Korea has entered into provide exemptions for capital gains tax for capital gains from sale of shares of common stock.ordinary shares. However, Korea’s tax treaties with Japan, Austria, Spain and a few other countries do not provide an exemption from such capital gains tax. For example, Article 13 of Korea’s tax treaty with Japan provides that if a taxpayer holding 25% or more (including

those shares held by any related party of the taxpayer) of total issued shares of a company in a taxable year sells 5% or more (including those sold by any related party of the taxpayer) of total issued shares of the same company in the same taxable year, the country where the company is a resident may impose tax on such taxpayer.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (a) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea or had resided in Korea for a continuous period of one year or more immediately prior to his death and (b) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. Taxes are currently imposed at the rate of 10% to 50% if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.

Under Korean Inheritance and Gift Tax Law, shares issued by a Korean corporation are deemed located in Korea irrespective of where they are physically located or by whom they are owned. It remains unclear whether, for Korean inheritance and gift tax purposes, anon-resident holder of ADSs will be treated as the owner of the shares underlying the ADSs. If suchnon-resident is treated as the owner of the shares, the heir or donee of suchnon-resident (or in certain circumstances, thenon-resident as the donor) will be subject to Korean inheritance or gift tax at the same rate as described above.

Securities Transaction Tax

If you transfer ordinary shares of common stock on the KRX KOSPI Market, you will be subject to the securities transaction tax at a rate of 0.15% and an agriculture and fishery special tax at a rate of 0.15%, calculated based on the sales price of the shares. If you transfer ordinary shares of common stock and your transfer is not made on the KRX KOSPI Market you will generally be subject to the securities transaction tax at a rate of 0.5% and will generally not be subject to the agriculture and fishery special tax.

With respect to transfers of ADSs, a tax ruling issued in 2004 by the Korean tax authority appears to hold that depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax. In May 2007, the Seoul Administrative Court held that depositary receipts do not constitute share certificates subject to the securities transaction tax. In 2008, the Seoul Administrative Court’s holding was upheld by the Seoul High Court and was further upheld by the Supreme Court. Subsequent to this series of rulings, however, the Securities Transaction Tax Law was amended to expressly provide that depositary receipts constituted a form of share certificates subject to the securities transaction tax. However, the sale price of ADSs from a transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges are exempt from the securities transaction tax.

United States Federal Income Taxation

The following discussion describes the materialUnited States federal income tax consequences of the ownership of our ADSs and commonordinary shares as of the date hereof. This discussion deals only with ADSs and commonordinary shares that are held as capital assets by a United States Holder (as defined below). In addition, the discussion set forth below is applicable only to United States Holders (i) who are residents of the United States for purposes of the current Treaty, (ii) whose ADSs or commonordinary shares are not, for purposes of the Treaty, effectively connected with a permanent establishment in Korea and (iii) who otherwise qualify for the full benefits of the Treaty.

As used herein, the term “United States Holder” means a beneficial owner of our ADSs or commonordinary shares that is, for United States federal income tax purposes, any of the following:

 

an individual citizen or resident of the United States;

 

a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

an estate the income of which is subject to United States federal income taxation regardless of its source; or

 

a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.

This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those summarized below. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.

This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:

 

a dealer in securities or currencies;

 

a financial institution;

 

a regulated investment company;

 

a real estate investment trust;

 

an insurance company;

 

atax-exempt organization;

 

a person holding our ADSs or commonordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;

 

a trader in securities that has elected themark-to-market method of accounting for your securities;

 

a person liable for alternative minimum tax;

 

a person who owns or is deemed to own 10% or more of our voting stock;

 

a partnership or other pass-through entity for United States federal income tax purposes; or

a person whose “functional currency” is not the United States dollar.

If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds our ADSs or commonordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs or commonordinary shares, you should consult your tax advisors.

This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income or the effects of any state, local ornon-United States tax laws.If you are considering the purchase of our ADSs or commonordinary shares, you should consult your own tax advisors concerning the particular United States federal income tax consequences to you of the purchase, ownership and disposition of our ADSs or commonordinary shares, as well as the consequences to you arising under other United States federal tax laws and the laws of any other taxing jurisdiction.

ADSs

If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying commonordinary shares that are represented by such ADSs.Accordingly, deposits or withdrawals of commonordinary shares for ADSs will not be subject to United States federal income tax.

Taxation of Dividends

The gross amount of distributions on the ADSs or commonordinary shares (including any amounts withheld to reflect Koreanwithholding taxes) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as atax-free return of capital, causing a reduction in the tax basis of the ADSs or commonordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain recognized on a sale or exchange. We do not, however, expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend.

Any dividends that you receive (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of commonordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. With respect tonon-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the United States Treasury Department determines to be satisfactory for these purposes and which includes an exchange of information provision. The United States Treasury Department has determined that the current income tax treaty between the United States and Korea meets these requirements, and we believe we are eligible for the benefits of that treaty. However,non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding

period has been met. You should consult your own tax advisors regarding the application of these rules to your particular circumstances.

Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company in the taxable year in which such dividends are paid or in the preceding taxable year (see “—Passive Foreign Investment Company” below).

The amount of any dividend paid in Won will equal the United States dollar value of the Won received calculated by reference to the exchange rate in effect on the date the dividend is received by you, in the case of commonordinary shares, or by the depositary, in the case of ADSs, regardless of whether the Wonare converted into United States dollars. If the Won received as a dividend are converted into United States dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the Wonreceived as a dividend are not converted into United States dollars on the date of receipt, you will have a basis in the Wonequal to their United States dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Wonwill be treated as United States source ordinary income or loss.

Subject to certain conditions and limitations (including a minimum holding period requirement), Koreanwithholding taxes on dividends may be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or commonordinary shares will be treated as income from sources outside the United States and will generally constitute passive category income. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.

Passive Foreign Investment Company

We do not believe that we were, for United States federal income tax purposes, a passive foreign investment company (a “PFIC”) for the most recent taxable year, and we expect to operate in such a manner so as not to become a PFIC. If, however, we are or become a PFIC, you could be subject to additional United States federal income taxes on gain recognized with respect to the ADSs or commonordinary shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules.

Taxation of Capital Gains

For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of the ADSs or commonordinary shares in an amount equal to the difference between the amount realized for the ADSs or commonordinary shares and your tax basis in the ADSs or commonordinary shares.Such gain or loss will generally be capital gain or loss and will generally be long-term capital gain or loss if you have held the ADSs or commonordinary shares for more than one year. Long-term capital gains ofnon-corporate United States Holders (including individuals) are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss.

You should note that any Koreansecurities transaction tax will not be treated as a creditable foreign tax for United States federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code.

Information Reporting and Backup Withholding

In general, information reporting will apply to dividends in respect of our ADSs or commonordinary shares and the proceeds from the sale, exchange or other disposition of our ADSs or commonordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of exempt status or fail to report in full dividend and interest income.

Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

Item 10.F.  Dividends and Paying Agents

See “Item 8. Financial Information—Item 8.A. Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of the process by which dividends are paid on our commonordinary shares. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares” for a discussion of the process by which dividends are paid on our ADSs. The paying agent for payment of our dividends on ADSs in the United States is Citibank, N.A.

Item 10.G.Statements by Experts

Not applicable.

Item 10.H.  Documents on Display

We are subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordance therewith, are required to file reports, including annual reports on Form20-F, and other information with the U.S. Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Commission at1-800-SEC-0330 for further information on the public reference rooms. We are required to make filings with the Commission by electronic means, which will be available to the public over the Internet at the Commission’s web site at http://www.sec.gov.

Item 10.I.Subsidiary Information

Not applicable.

Item 11.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to foreign exchange rate and interest rate risks primarily associated with underlying liabilities, and to equity price risk as a result of our investment in equity securities. Our long-term financial policies are annually reported to our Board of Directors, and our Finance Officedivision conducts financial risk management and assessment. Upon identification and evaluation of our risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. The activities of our finance division are subject to policies approved by our foreign exchange and interest rate risk management committee. These policies address the use

of derivative financial instruments, including the approval of counterparties, setting of limits and investment of excess liquidity. Our general policy is to hold or issue derivative financial instruments largely for hedging purposes.

For our trading financial instruments, we recognized a valuation gain of￦4 billion and a valuation loss of￦8 billion in 2013, a valuation gain of￦1 billion and a valuation loss of￦1 billion in 2014, and a valuation gain of￦0 and a valuation loss of￦2 billion in 2015.2015 and a valuation gain of￦1 billion and a valuation loss of￦8 billion in 2016. For our hedging derivative contracts, we recognized a valuation gain of￦127 million, a valuation loss of￦97 billion and accumulated other comprehensive loss of￦95 billion in 2013, a valuation gain of￦93 billion, a valuation loss of￦25 billion and accumulated other comprehensive income of￦22 billion in 2014, and a valuation gain of￦142 billion, a valuation loss of￦2 billion and accumulated other comprehensive income of￦148 billion in 2015.2015 and a valuation gain of￦109 billion, a valuation loss of￦0.1 billion and accumulated other comprehensive income of￦85 billion in 2016. For further details regarding the assets, liabilities, gains and losses recorded relating to our derivative contracts outstanding as of December 31, 2013, 2014, 2015 and 2015,2016, see Note 87 to the Consolidated Financial Statements.

Exchange Rate Risk

Substantially all of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, mostly in U.S. Dollars, relate primarily to payments of foreign currency denominated debt, net settlements paid to foreign telecommunication carriers and payments for equipment purchased from foreign suppliers. We have entered into several currency swap contracts, combined interest currency swap contracts and currency forward contracts to hedge our foreign currency risks.

The following table shows our assets and liabilities denominated in foreign currency as of December 31, 2013, 2014, 2015 and 2015:2016:

 

  As of December 31,   As of December 31, 
  2013   2014   2015   2014   2015   2016 

(in thousands of foreign currencies)

  Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		 

U.S. Dollar

   254,917     2,225,700     197,221     2,532,614     183,254     2,351,003     197,221    2,532,614    183,254    2,351,003    210,474    2,536,090 

Special Drawing Right

   1,105     1,211     573     1,027     444     849     573    1,027    444    849    311    737 

Japanese Yen

   190,520     30,054,316     34,168     30,051,367     73,716     40,279,411     34,168    30,051,367    73,716    40,279,411    80,555    21,802,051 

British Pound

   —     134     —     257     8     888     —    257    8    888    1    151 

Euro

   1,342     4,943     134     177     29     29     134    177    29    29    40    2,571 

Algerian Dinar

   2,798     —     929     —     —     —     929    —    —    —    471    — 

Chinese Yuan

   —     —     3,957     —     15,562     107     3,957    —    15,562    107    15,262    381 

Uzbekistani Som

   1,805,565     —     7,978,633     —     —     —     7,978,633    —    —    —    39,531    — 

Rwandan Franc

   11,962     —     13,593     —     —     —     13,593    —    —    —    1,203    — 

Indonesian Rupiah

   —     —     —     —     —     —     —    —    —    —    15,646,011    53,142,167 

Myanmar Kyat

   —    —    —    —    2,750    — 

Tanzanian Shilling

   —    —    —    —    29,987    — 

Botswana Pula

   —    —    —    —    15    — 

Hong Kong Dollar

   —     —     158     —     9     —     158    —    9    —    254    — 

Bangladeshi Taka

   —     —     299     —     6     —     299    —    6    —    69,473    — 

Colombian Peso

   —     —     23,583     —     —     —     23,583    —    —    —    —    — 

Polish Zloty

   —     —     28,195     —     207,273     —     28,195    —    207,273    —    106,025    — 

Vietnamese Dong

   —     —     273,313     93,756     270,000     —     273,313    93,756    270,000    —    515,412    — 

Swiss Franc

   —     —     —     78     —     —     —    78    —    —    —    — 

As of December 31, 2013, 2014, 2015 and 2015,2016, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our income before income tax by￦4645 billion,￦4552 billion and￦5228 billion, respectively, and total equity by￦4838 billion,￦3846 billion and￦4624 billion, respectively, with a 10% decrease in the exchange rate having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than

foreign exchange rates are held constant, and as such, does not reflect any correlation between

foreign exchange rates and other variables, nor our decision to decrease the risk. See Note 3534 to the Consolidated Financial Statements.

Interest Rate Risk

We are also subject to market risk exposure arising from changing interest rates. A reduction of interest rates increases the fair value of our debt portfolio, which is primarily of a fixed interest nature. We use, to a limited extent, interest rate swap contracts and combined interest rate and currency swap contracts to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt. We entered into several interest rate swap contracts in which we exchange fixed interest rate payments with variable interest rate payments for a specified period, as well as entered into the combined interest rate and currency swap contracts to hedge our interest rate risk.

The following table summarizes the principal amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 20152016 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency:

 

  

 

 

 

 

 

 

 

 

 

 December 31, 2015   

 

 

 

 

 

 

 

 

 

 December 31, 2016 
  2016 2017 2018 2019 Thereafter Total Fair Value   2017 2018 2019 2020 Thereafter Total Fair Value 
  (in millions of Won, except rates)   (in millions of Won, except rates) 

Local currency:

                

Fixed rate

   1,308,295    401,936    861,512    690,518    2,503,535    5,765,796    5,795,714     569,753   870,043   826,518   460,518   2,343,015   5,069,847   5,098,060 

Average weighted rate(1)

   4.21%   3.87%   3.95%   3.08%   3.60%   3.65%   —     3.67%   3.93%   2.94%   3.17%   3.50%   3.47%   — 

Variable rate

   —    —    —    —    —    —    —     —   —   —   —   —   —   — 

Average weighted rate(1)

   —%   —%   —%   —%   —%   —%   —     —%   —%   —%   —%   —%   —%   — 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Sub-total

   1,308,295    401,936    861,512    690,518    2,503,535    5,765,796    5,795,714     569,753   870,043   826,518   460,518   2,343,015   5,069,847   5,098,060 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Foreign currency:

                

Fixed rate

   418,338    1,214,203    265,826    464,127    175,487    2,537,981    2,555,398     1,243,927   273,260   470,210   47,235   649,235   2,683,867   2,704,388 

Average weighted rate(1)

   3.61%   2.49%   0.60%   2.63%   3.80%   2.71%   —     2.50%   0.99%   2.65%   2.85%   3.27%   2.57%   — 

Variable rate

   —    —    351,600    —    —    351,600    333,774     7,251   369,801   7,251   3,626   —   387,929   381,747 

Average weighted rate(1)

   —%   —%   1.41%   —%   —%   1.41%   —     1.35%   2.13%   1.35%   1.35%   —%   2.10%   — 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

   418,338    1,214,203    617,426    464,127    175,487    2,889,581    2,889,172     1,251,178   643,061   477,461   50,861   649,235   3,071,796   3,086,135 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

   1,726,633    1,616,139    1,478,938    1,154,645    2,679,022    8,655,377    8,684,886     1,820,931   1,513,104   1,303,979   511,379   2,992,250   8,141,643   8,184,195 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

 

(1)Weighted average rates of the portfolio at the period end.

As of December 31, 2013,2014, 2015 and 2016, a 100 basis point increase in the market interest rate, with all other variables held constant, would have decreased our profit before income tax by￦5 billion,￦4 billion and￦3 billion, respectively. As of December 31, 2014, a 100 basis point increase in the market interest rate, with all other variables held constant, would have increased our profit before income taxshareholders’ equity by￦105 billion. As of December 31, 20142015 and 2015,2016, such increase, with all other variables held constant, would have decreased our profit before income tax by￦5 billion and￦4 billion, respectively. As of December 31, 2013 and 2014, a 100 basis point increase in the market interest rates, with all other variables held constant, would have increased our shareholders’ equity by￦13 billion and￦5 billion, respectively, and decreased our shareholders’ equity by￦245 million as of December 31, 2015.and￦2 billion, respectively.

As of December 31, 2013 and 2014, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have decreased our profit before income tax by￦17 billion and￦5 billion, respectively.billion. As of December 31, 2015 and 2016, such decrease, with all other variables held constant, would have increased our profit before income tax by￦4 billion.billion and￦3 billion, respectively. As of December 31, 2013, 2014, 2015 and 2015,2016, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have decreased our shareholders’ equity by￦1911 billion,￦116 billion and

￦65 billion, respectively. The foregoing sensitivity analysis assumes that all variables other than market

interest rates are held constant, and as such, does not reflect any correlation between market interest rates and other variables, nor our decision to decrease the risk, but reflects the effects of derivative contracts in place at the time of conducting the analysis.

Equity Price Risk

We are also subject to market risk exposure arising from changes in the equity securities market, which affect the fair value of our equity portfolio. As of December 31, 2013, 2014, 2015 and 2015,2016, a 10% increase in the equity indices where our marketable equity securities are listed, with all other variables held constant, would have increased our total equity by￦67 billion,￦73 billion and￦30.5 billion, respectively, with a 10% decrease in the equity index having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than changes in the equity index are held constant, and that our marketable equity instruments had moved according to the historical correlation to the index, and as such, does not reflect any correlation between the equity index and other variables.

Item 12. Description of Securities Other than Equity Securities

Item 12.A.  Debt Securities

Not applicable.

Item 12.B.  Warrants and Rights

Not applicable.

Item 12.C.  Other Securities

Not applicable.

Item 12.D.  American Depositary Shares

Fees and Charges

Under the terms of the deposit agreement, holders of our ADSs are required to pay the following service fees to the depositary:

 

Services

  

Fees

Issuance of ADSs upon deposit of shares

  Up to $0.05 per ADS issued

Delivery of deposited shares against surrender of ADSs

  Up to $0.05 per ADS surrendered

Distribution delivery of ADSs pursuant to sale or exercise of rights

  Up to $0.02 per ADS held

Distributions of dividends

  None

Distribution of securities other than ADSs

  Up to $0.02 per ADS held

Other corporate action involving distributions to shareholders

  Up to $0.02 per ADS held

Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:

 

 • 

fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares);

expenses incurred for converting foreign currency into U.S. dollars;

expenses for cable, telex and fax transmissions and for delivery of securities;

 

 • 

taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit); and

 

fees and expenses incurred in connection with the delivery or servicing of shares on deposit.

Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.

The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend rights), the depositary charges the applicable fee to the ADS record daterecord-date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record daterecord-date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via the Depository Trust Company, or DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.

In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse to provide the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.

The fees and charges that holders of our ADSs may be required to pay may vary over time and may be changed by us and by the depositary. Holders of our ADSs will receive prior notice of such changes.

Fees and Payments from the Depositary to Us

In 2015,2016, we received the following payments, after deduction of applicable U.S. taxes, from the depositary:

 

Reimbursement of NYSE listing fees

  $93,755    $92,582.00 

Reimbursement of SEC filing fees

  $311,919.70    $150,124.76 

Reimbursement of settlement infrastructure fees (including maintenance fees)

  $0    $0 

Reimbursement of proxy process expenses (printing, postage and distribution)

  $33,223.36    $20,090.18 

Reimbursement of legal fees (reimbursement received in April 2016 in respect of 2015)

  $3,900.00    $3,900.00 

Contributions toward our investor relations efforts (including non-deal roadshows, investor conferences and investor relations agency fees)

  $252,903.84    $194,418.05 

PART II

Item 13.  Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

Item 15.  Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules13a-15(e) and15d-15(e) under the Exchange Act, as of December 31, 2015.2016. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2015.2016. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. 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.

Our management has performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015,2016, utilizing the criteria discussed in the Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we concluded that our internal control over financial reporting was effective as of December 31, 2015.2016.

Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2015,2016, as stated in their report which is included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

The attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is furnished in Item 18 of this Form20-F.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during 20152016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16.  [Reserved]

Item 16A.  Audit Committee Financial Expert

Our Audit Committee is comprised ofJong-Gu Kim, Sang Kyun Cha, Dae-Geun Park and Dong-Wook Chung. The board of directors has determined that Dae-Geun Park is the audit committee financial expert. Dae-Geun Park is independent as such term is defined in Section 303A.02 of the NYSE Listed Company Manual, Rule10A-3 under the Exchange Act and the Korea Stock Exchange listing standards.

Item 16B.  Code of Ethics

We have adopted a code of ethics, as defined in Item 16B. of Form20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our chief executive officer, chief financial officer and persons performing similar functions, as well as to our directors, other officers and employees. Our code of ethics is available on our web site at www.kt.com. If we amend the provisions of our code of ethics that apply to our chief executive officer, chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website.

Item 16C.  Principal Accountant Fees and Services

Audit andNon-Audit Fees

The following table sets forth the fees billed to us by Samil PricewaterhouseCoopers, our independent registered public accounting firm, during the fiscal year ended December 31, 20142015 and 2015.2016. Such fees exclude the fees billed for work associated with our foreign subsidiaries which Samil PricewaterhouseCoopers did not provide services and with our former subsidiaries.

 

  Year Ended
December 31,		   Year Ended
December 31,		 
  2014   2015   2015   2016 
  (In millions)   (In millions) 

Audit fees(1)

  ￦3,455    ￦3,025    ￦3,025   ￦3,090 

Audit-related fees

   —     —     —    — 

Tax fees(2)

   479     179     179    78 

All other fees (3)

   —     1     1    — 
  

 

   

 

   

 

   

 

 

Total fees

  ￦3,934    ￦3,204    ￦3,204   ￦3,168 
  

 

   

 

   

 

   

 

 

 

 

(1)Audit fees consist of fees for the annual audit and quarterly review services engagement and the comfort letters.

 

(2)Tax fees consist of fee for tax services which are mainly the preparation ornon-recurring tax compliance review of original or amended tax returns.

 

(3)All other fees consist of fees billed for Samil PricewaterhouseCoopers’ services to provide confirmation of our debt ratios as part of our application for the Government’s preliminary approval for Internet-only bank business.

Audit CommitteePre-Approval Policies and Procedures

Our audit committee has establishedpre-approval policies and procedures topre-approve all audit services to be provided by Samil PricewaterhouseCoopers, our independent registered public accounting firm. Our audit committee’s policy regarding thepre-approval ofnon-audit services to be provided to us by our independent registered public accounting firm is that all such services shall bepre-approved by our audit committee.Non-audit services that are prohibited to be provided to us by our independent registered public accounting firm under the rules of the SEC and applicable law may not bepre-approved. In addition, prior to the granting of anypre-approval, our audit committee must be satisfied that the performance of the services in question will not compromise the independence of our independent registered public accounting firm and does not include delegation of the audit committee’s responsibilities to the management under the Securities Exchange Act of 1934, as amended.

Our audit committee did notpre-approve anynon-audit services under the de minimis exception of Rule2-01 (c)(7)(i)(C) of RegulationS-X as promulgated by the SEC.

Item 16D.  Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth the repurchases of commonordinary shares by us or any affiliated purchasers during the fiscal year ended December 31, 2015:2016:

 

Period

  Total Number
of Shares
Purchased		   Average Price
Paid per Share
(In Won)		   Total Number of
Shares Purchased
as Part of Publicly
Announced  Plans		   Maximum Number of
Shares that May Yet
be Purchased Under
the  Plans		 

January 1 to January 31

   —    —    —    — 

February 1 to February 29

   —    —    —    — 

March 1 to March 31

   —    —    —    — 

April 1 to April 30

   —    —    —    — 

May 1 to May 31

   —    —    —    — 

June 1 to June 30

   —    —    —    — 

July 1 to July 31

   —    —    —    — 

August 1 to August 31

   —    —    —    — 

September 1 to September 30

   —    —    —    — 

October 1 to October 31

   —    —    —    — 

November 1 to November 30

   —    —    —    — 

December 1 to December 31

   —    —    —    — 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   —    —    —    — 
  

 

 

   

 

 

   

 

 

   

 

 

 

Neither we nor any “affiliated purchaser,” as defined in Rule10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

Item 16F.  Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G.  Corporate Governance

The following is a summary of the significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law:

 

NYSE Corporate Governance Standards

  

KT Corporation’s Corporate Governance Practice

Director Independence

  
Independent directors must comprise a majority of the board.  

The Commercial Code of Korea requires that our board of directors must comprise no less than a majority of outside directors. Our outside directors must meet the criteria for outside directorship set forth under the Commercial Code of Korea.

 

The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 8 out of 11 directors are outside directors.

Nominating/Corporate Governance Committee

  
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.  We have not established a nominating/corporate governance committee composed entirely of independent directors. However, we maintain an Outside Director Candidate Nominating Committee composed of all of our outside directors and one standing director. We also maintain a Corporate Governance Committee comprised of four outside directors and one standing director. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance.

NYSE Corporate Governance Standards

  

KT Corporation’s Corporate Governance Practice

Compensation Committee

  
Listed companies must have a compensation committee composed entirely of independent directors.  We maintain an Evaluation and Compensation Committee composed of four outside directors.

Executive Session

  
Non-management directors must meet in regularly scheduled executive sessions without management.  Our outside directors hold meetings solely attended by outside directors in accordance with the charter of our board of directors.

Audit Committee

  
Listed companies must have an audit committee that is composed of more than three directors and satisfy the requirements of Rule10A-3 under the Exchange Act.  We maintain an Audit Committee comprised of four outside directors who meet the applicable independence criteria set forth under Rule10A-3 under the Exchange Act.

Shareholder Approval of Equity Compensation Plan

  
Listed companies must allow their shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan.  

We currently have two equity compensation plans: one providing for the grant of stock options to officers and standing directors; and an employee stock ownership association program.

 

All material matters related to the granting stock options are provided in our articles of incorporation, and any amendments to the articles of incorporation are subject to shareholders’ approval. Matters related to the employee stock ownership association program are not subject to shareholders’ approval under Korean law.

Corporate Governance Guidelines

  
Listed companies must adopt and disclose corporate governance guidelines.  We have adopted Corporate Governance Guidelines in March 2007 setting forth our practices with respect to corporate governance matters. Our Corporate Governance Guidelines are in compliance with Korean law but do not meet all requirements established by the New York Stock Exchange for U.S. companies listed on the exchange. A copy of our Corporate Governance Guidelines in Korean is available on our website at www.kt.com.

Code of Business Conduct and Ethics

  
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for executive officers.  We have adopted a Code of Ethics for all directors, officers and employees. A copy of our Code of Ethics in Korean is available on our website at www.kt.com

Item 16H.  Mine Safety Disclosure

Not applicable.

PART III

Item 17.  Financial Statements

Not applicable.

Item 18.  Financial Statements

AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF KT CORPORATION

 

   Page 

Report of Independent Registered Public Accounting Firm

   F-2 

Consolidated Statements of Financial Position as of December 31, 20142015 and 20152016

   F-3 

Consolidated Statements of Operations for the Years Ended December 31, 2013, 2014, 2015 and 20152016

   F-5 

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2014, 2015 and 20152016

   F-6 

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2013, 2014, 2015 and 20152016

   F-7 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2014, 2015 and 20152016

   F-11F-10 

Notes to Consolidated Financial Statements

   F-12F-11 

Item 19. Exhibits

 

  1  Articles of Incorporation of KT Corporation (English translation)
  2.1*  Deposit Agreement dated as of May 25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt (incorporated herein by reference to Exhibit (a)(i) of the Registrant’s Registration Statement (RegistrationNo. 333-13578) on FormF-6)
  2.2*  Form of Amendment No. 1 Deposit Agreement dated as of May 25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt (incorporated herein by reference to Exhibit (a)(ii) of the Registrant’s Registration Statement (Registration(Registration No. 333-13578) on FormF-6)
  2.3*  Letter from Citibank, N.A., as depositary, to the Registrant relating to thepre-release of the American depositary receipts (incorporated herein by reference to the Registrant’s Registration Statement (RegistrationNo. 333-10330) on FormF-6)
  2.4*  Letter from Citibank, N.A., as depositary, to the Registrant relating to the establishment of a direct registration system for ADSs and the issuance of uncertified ADSs as part of the direct registration system. (incorporated herein by reference to Exhibit 2.4 of the Registrant’s Annual Report on Form20-F filed on June 30, 2008)
  8.1  List of subsidiaries of KT Corporation
12.1  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1  The Framework Act on Telecommunications (English translation)

15.2*  Enforcement Decree of the Framework Act on Telecommunications (English translation) (incorporated herein by reference to Exhibit 15.2 of the Registrant’s Annual Report on Form20-F filed on April 29, 2015)
15.3  The Telecommunications Business Act (English translation)
15.4  Enforcement Decree of the Telecommunications Business Act (English translation)

 

* Filed previously.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

KT CORPORATION
(Registrant)

/s/CHANG-GYU HWANG

Name:Chang-Gyu Hwang
Title: Chief Executive Officer

Date: April 29, 201628, 2017

INDEX TO FINANCIAL STATEMENTS

 

Page

Report of Independent Registered Public Accounting Firm

   F-2 

Consolidated Statements of Financial Position as of December 31, 20142015 and 20152016

   F-3 

Consolidated Statements of Operations for the Years Ended December  31, 2013, 2014, 2015 and 20152016

   F-5 

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2014, 2015 and 20152016

   F-6 

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December  31, 2013, 2014, 2015 and 20152016

   F-7 

Consolidated Statements of Cash Flows for the Years Ended December  31, 2013, 2014, 2015 and 20152016

F-10

Notes to Consolidated Financial Statements

   F-11 

Notes to Consolidated Financial Statements

F-12

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of KT Corporation

In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of comprehensive income (loss)income(loss), of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of KT Corporation and its subsidiaries at December 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015,2016, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control-Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control over Financial Reporting in Item 15 of Form20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

/s/    Samil PricewaterhouseCoopers

Seoul Korea

April 29, 201628, 2017

KT Corporation and Subsidiaries

Consolidated Statements of Financial Position

December 31, 20142015 and 20152016

 

               (in thousands of
US dollars)		 

(in millions of Korean won)

  Notes  2014   2015   2015 
              (Unaudited) (Note 2) 

Assets

        

Current assets

        

Cash and cash equivalents

  4, 5  ￦1,888,663    ￦2,559,464    $2,183,843  

Trade and other receivables, net

  4, 6   4,811,050     4,847,893     4,136,427  

Short-term loans, net

  4, 7   710,368     —     —  

Current finance lease receivables, net

  4, 21   258,982     5,739     4,897  

Other financial assets

  4, 8   332,708     292,943     249,951  

Current income tax assets

     3,566     3,881     3,311  

Inventories, net

  9   418,883     616,911     526,375  

Other current assets

  10   349,615     316,904     270,396  
    

 

 

   

 

 

   

 

 

 

Total current assets

     8,773,835     8,643,735     7,375,200  
    

 

 

   

 

 

   

 

 

 

Non-current assets

        

Trade and other receivables, net

  4, 6   848,863     679,751     579,992  

Long-term loans, net

  4, 7   584,914     15,877     13,547  

Non-current finance lease receivables, net

  4, 21   325,431     8,519     7,269  

Other financial assets

  4, 8   704,760     658,323     561,709  

Property and equipment, net

  11   16,468,196     14,478,914     12,354,022  

Investment property, net

  12   1,059,630     1,102,070     940,334  

Intangible assets, net

  13   3,544,033     2,599,751     2,218,218  

Investments in joint ventures and associates

  14   338,780     270,029     230,400  

Deferred income tax assets

  29   1,078,792     845,397     721,328  

Other non-current assets

  10   72,041     102,359     87,337  
    

 

 

   

 

 

   

 

 

 

Total non-current assets

     25,025,440     20,760,990     17,714,156  
    

 

 

   

 

 

   

 

 

 

Total assets

    ￦33,799,275    ￦29,404,725    $25,089,356  
    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Financial Position (continued)

December 31, 2014 and 2015

 

           (in thousands of
US dollars)		 

(in millions of Korean won)

 Notes 2014  2015  2015 
          (Unaudited) (Note 2) 

Liabilities and Equity

    

Current liabilities

    

Trade and other payables

 4, 15 ￦6,408,111   ￦6,273,852   $5,353,116  

Current finance lease liabilities, net

 4  20,155    61,175    52,197  

Borrowings

 4, 16  2,955,644    1,726,098    1,472,780  

Other financial liabilities

 4, 8  23,717    43,645    37,240  

Current income tax liabilities

   45,799    81,114    69,210  

Provisions

 17  111,439    103,907    88,658  

Deferred revenue

   143,530    98,427    83,982  

Other current liabilities

 10  278,752    311,170    265,503  
  

 

 

  

 

 

  

 

 

 

Total current liabilities

   9,987,147    8,699,388    7,422,686  
  

 

 

  

 

 

  

 

 

 

Non-current liabilities

    

Trade and other payables

 4, 15  909,192    573,951    489,719  

Non-current finance lease liabilities, net

 4  34,852    95,022    81,077  

Borrowings

 4, 16  9,859,741    6,908,799    5,894,880  

Other financial liabilities

 4, 8  190,525    103,683    88,467  

Defined benefit liabilities, net

 18  593,838    524,083    447,170  

Provisions

 17  106,430    91,365    77,956  

Deferred revenue

   147,439    95,916    81,840  

Deferred income tax liabilities

 29  143,964    129,650    110,623  

Other non-current liabilities

 10  38,590    26,737    22,813  
  

 

 

  

 

 

  

 

 

 

Total non-current liabilities

   12,024,571    8,549,206    7,294,545  
  

 

 

  

 

 

  

 

 

 

Total liabilities

   22,011,718    17,248,594    14,717,231  
  

 

 

  

 

 

  

 

 

 

Equity attributable to owners of the Parent Company

    

Capital stock

 22  1,564,499    1,564,499    1,334,897  

Share premium

   1,440,258    1,440,258    1,228,889  

Retained earnings

 23  8,568,399    9,049,971    7,721,818  

Accumulated other comprehensive income

 24  25,790    13,870    11,834  

Other components of equity

 24  (1,260,709)   (1,232,863)   (1,051,931) 
  

 

 

  

 

 

  

 

 

 
   10,338,237    10,835,735    9,245,507  
  

 

 

  

 

 

  

 

 

 

Non-controlling interest

   1,449,320    1,320,396    1,126,618  
  

 

 

  

 

 

  

 

 

 

Total equity

   11,787,557    12,156,131    10,372,125  
  

 

 

  

 

 

  

 

 

 

Total liabilities and equity

  ￦33,799,275   ￦29,404,725   $25,089,356  
  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Operations

Years ended December 31, 2013, 2014 and 2015

(in millions of Korean won) Notes   2015   2016 
            

Assets

     

Current assets

     

Cash and cash equivalents

  4, 5   ￦2,559,464   ￦2,900,311 

Trade and other receivables, net

  4, 6    4,853,632    5,327,352 

Other financial assets

  4, 7    292,943    720,555 

Current income tax assets

    3,881    2,079 

Inventories, net

  8    616,911    454,588 

Other current assets

  9    316,904    311,135 
   

 

 

   

 

 

 

Total current assets

    8,643,735    9,716,020 
   

 

 

   

 

 

 

Non-current assets

     

Trade and other receivables, net

  4, 6    704,147    709,011 

Other financial assets

  4, 7    658,323    664,726 

Property and equipment, net

  10, 20    14,478,914    14,312,111 

Investment properties, net

  11    1,102,070    1,148,044 

Intangible assets, net

  12    2,599,751    3,022,803 

Investments in associates and joint ventures

  13    270,029    284,075 

Deferred income tax assets

  28    845,397    701,409 

Othernon-current assets

  9    102,359    106,099 
   

 

 

   

 

 

 

Totalnon-current assets

    20,760,990    20,948,278 
   

 

 

   

 

 

 

Total assets

   ￦29,404,725   ￦30,664,298 
   

 

 

   

 

 

 

 

(in millions of Korean won, except
per share amounts)

             (in thousands
of US dollars)		 
 Notes  2013  2014  2015  2015 
              (Unaudited) (Note 2) 

Continuing Operations

     

Operating revenue

  26   ￦23,146,020   ￦22,612,713   ￦22,699,856   $19,368,477  
  

 

 

  

 

 

  

 

 

  

 

 

 

Revenue

   22,818,217    22,359,280    22,211,673    18,951,939  

Others

   327,803    253,433    488,183    416,538  

Operating expenses

  27    22,911,435    23,391,553    21,622,788    18,449,478  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating profit

   234,585    (778,840)   1,077,068    918,999  

Finance income

  28    277,969    253,089    272,860    232,816  

Finance costs

  28    (633,458)   (792,200)   (645,331)   (550,624) 

Income from joint ventures and associates

  14    6,989    18,697    6,144    5,242  
  

 

 

  

 

 

  

 

 

  

 

 

 

Profit (loss) from continuing operations before income tax (benefit)

   (113,915)   (1,299,254)   710,741    606,433  

Income tax expense(benefit)

  29    11,892    (271,441)   227,131    193,798  
  

 

 

  

 

 

  

 

 

  

 

 

 

Profit (loss) for the year from the continuing operations

   (125,807)   (1,027,813)   483,610    412,635  
  

 

 

  

 

 

  

 

 

  

 

 

 

Discontinued Operations

     

Profit from discontinued operations

  39    38,062    86,400    141,075    120,372  
  

 

 

  

 

 

  

 

 

  

 

 

 

Profit (loss) for the year

  ￦(87,745)  ￦(941,413)  ￦624,685   $533,007  
  

 

 

  

 

 

  

 

 

  

 

 

 

Profit (loss) for the year attributable to:

     

Equity holders of the Parent Company

  ￦(189,931)  ￦(1,030,240)  ￦546,361   $466,178  

Profit (loss) from continuing operations

   (215,843)   (1,094,177)   404,045    344,748  

Profit from discontinued operations

   25,912    63,937    142,316    121,430  

Non-controlling interest

  ￦102,186   ￦88,827   ￦78,324   $66,829  

Profit from continuing operations

   90,036    66,364    79,565    67,888  

Profit (loss) from discontinued operations

   12,150    22,463    (1,241)   (1,059) 

Earnings (loss) per share attributable to the equity holders of the Parent Company during the year (in won):

     

Basic earnings (loss) per share

  30   ￦(779)  ￦(4,215)  ￦2,231   $2  

From continuing operations

   (885)   (4,477)   1,650    1  

From discontinued operations

   106    262    581    1  

Diluted earnings (loss) per share

  30   ￦(782)  ￦(4,215)  ￦2,231   $2  

From continuing operations

   (888)   (4,477)   1,650    1  

From discontinued operations

   106    262    581    1  

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Years ended December 31, 2013, 2014 and 2015

(in millions of Korean won)

              (in thousands
of US dollars)		 
  Notes  2013  2014  2015  2015 
               (Unaudited) (Note 2) 

Profit (loss) for the year

    ￦(87,745)  ￦(941,413)  ￦624,685   $533,007  

Other comprehensive income (loss)

       

Items that will not be reclassified to profit or loss:

       

Remeasurements of the net defined benefit liability

  18   56,583    (236,637)   (37,872)   (32,314) 

Shares of remeasurement loss from joint ventures and associates

     (455)   (394)   (2,407)   (2,054) 

Items that may be subsequently reclassified to profit or loss:

       

Changes in value of available-for-sale financial assets

  4, 8   49,778    39,336    47,381    40,427  

Other comprehensive income (loss) from available-for sale financial assets reclassified to income (loss)

     6,554    (17,173)   (83,397)   (71,158) 

Net gains (losses) on cashflow hedges

  4, 8   (72,303)   16,990    111,914    95,490  

Other comprehensive income (loss) from cashflow hedges reclassified to income (loss)

     67,607    (44,795)   (97,962)   (83,585) 

Shares of other comprehensive income (loss) from joint ventures and associates

     2,896    3,902    (1,608)   (1,372) 

Currency translation differences

     (2,053)   3,526    (4,884)   (4,167) 
    

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss) after income tax for the year

     108,607    (235,245)   (68,835)   (58,733) 
    

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss) for the year

    ￦20,862   ￦(1,176,658)  ￦555,850   $474,274  
    

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss) for the year attributable to:

       

Equity holders of the Parent Company

     (109,539)   (1,252,456)   495,139    422,474  

Non-controlling interest

     130,401    75,798    60,711    51,800  

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Years ended December 31, 2013, 2014 and 2015

    Attributable to equity holders of the Parent Company       

(in millions of Korean won)

 Notes Capital
stock		  Share
premium		  Retained
earnings		  Accumulated
Other Comprehensive
income (loss)		  Other
Components
of equity		  Total  Non-controlling
interest		  Total
equity		 

Balance at January 1, 2013

  ￦1,564,499   ￦1,440,258   ￦10,646,383   ￦1,325   ￦(1,343,286)  ￦12,309,179   ￦908,796   ￦13,217,975  

Comprehensive income

         

Profit (loss) for the year

   —    —    (189,931)   —    —    (189,931)   102,186    (87,745) 

Changes in value of available-for-sale financial assets

 4, 8  —    —    —    32,098    —    32,098    24,234    56,332  

Remeasurements of the net defined benefit liability

 18  —    —    57,641    —    —    57,641    (1,058)   56,583  

Valuation gains (losses) on cashflow hedge

 4, 8  —    —    —    (4,711)   —    (4,711)   15    (4,696) 

Shares of other comprehensive income of joint ventures and associates

   —    —    —    2,570    —    2,570    326    2,896  

Shares of gain on remeasurements of joint ventures and associates

   —    —    (463)   —    —    (463)   7    (456) 

Currency translation differences

   —    —    —    (6,744)   —    (6,744)   4,691    (2,053) 

Transactions with equity holders

         

Dividends paid by the Parent Company

   —    —    (487,445)   —    —    (487,445)   —    (487,445) 

Dividends paid by subsidiaries

   —    —    —    —    —    —    (23,830)   (23,830) 

Appropriations of retained earning related to disposal of treasury stock

   —    —    (6,796)   —    6,796    —    —    —  

Changes in consolidation scope

   —    —    —    —    —    —    9,452    9,452  

Changes in ownership interest in subsidiaries

   —    —    —    —    14,150    14,150    85,971    100,121  

Others

   —    —    —    —    1,397    1,397    (1,115)   282  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2013

  ￦1,564,499   ￦1,440,258   ￦10,019,389   ￦24,538   ￦(1,320,943)  ￦11,727,741   ￦1,109,675   ￦12,837,416  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (Continued)Financial Position (continued)

December 31, 2015 and 2016

(in millions of Korean won) Notes   2015  2016 
           

Liabilities and Equity

    

Current liabilities

    

Trade and other payables

  4, 14   ￦6,335,027  ￦7,139,771 

Borrowings

  4, 15    1,726,098   1,820,001 

Other financial liabilities

  4, 7    43,645   233 

Current income tax liabilities

  28    81,114   88,739 

Provisions

  16    103,907   96,485 

Deferred income

    98,427   35,617 

Other current liabilities

  9    311,170   342,291 
   

 

 

  

 

 

 

Total current liabilities

    8,699,388   9,523,137 
   

 

 

  

 

 

 

Non-current liabilities

    

Trade and other payables

  4, 14    668,973   1,188,311 

Borrowings

  4, 15    6,908,799   6,300,790 

Other financial liabilities

  4, 7    103,683   108,431 

Net defined benefit liabilities

  17    524,083   378,404 

Provisions

  16    91,365   100,694 

Deferred income

    95,916   85,372 

Deferred income tax liabilities

  28    129,650   137,680 

Othernon-current liabilities

  9    26,737   58,761 
   

 

 

  

 

 

 

Totalnon-current liabilities

    8,549,206   8,358,443 
   

 

 

  

 

 

 

Total liabilities

    17,248,594   17,881,580 
   

 

 

  

 

 

 

Equity attribute to owners of the Parent Company

    

Share capital

  21    1,564,499   1,564,499 

Share premium

    1,440,258   1,440,258 

Retained earnings

  22    9,049,971   9,644,483 

Accumulated other comprehensive income

  23    13,870   (1,432) 

Other components of equity

  23    (1,232,863)   (1,217,934) 
   

 

 

  

 

 

 
    10,835,735   11,429,874 
   

 

 

  

 

 

 

Non-controlling interest

    1,320,396   1,352,844 
   

 

 

  

 

 

 

Total equity

    12,156,131   12,782,718 
   

 

 

  

 

 

 

Total liabilities and equity

   ￦29,404,725  ￦30,664,298 
   

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Operations

Years ended December 31, 2013, 2014, 2015 and 2015

2016

 

     Attributable to equity holders of the Parent Company       

(in millions of Korean won)

 Notes  Capital
stock		  Share
premium		  Retained
earnings		  Accumulated
Other Comprehensive
income (loss)		  Other
Components
of equity		  Total  Non-controlling
interest		  Total
equity		 

Balance at January 1, 2014

  ￦1,564,499   ￦1,440,258   ￦10,019,389   ￦24,538   ￦(1,320,943)  ￦11,727,741   ￦1,109,675   ￦12,837,416  

Comprehensive income

         

Profit (loss) for the year

   —    —    (1,030,240)   —    —    (1,030,240)   88,827    (941,413) 

Changes in value of available-for-sale financial assets

  4,8    —    —    —    20,889    —    20,889    1,274    22,163  

Remeasurements of the net defined benefit liability

  18    —    —    (223,157)   —    —    (223,157)   (13,480)   (236,637) 

Valuation gains (losses) on cashflow hedge

  4,8    —    —    —    (27,821)   —    (27,821)   16    (27,805) 

Shares of other comprehensive income of joint ventures and associates

   —    —    —    3,726    —    3,726    176    3,902  

Shares of gain on remeasurements of joint ventures and associates

   —    —    (311)   —    —    (311)   (83)   (394) 

Currency translation differences

   ���    —    —    4,458    —    4,458    (932)   3,526  

Transactions with equity holders

         

Dividends paid by the Parent Company

   —    —    (195,112)   —    —    (195,112)   —    (195,112) 

Dividends paid by subsidiaries

   —    —    —    —    —    —    (27,683)   (27,683) 

Appropriations of retained earning related to disposal of treasury stock

   —    —    (2,170)   —    2,170    —    —    —  

Changes in consolidation scope

   —    —    —    —    —    —    198,260    198,260  

Changes in ownership interest in subsidiaries

   —    —    —    —    26,601    26,601    (6,372)   20,229  

Disposal of treasury stock

   —    —    —    —    34,148    34,148    —    34,148  

New shares of subsidiary issued to Non-controlling interest

   —    —    —    —    —    —    99,033    99,033  

Others

   —    —    —    —    (2,685)   (2,685)   609    (2,076) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2014

  ￦1,564,499   ￦1,440,258   ￦8,568,399   ￦25,790   ￦(1,260,709)  ￦10,338,237   ￦1,449,320   ￦11,787,557  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(in millions of Korean won, except per share amounts)             
   Notes  2014  2015  2016 
              

Operating revenue

  25  ￦22,612,713  ￦22,699,856  ￦23,120,878 

Revenue

     22,359,280   22,211,673   22,755,006 

Others

     253,433   488,183   365,872 

Operating expenses

  26   23,391,553   21,622,788   21,781,098 
    

 

 

  

 

 

  

 

 

 

Operating profit

     (778,840)   1,077,068   1,339,780 

Finance income

  27   253,089   272,860   296,139 

Finance costs

  27   (792,200)   (645,331)   (515,087) 

Share of net profits of associates and joint ventures

  13   18,697   6,144   2,599 
    

 

 

  

 

 

  

 

 

 

Profit (loss) before income tax expense (benefit)

     (1,299,254)   710,741   1,123,431 

Income tax expense (benefit)

  28   (271,441)   227,131   328,314 
    

 

 

  

 

 

  

 

 

 

Profit (loss) from the continuing operations

     (1,027,813)   483,610   795,117 

Discontinued Operations

      

Profit from discontinued operations

  39   86,400   141,075   —   
    

 

 

  

 

 

  

 

 

 

Profit (loss) for the year

    ￦(941,413)  ￦624,685  ￦795,117 
    

 

 

  

 

 

  

 

 

 

Profit (loss) for the year attributable to:

      

Owners of the Controlling Company

    ￦(1,030,240)  ￦546,361  ￦708,362 

Profit from continuing operations

     (1,094,177)   404,045   708,362 

Profit from discontinued operations

     63,937   142,316   —   

Non-controlling interest

    ￦88,827  ￦78,324  ￦86,755 

Profit from continuing operations

     66,364   79,565   86,755 

Loss from discontinued operations

     22,463   (1,241)   —   

Earnings (loss) per share attributable to the equity holders of the Controlling Company during the year (in Korean won):

      

Basic earnings (loss) per share

  29  ￦(4,215)  ￦2,231  ￦2,893 

From continuing operations

     (4,477)   1,650   2,893 

From discontinued operations

     262   581   —   

Diluted earnings (loss) per share

  29  ￦(4,215)  ￦2,231  ￦2,891 

From continuing operations

     (4,477)   1,650   2,891 

From discontinued operations

     262   581   —   

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Years ended December 31, 2014, 2015 and 2016

(in millions of Korean won)           
  Notes 2014  2015  2016 
            

Profit (loss) for the year

  ￦(941,413)  ￦624,685  ￦795,117 

Other comprehensive income

    

Items that will not be reclassfied to profit or loss:

    

Remeasurements of the net defined benefit liability

 17  (236,637)   (37,872)   4,213 

Shares of remeasurement gain (loss) fromassociates and joint ventures

   (394)   (2,407)   116 

Items that may be subsequently reclassified to profit or loss:

    

Changes in value ofavailable-for-sale financial assets

 4, 7  39,336   47,381   10,925 

Other comprehensive income fromavailable-for salefinancial assets reclassified to loss

   (17,173)   (83,397)   (3,840) 

Net gains on cashflow hedges

 4, 7  16,990   111,914   64,796 

Other comprehensive income from cashflow hedgesreclassified to loss

   (44,795)   (97,962)   (75,871) 

Shares of other comprehensive incomefrom associates and joint ventures

   3,902   (1,608)   (602) 

Currency translation differences

   3,526   (4,884)   (5,407) 
  

 

 

  

 

 

  

 

 

 

Other comprehensive income for the year, net of tax

   (235,245)   (68,835)   (5,670) 
  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

  ￦(1,176,658)  ￦555,850  ￦789,447 
  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year attributable to:

    

Owners of the Controlling Company

   (1,252,456)   495,139   701,685 

Non-controlling interest

   75,798   60,711   87,762 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (Continued)

Years ended December 31, 2013, 2014 and 2015

    Attributable to equity holders of the Parent Company       

(in millions of Korean won)

 Notes Capital
stock		  Share
premium		  Retained
earnings		  Accumulated
Other Comprehensive
income (loss)		  Other
Components
of equity		  Total  Non-controlling
interest		  Total
equity		 

Balance at January 1, 2015

  ￦1,564,499   ￦1,440,258   ￦8,568,399   ￦25,790   ￦(1,260,709)  ￦10,338,237   ￦1,449,320   ￦11,787,557  

Comprehensive income

         

Profit for the year

   —    —    546,361    —    —    546,361    78,324    624,685  

Changes in value of available-for-sale financial assets

 4, 8  —    —    —    (24,310)   —    (24,310)   (11,706)   (36,016) 

Remeasurements of the net defined benefit liability

 18  —    —    (37,914)   —    —    (37,914)   42    (37,872) 

Valuation gains on cashflow hedge

 4, 8  —    —    —    13,924    —    13,924    28    13,952  

Shares of other comprehensive income of joint ventures and associates

   —    —    —    (1,357)   —    (1,357)   (251)   (1,608) 

Shares of gain on remeasurements of joint ventures and associates

   —    —    (2,109)   —    —    (2,109)   (298)   (2,407) 

Currency translation differences

   —    —    —    (177)   —    (177)   (4,707)   (4,884) 

Transactions with equity holders

         

Dividends paid by subsidiaries

   —    —    —    —    —    —    (41,575)   (41,575) 

Appropriations of retained earning related to disposal of treasury stock

   —    —    (24,766)   —    24,766    —    —    —  

Changes in consolidation scope

   —    —    —    —    —    —    (154,188)   (154,188) 

Changes in ownership interest in subsidiaries

   —    —    —    —    (2,968)   (2,968)   2,699    (269) 

Others

   —    —    —    —    6,048 ��  6,048    2,708    8,756  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2015

  ￦1,564,499   ￦1,440,258   ￦9,049,971   ￦13,870   ￦(1,232,863)  ￦10,835,735   ￦1,320,396   ￦12,156,131  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (Continued)

Years ended December 31, 2013, 2014 and 2015

    Attributable to equity holders of the Parent Company       

(in thousands of US dollars)
(Unaudited), (Note 2)

 Notes Capital
stock		  Share
premium		  Retained
earnings		  Accumulated
Other Comprehensive
income (loss)		  Other
Components
of equity		  Total  Non-controlling
interest		  Total
equity		 

Balance at January 1, 2015

  $1,334,897   $1,228,889   $7,310,921   $22,005   $(1,075,690)  $8,821,022   $1,236,621   $10,057,643  

Comprehensive income

         

Profit (loss) for the year

   —    —    466,178    —    —    466,178    66,829    533,007  

Changes in value of available-for-sale financial assets

 4, 8  —    —    —    (20,743)   —    (20,743)   (9,988)   (30,731) 

Remeasurements of the net defined benefit liability

 18  —    —    (32,350)   —    —    (32,350)   36    (32,314) 

Valuation gains (losses) on cashflow hedge

 4, 8  —    —    —    11,881    —    11,881    24    11,905  

Shares of other comprehensive income of joint ventures and associates

   —    —    —    (1,158)   —    (1,158)   (214)   (1,372) 

Shares of gain on remeasurements of joint ventures and associates

   —    —    (1,800)   —    —    (1,800)   (254)   (2,054) 

Currency translation differences

   —    —    —    (151)   —    (151)   (4,016)   (4,167) 

Transactions with equity holders

         

Dividends paid by subsidiaries

   —    —    —    —    —    —    (35,474)   (35,474) 

Appropriations of retained earning related to disposal of treasury stock

   —    —    (21,131)   —    21,131    —    —    —  

Changes in consolidation scope

   —    —    —    —    —    —    (131,560)   (131,560) 

Changes in ownership interest in subsidiaries

   —    —    —    —    (2,532)   (2,532)   2,303    (229) 

Others

   —    —    —    —    5,160    5,160    2,311    7,471  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2015

  $1,334,897   $1,228,889   $7,721,818   $11,834   $(1,051,931)  $9,245,507   $1,126,618   $10,372,125  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Cash FlowsChanges in Equity

Years ended December 31, 2013, 2014, 2015 and 20152016

 

              (in thousands of
US dollars)		 

(in millions of Korean won)

 Notes  2013  2014  2015  2015 
              (Unaudited)
(Note 2)		 

Cash flows from operating activities

     

Cash generated from operations

  32   ￦4,677,260   ￦2,379,311   ￦4,579,260   $3,907,218  

Interest paid

   (546,802)   (604,012)   (436,363)   (372,323) 

Interest received

   194,065    192,563    128,422    109,575  

Dividends received

   24,641    32,106    35,768    30,519  

Income tax paid

   (238,091)   (83,555)   (77,122)   (65,804) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash inflow from operating activities

   4,111,073    1,916,413    4,229,965    3,609,185  
  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities

     

Collection of loans

   70,451    37,589    38,856    33,154  

Grant of loans

   (31,279)   (82,258)   (79,136)   (67,522) 

Disposal of derivatives

   —    —    176,681    150,752  

Disposal of available-for-sale financial assets

   78,811    77,365    243,125    207,445  

Acquisition of available-for-sale financial assets

   (127,052)   (78,095)   (99,111)   (84,566) 

Disposal of investments in jointly controlled entities and associates

   22,455    22,251    42,946    36,643  

Acquisition of investments in jointly controlled entities and associates

   (16,338)   (18,396)   (12,238)   (10,442) 

Disposal of current and non-current financial instruments

   319,465    630,216    363,260    309,949  

Acquisition of current and non-current financial instruments

   (588,893)   (427,585)   (341,373)   (291,274) 

Disposal of property, equipment and investment property

   100,469    77,644    28,303    24,149  

Acquisition of property and equipment, investment property

   (3,088,185)   (2,852,869)   (3,115,728)   (2,658,471) 

Disposal of intangible assets

   18,336    9,438    25,841    22,049  

Acquisition of intangible assets

   (549,967)   (578,377)   (399,377)   (340,765) 

Increase in cash due to exclusion from consolidation scope

   7,498    6,228    741,834    632,964  

Cash inflow (outflow) from changes in scope of consolidation

   1,646    5,891    (15,751)   (13,439) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash outflow from investing activities

   (3,782,583)   (3,170,958)   (2,401,868)   (2,049,374) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities

     

Proceeds from borrowings and bonds

   6,199,601    10,037,067    5,675,302    4,842,408  

Repayments of borrowings and bonds

   (5,956,340)   (8,757,284)   (6,648,177)   (5,672,506) 

Settlement of derivative assets and liabilities, net

   (67,413)   (66,484)   (3,371)   (2,876) 

Disposal of treasury stock

   —    34,053    —    —  

Cash inflow from capital transactions with Non-controlling interest

   34,581    99,211    —    —  

Cash outflow from capital transactions with
Non-controlling interest

   (4,107)   —    —    —  

Dividends paid to shareholders

   (511,275)   (222,773)   (41,575)   (35,474) 

Decrease in finance leases liabilities

   (6,841)   (52,099)   (146,175)   (124,723) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash inflow (outflow) financing activities

   (311,794)   1,071,691    (1,163,996)   (993,171) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rate change on cash and cash equivalents

   (3,440)   648    6,700    5,716  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

   13,256    (182,206)   670,801    572,356  

Cash and cash equivalents

     

Beginning of the year

  5    2,057,613    2,070,869    1,888,663    1,611,487  
  

 

 

  

 

 

  

 

 

  

 

 

 

End of the year

  5   ￦2,070,869   ￦1,888,663   ￦2,559,464   $2,183,843  
  

 

 

  

 

 

  

 

 

  

 

 

 

    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, 2014

  ￦1,564,499  ￦1,440,258  ￦10,019,389  ￦24,538  ￦(1,320,943)  ￦11,727,741  ￦1,109,675  ￦12,837,416 

Comprehensive income

         

Profit (loss) for the year

   —     —     (1,030,240)   —     —     (1,030,240)   88,827   (941,413) 

Changes in value ofavailable-for-sale financial assets

 4, 7  —     —     —     20,889   —     20,889   1,274   22,163 

Remeasurements of the net defined benefit liability

 17  —     —     (223,157)   —     —     (223,157)   (13,480)   (236,637) 

Valuation gains (losses) on cashflow hedge

 4, 7  —     —     —     (27,821)   —     (27,821)   16   (27,805) 

Shares of other comprehensive income of associates and joint ventures

   —     —     —     3,726   —     3,726   176   3,902 

Shares of loss on remeasurements of associates and joint ventures

   —     —     (311)   —     —     (311)   (83)   (394) 

Currency translation differences

   —     —     —     4,458   —     4,458   (932)   3,526 

Transactions with equity holders

         

Dividends paid by the Controlling Company

   —     —     (195,112)   —     —     (195,112)   —     (195,112) 

Dividends paid tonon-controlling interest of subsidiaries

   —     —     —     —     —     —     (27,683)   (27,683) 

Appropriation of retained earnings related to loss on disposal of treasury stock

   —     —     (2,170)   —     2,170   —     —     —   

Changes in consolidation scope

   —     —     —     —     —     —     198,260   198,260 

Changes in ownership interest in subsidiaries

   —     —     —     —     26,601   26,601   (6,372)   20,229 

New shares of subsidiary issued tonon-controlling interest

   —     —     —     —     —     —     99,033   99,033 

Others

   —     —     —     —     31,463   31,463   609   32,072 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2014

  ￦1,564,499  ￦1,440,258  ￦8,568,399  ￦25,790  ￦(1,260,709)  ￦10,338,237  ￦1,449,320  ￦11,787,557 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Equity (Continued)

Years ended December 31, 2014, 2015 and 2016

     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, 2015

  ￦1,564,499  ￦1,440,258  ￦8,568,399  ￦25,790  ￦(1,260,709)  ￦10,338,237  ￦1,449,320  ￦11,787,557 

Comprehensive income

         

Profit for the year

   —     —     546,361   —     —     546,361   78,324   624,685 

Changes in value ofavailable-for-sale financial assets

  4, 7   —     —     —     (24,310)   —     (24,310)   (11,706)   (36,016) 

Remeasurements of the net defined benefit liability

  17   —     —     (37,914)   —     —     (37,914)   42   (37,872) 

Valuation gains on cashflow hedge

  4, 7   —     —     —     13,924   —     13,924   28   13,952 

Shares of other comprehensive income of associates and joint ventures

   —     —     —     (1,357)   —     (1,357)   (251)   (1,608) 

Shares of loss on remeasurements of associates and joint ventures

   —     —     (2,109)   —     —     (2,109)   (298)   (2,407) 

Currency translation differences

   —     —     —     (177)   —     (177)   (4,707)   (4,884) 

Transactions with equity holders

         

Dividends paid tonon-controlling interest of subsidiaries

   —     —     —     —     —     —     (41,575)   (41,575) 

Appropriation of retained earnings related to loss on disposal of treasury stock

   —     —     (24,766)   —     24,766   —     —     —   

Changes in consolidation scope

   —     —     —     —     —     —     (154,188)   (154,188) 

Changes in ownership interest in subsidiaries

   —     —     —     —     (2,968)   (2,968)   2,699   (269) 

Others

   —     —     —     —     6,048   6,048   2,708   8,756 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2015

  ￦1,564,499  ￦1,440,258  ￦9,049,971  ￦13,870  ￦(1,232,863)  ￦10,835,735  ￦1,320,396  ￦12,156,131 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Changes in Equity (Continued)

Years ended December 31, 2014, 2015 and 2016

    

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, 2016

  ￦1,564,499 ￦1,440,258  ￦9,049,971  ￦13,870  ￦(1,232,863)  ￦10,835,735  ￦1,320,396  ￦12,156,131 

Comprehensive income

         

Profit for the year

  —    —     708,362   —     —     708,362   86,755   795,117 

Changes in value ofavailable-for-sale financial assets

 4, 7 —    —     —     1,691    1,691   5,394   7,085 

Remeasurements of the net defined benefit liability

 17 —    —     8,531   —     —     8,531   (4,318)   4,213 

Valuation losses on cashflow hedge

 4, 7 —    —     —     (11,075)   —     (11,075)   —     (11,075) 

Shares of other comprehensive income of associates and joint ventures

  —    —     —     (571)   —     (571)   (31)   (602) 

Shares of gain on remeasurements of associates and joint ventures

  —    —     94   —     —     94   22   116 

Currency translation differences

  —    —     —     (5,347)   —     (5,347)   (60)   (5,407) 

Transactions with equity holders

         

Dividends paid by the Controlling Company

  —    —     (122,425)   —     —     (122,425)   —     (122,425) 

Dividends paid tonon-controlling interest of subsidiaries

  —    —     —     —     —     —     (61,674)   (61,674) 

Changes in ownership interest in subsidiaries

  —    —     —     —     11,369   11,369   (15,550)   (4,181) 

Appropriation of retained earnings related to loss on disposal of treasury stock

  —    —     (50)   —     50   —     —     —   

New shares of subsidiary issued tonon-controlling interest

  —    —     —     —     —     —     21,769   21,769 

Others

  —    —     —     —     3,510   3,510   141   3,651 
  

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2016

  ￦1,564,499 ￦1,440,258  ￦9,644,483  ￦(1,432)  ￦(1,217,934)  ￦11,429,874  ￦1,352,844  ￦12,782,718 
  

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Years ended December 31, 2014, 2015 and 2016

(in millions of Korean won)            
  Notes  2014  2015  2016 
             

Cash flows from operating activities

    

Cash generated from operations

  31  ￦2,379,311  ￦4,579,260  ￦5,202,520 

Interest paid

   (604,012)   (436,363)   (372,525) 

Interest received

   192,563   128,422   104,679 

Dividends received

   32,106   35,768   10,824 

Income tax paid

   (83,555)   (77,122)   (174,748) 
  

 

 

  

 

 

  

 

 

 

Net cash inflow from operating activities

   1,916,413   4,229,965   4,770,750 
  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities

    

Collection of loans

   37,589   38,856   47,887 

Grant of loans

   (82,258)   (79,136)   (57,400) 

Disposal of derivatives

   ���     176,681   —   

Disposal ofavailable-for-sale financial assets

   77,365   243,125   35,791 

Acquisition ofavailable-for-sale financial assets

   (78,095)   (99,111)   (44,302) 

Disposal of investments in associates and joint ventures

   22,251   42,946   11,074 

Acquisition of investments in associates and joint ventures

   (18,396)   (12,238)   (38,675) 

Disposal of current andnon-current financial instruments

   630,216   363,260   293,283 

Acquisition of current andnon-current financial instruments

   (427,585)   (341,373)   (597,345) 

Disposal of property and equipment and investment properties

   77,644   28,303   93,401 

Acquisition of property and equipment and investment properties

   (2,852,869)   (3,115,728)   (2,764,346) 

Disposal of intangible assets

   9,438   25,841   17,891 

Acquisition of intangible assets

   (578,377)   (399,377)   (455,763) 

Cash inflow(outflow) from disposal of subsidiaries, net

   6,228   741,834   (2,124) 

Cash inflow(outflow) from acquisition of subsidiaries, net

   5,891   (15,751)   (24,330) 
  

 

 

  

 

 

  

 

 

 

Net cash outflow from investing activities

   (3,170,958)   (2,401,868)   (3,484,958) 
  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities

    

Proceeds from borrowings and debentures

   10,037,067   5,675,302   1,122,898 

Repayments of borrowings and debentures

   (8,757,284)   (6,648,177)   (1,768,768) 

Settlement of derivative assets and liabilities, net

   (66,484)   (3,371)   (33,199) 

Disposal of treasury stock

   34,053   —     —   

Cash inflow from capital transactions withNon-controlling interest

   99,211   —     800 

Cash outflow from capital transactions withNon-controlling interest

   —     —     (5,140) 

Dividends paid to shareholders

   (222,773)   (41,575)   (184,099) 

Decrease in finance leases liabilities

   (52,099)   (146,175)   (75,763) 
  

 

 

  

 

 

  

 

 

 

Net cash inflow(outflow) from financing activities

   1,071,691   (1,163,996)   (943,271) 
  

 

 

  

 

 

  

 

 

 

Effect of exchange rate change on cash and cash equivalents

   648   6,700   (1,674) 
  

 

 

  

 

 

  

 

 

 

Net increase(decrease) in cash and cash equivalents

   (182,206)   670,801   340,847 

Cash and cash equivalents

    

Beginning of the year

   2,070,869   1,888,663   2,559,464 
  

 

 

  

 

 

  

 

 

 

End of the year

  ￦1,888,663  ￦2,559,464  ￦2,900,311 
  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 20152016

1.    General Information

1.General Information

The consolidated financial statements include the accounts of KT Corporation, which is the controlling company as defined under IFRS 10,Consolidated Financial Statements, and its 5456 controlled subsidiaries as described in Note 1.2 (collectively referred to as the “Group”).

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 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. As of the end of the reporting period, the Korean government does not own any share in the Controlling Company.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Consolidated Subsidiaries

The consolidated subsidiaries as of December 31, 20142015 and 2015,2016, are as follows:

 

(In millions of Korean won)

 Controlling
percentage
ownership 1
(%)		 Financial
year end		 
 Controlling percentage
ownership1  (%)		 

Subsidiary

 

Type of Business

 Location 2014 2015 Financial
year end		  Type of Business Location December 31,
2015		 December 31,
2016		 Closing
month

KT Powertel Co., Ltd.2

 Trunk radio system business Korea  44.8%   44.8%   Trunk radio system business Korea 44.8% 44.8% December

KT Linkus Co. ,Ltd.

 Public telephone maintenance Korea  93.8%   91.4%   December 31  

KT Submarine Co., Ltd.2

 Submarine cable construction and maintenance Korea  36.9%   36.9%   December 31  

KT Linkus Co., Ltd.

 Public telephone maintenance Korea 91.4% 91.4% December

KT Submarine Co., Ltd.2,5

 Submarine cable construction and maintenance Korea 39.3% 39.3% December

KT Telecop Co., Ltd.

 Security service Korea  86.8%   86.8%   December 31   Security service Korea 86.8% 86.8% December

KT Hitel Co., Ltd.

 Data communication Korea  67.1%   67.1%   December 31   Data communication Korea 67.1% 67.1% December

KT Service Nambu Co., Ltd

 Opening services of fixed line Korea  —    67.3%   December 31  

KT Service Bukbu Co., Ltd

 Opening services of fixed line Korea  —    77.3%   December 31  

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 31   B2C, B2B service Korea 100.0% 100.0% December

KT New Business Fund No.1

 Investment fund Korea  100.0%   100.0%   December 31   Investment fund Korea 100.0% 100.0% December

KTC Media Contents Fund 2

 New technology investment fund Korea  71.4%   71.4%   December 31  

KT Strategic Investment Fund No.1

 Investment fund Korea  100.0%   100.0%   December 31   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% 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.5

 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.5

 System integration and maintenance Korea 95.5% 95.5% December

KT M Hows Co., Ltd.

 Mobile marketing Korea 65.0% 90.0% December

KT M&S Co., Ltd.

 PCS distribution Korea 100.0% 100.0% December

KT Music Corporation4

 Online music production and distribution Korea 49.9% 49.9% December

KT Skylife Co., Ltd.5

 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 Innoedu Co., Ltd.

 E-learning business Korea 95.6% 96.8% December

KT Sat Co., Ltd.

 Satellite communication business Korea 100.0% 100.0% December

Nasmedia, Inc.3

 Online advertisement Korea 45.4% 42.8% December

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

(In millions of Korean won)

     Controlling
percentage
ownership 1
(%)		  Financial
year end		 

Subsidiary

 

Type of Business

 Location 2014  2015  

KT Strategic Investment Fund No.2

 Investment fund Korea  100.0%   100.0%   December 31  

BC Card Co., Ltd.

 Credit card business Korea  69.5%   69.5%   December 31  

VP Inc.

 Payment security service for credit card, others Korea  50.9%   50.9%   December 31  

H&C Network

 Call centre for financial sectors Korea  100.0%   100.0%   December 31  

BC Card China Co., Ltd.

 Research and development of calculation system and software China  100.0%   100.0%   December 31  

INITECH Co., Ltd.

 Internet banking ASP and security solutions Korea  57.0%   57.0%   December 31  

Smartro Co., Ltd.

 VAN (Value Added Network) business Korea  81.1%   81.1%   December 31  

KTDS Co., Ltd.

 System integration and maintenance Korea  95.3%   95.3%   December 31  

KT M Hows Co., Ltd.

 Mobile marketing Korea  51.0%   65.0%   December 31  

KT M&S Co., Ltd.

 PCS distribution Korea  100.0%   100.0%   December 31  

KT Music Corporation4

 Online music production and distribution Korea  49.9%   49.9%   December 31  

KT Skylife Co., Ltd. 2

 Satellite broadcasting business Korea  49.9%   49.9%   December 31  

Skylife TV Co., Ltd.

 TV contents provider Korea  92.6%   92.6%   December 31  

KT Estate Inc.

 Residential building development and supply Korea  100.0%   100.0%   December 31  

KT AMC Co., Ltd.

 Asset management and consulting services Korea  100.0%   100.0%   December 31  

NEXR Co., Ltd.

 Cloud system implementation Korea  100.0%   100.0%   December 31  

KTSB Data service

 Data centre development and related service Korea  51.0%   51.0%   December 31  

KT Innoedu Co., Ltd.

 E-learning business Korea  48.4%   95.6%   December 31  

KT Sat Co., Ltd.

 Satellite communication business Korea  100.0%   100.0%   December 31  

Nasmedia, Inc. 3

 Online advertisement Korea  45.4%   45.4%   December 31  

KT Sports

 Management of sports group Korea  100.0%   100.0%   December 31  

KT Music Contents Fund No.1

 Music contents investment business Korea  80.0%   80.0%   December 31  

KT-Michigan Global Content Fund

 Content investment business Korea  81.3%   81.3%   December 31  

Autopion Co., Ltd.

 Service for information and communication Korea  100.0%   100.0%   December 31  

K-Realty Rental Housing REIT 1

 Investment in real estate Korea  100.0%   100.0%   December 31  

KTCS Corporation2

 Database and online information provider Korea  30.3%   30.9%   December 31  

KTIS Corporation2

 Database and online information provider Korea  29.3%   30.0%   December 31  

KT M mobile

 Special category telecommunications operator and sales of communication device Korea  —    100.0%   December 31  

KT Investment Co., Ltd

 Technology business finance Korea  —    100.0%   December 31  

Olleh Rwanda Networks Ltd.

 Network installation and management Rwanda  51.0%   51.0%   December 31  

Africa Olleh Services Ltd.

 System integration and maintenance Rwanda  51.0%   51.0%   December 31  

KT Belgium

 Foreign investment business Belgium  100.0%   100.0%   December 31  

KT ORS Belgium

 Foreign investment business Belgium  100.0%   100.0%   December 31  

NgeneBio4

 Medicine and Pharmacy development business Korea  —    49.8%   December 31  

Korea Telecom Japan Co., Ltd.

 Foreign telecommunication business Japan  100.0%   100.0%   December 31  

KBTO sp.zo.o.,

 Electronic communication business Poland  60.0%   60.0%   December 31  

Korea Telecom China Co., Ltd.

 Foreign telecommunication business China  100.0%   100.0%   December 31  

KT Dutch B.V

 Super iMax and East Telecom management Netherlands  100.0%   100.0%   December 31  

Super iMax LLC

 Wireless high speed internet business Uzbekistan  100.0%   100.0%   December 31  

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

(In millions of Korean won)

 Controlling
percentage
ownership1
(%)		 Financial
year end		 
 Controlling percentage
ownership1  (%)		 

Subsidiary

 

Type of Business

 Location 2014 2015 Financial
year end		  Type of Business Location December 31,
2015		 December 31,
2016		 Closing
month

KT Sports

 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-Michigan Global Content Fund

 Content investment business Korea 81.3% 88.6% December

Autopion Co., Ltd.

 Service for information and communication Korea 100.0% 100.0% December

KTCS Corporation2,5

 Database and online information provider Korea 30.9% 30.9% December

KTIS Corporation2,5

 Database and online information provider Korea 30.0% 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

NgeneBio4

 Medicine and Pharmacy development business Korea 49.8% 49.8% December

Whowho&Company Co., Ltd.

 Software 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 60.0% 75.0% 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 31   Fixed line telecommunication business Uzbekistan 91.0% 91.0% December

Korea Telecom America, Inc.

 Foreign telecommunication business USA  100.0%   100.0%   December 31   Foreign telecommunication business USA 100.0% 100.0% December

PT. KT Indonesia

 Foreign telecommunication business Indonesia  99.0%   99.0%   December 31   Foreign telecommunication business Indonesia 99.0% 99.0% December

PT. BCCard Asia Pacific

 Credit finance and New technology investment business Indonesia  —    99.9%   December 31  

PT. BC Card Asia Pacific

 Software development and supply Indonesia 99.9% 99.9% December

KT Hongkong Telecommunications Co., Ltd.

 Fixed line communication business Hong Kong —   100.0% December

N SEARCH MARKETING Corp.

 Advertising agency business Korea —   100.0% December

 

1

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

2

Even thoughAlthough the Controlling Company hasowns less than 50% ownership in these subsidiaries, these entities arethis 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

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

4Even thoughAlthough the Controlling Company hasowns less than 50% ownership in these subsidiaries, these entities arethis entity, this entity is consolidated as the Controlling Company holds the majority ofpotential voting right based on the sharerights by a stock purchase agreement with other investors.
5The number of subsidiaries’ treasury stock is deducted from the total number of shares when calculating the controlling percentage ownership.

Changes in scope of consolidation in 20152016 are as follows:

 

Changes

  

Location

  

Subsidiaries

Subsidiary		  

Reason

Included

  Korea  KT M mobileSmart Channel Co., Ltd.Gain of actual control
K-Realty Rental Housing REIT 2  Newly established
  KoreaKT Investment Co., LtdK-Realty US REIT 1  Newly established
  KoreaWhowho&Company Co., Ltd.Spun-off
  KT Service Nambu Co., LtdStrategic Investment Fund No.3  Additional Acquisition of ownership interestNewly established
  KoreaN SEARCH MARKETING Corp.Acquisition of share
Hong Kong  KT Service BukbuHongkong Telecommunications Co., LtdAdditional Acquisition of ownership interest
KoreaNgeneBioLtd.  Newly Established
IndonesiaPT. BCCard Asia PacificNewly Establishedestablished

Excluded

  Korea  KT Media Hub Co. Ltd.K-Realty Rental Housing REIT 1  MergedDecrease in percentage of ownership
  KoreaK-Realty Rental Housing REIT 2  Incheon U-cityDecrease in percentage of ownership
Smart Channel Co., Ltd.  Disposal of ownership interestBankrupt
  KoreaK-REALTY US Rental Housing REIT 2  KT RentalLiquidation
  Disposal of ownership interest
KTC Media Contents Fund 2  KoreaKT Auto Lease CorporationDisposal of ownership interest
KoreaKT Rental Auto Care CorporationDisposal of ownership interest
KoreaGREEN CAR Co., Ltd.Disposal of ownership interest
KoreaEnswers Inc.Disposal of ownership interest
KoreaSofnics, Inc.Liquidated
KoreaBest Partners Co., Ltd.Liquidated
KoreaT-ON TelecomLiquidated
KoreaKT Capital Co., Ltd.Disposal of ownership interest
KoreaGyeonggi-KT Green Growth FundDisposal of ownership interest
KoreaConsus Changwon Private Estate Investment TrustDisposal of ownership interest
KoreaUstream Korea Inc.Liquidated
KoreaCentios Co., Ltd.Liquidated
VietnamKumho Rent-a-car(Vietnam) Co., Ltd.Disposal of ownership interest
PhilippinesCentios Philippines, Inc.Disposal of ownership interestLiquidation

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

A summary of financial data of the major

Summarized information for consolidated subsidiaries as of and for the years ended December 31, 2013, 2014, 2015 and 2015,2016, is as follows:

 

   2013 

(in millions of Korean won)

  Total assets   Total liabilities   Operating
revenues		   Net
income (loss)  3		 

KT Powertel Co., Ltd.

  ￦167,131    ￦44,012    ￦112,905    ￦5,453  

KT ENGCORE Co., Ltd

   291,636     225,285     587,438     11,133  

KT Linkus Co., Ltd.

   70,562     62,993     103,003     1,920  

KT Submarine Co., Ltd.

   115,781     27,449     83,006     6,146  

KT Telecop Co., Ltd.

   192,126     138,357     239,166     3,840  

KT Hitel Co., Ltd. 1

   293,665     102,644     582,925     3,551  

KT Capital Co., Ltd. 1

   5,462,028     4,759,100     3,317,337     129,354  

H&C Network 1

   257,390     110,126     225,402     18,870  

Sidus FNH Corporation

   9,481     2,549     5,729     (387) 

Nasmedia, Inc.

   97,140     40,943     24,769     5,615  

Sofnics, Inc.

   1,431     267     881     (178) 

KTDS Co., Ltd.

   189,983     125,172     574,792     18,245  

KT M Hows Co., Ltd.

   25,845     14,341     48,047     1,739  

KT M&S Co., Ltd.

   281,011     223,089     884,125     22,614  

KT Music Corporation1

   82,997     48,289     51,350     (5,088) 

KT Skylife Co., Ltd. 1

   684,651     283,068     630,469     72,724  

KT Estate Inc. 1

   1,434,685     109,634     253,367     22,692  

NEXR Co., Ltd.

   2,814     4,451     4,540     (1,965) 

KTSB Dataservice

   28,001     321     1,447     (4,802) 

KT Cloudware Corporation

   15,995     1,128     4,682     (2,913) 

Centios Co., Ltd1

   27,873     9,793     1,060     (5,097) 

Enswers Inc. 1

   8,722     20,148     5,922     (4,990) 

KT OIC Korea Co., Ltd.

   3,626     512     2,039     (448) 

Ustream Inc.

   2,677     1,050     2,831     (2,363) 

KT Innoedu Co., Ltd.

   12,618     8,450     21,578     (1,020) 

KT Rental1

   2,188,271     1,896,259     886,959     32,400  

KT Media Hub Co., Ltd.

   184,702     81,578     304,713     21,146  

KT Sat Co., Ltd.

   492,965     35,237     169,463     56,859  

Best Partners Co., Ltd.

   882     116     265     (681) 

T-ON Telecom2

   3,347     2,298     1,152     (2,358) 

KT Sports2

   15,672     6,750     21,794     (970) 

KT Music Contents Fund No.12

   10,529     185     72     (157) 

KT-Michigan Global Content Fund2

   6,227     —     26     (173) 

Autopion co., ltd.2

   5,314     3,314     —     —  

Korea Telecom Japan Co., Ltd.

   17,752     14,204     22,154     30  

Korea Telecom China Co., Ltd.

   1,178     367     1,338     (1,108) 

KT Dutch B.V. 1

   46,347     14,684     22,077     (4,131) 

Korea Telecom America, Inc.

   5,773     1,825     13,881     32  

PT. KT Indonesia

   30     —     —     1  

olleh Rwanda Networks Ltd. 2

   226,776     217,132     —     (943) 

KT Belgium2

   38,033     —     —     (11) 

KT ORS Belgium2

   95     —     —     —  
(in millions of Korean won)  2014 
   Total assets   Total
liabilities		   Operating
revenues		   

Profit (loss)

for the year

 

KT Powertel Co., Ltd.

  ￦157,330   ￦29,996   ￦105,250   ￦5,368 

KT Linkus Co., Ltd.

   70,718    64,043    106,642    1,076 

KT Submarine Co., Ltd.

   111,877    16,188    77,292    9,018 

KT Telecop Co., Ltd.

   305,988    161,188    258,692    (6,576) 

KT Hitel Co.,Ltd.1

   226,994    31,429    494,455    12,205 

KT Capital Co., Ltd.1

   2,038,263    1,759,641    186,114    69,491 

BC Card Co., Ltd.1

   2,700,388    1,794,923    3,297,308    134,450 

H&C Network1

   223,896    69,537    217,256    8,506 

Nasmedia, Inc.

   97,502    34,933    29,865    7,956 

Sofnics, Inc.

   213    48    349    (1,029) 

KTDS Co., Ltd1.

   92,676    58,486    354,094    (11,394) 

KT M Hows Co., Ltd.

   22,846    17,446    23,683    (5,626) 

KT M&S Co., Ltd.

   281,787    221,227    885,456    6,391 

KT Music Corporation

   83,386    27,069    86,449    3,240 

KT Skylife Co., Ltd.1

   683,009    246,326    656,430    55,162 

KT Estate Inc.1

   1,496,815    169,788    247,256    11,212 

KTSB Dataservice

   25,094    1,384    2,457    (3,960) 

Centios Co., Ltd1

   40,503    26,464    21,954    (4,012) 

Enswers Inc.

   7,260    23,244    4,644    (4,533) 

Ustream Inc.

   635    246    1,818    (1,313) 

KT Innoedu Co., Ltd.

   8,761    11,913    21,010    (7,291) 

KT Rental1

   2,656,385    2,317,650    1,074,569    51,388 

KT Media Hub Co., Ltd.

   172,621    76,995    335,451    14,054 

KT Sat Co., Ltd.

   480,689    45,540    139,865    30,016 

Best Partners Co., Ltd.

   113    100    346    (753) 

T-ON Telecom

   2,543    1,903    469    (1,802) 

KT Sports

   15,753    8,220    42,320    (1,305) 

KT Music Contents Fund No.1

   10,573    304    230    (74) 

KT-Michigan Global Content Fund

   5,610    —      29    (617) 

Autopion Co., Ltd.

   5,791    3,194    9,892    662 

KTCS Corporation1

   303,574    155,603    234,852    4,704 

KTIS Corporation

   215,741    68,046    83,850    (539) 

Korea Telecom Japan Co., Ltd.

   16,551    21,279    34,717    (22,769) 

Korea Telecom China Co., Ltd.

   1,011    213    1,532    (25) 

KT Dutch B.V.1

   43,312    8    519    462 

Super iMax LLC

   11,565    6,337    7,660    (710) 

East Telecom LLC

   27,916    13,602    18,672    278 

Korea Telecom America, Inc.

   5,627    1,295    6,318    211 

PT. KT Indonesia

   32    —      —      1 

KT Rwanda Networks Ltd.

   201,130    105,095    3,809    (18,984) 

KT Belgium

   72,405    14    —      (192) 

KT ORS Belgium

   1,932    6    —      (82) 

KBTO sp.zo.o.

   3    33    —      (32) 

Africa Olleh Services Ltd.

   9,870    255    4,773    (1,772) 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

   2014 

(in millions of Korean won)

  Total assets   Total liabilities   Operating
revenues		   Net
income (loss)  3		 

KT Powertel Co., Ltd.

  ￦157,330    ￦29,996    ￦105,250    ￦5,368  

KT Linkus Co., Ltd.

   70,718     64,043     106,642     1,076  

KT Submarine Co., Ltd.

   111,877     16,188     77,292     9,018  

KT Telecop Co., Ltd.

   305,988     161,188     258,692     (6,576) 

KT Hitel Co., Ltd. 1

   226,994     31,429     494,455     12,205  

KT Capital Co., Ltd. 1

   2,038,263     1,759,641     186,114     69,491  

BC Card Co., Ltd. 1

   2,700,388     1,794,923     3,297,308     134,450  

H&C Network 1

   223,896     69,537     217,256     8,506  

Nasmedia, Inc.

   97,502     34,933     29,865     7,956  

Sofnics, Inc.

   213     48     349     (1,029) 

KTDS Co., Ltd 1.

   92,676     58,486     354,094     (11,394) 

KT M Hows Co., Ltd.

   22,846     17,446     23,683     (5,626) 

KT M&S Co., Ltd.

   281,787     221,227     885,456     6,391  

KT Music Corporation

   83,386     27,069     86,449     3,240  

KT Skylife Co., Ltd. 1

   683,009     246,326     656,430     55,162  

KT Estate Inc. 1

   1,473,042     169,788     247,256     11,212  

KTSB Dataservice

   25,094     1,384     2,457     (3,960) 

Centios Co., Ltd1

   40,503     26,464     21,954     (4,012) 

Enswers Inc.

   7,260     23,244     4,644     (4,533) 

Ustream Inc.

   635     246     1,818     (1,313) 

KT Innoedu Co., Ltd.

   8,761     11,913     21,010     (7,291) 

KT Rental1

   2,656,385     2,317,650     1,074,569     51,388  

KT Media Hub Co., Ltd.

   172,621     76,995     335,451     14,054  

KT Sat Co., Ltd.

   480,689     45,540     139,865     30,016  

Best Partners Co., Ltd.

   113     100     346     (753) 

T-ON Telecom

   2,543     1,903     469     (1,802) 

KT Sports

   15,753     8,220     42,320     (1,305) 

KT Music Contents Fund No. 1

   10,573     304     230     (74) 

KT-Michigan Global Content Fund

   5,610     —     29     (617) 

Autopion Co., Ltd.

   5,791     3,194     9,892     662  

KTCS Corporation1,

   303,574     155,603     234,852     4,704  

KTIS Corporation

   215,741     68,046     83,850     (539) 

Korea Telecom Japan Co., Ltd.

   16,551     21,279     34,717     (22,769) 

Korea Telecom China Co., Ltd.

   1,011     213     1,532     (25) 

KT Dutch B.V. 1

   42,951     10,332     26,148     30  

Korea Telecom America, Inc.

   5,627     1,295     6,318     211  

PT. KT Indonesia

   32     —     —     1  

Olleh Rwanda Networks Ltd.

   201,130     105,095     3,809     (18,984) 

KT Belgium

   72,405     14     —     (192) 

KT ORS Belgium

   1,932     6     —     (82) 

KBTO sp.zo.o.,

   3     33     —     (32) 

Africa Olleh Services Ltd.

   9,870     255     4,773     (1,772) 

(In millions of Korean won)  2015 
   Total assets   Total liabilities   Operating
revenues		   

Profit (loss)

for the year

 

KT Powertel Co., Ltd.

  ￦113,515   ￦21,182   ￦104,527   ￦(32,417) 

KT Linkus Co., Ltd.

   77,141    65,745    116,095    3,449 

KT Submarine Co., Ltd.

   160,314    63,518    67,268    4,145 

KT Telecop Co., Ltd.

   269,191    134,966    302,844    (7,593) 

KT Hitel Co., Ltd.

   235,757    33,938    162,155    7,258 

KT Service Bukbu Co., Ltd2

   31,879    22,627    89,498    (4,630) 

KT Service Nambu Co., Ltd2

   20,729    10,567    110,129    (5,055) 

BC Card Co., Ltd.1

   2,963,952    1,945,634    3,504,946    218,969 

H&C Network1

   248,189    70,635    241,008    19,513 

Nasmedia, Inc.

   141,733    72,202    45,630    9,916 

KTDS Co., Ltd.1

   162,518    116,654    423,015    12,836 

KT M Hows Co., Ltd.

   25,093    17,980    19,352    1,728 

KT M&S Co., Ltd.

   256,246    217,892    853,011    (18,776) 

KT Music Corporation

   90,518    30,704    90,005    3,446 

KT Skylife Co., Ltd.1

   711,294    217,850    668,521    72,987 

KT Estate Inc.1

   1,603,438    260,292    254,776    27,487 

KTSB Data service

   23,063    1,730    4,390    (2,444) 

KT Innoedu Co., Ltd.

   5,858    7,585    18,156    (4,288) 

KT Sat Co., Ltd.

   679,959    210,110    133,326    27,174 

KT Sports

   15,341    11,643    51,801    (3,836) 

KT Music Contents Fund No.1

   10,206    47    468    (111) 

KT-Michigan Global Content Fund

   5,401    —      861    (209) 

Autopion Co., Ltd.

   7,102    3,317    10,585    1,123 

KT M mobile

   64,756    13,121    42,478    (36,725) 

KT Investment Co., Ltd.

   49,485    30,827    4,704    (219) 

NgeneBio

   7,894    4,683    —      (434) 

KTCS Corporation1

   346,949    194,367    1,066,556    13,685 

KTIS Corporation

   211,164    55,370    473,892    15,041 

Korea Telecom Japan Co., Ltd.

   13,889    14,393    25,652    (248) 

Korea Telecom China Co., Ltd.

   909    198    1,748    (95) 

KT Dutch B.V.1

   29,402    27    161    118 

Super iMax LLC

   14,962    8,186    8,291    (2,220) 

East Telecom LLC

   30,833    17,066    24,066    664 

Korea Telecom America, Inc.

   6,016    1,378    6,391    156 

PT. KT Indonesia

   22    —      —      (9) 

KT Rwanda Networks Ltd.

   188,951    147,653    7,299    (28,721) 

KT Belgium

   77,058    4    —      (127) 

KT ORS Belgium

   1,996    20    —      (75) 

KBTO sp.zo.o.

   1,471    1,817    —      (328) 

Africa Olleh Services Ltd.

   11,928    12,187    8,712    (923) 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

   2015 

(In millions of Korean won)

  Total assets   Total liabilities   Operating
revenues		   Net
income (loss)  3		 

KT Powertel Co., Ltd.

  ￦113,515    ￦21,182    ￦104,527    ￦(32,417) 

KT Linkus Co., Ltd.

   77,141     65,745     116,095     3,449  

KT Submarine Co., Ltd.

   160,314     63,518     67,268     4,145  

KT Telecop Co., Ltd.

   269,191     134,966     302,844     (7,593) 

KT Hitel Co., Ltd.

   235,757     33,938     162,155     7,258  

KT Service Bukbu Co., Ltd 2

   31,879     22,627     89,498     (4,630) 

KT Service Nambu Co., Ltd 2

   20,729     10,567     110,129     (5,055) 

BC Card Co., Ltd. 1

   2,963,952     1,945,634     3,504,946     218,969  

H&C Network 1

   248,189     70,635     241,008     19,513  

Nasmedia, Inc.

   141,733     72,202     45,630     9,916  

KTDS Co., Ltd. 1

   162,518     116,654     423,015     12,836  

KT M Hows Co., Ltd.

   25,093     17,980     19,352     1,728  

KT M&S Co., Ltd.

   256,246     217,892     853,011     (18,776) 

KT Music Corporation

   90,518     30,704     90,005     3,446  

KT Skylife Co., Ltd. 1

   711,294     217,850     668,521     72,987  

KT Estate Inc. 1

   1,539,899     187,368     324,324     34,090  

KTSB Data service

   23,063     1,730     4,390     (2,444) 

KT Innoedu Co., Ltd.

   5,858     7,585     18,156     (4,288) 

KT Sat Co., Ltd.

   679,959     210,110     133,326     27,174  

KT Sports

   15,341     11,643     51,801     (3,836) 

KT Music Contents Fund No.1

   10,206     47     468     (111) 

KT-Michigan Global Content Fund

   5,401     —     861     (209) 

Autopion Co., Ltd.

   7,102     3,317     10,585     1,123  

KT M mobile

   64,756     13,121     42,478     (36,725) 

KT Investment Co., Ltd

   49,485     30,827     4,704     (219) 

NgeneBio

   7,894     4,683     —     (434) 

KTCS Corporation 1

   346,949     194,367     1,066,556     13,685  

KTIS Corporation

   211,164     55,370     473,892     15,041  

Korea Telecom Japan Co., Ltd.

   13,889     14,393     25,652     (248) 

Korea Telecom China Co., Ltd.

   909     198     1,748     (95) 

KT Dutch B.V. 1

   49,057     13,861     31,571     (1,438) 

Korea Telecom America, Inc.

   6,016     1,378     6,391     156  

PT. KT Indonesia

   22     —     —     (9) 

Olleh Rwanda Networks Ltd.

   188,951     147,653     7,299     (28,721) 

KT Belgium

   77,058     4     —     (127) 

KT ORS Belgium

   1,996     20     —     (75) 

KBTO sp.zo.o.,

   1,471     1,817     —     (328) 

Africa Olleh Services Ltd.

   11,928     12,187     8,712     (923) 

(In millions of Korean won)  2016 
   Total assets   Total liabilities   Operating
revenue		   

Profit (loss)

for the year

 

KT Powertel Co., Ltd.

  ￦113,725   ￦19,899   ￦81,390   ￦202 

KT Linkus Co., Ltd.

   64,318    56,953    117,587    (3,830) 

KT Submarine Co., Ltd.

   156,993    55,573    84,137    5,146 

KT Telecop Co., Ltd.

   265,553    132,344    315,948    143 

KT Hitel Co., Ltd.

   249,202    46,941    198,994    4,298 

KT Service Bukbu Co., Ltd.

   32,863    24,580    182,952    694 

KT Service Nambu Co., Ltd.

   32,621    24,282    218,602    772 

BC Card Co., Ltd.1

   3,651,065    2,602,404    3,567,512    163,131 

H&C Network1

   272,110    80,983    266,613    14,749 

Nasmedia, Inc.1

   263,925    159,502    70,037    11,972 

KTDS Co., Ltd.1

   197,970    151,644    476,379    10,838 

KT M Hows Co., Ltd.

   28,539    18,466    19,922    2,865 

KT M&S Co., Ltd.

   247,854    227,507    724,144    (12,955) 

KT Music Corporation

   110,080    41,953    111,450    8,235 

KT Skylife Co., Ltd.1

   777,948    231,452    668,945    68,863 

KT Estate Inc.1

   1,734,729    375,341    405,417    6,815 

KTSB Data service

   20,075    759    5,136    (1,983) 

KT Innoedu Co., Ltd.

   6,477    7,259    15,599    103 

KT Sat Co., Ltd.

   744,653    253,041    144,594    36,266 

KT Sports

   16,925    13,573    48,476    (198) 

KT Music Contents Fund No.1

   10,592    331    349    103 

KT-Michigan Global Content Fund

   16,250    163    133    (514) 

Autopion Co., Ltd.

   6,163    2,794    7,772    (409) 

KT M mobile

   131,446    20,369    112,532    (40,041) 

KT Investment Co., Ltd.1

   39,506    23,123    10,130    (1,832) 

NgeneBio

   6,361    4,733    244    (1,833) 

KTCS Corporation1

   327,128    171,012    955,050    7,892 

KTIS Corporation

   221,176    63,871    436,914    9,991 

Korea Telecom Japan Co., Ltd.

   3,592    5,374    5,122    (1,391) 

Korea Telecom China Co., Ltd.

   532    188    930    60 

KT Dutch B.V

   34,197    73    166    85 

Super iMax LLC

   10,308    6,734    10,759    (1,802) 

East Telecom LLC

   31,885    16,554    27,492    3,257 

Korea Telecom America, Inc.

   4,464    1,306    7,113    181 

PT. KT Indonesia

   16    —      —      (7) 

KT Rwanda Networks Ltd.

   167,112    149,421    13,435    (31,455) 

KT Belguium

   79,391    7    —      (67) 

KT ORS Belgium

   2,013    23    —      (46) 

KBTO sp.zo.o.

   1,166    2,378    21    (2,587) 

AOS Ltd.

   10,025    10,683    14,481    (1,123) 

KT Hongkong Telecommunications Co., Ltd.

   1,571    956    1,568    120 

 

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

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

2These entities were newly consolidated duringfor the yearyears ended December 31, 2015. Only operating revenues and net income subsequent to the inclusion of consolidation scope are disclosed above.

 

32.The amounts are total net income (loss) before elimination of income attributable to non-controlling interest.Significant Accounting Policies

2.    Significant Accounting Policies

The following is a summary of significant accounting policies followed by the Group in the preparation of its financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

2.1    Basis of Preparation

2.1Basis of Preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“Standards(“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The preparation of the consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of 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    ChangesCertain accounts within the consolidated statement of financial position as of December 31, 2015 presented for comparative purpose have been reclassified in Accounting Policyaccordance with presentation method used in consolidated statement of financial position as of December 31, 2016. These reclassifications do not have any impacts on net asset and Disclosuresprofit or loss reported as of and for the year ended December 31, 2015.

2.2Changes in Accounting Policy and Disclosures

(1) New standards and amendments adopted by the Group

The Group newlyhas applied the following enactedstandards and amended standardsamendments for the first time for their annual reporting period beginning oncommencing January 1, 2015:2016. The adoption of these amendments did not have any material impact on the consolidated financial statements.

—- Disclosure Initiative – Amendments to IAS 1, Presentation of Financial Statements

Amendment to IAS 19, Employee Benefits1,Presentation of Financial Statements clarifies that materiality applies to the exclusion or inclusion or aggregation of the disclosures in the notes and also, clarifies that the share of OCI arising from equity-accounted should be presented in total for items which will and will not be reclassified to profit or loss. Additional amendments are made in relation to a particular order of the notes and other.

Amendment- Clarification of Acceptable methods of Depreciation and Amortization – Amendments to IAS 16, Property, plant and equipment, and IAS 38, Intangible assets: Amortization based on revenue

Amendments to IAS 16,Property, plant and equipmentclarify that a revenue-based method should not be used to calculate the depreciation of items of property, plant and equipment. IAS 38,Intangible assets: Amortization based on revenue now includes a rebuttable presumption that the amortization of intangible assets based on revenue is inappropriate. This presumption can be overcome if either; the intangible asset is expressed as a measure of revenue, or it can be shown that revenue and the consumption of economic benefits generated by the asset are highly correlated.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

- Investment entities: Applying the Consolidation Exception – Amendments to IFRS 10, Consolidated Financial Statements, IAS 28, Investment in Associates and Joint Ventures, and IFRS 12, Disclosures of Interests in Other Entities

•Amendments made to IFRS 10,Consolidated Financial Statements clarify that the exception from preparing consolidated financial statement is also available to intermediate parent entities which are subsidiaries of investment entities. If an investment entity has a subsidiary that is an investment entity and whose activities are providing services that related to the investment entity’s investment activities, the investment entity measures the subsidiary at fair value through profit or loss.

•Amendments made to IAS 28,Investment in Associates and Joint Ventures clarify that entities which are not investment entities but have an interest in an associate which is an investment entity have a policy choice when applying the equity method of accounting.

•Amendments made to IFRS 12,Disclosures of Interests in Other Entities clarify that an investment entity which does not prepare consolidated financial statements should present disclosures relating to investment entities required by IFRS 12.

- Annual Improvements to IFRSs2012-2014 Cycle

Annual Improvements to IFRSs2012-2014 Cycle consist of the following amendments. The application does not have a material impact on the consolidated financial statements.

•IFRS 5,Non-current Assets Held for Sale and Discontinued Operations clarifies when an asset (or disposal group) is reclassified from ‘held for sale’ to ‘held for distribution’ or vice versa, this does not have to be accounted for as such.

•IFRS 7,Financial Instruments: Disclosures clarifies the specific guidance for transferred financial assets to help management determine whether the terms of a servicing arrangement constitute ‘continuing involvement’, and also clarifies that the additional disclosures relating to the amendments in 2012 ‘Offsetting of Financial Assets and Financial Liabilities’ only need to be included in interim reports if required by IAS 34,Interim Financial Reporting.

•IAS 19,Employee Benefits, allows a practical expedient for companies that operate defined benefit plans and when contributions are made by employees or third parties. The Group expects that the application of this amendment would not have a material impact on its consolidated financial statements.

—Annual improvements to IFRSs 2010-2012 Cycle

Annual improvements to IFRSs 2010-2012 Cycle include the following amendments and the application of these amendments does not have a material impact on the consolidated financial statements.

•

Amendment to IFRS 2,Share-based payment

IFRS 2,Share-based payment, clarifies the definition of a ‘vesting conditions’, ‘performance condition’, and ‘service condition’.

•

Amendment to IFRS 3, Business Combination

IFRS 3,Business Combination, clarifies the classification and measurement of contingent consideration in the business combination.

•

Amendment to IFRS 8, Operating Segments

IFRS 8,Operating Segments, requires disclosure of the judgments made by management in aggregating operating segments and a reconciliation of the reportable segments’ assets to the entity’s assets.

•

Amendments to IAS 16, Property, plant and equipment,and IAS 38,Intangible assets

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

IAS 16, Property, plant and equipment,and IAS 38,Intangible assets,clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model.

•

Amendment to IAS 24,Related Party Disclosures

IAS 24,Related Party Disclosures, includes, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity.

—Annual improvements to IFRSs 2011-2013 Cycle

Annual improvements to IFRSs 2011-2013 Cycle include the following amendments and the application of these amendments does not have a material impact on the consolidated financial statements.

•

Amendment to IFRS 3, Business Combination

IFRS 3,Business Combination, clarifies that IFRS 3 does not apply towhen determining the accountingdiscount rate for post-employment benefit obligations, it is the formation of any joint arrangement.

•

Amendment to IFRS 13, Fair Value Measurement

IFRS 13,Fair Value Measurement, clarifiescurrency in which the liabilities are denominated that the portfolio exception, which allows an entity to measure the fair value of a group of financial instruments on a net basis, applies to all contracts including non-financial contracts within the scope of IAS 39.

•

Amendment to IAS 40,Investment property

IAS 40,Investment property, clarifies that IAS 40 and IFRS 3 are not mutually exclusive.

(2) New standards, amendments and interpretations not yet adopted

Amendments issued but not effective for the financial year beginning January 1, 2015,is important, and not early adopted are enumerated below. The Group expects that these Amendments would not have a material impact on its consolidated financial statements.

Amendment to IAS 1, Presentation of Financial Statements

•

IAS 16,Property, plant and equipment, and IAS 41,Agriculture: Productive plants

•

IAS 16,Property, plant and equipment, and IAS 38,Intangible assets: Amortization based on revenue

•

IFRS 10,Consolidated Financial Statements, IAS 28,Investment in Associates and Joint Ventures, and IFRS 12,Disclosures of Interests in Other Entities: Exemption for consolidation of investee

•

IFRS 11,Joint Arrangements

the country where they arise.

 

Annual Improvements
•IAS 34,Interim Financial Reporting clarifies what is meant by the reference in the standard to IFRSs 2012-2014 Cycle

KT Corporation‘information disclosed elsewhere in the interim financial report’; and Subsidiaries

Notesalso amended requirements for a cross-reference from the interim financial statements to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

Further, new standards issued, but not effective for the financial year beginning January 1, 2015, and not early adopted are enumerated below:

—IFRS 9, Financial Instrumentslocation of that information.

(2) New standards, amendments and interpretations not yet adopted

Certain new accounting standards and interpretations that have been published that are not mandatory for December 31, 2016 reporting periods and have not been early adopted by the Group are set out below.

- Amendments to IAS 7,Statement of Cash Flows

Amendments to IAS 7,Statement of Cash Flows

The new standard issued in December 2015 regarding financial instruments replaces IFRS 9,Financial Instruments: Recognition and Measurement.

IFRS 9,Financial Instruments, requires to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

both changes arising from cash flows andnon-cash flows. The Group will apply this amendment for annual reporting periods beginning on or after January 1, 2017. The Group does not expect the amendments to have a significant impact on the consolidated financial statements.

- Amendments to IFRS 2,Share-based Payment

Amendments to IFRS 2 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. Also, the amendments 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 Group will apply the amendments for annual periods beginning on or after January 1, 2018. The Group does not expect the amendments to have a significant impact on the consolidated financial statements.

- IFRS 9,Financial Instruments

The new standard for financial instruments issued on September 25, 2015 are effective for annual periods beginning on or after January 1, 2018 with early application permitted. This standard will replace IAS 39,Financial Instruments: Recognition and Measurement. The Group will apply the standards for annual periods beginning on or after January 1, 2018.

The standard requires retrospective application with some exceptions. For example, an entity is not required to restate prior period in relation to classification and measurement (including impairment) of financial instruments. The standard requires prospective application of its hedge accounting requirements for all hedging relationships except the accounting for time value of options and other exceptions.

IFRS 9,Financial Instruments requires all financial assets to be classified and measured on the basis of the holder’s business model and the instrument’s contractual cash flow characteristics. The Standard requires a financial instrument to be classified and measured on the basis of the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. A new impairment model, an expected credit loss model, is introduced and any subsequent changes in expected credit losses will be recognized in profit or loss. Also, hedge accounting rules are amended to extend the hedging relationship, which consists only of eligible hedging instruments and hedged items, qualifies for hedge accounting.

An effective implementation of IFRS 9 requires preparation processes including financial impact assessment, accounting policy establishment, accounting system development and the system stabilization. The impact on the Group’s financial statements due to the application of the standard is dependent on judgements made in applying the standard, financial instruments held by the Group and macroeconomic variables. The following areas are likely to be affected in general with the implementation of IFRS 9. The Group is in preparation for analyzing the effects to the consolidated financial statement.

(a) Classification and Measurement of Financial Assets

When implementing IFRS 9, the classification of financial assets will be driven by the Group’s business model for managing the financial assets and contractual terms of cash flow. The following table shows the classification of financial assets measured subsequently at amortized cost, at fair value through other comprehensive income and at fair value through profit or loss. For hybrid (combined) instruments, if the Group is unable to measure an embedded derivative separately from its host contract, financial assets with embedded derivatives are classified in their entirety.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Business model for the
contractual cash flows

characteristics

Solely represent payments of
principal and interest

All other

Hold the financial asset for the collection of the contractual cash flowsMeasured at amortized cost1Recognized at fair value through profit or loss2
Hold the financial asset for the collection of the contractual cash flows and tradingRecognized at fair value through other comprehensive income or1
Hold for tradingRecognized at fair value through profit or loss and provides guidance on accounting for related gains and losses. The impairment model is changed into an expected credit loss model, and changes in those expected credit losses are recognized in profit or loss. The new standard is effective for the financial year initially beginning on or after January

1 2018, but early adoption is allowed. Early adoption of only the requirements related to financial liabilities designatedA designation at fair value through profit or loss is also permitted. The Group is in the process of evaluating the effects resulting from the adoption of the new standard.

—IFRS 15, Revenue from Contracts with Customers

The new standardallowed only if such designation mitigates an accounting mismatch (irrevocable).

2Equity investments not held for the recognition of revenue issued in December 2015 will replace IAS 18,Revenue, IAS 11,Construction Contracts, and related Interpretations.

IFRS 15,Revenue from Contracts with Customers, will replace the risk-and-reward model under the current standards and is based on the principle that revenue is recognized when control of goods or services transfer to the customer by applying the five-step process. Key changes to current practices include guidance on separate recognition of distinct goods or services in any bundled arrangement, constraint on recognizing variable consideration, criteria on recognizing revenue over time, and increased disclosures. The new standard is effective for annual reporting beginning on or after January 1, 2018, but early application is permitted. The Group is in the process of evaluating the effects resulting from the adoption of the new standard.

2.3    Consolidation

The Group has prepared the consolidated financial statements in accordance with IFRS 10,Consolidated Financial Statements.

(1) Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Group has control. The Group controls the corresponding investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of a subsidiary begins from the date the Group obtains control of a subsidiary and ceases when the Group loses control of the subsidiary.

The Group applies the acquisition method to account for business combinations. The consideration transferred is measured at the fair values of the assets transferred, and identifiable

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis in the event of liquidation, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable net assets. All other non-controlling interests are measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs. Acquisition-related costs are expensed as incurred.

Goodwill is recognized as 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 acquirer’s previously held equity interest in the acquiree over the identifiable net assets acquired. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.

Balances of receivables and payables, income and expenses and unrealized gains on transactions between the Group’s subsidiaries are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

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

In transactions with non-controlling interests, which do not result in loss of control, the Company recognizes directly in equity any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attribute it to the owners of the parent.

(3) Disposal of subsidiaries

If the Group loses control of a subsidiary, any investment continuously retained in the subsidiary is re-measured at its fair value at the date when control is lost and any resulting differences are recognized in profit or loss.

(4) 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 value as impairment loss.

(5) Joint arrangement

A joint arrangement of which two or more parties have joint control is classified as either a joint operation or a joint venture. A joint operator has rights to the assets, and obligations for the liabilities, relating to the joint operation and recognizes the assets, liabilities, revenues and expenses relating to its interest in a joint operation. A joint venturer has rights to the net assets relating to the joint venture and accounts for that investment using the equity method.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

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 33). The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments.

2.5    Foreign Currency Translation

(1) 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 the each entity operates (the “functional currency). The consolidated financial statements are presented in Korean won, which is the Controlling Company’s functional and presentation currency.

(2) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.

Exchange differences arising on non-monetary financial assets and liabilities such as equity instruments at fair value through profit or loss and available-for-sale equity instruments are recognized in profit or loss and includedtrading can be recorded in other comprehensive income respectively, as part of the fair value gain or loss.

(3) Translation into presentation currency

Different functional currencies are translated into presentation currency using the following procedures.(irrevocable).

With the implementation of IFRS 9, the criteria to classify the financial assets at amortized cost or at fair value through other comprehensive income are more strictly applied than the criteria applied with IAS 39. Accordingly, the financial assets at fair value through profit or loss may increase by implementing IFRS 9 and may result an extended fluctuation in profit or loss.

As of December 31, 2016, the Group owns loans and receivables of￦9,653,443 million and financial assetsavailable-for-sales of￦404,774 million.

According to IFRS 9, equity instruments that are not held for trading, the Group can make an irrevocable election at initial recognition to classify the instruments as assets measured at fair value through other comprehensive income, which all subsequent changes in fair value being recognized in other comprehensive income and not recycled to profit or loss. As at December 31, 2016, the Group holds equity instruments of￦378,090 million classified as financial assetsavailable-for-sale.

According to IFRS 9, debt instruments those contractual cash flows do not represent solely payments of principal and interest and held for trading, and equity instruments that are not designated as instruments measured at fair value through other comprehensive income are measured at fair value through profit or loss.

(b) Impairment: Financial Assets and Contract Assets

IFRS 9 sets out a new forward looking ‘expected loss’ impairment model which replaces the incurred loss model under IAS 39 and applies to:

Financial assets measured at amortized cost

Debt investments measured at fair value through other comprehensive income, and

Certain loan commitments and financial guaranteed contracts.

And the Group could recognize credit losses early in accordance with IAS 39. The Group holds debt instrument of￦9,683,586 million (Loan and trade receivables of￦9,653,443 million,Held-to-maturity￦30,143 million). For this assets, the Group provides loss allowance of￦612,487 million.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

(c) Hedge Accounting

Hedge accounting mechanics (fair value hedges, cash flow hedges and hedge of net investments in a foreign operations) required by IAS 39 remains unchanged in IFRS 9, however, the new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. IFRS 9 allows more hedging instruments and hedged items to qualify for hedge accounting, and relaxes the hedge accounting requirement by removing two hedge effectiveness tests that are a prospective test to ensure that the hedging relationship is expected to be highly effective and a quantitative retrospective test (within range of80-120 %) to ensure that the hedging relationship has been highly effective throughout the reporting period. As of December 31, 2016, the Group applies the hedge accounting to its assets and liabilities that amount to￦227,318 million and￦14,928 million respectively.

- IFRS 15Revenue from Contracts with Customers

The Group will apply IFRS 15Revenue from Contracts with Customers issued on November 6, 2015 for annual reporting periods beginning on or after January 1, 2018. This standard replaces IAS 18,Revenue, IAS 11,Construction Contracts,SIC-31, Revenue-Barter Transactions Involving Advertising Services,IFRIC 13, Customer Loyalty Programs, IFRIC 15 Agreements for the Construction of Real Estate and IFRIC 18 Transfers of assets from customers. The Group must apply IFRS 15,Revenue from Contracts with Customers within annual reporting periods beginning on or after January 1, 2018, and will apply the standard retrospectively to prior reporting period presented in accordance with IAS 8,Accounting Policies, Changes in Accounting Estimates and Errors and apply simplified transition method with no restatement for completed contracts and other as of January 1, 2017.

The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer so the notion of control replaces the existing notion of risks and rewards. A new five-step process must be applied before revenue from contract with customer can be recognized:

Identify contracts with customers

Identify the separate performance obligation

Determine the transaction price of the contract

Allocate the transaction price to each of the separate performance obligations, and

Recognize the revenue as each performance obligation is satisfied.

The Group had organized separate Task Force team for implementation of IFRS 15 since December 31, 2014 for preparation of implementing IFRS 15Revenue from Contracts with Customers. Also, the Group has been developing the internal control system and constructs accounting process system by analyzing the Group’s revenue structure with accounting firm and computation expert. IFRS 15 will affect not only accounting method but also the general business practice including strategy for sales and business attitude. Therefore, the Group opens an orientation program for both Group’s directors and employees, and periodically reports to the managements about plan for implementation and progress.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

As at the December 31, 2016 the Group is analyzing the effects on the consolidated financial statement with the implementation of IFRS 15. The Group plans to complete the detailed analysis on financial effects of applying the standard by March 31, 2018. The Group identified the following areas are likely to be affected in general.

 

Assets and liabilities
(a)Identifying performance obligations

The Group provides telecommunication services and sells handsets as their main business. With the implementation of IFRS 15, the Group identifies performance obligations with a customer such as providing telecommunication services, selling handsets and other. The timing of revenue recognition depends on a performance obligation is satisfied at a point in time or over time. Where a performance obligation is satisfied over time, the related revenue is also recognized over time.

(b)Allocation the closing rate at the datetransaction price

With implementation of IFRS 15, the Group allocates the transaction price to each performance obligation identified in a contract based on the 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.

(c)Incremental costs of that statement of financial positionobtaining 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 IFRS 15, 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 may recognize the incremental costs of obtaining a contracts as an expense when incurred if the amortization period of the asset is one year or less.

2.3Consolidation

The Group has prepared the consolidated financial statements in accordance with IFRS 10,Consolidated Financial Statements.

(1) Subsidiaries

Subsidiaries are all entities 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

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 anynon-controlling interest in the acquired entity on anacquisition-by-acquisition basis either at fair value or at thenon-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. All othernon-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 anynon-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 recorded 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 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.

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

Any difference between the amount of the adjustment tonon-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.

(3) 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.

(4) 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.

(5) 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,

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

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.

2.4Segment 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 32). The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments.

2.5Foreign Currency Translation

(1) 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 the each entity operates (the “functional currency’). The consolidated financial statements are presented in Korean won, which is the Controlling Company’s functional and presentation currency.

(2) 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.

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 onnon-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 onnon-monetary assets such as equities classified asavailable-for-sale financial assets are recognized in other comprehensive income.

(3) 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.

 

Income and expenses at average rate for the period

Equity at historical rate

All resulting exchange differences are recognized in other comprehensive income

2.6Cash 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

2.7Financial Assets

(1) Classification and measurement

The Group classifies its financial assets into the following categories: financial assets at fair value through profit or loss,available-for-sale financial assets, loans and receivables, andheld-to-maturity financial assets. Regular way purchases and sales of financial assets are recognized on trade-date, the date on which the Group commits to purchase or sell the asset.

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.Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. And, loans and receivables andheld-to-maturity investments are subsequently carried at amortized cost using the effective interest method.

Gains or losses arising from changes in the fair value of financial assets at fair value through profit or loss are recognized in profit or loss within other income or other expenses. Gains or losses arising from changes in theavailable-for-sale financial assets are recognized in other comprehensive income, and amounts are reclassified to profit or loss when the associated assets are sold or impaired.

(1) Classification and measurement

The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, available-for-sale financial assets, loans and receivables, and held-to-maturity financial assets. Regular purchases and sales of financial assets are recognized on trade date.

A regular way purchase of financial assets shall be recognized as applicable, using trade date accounting. At initial recognition, financial assets are measured at fair value plus, in the case of financial assets not carried at fair value through profit or loss, transaction costs. Transaction costs of financial assets carried at fair value through profit or loss are expensed in the statement of income. After the initial recognition, available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables, and held-to-maturity investments are subsequently carried at amortized cost using the effective interest rate method.

Changes in fair value of financial assets at fair value through profit or loss are recognized in profit or loss and changes in fair value of available-for-sale financial assets are recognized in other comprehensive income. When the available-for-sale financial assets are sold or impaired, the fair value adjustments recorded in equity are reclassified into profit or loss.

(2) Impairment

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated.

Impairment of loans and receivables is presented as a deduction in an allowance account. Impairment of other financial assets is directly deducted from their carrying amount. The Group writes off financial assets when the assets are determined to be no longer recoverable.

The criteria that the Group uses to determine that there is objective evidence of an impairment loss include:

Significant financial difficulty of the issuer or obligor;

A breach of contract, such as a default or delinquency in interest or principal payments;

For economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

It becomes probable that the borrower will enter bankruptcy or other financial reorganization;

The disappearance of an active market for that financial asset because of financial difficulties; or

Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

(3) Derecognition

If the Group transfers a financial asset and the transfer does not result in derecognition because the Group has retained substantially of all risks and rewards of ownership of the transferred asset due to a recourse in the event the debtor defaults, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. The related financial liability is classified as ‘borrowings’ in the statement of financial position.

(4) 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.

 

Significant financial difficulty of the issuer or obligor;
2.8Derivative Instruments

Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently remeasured at their fair value. Changes in the fair value of the derivatives that are not qualified for hedge accounting are recognized in the statement of profit or loss within ‘other income (expenses)’ and ‘finance income (expenses)’ according to the nature of transactions.

If the Group uses a valuation technique that incorporates data not obtained from observable markets for the fair value at initial recognition of the financial instrument, there may be a difference between the transaction price and the amount determined using that valuation technique (Day 1 profit and loss). In these circumstances, the fair value of the financial instrument is recognized as the transaction price and the difference is amortized by using the straight-line method over the life of the financial instrument. If the fair value of the financial instrument is subsequently determined using observable market inputs, the remaining deferred amount is recognized in profit or loss in the statement of profit or loss.

The Group applies cash flow hedge accounting to hedge the risks of foreign exchange and interest rates of the variable rate foreign currency bonds. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately as finance income (expenses) in the statement of profit or loss. Amounts of changes in fair value of effective hedging instruments accumulated in other comprehensive income are recognized as ‘finance income (expenses)’ for the periods when the corresponding transactions affect profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that is reported in other comprehensive income is recognized as ‘finance income (expenses)’.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the period to maturity.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

A breach of contract, such as a default or delinquency in interest or principal payments;

For economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

It becomes probable that the borrower will enter bankruptcy or other financial reorganization;

The disappearance of an active market for that financial asset because of financial difficulties; or

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio.

(3) Derecognition

If the Group transfers a financial asset and the transfer does not result in derecognition because the Group has retained substantially of all risks and rewards of ownership of the transferred asset due to a recourse in the event the debtor defaults, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. The related financial liability is classified as ‘borrowings’ in the statement of financial position.

(4) 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.

2.8    Derivative Instruments

Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of the derivatives that are not qualified for hedge accounting are recognized in the statement of income within ‘other income (expenses)’ and ‘finance income (expenses)’ according to the nature of transactions.

If the Group uses a valuation technique that incorporates data not obtained from observable markets for the fair value at initial recognition of the financial instrument, there may be a difference between the transaction price and the amount determined using that valuation technique (Day 1 profit and loss). In these circumstances, the fair value of the financial instrument is recognized as the transaction price and the difference is amortized by using the straight-line method over the life of the financial instrument. If the fair value of the financial instrument is subsequently determined using observable market inputs, the remaining deferred amount is recognized in profit or loss in the statement of income.

The Group applies cash flow hedge accounting to hedge the risks of foreign exchange and interest rates of the variable rate foreign currency bonds. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately as finance income (expenses) in the statement of income. Amounts of changes in fair value of effective hedging instruments accumulated in other comprehensive income are recognized as ‘finance income (expenses)’ for the periods when the corresponding transactions affect profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that is reported in other comprehensive income is recognized as ‘finance income (expenses)’.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

2.9Inventories

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

 

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the period to maturity.

2.102.9    InventoriesNon-current

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

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

Non-current assets (or disposal group) are classified as assetsheld-for-sale when their carrying amount is to be recovered principally through a sale transaction 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.

Non-current assets (or disposal group) are classified as assets held-for-sale when their carrying amount is to be recovered principally through a sale transaction 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.

2.11Property, plant and Equipment

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

(Telecommunications equipment and accumulated impairment losses. Historical cost includes expenditures that is directly attributable to the acquisition of the items.others)

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between their cost and their residual values over their estimated useful lives, as follows:Others

Estimated Useful Lives

Buildings

5 – 40 years

Structures

5 – 40 years

Machinery and equipment (Telecommunications equipment and others)

32 – 40 years

Vehicles

4 – 6 years

Tools

4 – 6 years

Office equipment

  4 – 6 years

Tools

4 – 6 years

Office equipment

2 – 6 years

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

2.12    Investment Property

Property held to earn rentals or for capital appreciation or both is classified as investment property. 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 ten to 40 years.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

2.12Investment 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.

2.13Intangible Assets

(1) Goodwill

Goodwill is measured as explained in Note 2.3 (1) 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

(2) 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) 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 Group amortizes intangible assets with a limited useful life using the straight-line method over the following periods:

Estimated Useful Life

(1) GoodwillDevelopment costs

5 – 6 years

Goodwill is measured as explained in Note 2.3 (1) 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.Software

6 years

(2) Intangible assets, except goodwillIndustrial property rights

5 – 50 years

Intangible assets, except for goodwill, are shown at historical cost. These assets have definite useful lives and are carried at historical cost less accumulated amortization. Assets with definite useful lives are amortized using the straight-line method according to the estimated useful lives presented below. However, facilityFrequency usage rights

5 – 10 years

Others1

2 – 50 years

1Membership rights (condominium membershipsmembership and golf memberships)membership) and broadcast license included in others are regardedclassified as intangible assets with indefinite useful life and not amortized, because there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows.life.

The estimated useful life used for amortizing intangible assets is as follows:
2.14Borrowing 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.

2.15Government 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’.

2.16Impairment ofNon-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 to sell and value in use.Non-financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment at the end of reporting period.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

2.17Financial Liabilities

Estimated Useful Lives

Development costs

5 – 6 years

Software

6 years

Industrial property rights

5 – 10 years

Frequency usage rights

5.75 – 15 years

Others 1

2 – 50 years

(1) Classification and measurement

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

2.14    Borrowing Costs

Borrowing costs incurred in the acquisition or construction of a qualifying asset are capitalized in the period when it is prepared for its intended use, and investment income earned on the temporary investment of borrowings made specifically for the purpose obtaining a qualifying asset is deducted from the borrowing costs eligible for capitalization during the period. Other borrowing costs are recognized as expenses for the period in which they are incurred.

2.15    Government Grants

Government grants related to assets are recognized in profit or loss on a systematic and rational basis over the useful life of the asset by setting up the grant as deferred income, and government grants related to income are deferred and recognized in the statement of income as part of ‘other non-operating income’ for the period in which the related expenses for the purpose of the government grants are incurred.

2.16    Impairment of Non-Financial Assets

Goodwill or intangible assets with indefinite useful lives are tested annually for impairment. Depreciable assets are tested for impairment when there is any indication an asset may be impaired.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

The Group’s financial liabilities at fair value through profit or loss are financial instruments held for trading and designated as financial liabilities at fair value through profit or loss. Financial liabilities held for trading are financial liabilities that are incurred principally for the purpose of repurchasing them in the near term and derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives. Financial liabilities that the Group designated as at fair value through profit or loss are structured financial liabilities containing embedded derivatives issued by the Group.

As it was unable to measure the embedded derivatives separately from its host contract, the Group designated the entire hybrid contact as at fair value through profit or loss. The financial liability that the Group designated as at fair value through profit or loss is a foreign convertible bond.

The Group classifiesnon-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 presented as ‘trade payables’, ‘borrowings’, and ‘other financial liabilities’ in the statement of financial position.

Preferred shares that provide for a mandatory redemption at a particular date are classified as liabilities. Interest expenses on these preferred shares calculated 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.

(2) 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, cancelled or expired or when the terms of an existing financial liability are substantially modified.

 

Assets that are subject to amortization are reviewed 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 to sell and value in use. Non-financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

2.17    Financial Liabilities

(1) Classification and measurement

The Group’s financial liabilities at fair value through profit or loss are financial instruments held for trading and designated as financial liabilities at fair value through profit or loss. Financial liabilities held for trading are financial liabilities that are incurred principally for the purpose of repurchasing them in the near term and derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives. Financial liabilities at fair value through profit or loss are structured financial liabilities containing embedded derivatives issued by the Group.

As it was unable to measure the embedded derivatives separately from its host contract, the Group designated the entire hybrid contact as at fair value through profit or loss. The financial liability that the Group designated as at fair value through profit or loss is a foreign convertible bond.

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 presented as ‘trade payables’, ‘borrowings’, and ‘other financial liabilities’ in the statement of financial position.

Preferred shares that provide for a mandatory redemption at a particular date are classified as liabilities. Interest expenses on these preferred shares calculated using the effective interest method are recognized in the statement of income as ���finance costs’, together with interest expenses recognized on other financial liabilities.

(2) 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, cancelled or expired or when the terms of an existing financial liability are substantially modified.

2.18Financial Guarantee Contracts

Financial guarantees contracts provided by the Group are initially measured at fair value on the date the guarantee was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the higher of the amounts below and recognized as ‘other financial liabilities’:

 

 • 

the amount determined in accordance with IAS 37,Provisions, Contingent Liabilities and Contingent Assets; or

•

the initial amount, less accumulated amortization recognized in accordance with IAS 18,Revenue.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

2.19    Compound Financial Instruments

Compound financial instruments are convertible bonds that can be converted into equity instruments at the option of the holder. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially on the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

2.20    Employee Benefits

(1) Post-employment benefits

The Group has both defined benefit and defined contribution 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. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. 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 and that have terms to maturity approximating to the terms of the related pension obligation. The remeasurements of the net defined benefit liability are recognized in other comprehensive income.

If any plan amendments, curtailments, or settlements occur, past service costs or any gains or losses on settlement are recognized as profit or loss for the year.

(2) 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.

2.21    Share-based payments

Equity-settled, share-based payments granted to employees are estimated at the grant date fair value of equity instruments and recognized as employee benefit expenses over the vesting period. The number of equity instruments expected to vest is remeasured with consideration to non-market vesting conditions at the end of the reporting period, with any changes from the original measurement recognized in the profit for the year and equity.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

2.22    Provisions

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation and the increase in the provision due to passage of time is recognized as interest expense.

2.23    Leases

(1) 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 and recognized as lease assets and liabilities at the lower of the fair value of the leased property and the present value of the minimum lease payments on the opening date of the lease period.

(2) 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.

2.24    Capital Stock

Common stocks are classified as equity.

Where the Controlling Company purchases its own equity share capital, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Controlling Company’s equity holders until the stocks are cancelled or reissued. Where such shares are subsequently reissued, any consideration received is included in equity attributable to the Controlling Company’s equity holders.

2.25    Revenue Recognition

Revenue is measured at the fair value of the consideration received or receivable for the sale of goods or rendering of services arising from the normal activities of the Group. It is stated as net of value added taxes, returns, rebates and discounts, after elimination of intra-company transactions.

The Group recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

met for each of the Group’s activities, as described below. The Group bases its estimate on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

(1) Sales of Services

When providing interconnection or telecommunications service to a customer based on service plans, the related revenue is recognized at the time service is provided. If the customer uses the telecommunications equipment according to the service plans, the related revenue is recognized on straight-line basis over the contract period. Revenue related to the other telecommunications services is recognized when the service is provided to the customer.

For other services, when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with such a transaction is recognized by reference to the stage of performance of the services. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue is recognized only to the extent of the expenses recognized that are recoverable.

Total consideration for combined services is allocated to each service in proportion to its fair value and the allocated amount is recognized as revenue according to revenue recognition policy for the service.

(2) Sales of goods

The Group sells a range of handsets. Revenue from the sale of goods is recognized when products are delivered to the purchaser.

(3) Interest income

Interest income is recognized using the effective interest method according to the time passed. When a loan and receivable is impaired, the Group reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate.

(4) Commission fees

Commission fees related to credit card business recognized when it is probable that future economic benefits will flow to the entity and these benefits can be reliably measured. Revenues from acquiree fee, agent fee, optional service fees, member service fees and credit card service charge are measured at the fair value of the consideration received and recognized on accrual basis.

(5) Royalty income

Royalty income is recognized on an accrual basis in accordance with IAS 37,Provisions, Contingent Liabilities and Contingent Assets; or

•the substance of the relevant agreements.

(6) Dividend income

Dividend income isamount initially recognized when the right to receive payment is established.less cumulative amortization in accordance with IAS 18,Revenue.

KT Corporation and Subsidiaries

Notes to Consolidated
2.19Compound Financial Statements

December 31, 2013, 2014 and 2015Instruments

Compound financial instruments are convertible bonds that can be converted into equity instruments at the option of the holder. The liability component of a compound financial instrument

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially on the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

 

(7) Customer loyalty program
2.20Employee Benefits

(1) Post-employment benefits

The Group operates both defined benefit and defined contribution 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.

(2) 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.

The Group operates a customer loyalty program where customers accumulate points for purchases made which entitle them to discounts on future purchases. The reward points are recognized as a separately identifiable component of the initial sale transaction. The fair value of the consideration received or receivable in respect of the initial sale is allocated between the reward points and the other components of the sale. The fair value of the reward points is measured by taking into account the proportion of the reward points that are not expected to be redeemed by customers.
2.21Share-based payments

Equity-settled share-based payment is recognized at fair value of equity instruments on grant date, 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 thenon-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.

When the options are exercised, the Group issues new shares. The proceeds received, net of any directly attributable transaction costs, are recognized as share capital (nominal value) and share premium.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

2.22Provisions

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation, and the increase in the provision due to passage of time is recognized as interest expense.

2.23Leases

(1) 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.

(2) 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.

2.24Share 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.

2.25Revenue from the reward points is recognized when the points are redeemedRecognition

Revenue is measured at the fair value of the consideration received or receivable for the sale of goods or rendering of services arising from the normal activities of the Group. Amounts disclosed as revenue are net of value added taxes, returns, rebates and discounts and the reward points expire 12 months after elimination of intra-group transactions.

The Group recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the Group; and when specific criteria have been met for each of the Group’s activities, as described below. The Group bases its estimate on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

(1) Rendering of Services

When providing interconnection or telecommunications service to a customer based on service plans, the related revenue is recognized at the time service is provided. If the customer uses the telecommunications equipment according to the service plans, the related revenue is recognized on straight-line basis over the contract period. Revenue related to the other telecommunications services is recognized when the service is provided to the customer.

For other services such as information technology and network services, satellite service, security service and others, when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with such a transaction is recognized by reference to the stage of performance of the services. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue is recognized only to the extent of the expenses recognized that are recoverable.

Total consideration for combined services is allocated to each service in proportion to its fair value and the allocated amount is recognized as revenue according to revenue recognition policy for the service.

(2) Sales of goods

The Group sells a range of handsets. Revenue from the sale of goods is recognized when products are delivered to the purchaser.

(3) Interest income

Interest income is recognized using the effective interest method according to the time passed. When a loan and receivable is impaired, the Group reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate.

(4) Commission fees

Commission fees related to credit card business are recognized when it is probable that future economic benefits will flow to the entity and these benefits can be reliably measured. Revenues from acquiree fee, agent fee, optional service fees, member service fees and credit card service charge are measured at the fair value of the consideration received and recognized on an accrual basis.

(5) Royalty income

Royalty income is recognized on an accrual basis in accordance with the substance of the relevant agreements.

(6) Dividend income

Dividend income is recognized when the right to receive payment is established.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

(7) Customer loyalty program

The Group operates a customer loyalty program where customers accumulate points for purchases made which entitle them to discounts on future purchases. The reward points are recognized as a separately identifiable component of the initial sale transaction. The fair value of the consideration received or receivable in respect of the initial sale is allocated between the reward points and the other components of the sale. The fair value of the reward points is measured by taking into account the proportion of the reward points that are not expected to be redeemed by customers. Revenue from the reward points is recognized when the points are redeemed.

2.26Current and Deferred Income Tax

The tax expense for the period consists of current and deferred tax. Tax is recognized on the profit for the period in the statement of income, 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 calculated on the basis of the tax laws enacted or substantively enacted at 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 tax is recognized for temporary differences arising between the tax bases of assets and liabilities and their carrying amounts as expected tax consequences at the recovery or settlement of the carrying amounts of the assets and liabilities. However, deferred tax assets and liabilities are not recognized if they arise 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 to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized.

The tax expense for the period consists of current and deferred tax. Tax is recognized on the profit for the period in the statement of 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 calculated on the basis of the tax laws enacted or substantively enacted at 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 tax is recognized for temporary differences arising between the tax bases of assets and liabilities and their carrying amounts as expected tax consequences at the recovery or settlement of the carrying amounts of the assets and liabilities. However, deferred tax assets and liabilities are not recognized if they arise 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.

Deferred tax liability is recognized for taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, 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, deferred tax asset is recognized for 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 against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

2.27    Deferred Loan Fees and CostsDividend

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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Loan origination fees in relation to loan origination process such as upfront fee, are deferred and amortized over the life of the loan as an adjustment to the yield of the loan using the effective interest rate method. Loan origination costs, which relates to loan origination activities such as commissions to brokers, are deferred and amortized over the life of the loan as an adjustment to the yield of the loan, using the effective interest rate method, if the future economic benefit related costs incurred can be matched with each loan.

In addition, the amortizations of the deferred loan origination fees on costs are offset and the net amounts are presented in the consolidated statement of financial position.

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 issuance of the December 31, 2016 financial statements of the Group was approved by the directors on April 28, 2017.

The issuance of the December 31, 2015 financial statements of the Group was approved by the directors on April 25, 2016.

2.30    US Dollar Convention Translation

The December 31, 2015 consolidated financial statements are expressed in Korean Won and have been translated in US dollars at the rate of￦1,172.0 to US$1, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. and in effect on December 31, 2015, solely for the convenience of the reader. These translations should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.

3.Critical Accounting Estimates and Assumptions

The Group makes estimates and assumptions concerning the future. The estimates and assumptions are continuously evaluated with consideration to factors such as events reasonably predictable in the foreseeable future within the present circumstance according to historical experience. The resulting accounting estimates will, by definition, seldom equal the related actual results. 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 addressed below.

The Group makes estimates and assumptions concerning the future. The estimates and assumptions are continuously evaluated with consideration to factors such as events reasonably predictable in the foreseeable future within the present circumstance according to historical experience. The resulting accounting estimates will, by definition, seldom equal the related actual results. 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 addressed below.

3.1Impairment of Goodwill

The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations (Note 13)

The Group tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of cash-generating units (CGUs) is determined based onvalue-in-use calculations (Note 12).

3.2    Income Taxes

The Group is operating in numerous countries and the income generated from these operations is subject to income taxes based on tax laws and interpretations of tax authorities in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain (Note 29).

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

3.2Income Taxes

The Group is operating in numerous countries and the income generated from these operations is subject to income taxes based on tax laws and interpretations of tax authorities in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain (Note 28).

If certain portion of the taxable income is not used for investments or increase in wages or dividends in accordance with theTax System For Recirculation of Corporate Income, the Group is liable to pay additional income tax calculated based on the tax laws. The new tax system is effective for three years from 2015. Accordingly, the measurement of current and deferred income tax is affected by the tax effects from the new system. As the Group’s income tax is dependent on the investments, increase in wages and dividends, there existsis an uncertainty with regard toin measuring the final tax effects.

3.3    Fair Value of Derivatives and Financial Instruments

3.3Fair 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 36)35).

3.4    Allowance for Doubtful Accounts

3.4Allowance for doubtful accounts

The Group recognizes provisions for accounting of estimated loss in customers’ insolvency. When the allowanceAllowance for doubtful accounts is estimated, it is based on the aging analysis of trade receivables balances, incurred loss experience, customers’ credit rates and changes of payment terms. If the customer’s financial position becomes worse, the actual loss amount will be increased more than the estimated.

3.5    Net defined benefit liability

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

3.5Net 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)17).

3.6    Deferred Revenue

3.6Deferred Revenue

Service installation fees and initial subscription fees related to activation of service are deferred and recognized as revenue over the expected terms of customer relationships. The estimate of expected terms of customer relationship is based on the historical rate. If management’s estimation is amended, it may cause significant differences in the timing of revenue recognition and amount recognized.

3.7    Provisions

3.7Provisions

As described in Note 17,16, the Group records provisions for litigation and assets retirement obligations as of 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, Intangible Assets and Investment Property

3.8Useful lives of Property and Equipment, Intangible Assets and Investment Property

Depreciation on the property and equipment, intangible assets and investment property, excluding land, condominium memberships, golf club memberships, and broadcasting concession, is calculated 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 if the useful lives are considered shorter than the previously estimated useful lives.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

4.    Financial Instruments by category

4.Financial Instruments by Category

Financial instruments by category as of December 31, 20142015 and 2015,2016, are as follows:

 

(In millions of Korean won)

  2014   2015 

Financial assets

  Loans
and
receivables		   Assets at fair
value through
the profit and loss		   Derivatives
used for
hedge		   Available-
for-sale		   Held-to-
Maturity		   Total   

Loans

and

receivables

   

Assets at fair
value through
profit

and loss

   Derivatives
used for
hedge		   

Available-

for-sale

   

Held-to-

Maturity

   Total 

Cash and cash equivalents

  ￦1,888,663    ￦ —    ￦ —    ￦ —    ￦ —    ￦1,888,663    ￦2,559,464   ￦—     ￦—     ￦—     ￦—     ￦2,559,464 

Trade and other receivables

   5,659,913     —     —     —     —     5,659,913     5,557,779    —      —      —      —      5,557,779 

Loans receivable

   1,295,282     —     —     —     —     1,295,282  

Finance lease receivables

   584,413     —     —     —     —     584,413  

Other financial assets

   455,622     6,983     41,540     525,556     7,767     1,037,468     434,093    18    139,088    360,037    18,030    951,266 

 

(In millions of Korean won)

  2014   2015 

Financial liabilities

  Liabilities at
fair value through
the profit and loss		   Derivatives
used for
hedge		   Financial
liabilities at
amortized
cost		   Other
liabilities		   Total   

Liabilities at
fair value
through profit

and loss

   

Derivatives

used for
hedge

   Financial
liabilities at
amortized cost		   Total 

Trade and other payables

  ￦ —    ￦ —    ￦7,317,303    ￦ —    ￦7,317,303    ￦—     ￦—     ￦7,004,000   ￦7,004,000 

Finance lease liabilities

   —     —     55,007     —     55,007  

Borrowings

   —     —     12,815,385     —     12,815,385     —      —      8,634,897    8,634,897 

Other financial liabilities

   3,980     122,012     82,816     5,434     214,242     2,006    62,883    82,439    147,328 

(In millions of Korean won)

  2015 

Financial assets

  Loans
and
receivables		   Assets at fair
value through
the profit and loss		   Derivatives
used for
hedge		   Available-
for-sale		   Held-to-
Maturity		   Total 

Cash and cash equivalents

  ￦2,559,464    ￦—    ￦ —    ￦ —    ￦ —    ￦2,559,464  

Trade and other receivables

   5,527,644     —     —     —     —     5,527,644  

Loans receivable

   15,877     —     —     —     —     15,877  

Finance lease receivables

   14,258     —     —     —     —     14,258  

Other financial assets

   434,093     18     139,088     360,037     18,030     951,266  

(In millions of Korean won)

  2015 

Financial liabilities

  Liabilities at
fair value through
the profit and loss		   Derivatives
used for
hedge		   Financial
liabilities at
amortized
cost		   Other
liabilities		   Total 

Trade and other payables

  ￦ —    ￦ —    ￦6,847,803    ￦—    ￦6,847,803  

Finance lease liabilities

   —     —     156,197     —     156,197  

Borrowings

   —     —     8,634,897     —     8,634,897  

Other financial liabilities

   2,006     62,883     82,439     —     147,328  

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

Income

(In millions of Korean won)  2016 
Financial assets  

Loans

and

receivables

   

Assets at fair

value through
profit

and loss

   Derivatives
used for
hedge		   

Available-

for-sale

   

Held-to-

Maturity

   Total 

Cash and cash equivalents

  ￦2,900,311   ￦—     ￦—     ￦—     ￦—     ￦2,900,311 

Trade and other receivables

   6,036,363    —      —      —      —      6,036,363 

Other financial assets

   716,769    6,277    227,318    404,774    30,143    1,385,281 

(In millions of Korean won)  2016 
Financial liabilities  Liabilities at
fair value
through profit
and loss		   

Derivatives

used for
hedge

   Financial
liabilities at
amortized cost		   Total 

Trade and other payables

  ￦—     ￦—     ￦8,328,082   ￦8,328,082 

Borrowings

   —      —      8,120,791    8,120,791 

Other financial liabilities

   1,973    14,928    91,763    108,664 

Gains or expense (gain or loss) bylosses arising from financial instruments by category for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

(In millions of Korean won)

  2013  2014  2015 

Loans and receivables

    

Interest income 1,4

  ￦127,875   ￦94,380   ￦85,603) 

Loss on foreign currency transaction

   5,985    (1,086)   (365) 

Gain on foreign currency translation

   (5,245)   7,954    1,921  

Loss on disposal

   (8,009)   (16,464)   (2,539) 

Bad debts expense

   (148,032)   (230,791)   (141,555) 

Assets at fair value through the profit or loss

    

Loss on disposal

   375    (587)   368  

Loss on valuation

   (4,350)   (794)   —  

Derivatives used for hedging

    

Gain(loss) on transaction

   1,134    (34,653)   (5,157) 

Gain on valuation

   127    64,700    141,512  

Other comprehensive income 2

   (1,936)   28,928    100,401  

Reclassified to profit or loss from other comprehensive loss 2,3

   1,408    (49,524)   (88,003) 

Available -for-sale

    

Interest income 1,4

   49    45    73  

Dividend income

   4,700    3,808    7,733  

Gain(loss) on disposal

   2,241    (13,495)   131,045  

Impairment loss

   (5,052)   (70,022)   (1,471) 

Other comprehensive income 2

   49,778    39,336    47,381  

Reclassified to profit or loss from other comprehensive income 2

   6,554    (17,173)   (83,397) 

Held-to-Maturity

    

Interest income 1,4

   1    159    226  

Liabilities at fair value through the profit and loss

    

Gain on foreign currency transaction

   42    (134)   —  

Gain(loss) on disposal

   (676)   13    (850) 

Gain(loss) on valuation

   (6)   32    (2,006) 

Derivatives used for hedging

    

Gain(loss) on disposal

   (3,339)   2,121    (273) 

Gain(loss) on valuation

   (97,289)   3,179    (1,733) 

Other comprehensive income(loss) 2

   (70,367)   (11,938)   11,513  

Reclassified to profit or loss from other comprehensive income2,3

   66,199    4,729    (9,959) 

Financial liabilities at amortized cost

    

Interest expense 4

   (436,374)   (475,084)   (385,925) 

Gain(loss) foreign currency transaction

   (285)   12,443    (23,416) 

Gain(loss) foreign currency translation

   94,022    (99,145)   (166,254) 

Other liabilities

    

Financial guarantee gain

   (9,034)   5,198    —  
  

 

 

  

 

 

  

 

 

 

Total

  ￦(429,504)  ￦(753,865)  ￦(385,127) 
  

 

 

  

 

 

  

 

 

 
(In millions of Korean won)  2014  2015  2016 

Loans and receivables

    

Interest income1, 4

  ￦94,380  ￦85,603  ￦129,813 

Loss on foreign currency transaction

   (1,086)   (365)   (7,493) 

Gain on foreign currency translation

   7,954   1,921   3,083 

Loss on disposal

   (16,464)   (2,539)   (15,838) 

Loss on valuation

   (230,791)   (141,555)   (92,589) 

Assets at fair value through profit or loss

    

Gain(loss) on disposal

   (587)   368   186 

Loss on valuation

   (794)   —     (7,184) 

Derivatives used for hedging

    

Loss on transaction

   (34,653)   (5,157)   —   

Gain on valuation

   64,700   141,512   109,436 

Other comprehensive income for the year2

   28,928   100,401   60,501 

Reclassified to profit or loss from other comprehensive income for the year2,3

   (49,524)   (88,003)   (71,915) 

Available-for-sale

    

Interest income1,4

   45   73   40 

Dividend income

   3,808   7,733   3,926 

Gain(loss) on disposal

   (13,495)   131,045   22,695 

Impairment loss

   (70,022)   (1,471)   (966) 

Other comprehensive income for the year2

   39,336   47,381   10,925 

Reclassified to profit or loss from other comprehensive income for the year2

   (17,173)   (83,397)   (3,840) 

Held-to-Maturity

    

Interest income1,4

   159   226   213 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

(In millions of Korean won)  2014  2015  2016 

Liabilities at fair value through profit and loss

    

Loss on foreign currency transaction

   (134)   —     —   

Gain(loss) on disposal

   13   (850)   (632) 

Gain(loss) on valuation

   32   (2,006)   33 

Derivatives used for hedging

    

Gain(loss) on transactions

   2,121   (273)   8,329 

Gain(loss) on valuation

   3,179   (1,733)   (138) 

Other comprehensive income for the year2

   (11,938)   11,513   4,295 

Reclassified to profit or loss from other comprehensive income for the year2,3

   4,729   (9,959)   (3,956) 

Financial liabilities at amortized cost

    

Interest expense4

   (475,084)   (385,925)   (337,219) 

Gain(loss) foreign currency transaction

   12,443   (23,416)   (7,518) 

Loss foreign currency translation

   (99,145)   (166,254)   (112,864) 

Other liabilities

    

Financial guarantee gain

   5,198   —     —   

Total

  ￦(753,865)  ￦(385,127)  ￦(308,677) 

 

1BC Card, a subsidiary of the Group, recognizesrecognized interest income as operating revenue. Interest income recognized as operating revenue is￦15,86714,380 million (2013:￦20,374 million, 2014:(2014:￦14,340 million, 2015:￦15,867 million) for the year ended December 31, 2015.2016.

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

3During the year, certain derivatives of the Group 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.

4TheExcluded the interest income amounting to￦75,221 million (2013:￦151,467 million, 2014:(2014:￦143,391 million) and the interest expense amounting to￦59,889 million (2013:￦111,755 million, 2014:(2014:￦103,126 million) recognized by KT Rental Co., Ltd. and KT Capital Co., Ltd., former subsidiaries, as they are classified as discontinued operations.operations for the year ended December 31, 2015.

5.Cash and Cash Equivalents to Restricted Cash

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

5.    Cash and Cash Equivalents

CashRestricted cash and cash equivalents as of December 31, 20142015 and 2015,2016, are as follows:

 

(In millions of Korean won)

  2014   2015 

Cash on hand

  ￦3,918    ￦21,928  

Cash in banks

   805,145     1,256,049  

Money market trust

   699,879     656,000  

Other financial instruments

   379,721     625,487  
  

 

 

   

 

 

 

Total

  ￦1,888,663    ￦2,559,464  
  

 

 

   

 

 

 
(In millions of Korean won)  Type  2015  2016  Description

Restricted cash and

cash equivalents

  Restricted deposit  ￦9,033  ￦19,920  Deposit restricted for governmental 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.

Restricted cash

KT Corporation and cash equivalents as of Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2015, are as follows:2016

 

(In millions of Korean won)

  Type   2014   2015   

Description

Cash and cash equivalents

   Restricted deposit     ￦3,318     ￦9,033    Deposit restricted for governmental project and others

6.    Trade and Other Receivables

6.Trade and Other Receivables

Trade and other receivables as of December 31, 20142015 and 2015,2016, are as follows:

 

  2014   2015 

(in millions of Korean won)

  Total
amounts		   Allowance for
doubtful
accounts		 Present
value discount		 Carrying
value		 

(In millions of

Korean won)

  

Total

amounts

   

Allowance
for

doubtful

accounts

   

Present

value
discount

   

Carrying

amount

 

Current assets

              

Trade receivables

  ￦3,657,814    ￦(524,865)  ￦(9,589)  ￦3,123,360    ￦3,483,719   ￦(468,263)   ￦(8,879)   ￦3,006,577 

Other receivables

   1,872,095     (183,987)   (418)   1,687,690     2,023,195    (175,753)    (387)    1,847,055 
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total

  ￦5,529,909    ￦(708,852)  ￦(10,007)  ￦4,811,050  
  ￦5,506,914   ￦(644,016)   ￦(9,266)   ￦4,853,632 
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Non-current assets

              

Trade receivables

  ￦393,354    ￦(2,752)  ￦(25,217)  ￦365,385    ￦248,212   ￦(478)   ￦(16,644)   ￦231,090 

Other receivables

   552,190     (26,659)   (42,053)   483,478     583,562    (75,089)    (35,416)    473,057 
  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total

  ￦945,544    ￦(29,411)  ￦(67,270)  ￦848,863  
  

 

   

 

  

 

  

 

   ￦831,774   ￦(75,567)   ￦(52,060)   ￦704,147 
  

 

   

 

   

 

   

 

 

 

   2015 

(in millions of Korean won)

  Total
amounts		   Allowance for
doubtful
accounts		  Present
value discount		  Carrying
value		 

Current assets

      

Trade receivables

  ￦3,483,719    ￦(468,263)  ￦(8,879)  ￦3,006,577  

Other receivables

   2,014,442     (172,739)   (387)   1,841,316  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

  ￦5,498,161    ￦(641,002)  ￦(9,266)  ￦4,847,893  
  

 

 

   

 

 

  

 

 

  

 

 

 

Non-current assets

      

Trade receivables

  ￦248,212    ￦(478)  ￦(16,644)  ￦231,090  

Other receivables

   548,569     (64,492)   (35,416)   448,661  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

  ￦796,781    ￦(64,970)  ￦(52,060)  ￦679,751  
  

 

 

   

 

 

  

 

 

  

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

   2016 

(In millions of

Korean won)

  

Total

amounts

   

Allowance
for

doubtful

accounts

   

Present

value
discount

   

Carrying

amount

 

Current assets

        

Trade receivables

  ￦3,161,234   ￦(470,239)   ￦(5,343)   ￦2,685,652 

Other receivables

   2,763,942    (121,972)    (270)    2,641,700 
  

 

 

   

 

 

   

 

 

   

 

 

 
  ￦5,925,176   ￦(592,211)   ￦(5,613)   ￦5,327,352 
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-current assets

        

Trade receivables

  ￦263,367   ￦(632)   ￦(12,835)   ￦249,900 

Other receivables

   507,251    (19,644)    (28,496)    459,111 
  

 

 

   

 

 

   

 

 

   

 

 

 
  ￦770,618   ￦(20,276)   ￦(41,331)   ￦709,011 
  

 

 

   

 

 

   

 

 

   

 

 

 

The fair values of trade and other receivables with original maturities less than one year equal to their carrying valuesamounts 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 borrowinginterest rate.

Details of changes in allowanceAllowance for doubtful accounts for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

  2014 2015   2015   2016 

(in millions of Korean won)

  Trade
receivables		 Other
receivables		 Trade
receivables		 Other
receivables		 
(In millions of Korean won)  Trade
receivables		   Other
receivables		   Trade
receivables		   Other
receivables		 

Beginning balance

  ￦525,666   ￦152,596   ￦527,617   ￦210,646    ￦527,617   ￦311,082   ￦468,741   ￦250,842 

Provision

   127,881    71,254    95,489    43,620     95,489    46,066    84,975    7,736 

Reversal or written-off

   (124,993)   (16,201)   (135,381)   (12,336)    (135,381)    (33,282)    (80,518)    (108,638) 

Changes in the scope of consolidation

   (334)   3,759    (16,752)   (5,401)    (16,752)    (69,732)    215    56 

Others

   (603)   (762)   (2,232)   702     (2,232)    (3,292)    (2,542)    (8,380) 
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Ending balance

  ￦527,617   ￦210,646   ￦468,741   ￦237,231    ￦468,741   ￦250,842   ￦470,871   ￦141,616 
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

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

Details of aging analysis of trade receivables as of December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014  2015 

Neither past due nor impaired

  ￦2,893,083   ￦2,756,471  
  

 

 

  

 

 

 

Past due and impaired

   

Up to six months

   707,140    606,704  

Six months to twelve months

   101,297    82,668  

Over twelve months

   314,842    260,565  
  

 

 

  

 

 

 
   1,123,279    949,937  

Allowance for doubtful accounts

   (527,617)   (468,741) 
  

 

 

  

 

 

 

Total

  ￦3,488,745   ￦3,237,667  
  

 

 

  

 

 

 
(in millions of Korean won)  2015   2016 

Neither past due nor impaired

  ￦2,756,471   ￦2,377,637 
  

 

 

   

 

 

 

Past due and impaired

    

Up to 6 months

   606,704    685,288 

6 months to 12 months

   82,668    87,547 

Over 12 months

   260,565    255,951 
  

 

 

   

 

 

 
   949,937    1,028,786 

Less: Allowance for doubtful accounts

   (468,741)    (470,871) 
  

 

 

   

 

 

 
  ￦3,237,667   ￦2,935,552 
  

 

 

   

 

 

 

The detailDetails of other receivables as of December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014 2015 
(In millions of Korean won)  2015   2016 

Loans

  ￦81,963   ￦117,808    ￦117,808   ￦80,308 

Receivables1

   1,834,813    1,973,280     1,973,280    2,709,177 

Accrued income

   26,032    10,119     10,119    9,903 

Refundable deposits

   434,846    403,816     403,816    390,035 

Loans receivable

   29,101    10,355 

Finance lease receivables

   14,645    16,280 

Others

   4,160    22,185     22,185    26,369 

Allowance

   (210,646)   (237,231) 

Less: Allowance for doubtful accounts

   (250,842)    (141,616) 
  

 

  

 

   

 

   

 

 

Total

  ￦2,171,168   ￦2,289,977  
  

 

  

 

   ￦2,320,112   ￦3,100,811 

Current

   1,687,690    1,841,316  
  

 

  

 

   

 

   

 

 

Non-current

   483,478    448,661  
  

 

  

 

 

 

1The settlement receivables of BC Card Co., Ltd. of￦1,211,2721,962,880 million (2014:(2015:￦1,123,7441,211,272 million) are included.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

Details of aging analysis of other receivables as of December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014  2015 

Neither past due nor impaired

  ￦2,046,235   ￦2,185,438  
  

 

 

  

 

 

 

Past due and impaired

   

Up to six months

   87,852    113,525  

Six months to twelve months

   77,773    11,918  

Over twelve months

   169,954    216,327  
  

 

 

  

 

 

 
   335,579    341,770  

Allowance for doubtful accounts

   (210,646)   (237,231) 
  

 

 

  

 

 

 

Total

  ￦2,171,168   ￦2,289,977  
  

 

 

  

 

 

 
(In millions of Korean won)  2015   2016 

Neither past due nor impaired

  ￦2,203,796   ￦2,971,239 
  

 

 

   

 

 

 

Past due and impaired

    

Up to 6 months

   114,920    134,231 

6 months to 12 months

   12,163    12,805 

Over 12 months

   240,075    124,152 
  

 

 

   

 

 

 
   367,158    271,188 

Less: Allowance for doubtful accounts

   (250,842)    (141,616) 
  

 

 

   

 

 

 

Total

  ￦2,320,112   ￦3,100,811 
  

 

 

   

 

 

 

The maximum exposure of trade and other receivables to credit risk is the carrying valueamount of each class of receivables mentioned above as of December 31, 2015. As of December 31, 2015, the Group is provided with guarantees of￦578,904 million (2014:￦674,768 million) by Seoul Guarantee Insurance related to the collection of certain accounts receivable arising from the handset sales.2016.

7.    Loans Receivable

Loans receivable as of December 31, 2014 and 2015, are as follows:

Current

   2014  2015 

(in millions of Korean won)

  Original
amount		  Allowance
for doubtful
accounts		  Carrying
Value		  Original
amount		   Allowance
for doubtful
accounts		  Carrying
Value		 

Factoring receivables

  ￦64,231   ￦(2,916)  ￦61,315   ￦ —    ￦ —   ￦ —  

Loans

   645,955    (28,331)   617,624    —     —    —  

Loans for installment credit

   32,875    (1,231)   31,644    —     —    —  

Deferred loan origination profit and loss

   (215)   —    (215)   —     —    —  

New technology financial loans

   2,736    (2,736)   —    2,736     (2,736)   —  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total1

  ￦745,582   ￦(35,214)  ￦710,368   ￦2,736    ￦(2,736)  ￦ —  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

1As a result of the disposal of KT Capital and KT Rental, which were the Company’s subsidiaries, current loans receivable decreased by￦680 billion and￦30 billion respectively.

Non-Current

   2014   2015 

(in millions of Korean won)

  Original
amount		   Allowance
for doubtful
accounts		  Carrying
Value		   Original
amount		   Allowance
for doubtful
accounts		  Carrying
Value		 

Factoring receivables

  ￦6,721    ￦(173)  ￦6,548    ￦ —    ￦ —   ￦ —  

Loans

   497,153     (18,349)   478,804     —     —    —  

Loans for installment credit

   54,580     (2,336)   52,244     —     —    —  

Deferred loan origination profit and loss

   4,209     —    4,209     —     —    —  

New technology financial investment assets

   8,884     (1,707)   7,177     8,048     (1,918)   6,130  

New technology financial loans

   57,256     (21,324)   35,932     18,317     (8,570)   9,747  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total1

  ￦628,803    ￦(43,889)  ￦584,914    ￦26,365    ￦(10,488)  ￦15,877  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

1As a result of the disposal of KT Capital and KT Rental, which were the Company’s subsidiaries, non-current loans receivable decreased by￦514 billion and￦55 billion respectively.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

The fair values of loans receivable with maturities less than one year equal their carrying values because the discounting effect is immaterial. The fair value of loans receivable with original maturities longer than one year is determined discounting the future cash flow at the weighted average borrowing rate.

Details of changes in allowance for doubtful accounts for the years ended December 31, 2014, 2015 and 2015, are as follows:2016

 

(in millions of Korean won)

  2014  2015 

Beginning

  ￦73,075   ￦79,103  

Provision

   31,656    2,446  

Reversal or written-off

   (23,618)   —  

Changes in scope of consolidation 1

   —    (64,331) 

Others

   (2,010)   (3,994) 
  

 

 

  

 

 

 

Ending

  ￦79,103   ￦13,224  
  

 

 

  

 

 

 

 

17.As a result of the disposal of KT CapitalOther Financial Assets and KT Rental, which were the company’s subsidiaries, allowance for doubtful accounts decreased by￦59 billion and￦5 billion respectively, during the year ended December 31, 2015.Liabilities

Provisions for doubtful loans receivable are recognized as operating expenses.

Details of aging analysis of loans receivable as of December 31, 2014 and 2015, are as follows:

(in millions of Korean won)

  2014  2015 

Neither past due nor impaired

  ￦1,236,387   ￦4,605  
  

 

 

  

 

 

 

Past due and impaired

   

Up to six months

   101,071    580  

Six months to twelve months

   3,718    190  

Over twelve months

   33,209    23,726  
  

 

 

  

 

 

 
   137,998    24,496  

Allowance for doubtful accounts

   (79,103)   (13,224) 
  

 

 

  

 

 

 

Total

  ￦1,295,282   ￦15,877  
  

 

 

  

 

 

 

The maximum exposure of loans receivable to credit risk is carrying value as of December 31, 2015.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

8.    Other Financial Assets and Liabilities

Otherother financial assets and liabilities as of December 31, 20142015 and 2015,2016, are as follows:

 

(In millions of Korean won)

  2014 2015   2015   2016 

Other financial assets

       

Assets at fair value through the profit or loss

  ￦6,983   ￦18  

Financial assets at fair value through profit or loss

  ￦18   ￦6,277 

Derivatives used for hedge

   41,540    139,088     139,088    227,318 

Financial instruments 1

   455,622    434,093     434,093    716,769 

Available-for-sale financial assets 1

   525,556    360,037     360,037    404,774 

Held-to-maturity investments

   7,767    18,030     18,030    30,143 

Less: Non-current

   (704,760)   (658,323)    (658,323)    (664,726) 
  

 

  

 

   

 

   

 

 

Current

  ￦332,708   ￦292,943    ￦292,943   ￦720,555 
  

 

  

 

   

 

   

 

 

Other financial liabilities

       

Liabilities at fair value through the profit or loss

  ￦3,980   ￦2,006  

Financial liabilities at fair value through the profit or loss

  ￦2,006   ￦1,973 

Derivatives used for hedge

   122,012    62,883     62,883    14,928 

Financial guarantee liabilities 2

   5,434    —  

Other financial liabilities

   82,816    82,439  

Other financial liabilities2

   82,439    91,763 

Less: Non-current

   (190,525)   (103,683)    (103,683)    (108,431) 
  

 

  

 

   

 

   

 

 

Current

  ￦23,717   ￦43,645    ￦43,645   ￦233 
  

 

  

 

   

 

   

 

 

 

1Restricted other financial assets asAs of December 31, 20142016, the Group’s financial instruments amounting to￦49,721 million (December 31, 2015:￦42,669 million), which consist of certain proceeds from the disposal of Ustream Inc. deposited in an escrow account, checking account deposits and 2015,deposits forWin-win Growth Cooperative loans, are as follows:subject to withdrawal restrictions.

(In millions of Korean won)

 ��2014   2015   

Details

Short-term financial instruments

  ￦2,000    ￦2,000    Collateral of payments for the handset

Short-term financial instruments

   17,776     17,307    Collateral and payment guarantee

Short-term financial instruments

   —     2,051    Proceed from disposal of Enswers Inc. deposited in the escrow account

Long-term financial instruments

   6,308     6,311    Deposit for Win-win Growth Cooperative loans

Available-for-sale financial assets

   1,000     1,000    Collateral for Korea Software Financial Cooperative

2The Group recognized the financial guarantee liabilities related to an obligation to fund Smart Channel.Redeemable preferred shares of subsidiaries of￦87,769 million (2015:￦79,238 million) are included.

Financial instruments at fair value through the profit or loss as of December 31, 20142015 and 2015,2016, are as follows:

 

   2014   2015 

(in millions of Korean won)

  Assets   Liabilities   Assets   Liabilities 

Financial instruments held for trading

        

Other derivatives

  ￦6,983    ￦646    ￦18    ￦2,006  

Financial instruments at fair value through the profit and loss

   —     3,334     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦6,983    ￦3,980    ￦18    ￦2,006  
  

 

 

   

 

 

   

 

 

   

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

   2015   2016 
(In millions of Korean won)  Assets   Liabilities   Assets   Liabilities 

Financial instruments at fair value through profit and loss

  ￦—     ￦—     ￦6,277   ￦—   

Other derivatives liabilities

  ￦18   ￦2,006   ￦—     ￦1,973 

The valuation gains and losses on financial assets held for trading for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

  2013   2014   2015   2014   2015   2016 

(in millions of Korean won)

  Valuation
gain		   Valuation
loss		   Valuation
gain		   Valuation
loss		   Valuation
gain		   Valuation
loss		   Valuation
gains		   Valuation
losses		   Valuation
gains		   Valuation
losses		   Valuation
gains		   Valuation
losses		 

Currency swap

  ￦—    ￦8,395    ￦—    ￦—    ￦—    ￦—  

Currency forward

   499     —     —     —     —     —  

Interest rate swap

   —     —     —     1     —     —    ￦—     ￦1   ￦—     ￦—     ￦—     ￦—   

Other derivatives

   3,546     —     611     1,006     —     —     611    1,006    —      —      —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  ￦4,045    ￦8,395    ￦611    ￦1,007    ￦—    ￦—    ￦    611   ￦    1,007   ￦    —     ￦    —     ￦    —     ￦    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

The valuation gains and losses on financial instruments at fair value through the profit or loss for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

(In millions of Korean won)

  2013   2014 2015   2014   2015   2016 

Profit (loss) foreign currency translation

  ￦42    ￦(134)  ￦—  

Profit (loss) on valuations

   309     (398)   —  

Loss foreign currency translation

  ￦(134)   ￦—     ￦—   

Loss on valuation

   (398)    —      —   
  

 

   

 

  

 

   

 

   

 

   

 

 

Total

  ￦351    ￦(532)  ￦—    ￦    (532)   ￦    —     ￦    —   
  

 

   

 

  

 

   

 

   

 

   

 

 

The maximum exposure of debt securities of financial instruments at fair value through the profit or loss to credit risk is carrying valueamount as of December 31, 2015.2016.

The valuation gains and losses on financial assets and liabilities at fair value forthrough profit or loss and held for trading for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

Financial assets and liabilities at fair value through profit or loss

   2013   2014   2015 

(in millions of Korean won)

  Valuation
gain		   Valuation
loss		   Valuation
gain		   Valuation
loss		   Valuation
gain		   Valuation
loss		 

Other derivatives liabilities

  ￦—    ￦6    ￦32    ￦—    ￦—    ￦2,006  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦—    ￦6    ￦32    ￦—    ￦—    ￦2,006  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   2014   2015   2016 
(in millions of Korean won)  Valuation
gains		   Valuation
losses		   Valuation
gains		   Valuation
losses		   Valuation
gains		   Valuation
losses		 

Valuation gains and losses on financial assets

  ￦—     ￦—     ￦—     ￦—     ￦470   ￦7,654 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦    —     ￦    —     ￦    —     ￦    —     ￦    470   ￦    7,654 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held for trading

  2014  2015  2016 
(in millions of Korean won) Valuation
gains		  Valuation
losses		  Valuation
gains		  Valuation
losses		  Valuation
gains		  Valuation
losses		 

Valuation gains and losses on financial assets

 ￦32  ￦—    ￦—    ￦2,006  ￦33  ￦—   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 ￦    32  ￦    —    ￦    —    ￦    2,006  ￦    33  ￦    —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The maximum exposure of debt securities of financial instruments at fair value through the profit or loss to credit risk is carrying valueamount as of December 31, 2015.2016.

Derivatives used for hedge as of December 31, 20142015 and 2015,2016, are as follows:

 

  2014   2015   2015 2016 

(in millions of Korean won)

  Assets   Liabilities   Assets   Liabilities   Assets Liabilities Assets Liabilities 

Interest rate swap 1

  ￦ —    ￦601    ￦ —    ￦2,859    ￦—    ￦2,859  ￦—    ￦3,278 

Currency swap2

   41,540     121,411     137,100     58,284     137,100  58,284  214,648  11,650 

Currency forwards3

   —     —     1,988     1,740     1,988  1,740  12,670   —   
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

 

Total

   41,540     122,012     139,088     62,883     139,088  62,883  227,318  14,928 

Less: non-current

   (34,198)    (107,667)    (139,088)    (19,238)    (139,088)  (19,238)  (97,220)  (14,695) 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

 

Current

  ￦7,342    ￦14,345    ￦ —    ￦43,645    ￦—    ￦43,645  ￦130,098  ￦233 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

 

 

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

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

2The 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.

3The 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

The full value of a hedging derivative is classified as anon-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 derivatives contracts for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

(in millions of Korean
won)

 2013 2014 2015  2014 2015 2016 

Type of Transaction

 Valuation
gain		 Valuation
loss		 Accumulated
other
comprehensive
income(loss) 1		 Valuation
gain		 Valuation
loss		 Accumulated
other
comprehensive
income 1		 Valuation
gain		 Valuation
loss		 Accumulated
other
comprehensive
income(loss) 1		  Valuation
gain		 Valuation
loss		 

Other

comprehensive
income1

 Valuation
gain		 Valuation
loss		 

Other

comprehensive
income1

 Valuation
gain		 Valuation
loss		 

Other

comprehensive
income1

 

Interest rate swap

 ￦ —   ￦ —   ￦405   ￦ —   ￦ —   ￦334   ￦ —   ￦ —   ￦(2,858)  ￦—    ￦—    ￦334  ￦—    ￦—    ￦(2,858)  ￦—    ￦148  ￦(142) 

Currency swap

  127    97,289    (95,792)   93,235    25,356    22,080    141,512    1,733    150,255   93,235  25,356  22,080  141,512  1,733  150,255  97,158  (10)  85,479 

Currency forwards

  —    —    —    —    —    —    —    —    247    —     —     —     —     —    247  12,278   —    146 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 ￦127   ￦97,289   ￦(95,387)  ￦93,235   ￦25,356   ￦22,414   ￦141,512   ￦1,733   ￦147,644   ￦93,235  ￦25,356  ￦22,414  ￦141,512  ￦1,733  ￦147,644  ￦109,436  ￦138  ￦85,483 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

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

The ineffective portion recognized in profit or loss on the cash flow hedge is valuation incomegain of￦2,6631,637 million for the current year (2013: valuation income of￦1,241 million, 2014:period (2014: valuation income of￦1,178 million, 2015: valuation gain of￦2,663 million).

Details ofavailable-for-sale financial assets as of December 31, 2014,2015, and 20152016 are as follows:

 

(In millions of Korean won)

  2014 2015   2015 2016 

Marketable equity securities

  ￦55,631   ￦41,202    ￦41,202  ￦5,387 

Non-marketable equity securities

   442,055    297,447     297,447  372,703 

Marketable debt securities

   10,301    —  

Non-marketable debt securities

   17,569    21,388  

Debt securities

   21,388  26,684 
  

 

  

 

   

 

  

 

 

Total

   525,556    360,037     360,037  404,774 

Less: non-current

   (509,253)   (342,562)    (342,562)  (384,798) 
  

 

  

 

   

 

  

 

 

Current

  ￦16,303   ￦17,475    ￦17,475  ￦19,976 
  

 

  

 

   

 

  

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Changes ofavailable-for-sale financial assets for the years ended December 31, 2014,2015, and 20152016 are as follows:

 

(In millions of Korean won)

  2014 2015   2015 2016 

Beginning

  ￦547,627   ￦525,556    ￦525,556  ￦360,037 

Acquisition

   78,095    99,111     99,111  44,302 

Disposal

   (138,394)   (222,103)    (222,103)  (18,161) 

Valuation1

   51,894    62,508     62,508  14,413 

Impairment 2

   (70,022)   (1,471) 

Reclassification 3

   48,684    125  

Impairment

   (1,471)  (966) 

Reclassification

   125  5,149 

Changes in scope of consolidation

   7,672    (103,689)    (103,689)   —   
  

 

  

 

   

 

  

 

 

Ending

  ￦525,556   ￦360,037    ￦    360,037  ￦    404,774 
  

 

  

 

   

 

  

 

 

 

1The amountamounts before adjustmentadjustments of deferred income tax directly reflected in equity and allocation to thenon-controlling interest.

2Includes impairment losses of￦48,684 million on KT ENGCORE Co., Ltd. (formerly KT ENS Corporation) recognized in 2014.

3During the year ended December 31, 2014, KT ENGCORE Co., Ltd. (formerly KT ENS Corporation) was reclassified to available-for-sale financial securities from investment in subsidiaries due to the commencement of rehabilitation procedures.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

The maximum exposure of debt securities ofavailable-for-sale financial assets to credit risk is carrying valueamount as of December 31, 2015.2016.

Available-for-sale financial assets are measured at fair value. However,non-marketable equity securities that do not have quoted market prices in an active market and the fair value of which cannot be reliably measured are recognized at cost and the impairment loss is recognized if any.

None of theavailable-for-sale financial assets are past due and the impaired assets amount to￦17,882788 million as of December 31, 2015.2016.

Investment in Korea Software Financial Cooperative amounting to￦1,000 million is provided as collateral as consideration for payment guarantees provided by Korea Software Financial Cooperative (Note 20)19).

9.    Inventories

8.Inventories

Inventories as of December 31, 20142015 and 2015,2016, are as follows:

 

  2014   2015   2015   2016 

(in millions of Korean won)

  Acquisition
cost		   Valuation
allowance		 Book
Value		   Acquisition
cost		   Valuation
allowance		 Book
Value		 
(In millions of Korean won)  Acquisition
cost		   Valuation
allowance		 Book
amount		   Acquisition
cost		   Valuation
allowance		 Book
amount		 

Merchandise

   ￦445,644     ￦(62,902)   ￦382,742     ￦580,761     ￦(66,996)   ￦513,765    ￦580,761   ￦(66,996)  ￦513,765   ￦403,938   ￦(46,634)  ￦357,304 

Others

   36,474     (333)   36,141     103,501     (355)   103,146     103,501    (355)  103,146    97,778    (494)  97,284 
  

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

 

Total

   ￦482,118     ￦(63,235)   ￦418,883     ￦684,262     ￦(67,351)   ￦616,911    ￦684,262   ￦(67,351)  ￦616,911   ￦501,716   ￦(47,128)  ￦454,588 
  

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

 

Cost of inventories recognized as expenses for the year ended December 31, 2015,2016, amounts to￦3,760,8923,589,809 million (2013:￦3,676,307 million, 2014:(2014:￦3,823,397 million, 2015:￦3,760,892 million) and reversal of valuation loss on inventory recognized amounts to￦4,11620,223 million for year ended December 31, 2015 (2013: valuation loss of￦88,946 million, 2014:2016 (2014: reversal of valuation allowance of￦59,973 million, 2015: valuation loss on inventory amounts to￦4,116 million).

10.    Other Assets

KT Corporation and LiabilitiesSubsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

9.Other Assets and Liabilities

Other assets and liabilities as of December 31, 20142015 and 2015,2016, are as follows:

 

(In millions of Korean won)

  2014  2015 

Other assets

   

Advance payments

  ￦126,674   ￦148,037  

Prepaid expenses

   284,887    244,890  

Others

   10,095    26,336  

Less: Non-current

   (72,041)   (102,359) 
  

 

 

  

 

 

 

Current

  ￦349,615   ￦316,904  
  

 

 

  

 

 

 

Other liabilities

   

Advances received

  ￦193,900   ￦234,575  

Withholdings

   100,345    46,769  

Unearned revenue

   22,208    15,363  

Others

   889    41,200  

Less: Non-current

   (38,590)   (26,737) 
  

 

 

  

 

 

 

Current

  ￦278,752   ￦311,170  
  

 

 

  

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

(In millions of Korean won)  2015   2016 

Other assets

    

Advance payments

  ￦148,037   ￦148,299 

Prepaid expenses

   244,890    255,464 

Others

   26,336    13,471 

Less:Non-current

   (102,359)    (106,099) 
  

 

 

   

 

 

 

Current

  ￦316,904   ￦311,135 
  

 

 

   

 

 

 

Other liabilities

    

Advances received

  ￦234,575   ￦281,071 

Withholdings

   46,769    89,679 

Unearned revenue

   15,363    24,142 

Others

   41,200    6,160 

Less:Non-current

   (26,737)    (58,761) 
  

 

 

   

 

 

 

Current

  ￦311,170   ￦342,291 
  

 

 

   

 

 

 

 

10.Property, Plant and Equipment

11.    Property, Plant and Equipment

The changesChanges in property, plant and equipment for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

 2014  2015 

(in millions of Korean won)

 Land Buildings
and
structures		 Machinery
and
equipment		 Others Construction-
in-progress		 Total  Land 

Buildings

and

structures

 Machinery
and
equipment		 Others Construction-
in-progress		 Total 

Acquisition cost

 ￦1,253,612   ￦3,270,339   ￦32,103,084   ￦4,232,627   ￦1,092,155   ￦41,951,817   ￦1,287,821  ￦3,345,587  ￦33,390,640  ￦4,806,849  ￦845,662  ￦43,676,559 

Accumulated depreciation (including accumulated impairment loss and others)

  (132)   (1,210,369)   (22,209,359)   (2,131,245)   (13,748)   (25,564,853) 

Less: Accumulated depreciation

(including accumulated impairment loss and others)

 (132)  (1,336,337)  (23,556,971)  (2,311,219)  (3,704)  (27,208,363) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at 2014.1.1

  1,253,480    2,059,970    9,893,725    2,101,382    1,078,407    16,386,964  

Beginning, net

 1,287,689  2,009,250  9,833,669  2,495,630  841,958  16,468,196 

Acquisition

  —    4,293    255,419    1,129,330    2,268,594    3,657,636   34,686  10,564  445,452  258,094  2,563,372  3,312,168 

Disposal/Abandonment

  (8,781)   (16,972)   (171,691)   (182,466)   (16,759)   (396,669)  (423)  (797)  (139,687)  (8,294)  (3,787)  (152,988) 

Depreciation

  —    (105,402)   (2,450,216)   (635,282)   —    (3,190,900)   —    (117,328)  (2,674,339)  (190,630)   —    (2,982,297) 

Impairment

  —     —    (28,206)  (2,270)  (1,831)  (32,307) 

Transfer in (out)

  24,072    75,422    2,295,290    83,380    (2,478,164)   —   10,134  230,535  2,064,871  67,483  (2,373,023)   —   

Inclusion in scope of consolidation

  8,657    4,189    2,921    3,024    —    18,791   15  177  139  990  187  1,508 

Exclusion from scope of consolidation

  (4,234)   (5,064)   (3,462)   (2,493)   —    (15,253)  (37,314)  (25,743)  (638)  (2,079,426)  (237)  (2,143,358) 
 

 

  

 

  

 

  

 

  

 

  

 

 

Others

  14,495    (7,186)   11,683    (1,245)   (10,120)   7,627   (7,170)  (7,614)  7,532  9,406  5,838  7,992 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at 2014.12.31

 ￦1,287,689   ￦2,009,250   ￦ 9,833,669   ￦2,495,630   ￦841,958   ￦16,468,196  

Ending, net

 ￦1,287,617  ￦2,099,044  ￦9,508,793  ￦550,983  ￦1,032,477  ￦14,478,914 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Acquisition cost

 ￦1,287,821   ￦3,345,587   ￦33,390,640   ￦4,806,849   ￦845,662   ￦43,676,559   ￦1,287,749  ￦3,558,460  ￦34,388,584  ￦1,951,749  ￦1,033,777  ￦42,220,319 

Accumulated depreciation (including accumulated impairment loss and others)

  (132)   (1,336,337)   (23,556,971)   (2,311,219)   (3,704)   (27,208,363) 

Less: Accumulated depreciation

(including accumulated impairment loss and others)

 (132)  (1,459,416)  (24,879,791)  (1,400,766)  (1,300)  (27,741,405) 
  2015 

(in millions of Korean won)

 Land  Buildings
and
structures		  Machinery
and
equipment		  Others  Construction-
in-progress		  Total 

Acquisition cost

 ￦1,287,821   ￦3,345,587   ￦33,390,640   ￦4,806,849   ￦845,662   ￦43,676,559  

Accumulated depreciation (including accumulated impairment loss and others)

  (132)   (1,336,337)   (23,556,971)   (2,311,219)   (3,704)   (27,208,363) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2015.1.1

  1,287,689    2,009,250    9,833,669    2,495,630    841,958    16,468,196  

Acquisition

  34,686    10,564    445,452    258,094    2,563,372    3,312,168  

Disposal/Abandonment

  (423)   (797)   (139,687)   (8,294)   (3,787)   (152,988) 

Depreciation

  —    (117,328)   (2,674,339)   (190,630)   —    (2,982,297) 

Impairment

  —    —    (28,206)   (2,270)   (1,831)   (32,307) 

Transfer in (out)

  10,134    230,535    2,064,871    67,483    (2,373,023)   —  

Inclusion in scope of consolidation

  15    177    139    990    187    1,508  

Exclusion from scope of consolidation 1

  (37,314)   (25,743)   (638)   (2,079,426)   (237)   (2,143,358) 

Others

  (7,170)   (7,614)   7,532    9,406    5,838    7,992  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2015.12.31

 ￦1,287,617   ￦2,099,044   ￦9,508,793   ￦550,983   ￦1,032,477   ￦14,478,914  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Acquisition cost

 ￦1,287,749   ￦3,558,460   ￦34,388,584   ￦1,951,749   ￦1,033,777   ￦42,220,319  

Accumulated depreciation (including accumulated impairment loss and others)

  (132)   (1,459,416)   (24,879,791)   (1,400,766)   (1,300)   (27,741,405) 

1As a result of the disposal of KT Capital and KT Rental, which were the Company’s subsidiaries, other in property, plant and equipment decreased by￦1 billion and￦2,078 billion respectively during the year ended December 31, 2015.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

  2016 
(In millions of Korean won) Land  Buildings and
structures		  Machinery
and
equipment		  Others  Construction-
in-progress		  Total 

Acquisition cost

 ￦1,287,749  ￦3,558,460  ￦34,388,584  ￦1,951,749  ￦1,033,777  ￦42,220,319 

Less: Accumulated depreciation (including accumulated impairment loss and others)

  (132)   (1,459,416)   (24,879,791)   (1,400,766)   (1,300)   (27,741,405) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Beginning, net

  1,287,617   2,099,044   9,508,793   550,983   1,032,477   14,478,914 

Acquisition

  291   3,608   247,431   146,471   2,297,346   2,695,147 

Disposal and termination

  (855)   (1,650)   (112,135)   (8,155)   (3,357)   (126,152) 

Depreciation

  —     (135,389)   (2,498,837)   (143,978)   —     (2,778,204) 

Impairment (Recovery of impairment)

  —     —     361   (47,086)   —     (46,725) 

Transfer in (out)

  4,274   136,041   2,060,936   11,073   (2,212,324)   —   

Inclusion in scope of consolidation

  —     —     68   764   —     832 

Others

  17,625   23,078   53,568   14,851   (20,823)   88,299 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending, net

 ￦1,308,952  ￦2,124,732  ￦9,260,185  ￦524,923  ￦1,093,319  ￦14,312,111 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Acquisition cost

 ￦1,309,084  ￦3,729,228  ￦35,106,184  ￦1,895,332  ￦1,093,941  ￦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) 

Details of property, plant and equipment provided as collateral as of December 31, 20142015 and 2015,2016, are as follows:

 

   2014

(in millions of Korean won)

  Carrying
amount		   Secured
amount		   Related
line item		   Related
amount		   Secured
party

Land/Buildings

  ￦12,839    ￦12,000     Borrowings    ￦10,000    Standard Chartered Bank

Buildings

  ￦10,875    ￦7,800     Borrowings    ￦6,000    Hana Bank
   2015

(in millions of Korean won)

  Carrying
amount		   Secured
amount		   Related
line item		   Related
amount		   Secured
party

Land/Buildings

  ￦12,529    ￦12,000     Borrowings    ￦8,000    Standard Chartered Bank

Buildings

  ￦57,374    ￦42,192     Borrowings    ￦35,835    Shinhan Bank
(In millions of Korean won)  2015
   Carrying
amount		   Secured
amount		   Related line
item		   Related
amount		   Secured party

Land and Buildings

  ￦12,529   ￦12,000    Borrowings   ￦8,000   Standard
Charted Bank

Others

   57,374    42,192      35,835   Shinhan Bank

(In millions of Korean won)  2016
   Carrying
amount		   Secured
amount		   

Related

line item

   Related
amount		   

Secured

party

Land and Buildings

   13,337    16,009    Borrowings    11,540   Standard
Charted Bank

Others

   55,951    43,506      25,379   Shinhan Bank

The borrowing costs capitalized for qualifying assets amount to￦11,87716,451 million (2014:(2015:￦14,49311,877 million) in 2015.2016. The interest rate applied to calculate the capitalized borrowing costs in 20152016 is 2.29% to 3.50% (2015: 2.46% to 4.07% (2014: 3.56%).

KT Corporation and Subsidiaries

Notes to 4.05%).Consolidated Financial Statements

12.    Investment PropertyDecember 31, 2014, 2015 and 2016

The changes

11.Investment Properties

Changes in investment propertyproperties for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

  2014 

(in millions of Korean won)

  Land Buildings Construction-
in-progress		   Total 
(In millions of Korean won)  2015 
Land Buildings 

Construction-in-

progress

 Total 

Acquisition cost

  ￦328,964   ￦1,015,079   ￦3,778    ￦1,347,821    ￦315,794  ￦1,003,031  ￦19,378  ￦1,338,203 

Accumulated depreciation

   —    (242,326)   —     (242,326) 

Less: Accumulated depreciation

   —    (278,573)   —    (278,573) 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Beginning

   328,964    772,753    3,778     1,105,495     315,794  724,458  19,378  1,059,630 

Acquisition

   —    4,443    15,600     20,043     26,194  17,210  55,621  99,025 

Disposal/Abandonment

   (1,487)   (5,740)   —     (7,227)    —    (4,436)   —    (4,436) 

Depreciation

   —    (51,446)   —     (51,446)    —    (48,524)   —    (48,524) 

Transfer

   (11,683)   4,448    —     (7,235)    6,828  (1,636)  (791)  4,401 

Changes in scope of consolidation

   (8,026)   —     —    (8,026) 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Ending

  ￦315,794   ￦724,458   ￦19,378    ￦1,059,630    ￦340,790  ￦687,072  ￦74,208  ￦1,102,070 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Acquisition cost

  ￦315,794   ￦1,003,031   ￦19,378    ￦1,338,203    ￦340,790  ￦1,011,236  ￦74,208  ￦1,426,234 

Accumulated depreciation

   —    (278,573)   —     (278,573) 

Less: Accumulated depreciation

   —    (324,164)   —    (324,164) 

 

  2015 

(in millions of Korean won)

  Land Buildings Construction-
in-progress		 Total 
(In millions of Korean won)  2016 
Land Buildings 

Construction-in-

progress

 Total 

Acquisition cost

  ￦ 315,794   ￦ 1,003,031   ￦ 19,378   ￦ 1,338,203    ￦340,790  ￦1,011,236  ￦74,208  ￦1,426,234 

Accumulated depreciation

   —    (278,573)   —    (278,573) 

Less: Accumulated depreciation

   —    (324,164)   —    (324,164) 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Beginning

   315,794    724,458    19,378    1,059,630     340,790  687,072  74,208  1,102,070 

Acquisition

   26,194    17,210    55,621    99,025     51  417  160,138  160,606 

Disposal/Abandonment

   —    (4,436)   —    (4,436)    (5,837)  (1,802)   —    (7,639) 

Depreciation

   —    (48,524)   —    (48,524)    —    (43,575)   —    (43,575) 

Transfer

   6,828    (1,636)   (791)   4,401     (32,254)  124,417  (155,581)  (63,418) 

Changes in scope of consolidation

   (8,026)   —    —    (8,026) 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Ending

  ￦ 340,790   ￦ 687,072   ￦ 74,208   ￦ 1,102,070    ￦302,750  ￦766,529  ￦78,765  ￦1,148,044 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Acquisition cost

  ￦ 340,790   ￦ 1,011,236   ￦ 74,208   ￦ 1,426,234    ￦302,750  ￦1,119,885  ￦78,765  ￦1,501,400 

Accumulated depreciation

   —    (324,164)   —    (324,164) 

Less: Accumulated depreciation

   —    (353,356)   —    (353,356) 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

The fair value of investment propertyproperties is￦2,645,2462,340,893 million as of December 31, 2015 (2014: 2016 (2015:￦2,277,2342,645,246 million). The fair value of investment propertyproperties is estimated based on the expected cash flow.

Rental income from investment propertyproperties is￦184,819184,670 million in 2015 (2014:2016 (2015:￦216,976184,819 million) and direct operating expenses (including repairs and maintenance) arising from investment propertyproperties that generated rental income during the period are recognized as operating expenses.

Details of investment propertyproperties provided as collateral as of December 31, 20142015 and 2015,2016, are as follows:

 

(In millions of Korean won)  2015 
  2014   

Carrying

amount

   

Secured

amount

   

Related

account

  

Related

amount

 

(in millions of Korean won)

  Carrying
amount		   Secured
amount		   Collateral for   Amount of deposits
received		 

Buildings

  ￦10,773    ￦6,773     borrowings    ￦5,210    ￦634,028   ￦66,034   Deposits  ￦55,765 

Buildings

   345,281     47,350     Deposits received     34,675  

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

(In millions of Korean won)

  2015 
  Carrying
amount		   Secured
amount		   Collateral for  Amount of deposits
received		 

Buildings

  ￦634,028    ￦66,034    Deposits  ￦55,765  

13.    Intangible Assets

(In millions of Korean won)  2016 
   Carrying
amount		   Secured
amount		   Related
account		  Related
amount		 

Buildings

  ￦711,989   ￦98,543   Deposits  ￦84,334 

Land and Buildings

  ￦8,035   ￦7,891   Borrowings  ￦5,260 

The changes

12.Intangible Assets

Changes in intangible assets for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

  2014 

(in millions of Korean won)

 Goodwill  Development
costs		  Software  Frequency
usage rights		  Others  Total 

Acquisition cost

 ￦610,715   ￦1,359,478   ￦681,176   ￦2,768,943   ￦1,100,540   ￦6,520,852  

Accumulated amortization (including accumulated impairment loss and others)

  (18,376)   (811,404)   (418,860)   (1,041,737)   (403,082)   (2,693,459) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2014.1.1

  592,339    548,074    262,316    1,727,206    697,458    3,827,393  

Acquisition

  —    286,516    95,781    —    51,633    433,930  

Disposal

  (1,519)   (16,713)   (2,205)   —    (6,359)   (26,796) 

Amortization

  —    (171,817)   (101,344)   (253,588)   (85,669)   (612,418) 

Impairment

  (11,693)   —    (5,210)   (69,428)   (944)   (87,275) 

Inclusion in scope of consolidation

  —    733    1,363    —    13,548    15,644  

Exclusion in scope of consolidation

  —    (3,297)   (4,960)   —    (2,052)   (10,309) 

Others

  621    7,191    (2,080)   —    (1,868)   3,864  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2014.12.31

 ￦579,748   ￦ 650,687   ￦243,661   ￦1,404,190   ￦665,747   ￦3,544,033  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Acquisition cost

 ￦609,817   ￦1,589,994   ￦747,343   ￦2,768,943   ￦1,154,915   ￦6,871,012  

Accumulated amortization (including accumulated impairment loss and others)

  (30,069)   (939,307)   (503,682)   (1,364,753)   (489,168)   (3,326,979) 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

  2015  2015 

(in millions of Korean won)

  Goodwill Development
costs		 Software Frequency
usage rights		 Others Total 
(In millions of Korean won) Goodwill Development
costs		 Software 

Frequency

usage rights

 Others Total 

Acquisition cost

  ￦609,817   ￦1,589,994   ￦747,343   ￦2,768,943   ￦1,154,915   ￦6,871,012   ￦609,817  ￦1,589,994  ￦747,343  ￦2,768,943  ￦1,154,915  ￦6,871,012 

Accumulated amortization (including accumulated impairment loss and others)

   (30,069)   (939,307)   (503,682)   (1,364,753)   (489,168)   (3,326,979) 

Less: Accumulated amortization (including accumulated impairment loss and others)

 (30,069)  (939,307)  (503,682)  (1,364,753)  (489,168)  (3,326,979) 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at 2015.1.1

   579,748    650,687    243,661    1,404,190    665,747    3,544,033  

Beginning, net

 579,748  650,687  243,661  1,404,190  665,747  3,544,033 

Acquisition

   549    41,108    67,640    7,722    91,374    208,393   549  41,108  67,640  7,722  91,374  208,393 

Disposal

   (1,272)   (28,645)   (4,251)   —    (33,651)   (67,819)  (1,272)  (28,645)  (4,251)   —    (33,651)  (67,819) 

Amortization

   —    (183,845)   (76,866)   (254,439)   (94,035)   (609,185)   —    (183,845)  (76,866)  (254,439)  (94,035)  (609,185) 

Impairment1

   (100,352)   —    (2,200)   (184,703)   (5,090)   (292,345)  (100,352)   —    (2,200)  (184,703)  (5,090)  (292,345) 

Inclusion in scope of consolidation

   —    —    306    —    160    466    —     —    306   —    160  466 

Exclusion in scope of consolidation

   (136,332)   (19,916)   (3,799)   —    (29,321)   (189,368)  (136,332)  (19,916)  (3,799)   —    (29,321)  (189,368) 

Others

   —    2,154    6,893    —    (3,471)   5,576    —    2,154  6,893   —    (3,471)  5,576 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at 2015.12.31

  ￦342,341   ￦ 461,543   ￦ 231,384   ￦ 972,770   ￦ 591,713   ￦2,599,751  

Ending, net

 ￦342,341  ￦461,543  ￦231,384  ￦972,770  ￦591,713  ￦2,599,751 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Acquisition cost

  ￦449,379   ￦1,487,420   ￦ 805,387   ￦2,591,229   ￦1,109,085   ￦6,442,500   ￦449,379  ￦1,487,420  ￦805,387  ￦2,591,229  ￦1,109,085  ￦6,442,500 

Accumulated amortization (including accumulated impairment loss and others)

   (107,038)   (1,025,877)   (574,003)   (1,618,459)   (517,372)   (3,842,749) 

Less: Accumulated amortization (including accumulated impairment loss and others)

 (107,038)  (1,025,877)  (574,003)  (1,618,459)  (517,372)  (3,842,749) 

 

1The amount￦184,703 million is recognized as an impairment loss on intangible assets related to 800MHz frequency usage rights.

  2016 
(In millions of Korean won) Goodwill  Development
costs		  Software  

Frequency

usage rights

  Others  Total 

Acquisition cost

 ￦449,379  ￦1,487,420  ￦805,387  ￦2,591,229  ￦1,109,085  ￦6,442,500 

Less: Accumulated amortization (including accumulated impairment loss and others)

  (107,038)   (1,025,877)   (574,003)   (1,618,459)   (517,372)   (3,842,749) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Beginning, net

  342,341   461,543   231,384   972,770   591,713   2,599,751 

Acquisition and capital expenditure1

  —     36,075   35,631   978,309   74,312   1,124,327 

Disposal and termination

  —     (8,600)   (1,928)   —     (16,397)   (26,925) 

Amortization

  —     (162,682)   (78,643)   (273,790)   (84,606)   (599,721) 

Impairment

  (131,600)   —     (46)   —     (3,618)   (135,264) 

Inclusion in scope of consolidation

  42,745   —     2,462   —     16,015   61,222 

Others

  —     8,340   8,278   —     (17,205)   (587) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending, net

 ￦253,486  ￦334,676  ￦197,138  ￦1,677,289  ￦560,214  ￦3,022,803 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Acquisition cost

 ￦492,105  ￦1,483,205  ￦838,532  ￦2,531,654  ￦1,154,993  ￦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) 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

1The Company had acquired the 1.8GHz and 2.1GHz frequency usage rights amortized using the straight-line method.

The carrying valueamount of facility usagemembership rights with indefinite useful life not subject to amortization is￦122,829128,539 million (2014:(2015:￦149,832122,829 million) as of December 31, 2015.2016.

Goodwill is allocated to the Group’s cash-generating unit which is identified by operating segments. As of December 31, 2015,2016, goodwill allocated to each cash-generation unit is as follows:

 

(inIn millions of Korean won)

Cash generating Unit

  Amount 

Customer/MarketingMarketing/Customer

  

Telecom wirelessWireless business1

  ￦65,057

Finance

  

BC Card Co., Ltd.2

   41,234 

Others

  

KT Skylife Co., LtdLtd.23

   209,80078,200 

KT MusicN SEARCH MARKETING Corporation and others4

42,745

Others

   26,250 
  

 

 

 

Total

  ￦342,341253,486
  

 

 

 

 

1The recoverable amounts of mobile business are calculated based onvalue-in use calculations. These calculations use cash flow projections for the next five years based on financial budgets. Cash flow exceedsAn annual growth rate of 0.0% was applied for the financial budgets are estimated by thecash flows expected growth rate.to be incurred after five years. 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 (-2.52%) based on past performance and its expectation of future market changes. In addition, management estimated the cash flow based on past performance and its expectation of market growth and the discount ratesrate of 4.36% used areis reflect specific risks relating to the relevant CGUs.

2

The recoverable amounts of BC Card Co., Ltd., and KT Skylife Co., Ltd. are is calculated based onvalue-in use calculations. These calculations use use. Calculation uses cash flow projections for the next five years based on financial budgets. Cash flow that exceedsAn annual growth rate of 0.0% was applied for the financial budgets is projected bycash flows expected growth rate.to be incurred after five years. 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 (-0.31%) based on past performance and its expectation of future market changes. The Group determined cash flow projections based on past

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

performance and its estimation of market growth. Specific risk of related operating segment is reflected in its discount rate. As a resultrate of the impairment test, the Group recognized the impairment losses of12.72%.
3The recoverable amount (￦96,503 million on goodwill allocated to KT651,735 million) of Skylife Co., Ltd. by whichis calculated based on fair value less costs to sell.
4The goodwill is recognized from the carrying amount exceeds its recoverable amount, and recognized the losses as operating expensesbusiness combination in the consolidated statement of the income.2016 (Note 36).

As a result of the impairment test, the Group recognized the impairment losses of￦3,849131,600 million on goodwill allocated to KT Powertel Co., Ltd.Satellite TV segment. It resulted from reflecting market circumstances where the competition with other players such as the internet providers, IPTV and others, andCable TV operators becomes more intense. The impairment loss was recognized the losses as otheroperating expenses in the consolidated statement of the income.operations. The Group considers that the carrying valueamount of other cash generating units does not exceed the recoverable amount of the CGUs.

14.    Investments in Associates

KT Corporation and Joint VenturesSubsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

13.Investments in Associates and Joint Ventures

Details of associates as of December 31, 2015,2016, are as follows:

 

  Percentage of
ownership (%)		 Location  Date of financial
statements		  Percentage of ownership (%) Location  Reporting
period end		 
  2014 2015     2015 2016     

Korea Information & Technology Fund

   33.3%   33.3%  Korea  31-Dec   33.3%  33.3%  Korea   31-Dec 

KT-SB Venture Investment 1

   50.0%   50.0%  Korea  31-Dec   50.0%  50.0%  Korea   31-Dec 

Mongolian Telecommunications

   40.0%   40.0%  Mongolia  31-Dec   40.0%  40.0%  Mongolia   31-Dec 

KT Wibro Infra Co., Ltd.

   26.2%   26.2%  Korea  31-Dec   26.2%  26.2%  Korea   31-Dec 

KT-CKP New Media Investment Fund

   49.7%   49.7%  Korea  31-Dec   49.7%  49.7%  Korea   31-Dec 

QTT Global (Group) Company Limited

   25.0%   25.0%  China  31-Dec

 

1At the end of the reporting period, even though the Group has 50% ownership, the equity method of accounting has been applied as the Group, which is a limited partner of investment fund, cannot participate in determining the operating and financial policies.

The changesChanges in investments in associates and joint ventures for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

  2014 

(in millions of Korean won)

 Beginning  Acquisition
(Disposal)		  Reclassification  Share in income (loss)
of jointly controlled
entities and associates 1		  Others  Ending 

ktcs Corporation 2

 ￦22,180   ￦ —   ￦ (22,505)   ￦ 1,703   ￦(1,378)  ￦ —  

ktis Corporation 3

  23,328    —    (24,343)   1,766    (751)   —  

Korea Information & Technology Fund

  123,782    —    —    (42)   (773)   122,967  

KT-SB Venture Investment

  15,930    (1,938)   —    13,302    (4,737)   22,557  

Mongolian Telecommunications

  8,696    —    —    97    (1,316)   7,477  

KT Wibro Infra Co., Ltd.

  67,553    —    —    938    —    68,491  

KT-CKP new media Investment Fund

  2,177    2,250    —    (441)   —    3,986  

QTT Global (Group) Company Limited

  13,115    —    —    222    (361)   12,976  

How Smartmall Private Special Asset Investment Trust

  28,406    —    —    2,747    (3,523)   27,630  

Others

  58,736    (12,203)   —    4,069    22,094    72,696  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 ￦363,903   ￦(11,891)  ￦(46,848)  ￦ 24,361   ￦9,255   ￦338,780  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   2015 
(In millions of Korean won)  Beginning   Acquisition
(Disposal)		  Share of net profit
from associates and
joint ventures1		  Others  Ending 

Korea Information & Technology Fund

  ￦122,967   ￦—    ￦3,696  ￦920  ￦127,583 

KT-SB Venture Investment

   22,557    (3,691)   (2,210)   (11,795)   4,861 

Mongolian Telecommunications

   7,477    —     (121)   127   7,483 

KT Wibro Infra Co., Ltd.

   68,491    —     843   (6)   69,328 

KT-CKP New Media Investment Fund

   3,986    —     (126)   —     3,860 

Others

   113,302    (64,601)   3,480   4,733   56,914 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 
  ￦338,780   ￦(68,292)  ￦5,562  ￦(6,021)  ￦270,029 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

  2016 
(In millions of Korean won) Beginning  Acquisition
(Disposal)		  Share of net profit
from associates and
joint ventures1		  Impairment  Others  Ending 

Korea Information & Technology Fund

 ￦127,583  ￦—    ￦7,446  ￦—    ￦(60)  ￦134,969 

KT-SB Venture Investment

  4,861   —     (125)   —     —     4,736 

Mongolian Telecommunications

  7,483   —     32   —     (1,271)   6,244 

KT Wibro Infra Co., Ltd.

  69,328   —     —     (17,128)   —     52,200 

KT-CKP New Media Investment Fund

  3,860   —     594   —     —     4,454 

Others

  56,914   29,052   (5,400)   —     906   81,472 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 ￦270,029  ￦29,052  ￦2,547  ￦(17,128)  ￦(425)  ￦284,075 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

  2015 

(in millions of Korean won)

 Beginning  Acquisition
(Disposal)		  Reclassification  Share in income (loss)
of joint ventures and
associates 1		  Others  Ending 

Korea Information & Technology Fund

 ￦122,967   ￦ —   ￦ —   ￦3,696   ￦920   ￦127,583  

KT-SB Venture Investment

  22,557    (3,691)   —    (2,210)   (11,795)   4,861  

Mongolian Telecommunications

  7,477    —    —    (121)   127    7,483  

KT Wibro Infra Co., Ltd.

  68,491    —    —    843    (6)   69,328  

KT-CKP New Media Investment Fund

  3,986    —    —    (126)   —    3,860  

QTT Global (Group) Company Limited

  12,976    —    —    102    99    13,177  

Others

  100,326    (64,601)   —    3,378    4,634    43,737  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 ￦338,780   ￦(68,292)  ￦ —   ￦5,562   ￦(6,021)  ￦270,029  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

1KT Investmentinvestment Co., Ltd., a subsidiary of the Group, recognizesrecognized its share in income (loss)net profit from associates and joint ventures and associates as operating revenue and expense. These include its share in the income ofloss from associates and joint ventures and associates of￦9652 million recognized as operating revenue and itsexpense during the period. Meanwhile, share in the loss of joint ventures and associates of￦484 million (2014:￦499 million) recognized as operating expense. Meanwhile, the share in lossfrom subsidiary of￦193 million (2013: incomerecognized as operation expense of￦3,621 million, 2014: income of￦6,163 million) recognized by KT Capital Corporation, a subsidiary soldCo., Ltd, which were recognized in the current period, is classified asloss from discontinued operations.operations, are included.

2As the Group obtained control over the entity in 2014, the entity was reclassified as a consolidated subsidiary. As a result of the reclassification, the Group recognized the difference of￦2,469 million between the fair value of￦22,907 million and the book value of￦25,376 million (including reclassification adjustment of accumulated other comprehensive income of￦2,871 million) as other expense.

3As the Group obtained control over the entity in 2014, the entity was reclassified as a consolidated subsidiary. As a result of the reclassification, the Group recognized the difference of￦4,667 million between the fair value of￦21,992 million and the book value of￦26,659 million (including reclassification adjustment of accumulated other comprehensive income of￦2,316 million) as other expense.

The summary ofSummarized financial information of associates and joint ventures as of and for the years ended December 31, 20142015 and 20152016, is as follows:

 

  2014 

(In millions of Korean won)

  Current
assets		   Non-current
assets		   Current
liabilities		   Non-current
liabilities		   2015 
  Current
assets		   

Non-current

assets

   Current
liabilities		   

Non-current

liabilities

 

Korea Information & Technology Fund

  ￦122,026    ￦246,874    ￦ —    ￦ —    ￦152,070   ￦230,678   ￦—     ￦—   

KT-SB Venture Investment

   22,402     23,368     656     —     882    9,218    378    —   

Mongolian Telecommunications

   12,636     10,648     4,591     —     10,823    8,520    635    —   

KT Wibro Infra Co., Ltd.

   205,147     61,068     4,960     40     230,505    39,062    5,099    37 

KT-CKP New Media Investment Fund

   4,588     3,441     4     —     3,253    4,523    4    —   

QTT Global (Group) Company Limited

   15,439     414     —     —  

How Smartmall Private Special Asset Investment Trust

   37,412     —     875     —  

 

  2014 

(In millions of Korean won)

  Operating
revenue		   Net profit
(loss)		 Other
comprehensive
income (loss)		 Total
comprehensive
income (loss)		 Dividends
received from
associates		   2015 
  Operating
revenue		   Profit (loss)
for the year		 Other
comprehensive
income		 Total
comprehensive
income		 Dividend
received from
associates		 

Korea Information & Technology Fund

  ￦10,411    ￦(128)  ￦(835)  ￦ (963)  ￦494    ￦33,041   ￦11,088  ￦(2,759)  ￦8,329  ￦1,107 

KT-SB Venture Investment

   1,056     26,603    —    26,603    4,238     361    (4,419)   —    (4,419)  11,795 

Mongolian Telecommunications

   8,745     242    —    242    —     11,354    (302)  (317)  (619)  35 

KT Wibro Infra Co., Ltd.

   1,237     3,555    —    3,555    —     814    3,217   —    3,217   —   

KT-CKP New Media Investment Fund

   89     (888)   80    (808)   —     75    (254)   —    (254)   —   

QTT Global (Group) Company Limited

   9,462     887    (156)   731    —  

How Smartmall Private Special Asset Investment Trust

   3,580     3,401    —    3,401    2,767  

(In millions of Korean won)  2016 
   Current
assets		   

Non-current

assets

   Current
liabilities		   

Non-current

liabilities

 

Korea Information & Technology Fund

  ￦154,651   ￦250,257   ￦—     ￦—   

KT-SB Venture Investment

   1,009    8,704    242    —   

Mongolian Telecommunications

   9,852    9,055    3,296    —   

KT Wibro Infra Co., Ltd.

   274,811    6    4,996    52 

KT-CKP New Media Investment Fund

   1,801    7,170    4    —   

(In millions of Korean won)  2016 
   Operating
revenue		   Profit (loss)
for the year		  Other
comprehensive
income		  Total
comprehensive
income		  Dividend
received from
associates		 

Korea Information & Technology Fund

  ￦26,942   ￦22,338  ￦(9,425)  ￦12,913  ￦3,201 

KT-SB Venture Investment

   2    (251)   —     (251)   —   

Mongolian Telecommunications

   10,336    81   3,178   3,259   —   

KT Wibro Infra Co., Ltd.

   391    5,025   —     5,025   —   

KT-CKP New Media Investment Fund

   1,684    1,195   —     1,195   —   

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

   2015 

(In millions of Korean won)

  Current
assets		   Non-current
assets		   Current
liabilities		   Non-current
liabilities		 

Korea Information & Technology Fund

  ￦152,070    ￦230,678    ￦ —    ￦ —  

KT-SB Venture Investment

   882     9,218     378     —  

Mongolian Telecommunications

   19,343     —     635     —  

KT Wibro Infra Co., Ltd.

   230,505     39,062     5,099     37  

KT-CKP New Media Investment Fund

   3,253     4,523     4     —  

QTT Global (Group) Company Limited

   18,942     —     1,008     1,278  

 

   2015 

(In millions of Korean won)

  Operating
revenue		   Net profit
(loss)		  Other
comprehensive
income (loss)		  Total
comprehensive
income (loss)		  Dividends
received from
associates		 

Korea Information & Technology Fund

  ￦33,041    ￦11,088   ￦(2,759)  ￦8,329   ￦ —  

KT-SB Venture Investment

   361     (4,419)   —    (3,036)   11,795  

Mongolian Telecommunications

   11,354     (302)   (317)   (619)   —  

KT Wibro Infra Co., Ltd.

   814     3,217    —    3,227    —  

KT-CKP New Media Investment Fund

   75     (254)   —    (254)   —  

QTT Global (Group) Company Limited

   10,173     409    (394)   15    —  

Details of a reconciliation of the summarized financial information to the carrying amount of interests in the associates and joint ventures as of and for the years end December 31, 20142015 and 2015,2016, are as follows:

 

  2014   2015 

(in millions of Korean won)

  Net assets   Percentage
of
ownership		 Share in net
assets		   Goodwill   Intercompany
transaction
and others		 Book value 
(In millions of Korean won)  Net assets   Percentage of
ownership		 Share in net
assets		   Carrying
amount		 

Korea Information & Technology Fund

  ￦368,900     33.3%  ￦122,967    ￦ —    ￦ —   ￦122,967    ￦382,748    33.3%  ￦127,583   ￦127,583 

KT-SB Venture Investment

   45,114     50.0%   22,557     —     —    22,557     9,722    50.0%  4,861    4,861 

Mongolian Telecommunications

   18,693     40.0%   7,477     —     —    7,477     18,708    40.0%  7,483    7,483 

KT Wibro Infra Co., Ltd.

   261,215     26.2%   68,491     —     —    68,491     264,431    26.2%  69,328    69,328 

KT-CKP New Media Investment Fund

   8,025     49.7%   3,986     —     —    3,986     7,772    49.7%  3,860    3,860 

QTT Global (Group) Company Limited

   15,853     25.0%   3,963     9,013     —    12,976  

How Smartmall Private Special Asset Investment Trust

   36,537     80.8%   29,511     —     (1,881)   27,630  

 

   2015 

(in millions of Korean won)

  Net assets   Percentage
of
ownership		  Share in net
assets		   Goodwill   Book value 

Korea Information & Technology Fund

  ￦382,748     33.3%  ￦127,583    ￦—    ￦127,583  

KT-SB Venture Investment

   9,722     50.0%   4,861     —     4,861 ��

Mongolian Telecommunications

   18,708     40.0%   7,483     —     7,483  

KT Wibro Infra Co., Ltd.

   264,431     26.2%   69,328     —     69,328  

KT-CKP New Media Investment Fund

   7,772     49.7%   3,860     —     3,860  

QTT Global (Group) Company Limited

   16,656     25.0%   4,164     9,013     13,177  

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

   2016 
(In millions of Korean won)  Net assets   Percentage of
ownership		  Share in net
assets		   Intercompany
transaction
and others		  Carrying
amount		 

Korea Information & Technology Fund

  ￦404,908    33.3%  ￦134,969   ￦—    ￦134,969 

KT-SB Venture Investment

   9,471    50.0%   4,736    —     4,736 

Mongolian Telecommunications

   15,610    40.0%   6,244    —     6,244 

KT Wibro Infra Co., Ltd.

   269,769    26.2%   70,679    (18,479)   52,200 

KT-CKP New Media Investment Fund

   8,967    49.7%   4,454    —     4,454 

Marketable investments in associates and joint ventures as of December 31, 20142015 and 2015,2016, are as follows:

 

   2014 
   Number of
shares		   Book Value
(In millions of
Korean won)		   Fair Value
(In millions of
Korean won)		 

Mongolian Telecommunications

   10,348,111    ￦7,477    ￦8,247  
   2015 
   Number of shares   Carrying amount   Fair Value 
       

(In millions of

Korean won)

   

(In millions of

Korean won)

 

Mongolian Telecommunications

   10,348,111   ￦7,483   ￦4,884 

 

   2015 
   Number of
shares		   Book Value
(In millions of
Korean won)		   Fair Value
(In millions of
Korean won)		 

Mongolian Telecommunications

   10,348,111    ￦7,483    ￦4,884  
   2016 
   Number of shares   Carrying amount   Fair Value 
       (In millions of
Korean won)		   (In millions of
Korean won)		 

Mongolian Telecommunications

   10,348,111   ￦6,244   ￦3,940 

Due to the suspensiondiscontinuance of the equity method of accounting, the Group has not recognized loss from associates and joint ventures of￦6011,354 million for the year (2013:￦17,428 million, 2014:(2014:￦11,425 million)million, 2015:￦601 million,). The accumulated comprehensive loss of associates and joint ventures and associates as of December 31, 2015,2016, which was not recognized by the Group is￦51,59718,096 million (2013:￦39,571 million, 2014:(2014:￦50,996 million, 2015:￦51,597 million).

15.    Trade

KT Corporation and other payablesSubsidiaries

The Group’sNotes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

14.Trade and other payables

Details of trade and other payables as of December 31, 20142015 and 2015,2016, are as follows:

 

(In millions of Korean won)

  2014   2015   December 31, 2015   December 31, 2016 

Current liabilities

        

Trade payables

  ￦1,200,032    ￦1,290,373    ￦1,290,373   ￦1,235,955 

Other payables

   5,208,079     4,983,479     5,044,654    5,903,816 
  

 

   

 

   

 

   

 

 

Total

  ￦6,408,111    ￦6,273,852    ￦6,335,027   ￦7,139,771 
  

 

   

 

   

 

   

 

 

Non-current liabilities

        

Trade payables

  ￦6,457    ￦9,944    ￦9,944   ￦8,041 

Other payables

   902,735     564,007     659,029    1,180,270 
  

 

   

 

   

 

   

 

 

Total

  ￦909,192    ￦573,951    ￦668,973   ￦1,188,311 
  

 

   

 

   

 

   

 

 

Details of other payables as of December 31, 20142015 and 20152016 are as follows:

 

(In millions of Korean won)

  2014 2015   2015 2016 

Non-trade payables 1

  ￦3,768,923   ￦3,581,505    ￦3,581,505  ￦4,803,642 

Accrued expenses

   949,392    921,650     921,650  1,061,002 

Operating deposits

   886,165    885,566     885,566  861,739 

Others

   576,334    158,765     314,962  357,703 

Less: non-current

   (902,735)   (564,007)    (659,029)  (1,180,270) 
  

 

  

 

   

 

  

 

 

Current

  ￦5,208,079   ￦4,983,479    ￦5,044,654  ￦5,903,816 
  

 

  

 

   

 

  

 

 

 

1Settlement payables of BC Card Co., Ltd. of￦1,386,0812,095,989 million related to credit card transactions included as of December 31, 2015 (2014:2016 (2015:￦1,331,2491,386,081 million).

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

16.15.    Bonds Payable and Borrowings

Details of bonds payable and borrowings as of December 31, 20142015 and 2015,2016, are as follows:

Bonds PayableDebentures

 

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

  2014  2015 

Type

 

Maturity

 Annual interest
rates		  Foreign
currency		  Korean won  Foreign
currency		  Korean won 

MTNP notes1

 Sep. 07, 2034  6.50%  USD 100,000   ￦109,920   USD 100,000    117,200  

MTNP notes1

 July 15, 2015  —   USD 400,000    439,680    —    —  

MTNP notes1

 May 03, 2016  5.88%  USD 200,000    219,840   USD200,000    234,400  

MTNP notes

 Jan. 20, 2017  3.88%  USD 350,000    384,720   USD350,000    410,200  

FR notes2

 Aug. 28, 2018  LIBOR(3M)+1.15%  USD 300,000    329,760   USD300,000    351,600  

MTNP notes

 Jan. 29, 2015  —   JPY5,000,000    46,007    —    —  

MTNP notes

 Jan. 29, 2016  0.70%  JPY 18,200,000    167,465   JPY 18,200,000    176,906  

MTNP notes

 Jan. 29, 2018  0.86%  JPY 6,800,000    62,570   JPY6,800,000    66,097  

MTNP notes

 Apr. 22, 2017  1.75%  USD 650,000    714,480   USD650,000    761,800  

MTNP notes

 Apr. 22, 2019  2.63%  USD 350,000    384,720   USD350,000    410,200  

MTNP notes

 Feb. 23, 2018  0.48%   —    —   JPY15,000,000    145,802  

The 167-2nd Public bond

 Apr. 20, 2015  —    —    100,000    —    —  

The 168-2nd Public bond

 June 21, 2015  —    —    90,000    —    —  

The 173-2nd Public bond

 Aug. 06, 2018  6.62%   —    100,000    —    100,000  

The 176-3rd Public bond

 May 28, 2016  5.24%   —    260,000    —    260,000  

The 177-2nd Public bond

 Feb. 09, 2015  —    —    190,000    —    —  

The 177-3rd Public bond

 Feb. 09, 2017  5.38%   —    170,000    —    170,000  

The 179th Public bond

 Mar. 29, 2018  4.47%   —    260,000    —    260,000  

The 180-1st Public bond

 Apr. 26, 2016  4.35%   —    210,000    —    210,000  

The 180-2nd Public bond

 Apr. 26, 2021  4.71%   —    380,000    —    380,000  

The 181-1st Public bond

 Aug. 26, 2016  3.94%   —    260,000    —    260,000  

The 181-2nd Public bond

 Aug. 26, 2018  3.99%   —    90,000    —    90,000  

The 181-3rd Public bond

 Aug. 26, 2021  4.09%   —    250,000    —    250,000  

The 182-1st Public bond

 Oct. 28, 2016  4.11%   —    320,000    —    320,000  

The 182-2nd Public bond

 Oct. 28, 2021  4.31%   —    100,000    —    100,000  

The 183-1st Public bond

 Dec. 22, 2016  3.81%   —    50,000    —    50,000  

The 183-2nd Public bond

 Dec. 22, 2021  4.09%   —    90,000    —    90,000  

The 183-3rd Public bond

 Dec. 22, 2031  4.27%   —    160,000    —    160,000  

The 184-1st Public bond

 Apr. 10, 2018  2.74%   —    120,000    —    120,000  

The 184-2nd Public bond

 Apr. 10, 2023  2.95%   —    190,000    —    190,000  

The 184-3rd Public bond

 Apr. 10, 2033  3.17%   —    100,000    —    100,000  

The 185-1st Public bond

 Sep. 16, 2018  3.46%   —    200,000    —    200,000  

The 185-2nd Public bond

 Sep. 16, 2020  3.65%   —    300,000    —    300,000  

The 186-1st Public bond

 June 26, 2017  2.86%   —    120,000    —    120,000  

The 186-2nd Public bond

 June 26, 2019  3.08%   —    170,000    —    170,000  

The 186-3rd Public bond

 June 26.2024  3.42%   —    110,000    —    110,000  

The 186-4th Public bond

 June 26, 2034  3.70%   —    100,000    —    100,000  

The 187-1st Public bond

 Sep. 02, 2017  2.69%   —    110,000    —    110,000  

The 187-2nd Public bond

 Sep. 02, 2019  2.97%   —    220,000    —    220,000  

The 187-3rd Public bond

 Sep. 02, 2024  3.31%   —    170,000    —    170,000  

The 187-4th Public bond

 Sep. 02, 2034  3.55%   —    100,000    —    100,000  

The 188-1st Public bond

 Jan. 29, 2020  2.26%   —    —    —    160,000  

The 188-2nd Public bond

 Jan. 29, 2025  2.45%   —    —    —    240,000  

The 188-3rd Public bond

 Jan. 29, 2035  2.71%   —    —    —    50,000  

The 32-3rd Public bond

 Jan. 22, 2015  —    —    30,000    —    —  

The 33rd Public bond

 Feb. 11, 2015  —    —    50,000    —    —  
(In millions of Korean won and thousands of foreign currencies) 2015  2016 
Type Maturity  

Annual interest

rates

 

Foreign

currency

  

Korean

won

  

Foreign

currency

  

Korean

won

 

MTNP notes1

  Sept. 07, 2034  6.50%  USD 100,000  ￦117,200   USD 100,000  ￦120,850 

MTNP notes1

  May 03, 2016  —    USD 200,000   234,400   —     —   

MTNP notes

  Jan. 20, 2017  3.88%  USD 350,000   410,200   USD 350,000   422,975 

FR notes2

  Aug. 28, 2018  LIBOR(3M)+1.15%  USD 300,000   351,600   USD 300,000   362,550 

MTNP notes

  Apr. 22, 2017  1.75%  USD 650,000   761,800   USD 650,000   785,525 

MTNP notes

  Apr. 22, 2019  2.63%  USD 350,000   410,200   USD 350,000   422,975 

MTNP notes

  Jan. 29, 2016  —    JPY 18,200,000   176,906   —     —   

MTNP notes

  Jan. 29, 2018  0.86%  JPY 6,800,000   66,097   JPY 6,800,000   70,503 

MTNP notes

  Feb. 23, 2018  0.48%  JPY 15,000,000   145,802   JPY 15,000,000   155,522 

MTNP notes

  July 18, 2026  2.50%  —     —     USD 400,000   483,400 

The173-2nd Public bond

  Aug. 06, 2018  6.62%  —     100,000   —     100,000 

The176-3rd Public bond

  May 28, 2016  —    —     260,000   —     —   

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

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

  2014  2015 

Type

 

Maturity

 Annual interest
rates		  Foreign
currency		  Korean won  Foreign
currency		  Korean won 

The 36-3rd Public bond

 Apr. 30, 2015  —    —    20,000    —    —  

The 40-3rd Public bond

 Aug. 10, 2015  —    —    20,000    —    —  

The 42-3rd Public bond

 Nov. 22, 2015  —    —    10,000    —    —  

The 43-2nd Public bond

 Jan. 28, 2015  —    —    10,000    —    —  

The 43-3rd Public bond

 Jan. 28, 2016  —    —    30,000    —    —  

The 46-3rd Public bond

 May 26, 2015  —    —    20,000    —    —  

The 46-4th Public bond

 May 26, 2016  —    —    20,000    —    —  

The 48th Public bond

 Aug. 11, 2016  —    —    10,000    —    —  

The 50-2nd Public bond

 Sep. 21, 2016  —    —    5,000    —    —  

The 51-2nd Public bond

 Sep. 30, 2016  —    —    20,000    —    —  

The 55-2nd Public bond

 Nov. 16, 2015  —    —    20,000    —    —  

The 55-3rd Public bond

 Nov. 16, 2016  —    —    5,000    —    —  

The 57-2nd Public bond

 Jan. 05, 2016  —    —    20,000    —    —  

The 57-3rd Public bond

 Jan. 05, 2017  —    —    30,000    —    —  

The 58-2nd Public bond

 July 10, 2015  —    —    20,000    —    —  

The 59-1st Public bond

 May 25, 2015  —    —    20,000    —    —  

The 59-2nd Public bond

 May 25, 2016  —    —    20,000    —    —  

The 59-3rd Public bond

 May 25, 2017  —    —    40,000    —    —  

The 60th Public bond

 July 13, 2015  —    —    40,000    —    —  

The 61st Public bond

 Sep. 22, 2017  —    —    45,000    —    —  

Asset backed short-term bond

 Feb. 27, 2015  —    —    25,000    —    —  

The 62-1st Public bond

 Aug. 27, 2015  —    —    20,000    —    —  

The 62-2nd Public bond

 Oct. 11, 2017  —    —    50,000    —    —  

The 63rd Public bond

 Sep. 27, 2017  —    —    40,000    —    —  

The 64-1st Public bond

 Oct. 29, 2015  —    —    20,000    —    —  

The 64-2nd Public bond

 Dec. 21, 2017  —    —    50,000    —    —  

The 65th Public bond

 Mar. 22, 2018  —    —    55,000    —    —  

The 66th Public bond

 Apr. 02, 2018  —    —    54,000    —    —  

The 67-1st Public bond

 Mar. 22, 2017  —    —    30,000    —    —  

The 67-2nd Public bond

 Mar. 22, 2018  —    —    40,000    —    —  

The 67-3rd Public bond

 Mar. 22, 2020  —    —    20,000    —    —  

The 68-1st Public bond

 Apr. 30, 2016  —    —    40,000    —    —  

The 68-2nd Public bond

 Apr. 30, 2017  —    —    10,000    —    —  

The 69-2nd Public bond

 June 27, 2016  —    —    20,000    —    —  

The 69-3rd Public bond

 June 27, 2018  —    —    20,000    —    —  

The 70-1st Public bond

 Oct. 28, 2016  —    —    40,000    —    —  

The 70-2nd Public bond

 Oct. 28, 2018  —    —    10,000    —    —  

The 71-1st Public bond

 Nov. 29, 2016  —    —    10,000    —    —  

The 71-2nd Public bond

 Nov. 29, 2020  —    —    30,000    —    —  

The 72-1st Public bond

 Dec. 23, 2015  —    —    10,000    —    —  

The 72-2nd Public bond

 Dec. 23, 2016  —    —    30,000    —    —  

The 73-1st Public bond

 Mar. 17, 2016  —    —    30,000    —    —  

The 73-2nd Public bond

 Sep. 17, 2017  —    —    20,000    —    —  

The 74th Public bond

 Oct. 02, 2017  —    —    50,000    —    —  

The 75-1st Public bond

 Nov. 23, 2015  —    —    50,000    —    —  

The 75-2nd Public bond

 Nov. 21, 2017  —    —    50,000    —    —  

Asset backed short-term bond

 Jan. 13, 2015  —    —    10,000    —    —  

Unsecured private convertible bond

 Jan. 20, 2016  —    —    15,000    —    —  

Unsecured public bond in won

 Jan. 24, 2016  3.43%   —    30,000    —    30,000  

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

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

  2014  2015 

Type

 

Maturity

 Annual interest
rates		  Foreign
currency		  Korean won  Foreign
currency		  Korean won 

The 16th unsecured bond

 Apr. 23, 2015  —    —    80,000    —    —  

The 17th unsecured bond

 Apr. 22, 2018  1.89%   —    —    —    60,000  

The 2nd convertible preferred stock

 Oct. 17, 2015  —    —    2,100    —    —  

The 28-2nd Public bond

 Apr. 05, 2016  —    —    65,000    —    —  

The 29th Public bond

 Sep. 05, 2016  —    —    45,000    —    —  

The 31-1st Public bond

 June 15,2015  —    —    100,000    —    —  

Unsecured private convertible bond

 Sep. 30, 2018  —    —    179    —    —  

The 32-1st Public bond

 Nov. 20, 2015  —    —    100,000    —    —  

The 32-2nd Public bond

 Nov. 20, 2017  —    —    100,000    —    —  

The 33rd Public bond

 Mar. 21, 2018  —    —    53,000    —    —  

The 31-2nd Public bond

 June 15, 2017  —    —    100,000    —    —  

The 34th Public bond

 Mar. 21, 2018  —    —    54,000    —    —  

The 36th Public bond

 June 21, 2018  —    —    50,000    —    —  

The 37th Public bond

 June 21, 2018  —    —    50,000    —    —  

The 38-1st Public bond

 Nov. 20, 2015  —    —    40,000    —    —  

The 38-2nd Public bond

 Nov. 20, 2016  —    —    60,000    —    —  

The 39-1st Public bond

 Aug. 28, 2017  —    —    150,000    —    —  

The 39-2nd Public bond

 Aug. 28, 2019  —    —    50,000    —    —  

The 40-1st Public bond

 Oct. 31, 2017  —    —    50,000    —    —  

The 40-2nd Public bond

 Oct. 31, 2019  —    —    50,000    —    —  
    

 

 

   

 

 

 
   10,532,441     7,924,205  

Less: Current portion

  

  (1,597,732)    (1,540,771) 

Discount on bonds

  

  (28,258)    (20,480) 

Add: Premium on bonds redemption

  

  1,483     —  

Conversion right adjustment

  

  12     —  
    

 

 

   

 

 

 

Total

  

 ￦8,907,946    ￦6,362,954  
    

 

 

   

 

 

 
(In millions of Korean won and thousands of foreign currencies) 2015  2016 
Type Maturity  

Annual interest

rates

 

Foreign

currency

  

Korean

won

  

Foreign

currency

  

Korean

won

 

The177-3rd Public bond

  Feb. 09, 2017  5.38%  —     170,000   —     170,000 

The 179th Public bond

  Mar. 29, 2018  4.47%  —     260,000   —     260,000 

The180-1st Public bond

  Apr. 26, 2016  —    —     210,000   —     —   

The180-2nd Public bond

  Apr. 26, 2021  4.71%  —     380,000   —     380,000 

The181-1st Public bond

  Aug. 26, 2016  —    —     260,000   —     —   

The181-2nd Public bond

  Aug. 26, 2018  3.99%  —     90,000   —     90,000 

The181-3rd Public bond

  Aug. 26, 2021  4.09%  —     250,000   —     250,000 

The182-1st Public bond

  Oct. 28, 2016  —    —     320,000   —     —   

The182-2nd Public bond

  Oct. 28, 2021  4.31%  —     100,000   —     100,000 

The183-1st Public bond

  Dec. 22, 2016  —    —     50,000   —     —   

The183-2nd Public bond

  Dec. 22, 2021  4.09%  —     90,000   —     90,000 

The183-3rd Public bond

  Dec. 22, 2031  4.27%  —     160,000   —     160,000 

The184-1st Public bond

  Apr. 10, 2018  2.74%  —     120,000   —     120,000 

The184-2nd Public bond

  Apr. 10, 2023  2.95%  —     190,000   —     190,000 

The184-3rd Public bond

  Apr. 10, 2033  3.17%  —     100,000   —     100,000 

The185-1st Public bond

  Sept. 16, 2018  3.46%  —     200,000   —     200,000 

The185-2nd Public bond

  Sept. 16, 2020  3.65%  —     300,000   —     300,000 

The186-1st Public bond

  June 26, 2017  2.86%  —     120,000   —     120,000 

The186-2nd Public bond

  June 26, 2019  3.08%  —     170,000   —     170,000 

The186-3rd Public bond

  June 26, 2024  3.42%  —     110,000   —     110,000 

The186-4th Public bond

  June 26, 2034  3.70%  —     100,000   —     100,000 

The187-1st Public bond

  Sept. 02, 2017  2.69%  —     110,000   —     110,000 

The187-2nd Public bond

  Sept. 02, 2019  2.97%  —     220,000   —     220,000 

The187-3rd Public bond

  Sept. 02, 2024  3.31%  —     170,000   —     170,000 

The187-4th Public bond

  Sept. 02, 2034  3.55%  —     100,000   —     100,000 

The188-1st Public bond

  Jan. 29, 2020  2.26%  —     160,000   —     160,000 

The188-2nd Public bond

  Jan. 29, 2025  2.45%  —     240,000   —     240,000 

The188-3rd Public bond

  Jan. 29, 2035  2.71%  —     50,000   —     50,000 

The189-1st Public bond

  Jan. 27, 2019  1.76%  —     —     —     100,000 

The189-2nd Public bond

  Jan. 27, 2021  1.95%  —     —     —     130,000 

The189-3rd Public bond

  Jan. 27, 2026  2.20%  —     —     —     100,000 

The189-4th Public bond

  Jan. 27, 2036  2.35%  —     —     —     70,000 

Unsecured public bond in won

  Jan. 24, 2016  —    —     30,000   —     —   

The 17th unsecured bond

  Apr. 22, 2018  1.89%  —     60,000   —     60,000 
    

 

 

   

 

 

 
   7,924,205    7,344,300 

Less: Current portion

   (1,540,771)    (1,607,570) 

Discount on bonds

   (20,480)    (20,852) 
    

 

 

   

 

 

 

Total

  ￦6,362,954   ￦5,715,878 
  

 

 

   

 

 

 

 

1As of December 31, 2015,2016, the Controlling Company has outstanding notes in the amount of USD 300100 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.

2Libor (3M) are approximately 0.612 %0.998% as of December 31, 2015.2016.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

Short-term borrowings

 

(In millions of Korean won and

foreign currencies in thousands)

  2014  2015 

Financial institution

 

Type

 Annual
interest rates as		  Foreign
Currency		  Korean
won		  Foreign
Currency		  Korean
Won		 

Shinhan Bank

 Commercial papers  —    —   ￦140,000    —   ￦—  
 Commercial papers  —   VND32,000,000    1,667    —    —  
 Commercial papers  —   USD 2,000    2,198    —    —  
 General loan  3.42%   —    101,200    —    100,000  
 Credit loan  —    —    12,383    —    —  
 Usance  2.54%~3.77%   —    19,000    —    31,000  
 Facility loans  —    —    40,000    —    —  

Standard Chartered Bank

 Secured loans  2.86%   —    10,000    —    8,000  

Samsung Securities

 Commercial papers  —    —    50,000    —    —  

Korea Investment & Securities Co., Ltd.

 Commercial papers  —    —    230,000    —    —  

Woori Bank

 Commercial papers  —   VND 61,756,000    3,218    —    —  
 General loans  —    —    1,246    —    —  
 Credit loan  3.97%   —    —    —    346  
 Usance  2.67%~2.75%   —    —    —    6,000  

Korea Exchange Bank

 Commercial papers  —    —    50,000    —    —  
 Credit loans  —    —    4,000    —    —  
 Revolving loan  —    —    2,000    —    —  

Kookmin Bank

 General loans  —    —    3,500    —    —  
 Facility loans  —    —    50,000    —    —  
 Credit loans  3.97%   —    1,000    —    1,452  
 Commercial papers  —    —    25,000    —    —  

Citibank

 Usance  —    —    11,000    —    —  

Korea Development Bank

 Credit loans  3.52%   —    10,000    —    15,000  
 General loans  —    —    80,000    —    —  
 Usance  2.25%   —    —    —    5,100  

IBK Bank

 Credit loans  5.61%   —    6,000    —    4,000  

KT Capital

 Credit loans  3.80%~4.95%   —    —    —    3,900  

NH Investment & Securities

 Commercial papers  —    —    25,000    —    —  

HYUNDAI Securities

 Commercial papers  —    —    30,000    —    —  

Woori Investment & Securities

 Commercial papers  —    —    10,000    —    —  

KTB Investment & Securities

 Commercial papers  —    —    70,000    —    —  

Hana Daetoo Securities Co., Ltd.

 Commercial papers  —    —    5,000    —    —  

NongHyup Bank

 Facility loans  —    —    50,000    —    —  

Shinyoung Securities Co., Ltd.

 Commercial papers  —    —    55,000    —    —  

UFJ Bank

 LC  —   JPY 194,236    1,943    —    —  
    

 

 

   

 

 

 

Total

    ￦1,100,355    ￦174,798  
    

 

 

   

 

 

 
   (In millions of Korean won)    2015   2016 
Type  Financial institution  Annual interest rates   

Operational

  Shinhan Bank  2.75% ~ 4.19% ￦131,000   ￦120,300 
  Standard Charted Bank  2.52%  8,000    8,000 
  Woori Bank  —    6,346    —   
  Kookmin Bank  —    1,452    —   
  Korea Development Bank  2.02% ~ 3.47%  20,100    20,800 
  Indutrial Bank of Korea  4.95%  4,000    1,000 
  SooHyup Bank  3.79%  —      3,000 
  Acuoncapital  —    3,900    —   
     

 

 

   

 

 

 
  Total ￦174,798   ￦153,100 
   

 

 

   

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

Long-term borrowings

 

Long-term borrowings

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

  2014  2015 

Financial institution

 Type Annual
interest rates		  Foreign
currency		  Korean
won		  Foreign
currency		  Korean
won		 

Shinhan Bank

 Informatization
promotion funds 1		  —    —   ￦1,539    —   ￦ —  
 General loans  2.54%~4.20%   —    21,000    —    32,000  
 Facility loans  2.50%   —    100,320    —    2,497  
 Vessel facility loans  1.03%   —    —   USD27,000    31,644  

Export-Import Bank of Korea

 Inter-Korean
Cooperation Fund 1		  2.00%   —    5,922    —    5,428  

Korea Exchange Bank

 General loans  —    —    25,210    —    —  

National Federation of Fisheries Cooperatives

 General loans  —    —    50,000    —    —  

NH Bank

 General loans  —    —    58,000    —    —  
 Facility loans  2.00%   —    183    —    123  

Korea Development Bank

 General loans  —    —    20,000    —    —  
 Facility loans  —    —    170,000    —    —  

Industrial Bank of Korea

 Facility loans  —    —    167    —    —  

Samsung Securities

 Commercial papers  —    —    100,000    —    —  

HYUNDAI Securities

 Commercial papers  —    —    160,000    —    —  

IBK Securities

 Commercial papers  —    —    50,000    —    —  

Shinhan invest corp

 Commercial papers  —    —    40,000    —    —  

NH Investment & Security
Co., Ltd

 Commercial papers  3.17%   —    300,000    —    300,000  

The Jeonbuk Bank Ltd

 General loans  —    —    20,000    —    —  
 Facility loans  —    —    30,000    —    —  

Others

 Redeemable
convertible preferred
stock2		  —    —    56,768    —    950  
 Kookmin Bank

and other

  2.11%~2.45%   —    243   USD 156,768    183,732  
    

 

 

   

 

 

 
     1,209,352     556,374  

Less: Current portion

     (257,557)    (10,529) 
    

 

 

   

 

 

 
 Total   ￦951,795    ￦545,845  
    

 

 

   

 

 

 
(In millions of Korean won and thousands of foreign currencies)  2015  2016 
Financial institution Type Annual interest rates  

Foreign

currency

  

Korean

won

  

Foreign

currency

  

Korean

won

 

Export-Import Bank of Korea

 Inter-Korean Cooperation Fund1  1.50%   —    ￦5,428   —    ￦5,181 

Shinhan Bank

 General loans  2.39% ~ 2.87%   —     32,000   —     31,000 
 Facility loans  2.30% ~ 2.56%   —     2,497   —     6,493 
 Vessel facility loans2  LIBOR(3M)+0.36%   USD 27,000   31,644   USD 21,000   25,379 

KEB Hana Bank

 General loans  3.95%   —     —     —     3,000 

Woori Bank

 General loans  2.53% ~ 3.94%   —     —     —     13,000 

NongHyup Bank

 Facility loans  2.00%   —     123   —     123 

Korea Development Bank

 General loans  3.27%   —     —     —     30,000 

Kookmin Bank

 Facility loans  2.59%   —     —     —     7,000 

NH Investment & Security Co., Ltd.

 Commercial papers  3.17%   —     300,000   —     300,000 

Others

 Redeemable convertible preferred stock3  —     —     950   —     950 
 

Kookmin Bank

and other2

  LIBOR(3M)+1.85%   USD 156,768   183,732   USD 183,796   222,117 
    

 

 

   

 

 

 
    ￦556,374   ￦644,243 
 

Less: Current portion

    (10,529)    (59,331) 
    

 

 

   

 

 

 
 

Total

   ￦545,845   ￦584,912 
    

 

 

   

 

 

 

 

1The above Informatization Promotion Funds are repayable in installments over three years after a two-year grace period, while Inter-Korean Cooperation Fund is repayable in installments over 13 years after a seven-year grace period.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

2LIBOR(3M) is approximately 0.998% as of December 31, 2016.
3Skylife TV Co., Ltd., a subsidiary of the Group, issued 1,900,000 of redeemable convertible preferred stock with a par value per share of￦500 in 2010.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

Repayment schedule of the Group’s bonds payable and borrowings including the portion of current liabilities as of December 31, 2015,2016, is as follows:

 

   Bonds   Borrowings   Total 

(in millions of

Korean won)

  In local
currency		   In foreign
currency		   Sub-total   In local
currency		   In foreign
currency		   Sub-total   

2016

  ￦1,130,000     ￦411,306    ￦1,541,306    ￦178,295    ￦7,032    ￦185,327    ￦1,726,633  

2017

   400,000     1,172,000     1,572,000     1,936     42,203     44,139     1,616,139  

2018

   830,000     563,499     1,393,499     31,512     53,927     85,439     1,478,938  

2019

   390,000     410,200     800,200     300,518     53,927     354,445     1,154,645  

Thereafter

   2,500,000     117,200     2,617,200     3,535     58,287     61,822     2,679,022  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦5,250,000    ￦2,674,205    ￦7,924,205    ￦515,796    ￦215,376    ￦731,172    ￦8,655,377  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(In millions of Korean won) 
  Debentures  Borrowings  Total 
  In local
currency		  In foreign
currency		  Sub- total  In local
currency		  In foreign
currency		  Sub- total    

Jan 1, 2017 ~ Dec 31, 2017

 ￦400,000  ￦1,208,500  ￦1,608,500  ￦169,753  ￦42,678  ￦212,431  ￦1,820,931 

Jan 1, 2018 ~ Dec 31, 2018

  830,000   588,575   1,418,575   40,043   54,486   94,529   1,513,104 

Jan 1, 2019 ~ Dec 31, 2019

  490,000   422,975   912,975   336,518   54,486   391,004   1,303,979 

Jan 1, 2020 ~ Dec 31, 2020

  460,000   —     460,000   518   50,861   51,379   511,379 

After 2021

  2,340,000   604,250   2,944,250   3,015   44,985   48,000   2,992,250 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 ￦4,520,000  ￦2,824,300  ￦7,344,300  ￦549,847  ￦247,496  ￦797,343  ￦8,141,643 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Book valueCarrying amount and fair value of the Group’s bonds payabledebentures and borrowings as of December 31, 20142015 and 2015,2016, are as follows:

 

   2014   2015 

(in millions of Korean won)

Type

  Book Value   Fair Value   Book Value   Fair Value 

Bonds payable

  ￦10,505,678    ￦10,537,442    ￦7,903,725    ￦7,965,097  

Long-term borrowings (Including current borrowings)

   1,209,352     1,183,645     556,374     544,991  

Short-term borrowings

   1,100,355     1,100,355     174,798     174,798  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦12,815,385    ￦12,821,442    ￦8,634,897    ￦8,684,886  
  

 

 

   

 

 

   

 

 

   

 

 

 
(In millions of Korean won)  2015   2016 
Type  

Carrying

Amount

   

Fair

Value

   

Carrying

Amount

   

Fair

Value

 

Debentures

  ￦7,903,725   ￦7,965,097   ￦7,323,448   ￦7,387,085 

Long-term borrowings (Including current portion of long-term borrowings)

   556,374    544,991    644,243    644,010 

Short-term borrowings

   174,798    174,798    153,100    153,100 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦8,634,897   ￦8,684,886   ￦8,120,791   ￦8,184,195 
  

 

 

   

 

 

   

 

 

   

 

 

 

The fair values of bonds payabledebentures and long-term borrowings are calculated by discounting the expected future cash flows at weighted average borrowing rate. The weighted average borrowing rate is approximately 1.03%1.36% ~ 4.20%3.95% as of December 31, 2015 (2014: 3.36%2016 (2015: 1.03% ~ 4.28%4.20%).

17.    Provisions

The changes

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

16.Provisions

Changes in provisions for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

   2014 

(in millions of Korean won)

  Litigation  Asset retirement
obligation		  Others  Total 

Balance at 2014.1.1

  ￦50,912   ￦105,279   ￦ 92,125   ￦248,316  

Increase (Transfer)

   4,574    5,515    61,342    71,431  

Usage

   (11,988)   (4,022)   (43,285)   (59,295) 

Reversal

   (23,259)   (9,549)   (9,963)   (42,771) 

Changes in scope of consolidation

   —    899    (711)   188  
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2014.12.31

  ￦20,239   ￦98,122   ￦ 99,508   ￦ 217,869  
  

 

 

  

 

 

  

 

 

  

 

 

 

Current portion

   20,239    718    90,482    111,439  

Non-current portion

   —    97,404    9,026    106,430  
   2015 
(In millions of Korean won)  Litigation  Restoration cost  Others  Total 

Beginning balance

  ￦20,239  ￦98,122  ￦99,508  ￦217,869 

Increase (transfer)

   10,633   6,093   15,162   31,888 

Usage

   (6,860)   (7,498)   (23,625)   (37,983) 

Reversal

   (6,488)   (4,890)   (5,124)   (16,502) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  ￦17,524  ￦91,827  ￦85,921  ￦195,272 
  

 

 

  

 

 

  

 

 

  

 

 

 

Current

   17,524   1,124   85,259   103,907 

Non-current

   —     90,703   662   91,365 
   2016 
(In millions of Korean won)  Litigation  Restoration cost  Others  Total 

Beginning balance

  ￦17,524  ￦91,827  ￦85,921  ￦195,272 

Increase (Transfer)

   3,392   13,653   40,293   57,338 

Usage

   (640)   (3,378)   (37,378)   (41,396) 

Reversal

   (1,238)   (790)   (12,007)   (14,035) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  ￦19,038  ￦101,312  ￦76,829  ￦197,179 
  

 

 

  

 

 

  

 

 

  

 

 

 

Current

   18,988   2,334   75,163   96,485 

Non-current

   50   98,978   1,666   100,694 

 

   2015 

(in millions of Korean won)

  Litigation  Asset retirement
obligation		  Others  Total 

Balance at 2015.1.1

  ￦20,239   ￦ 98,122   ￦ 99,508   ￦ 217,869  

Increase (Transfer)

   10,633    6,093    15,162    31,888  

Usage

   (6,860)   (7,498)   (23,625)   (37,983) 

Reversal

   (6,488)   (4,890)   (5,124)   (16,502) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at 2015.12.31

  ￦ 17,524   ￦ 91,827   ￦ 85,921   ￦ 195,272  
  

 

 

  

 

 

  

 

 

  

 

 

 

Current portion

   17,524    1,124    85,259    103,907  

Non-current portion

   —    90,703    662    91,365  

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

18.    Net Defined Benefit Liabilities

17.Net Defined Benefit Liabilities

The amounts recognized in the statementsstatement of financial position are determined as follows:

 

(in millions of Korean won)

  2014 2015 
(In millions of Korean won)  2015 2016 

Present value of defined benefit obligations

  ￦1,460,957   ￦1,601,974    ￦1,601,974  ￦1,713,184 

Fair value of plan assets

   (867,119)   (1,077,891)    (1,077,891)  (1,334,780) 
  

 

  

 

   

 

  

 

 

Liabilities

  ￦593,838   ￦524,083    ￦524,083  ￦378,404 
  

 

  

 

   

 

  

 

 

The changesChanges in the defined benefit obligations for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014 2015 
(In millions of Korean won)  2015 2016 

Beginning

  ￦1,636,593   ￦1,460,957    ￦1,460,957  ￦1,601,974 

Current service cost

   184,870    200,994     200,994  205,114 

Interest expense

   48,863    40,641     40,641  37,378 

Benefit paid

   (131,796)   (119,366)    (119,366)  (127,581) 

Losses on settlements of plan

   666,299    —  

Changes due to settlements of plan1

   (1,321,683)   —  

Changes due to settlements of plan

   —    (424) 

Remeasurements:

      

Actuarial gains and losses arising from changes in demographic assumptions

   27,745    (8,637)    (8,637)  (53,407) 

Actuarial gains and losses arising from changes in financial assumptions

   204,847    47,230     47,230  26,717 

Actuarial gains and losses arising from experience adjustments

   73,819    8,469     8,469  18,809 

Changes in scope of Consolidation

   71,400    (28,314) 

Changes in scope of consolidation

   (28,314)  4,604 
  

 

  

 

   

 

  

 

 

Ending

  ￦1,460,957   ￦1,601,974    ￦1,601,974  ￦1,713,184 
  

 

  

 

   

 

  

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

1The payment of the benefits for voluntary retirement amounts to￦1,215,407 million in 2014.

Changes in the fair value of plan assets for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014  2015 

Beginning

  ￦1,050,510   ￦867,119  

Interest income

   30,966    23,848  

Remeasurements:

   

Return on plan assets (excluding amounts included in interest income)

   (5,775)   (2,901) 

Benefits paid

   (61,085)   (88,490) 

Changes due to settlements of plan1

   (381,501)   —  

Employer contributions

   182,904    297,967  

Changes in scope of consolidation

   51,100    (19,652) 
  

 

 

  

 

 

 

Ending

  ￦867,119   ￦1,077,891  
  

 

 

  

 

 

 

1The payment from the plan assets for voluntary retirement amounts to￦307,268 million in 2014.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

(In millions of Korean won)  2015  2016 

Beginning

  ￦867,119  ￦1,077,891 

Interest income

   23,848   25,237 

Remeasurements:

   

Return on plan assets (excluding amounts included in interest income)

   (2,901)   (2,323) 

Benefits paid

   (88,490)   (88,876) 

Employer contributions

   297,967   322,851 

Changes in scope of consolidation

   (19,652)   —   
  

 

 

  

 

 

 

Ending

  ￦1,077,891  ￦1,334,780 
  

 

 

  

 

 

 

Amounts recognized in the statements of incomeoperations for the years ended December 31, 2014 and 2015, 20132016 are as follows:

 

(in millions of Korean won)

  2013 2014 2015 
(In millions of Korean won)  2014 2015 2016 

Current service cost

  ￦210,466   ￦184,870   ￦200,994    ￦184,870  ￦200,994  ￦205,114 

Net Interest cost

   14,927    17,897    16,793     17,897  16,793  12,141 

Losses on settlements

   2,171    666,299    —     666,299   —    424 

Transfer out

   (10,502)   (6,173)   (11,942)    (6,173)  (11,942)  (8,737) 

Transfer to discontinued operation

   (4,545)   (5,721)   (3,031)    (5,721)  (3,031)   —   
  

 

  

 

  

 

   

 

  

 

  

 

 

Total expenses

  ￦212,517   ￦857,172   ￦202,814    ￦857,172  ￦202,814  ￦208,942 
  

 

  

 

  

 

   

 

  

 

  

 

 

Principal actuarial assumptions used are as follows:

 

   2013.12.31   2014.12.31   2015.12.31 

Discount rate

   3.10% ~ 4.05%     2.37% ~ 3.80%     1.95% ~ 2.70%  

Future salary increase

   2.10% ~ 8.44%     2.00% ~ 8.10%     1.12% ~ 7.27%  

As of December 31, 2015, total amounts of the plan assets are invested in principal and interest-guaranteed financial instruments.

   2014.12.31  2015.12.31  2016.12.31 

Discount rate

   2.74%   2.43%   2.43% 

Future salary increase

   4.03%   4.06%   4.10% 

The sensitivity of the defined benefit obligations as of December 31, 2015,2016, to changes in the weighted principal assumptions is:

 

(In percentage, in millions of Korean won)  Effect on defined benefit obligation 
  Effect on defined benefit obligation   Changes in
assumption		  Increase in
assumption		 Decrease in
assumption		 

(in percentage, in millions of Korean won)

  Changes in principal
assumption		 Increase in principal
assumption		 Decrease in principal
assumption		 

Discount rate

   0.5% point  ￦(69,064)  ￦70,730    0.5% point  ￦(61,737)  ￦66,653 

Salary growth rate

   0.5% point   67,813    (66,475)   0.5% point   61,939  (58,084) 

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 annually reviews funding levels of plan assets and has plan asset policies that require maintaining the funding level of the Group equal to or more than the level required under the

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Employee Retirement Benefit Security Act. Expected contributions to post-employment benefit plans for the year ending December 31, 2016,2017, are￦313,346160,301 million.

Expected maturity analysis of undiscounted pension benefits as of December 31, 2015,2016, is as follows:

 

(in millions of Korean won)

  Less than
1 year		   Between
1 and 2 years		   Between
2 and 5 years		   Over
5 years		   Total 
(In millions of Korean won)  

Less than

1 year

   

Between

1 and 2 years

   

Between

2 and 5 years

   Over 5 years   Total 

Pension benefits

  ￦114,154    ￦121,367    ￦402,614    ￦3,806,911    ￦4,445,046    ￦127,453   ￦149,881   ￦535,579   ￦3,280,732   ￦4,093,645 

The weighted average duration of the defined benefit obligations is 9.88.5 years.

18.Defined Contribution Plan

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

19.    Defined Contribution Plan

Recognized expense related to the defined contribution plan for the year ended December 31, 2015,2016, is￦35,69946,023 million (2013:￦23,857 million, 2014:(2014:￦25,423, 2015:￦35,699 million).

20. Commitments and Contingencies

19.Commitments and Contingencies

As of December 31, 2015,2016, 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		   Financial institution Currency Limit Used amount 

Bank overdraft

 Kookmin Bank and others  KRW    1,869,800    3,698    Kookmin Bank and others KRW 1,863,300   —   

Commercial papers Factoring

 KEB Hana Bank and others  KRW    520,000    300,000    KEB Hana Bank and others KRW 520,000  300,000 

Collateralized loan on accounts receivable-trade

 Kookmin Bank and others  KRW    720,000    19,469    NH Bank KRW  31,560   —   

Collateralized loan on electronic accounts receivable-trade

  Shinhan Bank and others KRW  601,000   13,673 

Plus electronic notes payable

 Shinhan Bank  KRW    50,000    374    Industrial Bank of Korea KRW 50,000  140 

Loans for working capital

 Industrial Bank of Korea and others  KRW    243,100    105,100    Korea Development Bank KRW 300,400  230,100 
 Woori Bank  USD    960    —    and others USD 960   —   

Comprehensive credit line

 

KEB Hana Bank

  KRW    35,000    4,030  

Green energy factoring

 Kookmin Bank and others  KRW    387    185    Shinhan Bank KRW 92  92 

FX forward trading commitment

 Industrial Bank of Korea  USD    11,500    —    Shinhan Bank USD 11,500   —   

Facility loans

 Korea Development Bank and others  KRW    40,000    —    Kookmin Bank and others KRW 13,616  13,616 

Inter-Korea Cooperation Fund

 Export-Import Bank of Korea  KRW    37,700    5,428  
   USD 212,000  183,796 

Facility loans on ships

  Shinhan Bank USD 27,000  21,000 

Inter-Korean Cooperation Fund

  Export-Import Bank of Korea KRW  37,700   5,181 

Total

   KRW    3,515,987    438,284     KRW 3,417,668  562,802 
   USD    12,460    —     USD 251,460  204,796 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

As of December 31, 2015,2016, 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   97,482127,542 
   USD   5,123
DZD 125,8634,148 

Guarantee for import letters of credit

  KookminIndustrial Bank of Korea and others   USD   5,980 

Performance guarantee

PT Bank KEB HanaIDR1123,023,153

Counter guarantee

Woori BankIDR1123,023,153

Guarantee for payment in foreign currency

  KEB Hana

Export-Import Bank of Korea and others

PLN 223,000

   USD   87,24278,005
PLN223,000 

Guarantee for payment in local currency

Woori Bank and othersKRW11,604

Guarantee for refund advance paymentsadvances received

  Export-Import Bank of Korea   USD   87,9287,414

Comprehensive credit line

KEB Hana Bank and othersKRW45,000

Guarantee for payment in local currency

Kookmin Bank and othersKRW1,197 

Bid guarantee

  Korea Software Financial Cooperative   KRW   74,945110,343 

Performance guarantee /Warranty/ Warranty guarantee

  Korea Software Financial Cooperative   KRW   227,385262,758 

Guarantee for advances received/others

  

Korea Software Financial Cooperative and others

   KRW   56,34470,100 

Warranty guarantee

  Seoul Guarantee Insurance   KRW   461

Guarantees for accounts receivable from the handset sales

Seoul Guarantee InsuranceKRW578,904786 

Guarantees for licensing

  Seoul Guarantee Insurance   KRW   12,581

Guarantees for deposits

Seoul Guarantee InsuranceKRW5,13512,408 

Guarantees for public sale

  Seoul Guarantee Insurance   KRW   80307 

Guarantees for deposits

  

TotalSeoul Guarantee Insurance and others

   KRW   1,064,9213,558

Total

KRW633,999 
     USD   186,27395,547 
     DZDIDR1   25,863246,046,306 
     PLN2   23,000 

 

1Algeria Dinar.Indonesia Rupiah.

2Polish Zloty.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

As of December 31, 2015,2016, guarantees provided by the Group for third parties, are as follows:

 

(in millions of Korean won)

  Creditor   Limit   Used amount   Period 

Individuals with the right of ownership of Gyeryeong Rishivill II Apartment

   Shinhan Bank    ￦50,000    ￦49,748     

 

Jun. 10, 2014

~ May 31, 2016

  

  

Individuals with the right of ownership of Busan Lotte Castle Blue Ocean Apartment

   Shinhan Bank    ￦56,550    ￦9,395     

 

July 31, 2015

~Nov. 30, 2017

  

  

(In millions of Korean won)  Subject to payment Guarantees  Creditor  Limit  Used amount  Period

KT Estate Inc.

  Individuals with the right of ownership of Busan Lotte Castle Blue Ocean Apartment  Shinhan Bank  56,373  49,977  

July 31, 2015

~ Nov. 30, 2017

The Controlling Company is jointly and severally obligated with KT Sat Co., Ltd. to pay KT Sat Co., Ltd.’s liabilities prior tospin-off. As of December 31, 2015,2016, the Controlling Company and KT Sat Co., Ltd. are jointly and severally liable for reimbursement of￦6,9516,004 million.

DuringFor the year ended December 31, 2015,2016, the CompanyGroup entered into agreements with theOlleh KT Twenty-fifth to Twenty-sixth Securitization Specialty CompaniesCo., Ltd. and GIGA LTE Twenty-seventh to Thirtieth Securitization Specialty Co., Ltd. (2015: Olleh KT Nineteenth to Twenty-fourth Securitization Specialty Co., Ltd. (2014: Olleh KT Thirteenth to Eighteenth Securitization Specialty Co., Ltd.), and disposed of its trade receivables related to handset sales. The CompanyGroup also entered intomade asset management agreements with each securitization specialty company and will receive the related management fees.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

As of December 31, 2015,2016, the Group is a defendant in 194181 lawsuits with an aggregatethe total claimed amount of￦85,83377,461 million (2014:(2015:￦230,00685,833 million). As of December 31, 2015,2016, litigation provisions of￦17,52419,038 million for various pending lawsuits and unasserted claims are recorded as liabilities for potential loss in the ordinary course of business. The GroupCompany cannot yet predict the final outcomes of the cases because these matters involve significant uncertainties related to the legal theory or the nature of the claims as well as the complexity of the facts.

On March 6, 2014, the website of the Controlling Company was accessed by hackers and personal information of the customers was stolen. There are lawsuits against the Controlling Company over this breach seeking damages of approximately￦6,661 million. The resolution of the lawsuit cannot yet be reasonably predicted. Also, there may be more lawsuits to be filed against the Controlling Company in the future. However, the size and result of any potential lawsuits cannot yet be reasonably predicted since it is not sure yet whether the customers whose personal information was stolen would litigate or not.

Asia Broadcast Satellite Holdings Ltd. (ABS) sued the Controlling Company and its subsidiary, KT Sat, at the International Court of Arbitration of the International Chamber of Commerce on December 31, 2013, for the ownership and compensation of damages due to the sales contract of the satellite KOREASAT. In addition, ABS sued the Controlling Company and KT Sat at the International Centre for Dispute Resolution of the American Arbitration Association on December 24, 2013, for the compensation of damages from the breach of entrustment contract. Currently, the mediator selection process for the Controlling Company, KT Sat and ABS is complete, and the process of arbitration is in progress. The final outcome of this arbitration cannot yet be predicted.

According to the financial and other covenants included in certain bondsdebentures and borrowings, the Group is required to maintain certain financial ratios such asdebt-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. As of December 31, 2015, the Group is in compliance with the related covenants.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

21.    Lease

20.Lease

The Group’snon-cancellable lease arrangements are as follows:

The Group as the Lessee

Finance Lease

Details of finance lease assets as of December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014 2015 
(In millions of Korean won)  2015 2016 

Acquisition costs

  ￦94,247   ￦285,932    ￦285,932  ￦298,631 

Accumulated depreciation

   (39,032)   (122,617) 

Less: Accumulated depreciation

   (122,617)  (105,013) 
  

 

  

 

   

 

  

 

 

Net balance

  ￦55,215   ￦163,315    ￦163,315  ￦193,618 
  

 

  

 

   

 

  

 

 

As of December 31, 2015,2016, the Group recognizesrecognized financial lease assets as other property, plant and equipment. The related depreciation amounted to￦72,29750,704 million (2014:(2015:￦97,49472,297 million) for the year ended December 31, 2015.2016.

Details of future minimum lease payments as of December 31, 20142015 and 2015,2016, under finance lease contracts are summarized below:

 

(in millions of Korean won)

  2014   2015 
(In millions of Korean won)  2015 2016 

Total amount of minimum lease payments

       

Within one year

  ￦22,516    ￦78,996    ￦78,996  ￦79,644 

From one year to five years

   37,382     105,555     105,555  131,813 
  

 

   

 

   

 

  

 

 

Total

  ￦59,898    ￦184,551    ￦184,551  ￦211,457 
  

 

   

 

   

 

  

 

 

Unrealized interest expense

   4,891     (28,354)    (28,354)  (30,743) 
  

 

   

 

   

 

  

 

 

Net amount of minimum lease payments

       

Within one year

   20,155     61,175     61,175  64,008 

From one year to five years

   34,852     95,022     95,022  116,706 
  

 

   

 

   

 

  

 

 

Total

  ￦55,007    ￦156,197    ￦156,197  ￦180,714 
  

 

   

 

   

 

  

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Operating Lease

Details of future minimum lease payments as of December 31, 20142015 and 2015,2016, under operating lease contracts are summarized below:

 

(in millions of Korean won)

  2014   2015 
(In millions of Korean won)  2015   2016 

Within one year

  ￦77,727    ￦110,771    ￦110,771   ￦102,015 

From one year to five years

   312,305     297,027     297,027    270,462 

Thereafter

   165,799     77,859     77,859    16,549 
  

 

   

 

   

 

   

 

 

Total

  ￦555,831    ￦485,657    ￦485,657   ￦389,026 
  

 

   

 

   

 

   

 

 

Operating lease expenses incurred for the years ended December 31, 2013, 2014, 2015 and 2015,2016, amounted to￦104,883125,430 million,￦125,430111,776 million, and￦111,776121,852 million, respectively.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

 

21.Share Capital

The Group as the Lessor

Finance Lease

Details of finance lease assets as of December 31, 2014, are as follows:

(in millions of Korean won)

  Minimum lease
receipts		   Gross investment
in the lease		   Unaccrued
interest		  Net investment
in the lease		 

Within one year

  ￦286,570    ￦286,570    ￦(20,794)  ￦265,776  

From one year to five years

   363,277     363,277     (24,116)   339,161  

Thereafter

   874     874     (65)   809  
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  ￦650,721    ￦650,721    ￦(44,975)  ￦605,746  
  

 

 

   

 

 

   

 

 

  

 

 

 

Details of finance lease assets asAs of December 31, 2015 are as follows:

(in millions of Korean won)

  Minimum lease
receipts		   Gross investment
in the lease		   Unaccrued
interest		  Net investment
in the lease		 

Within one year

  ￦6,375    ￦6,375    ￦(358)  ￦6,017  

From one year to five years

   8,814     8,814     (186)   8,628  
  

 

 

   

 

 

   

 

 

  

 

 

 

Total

  ￦15,189    ￦15,189    ￦(544)  ￦14,645  
  

 

 

   

 

 

   

 

 

  

 

 

 

Details of bad debts allowance for finance lease receivables as of December 31, 2014 and 2015, are as follows:

(in millions of Korean won)

  2014   2015 

Within one year

  ￦6,794    ￦278  

From one year to five years

   14,412     109  

Thereafter

   127     —  
  

 

 

   

 

 

 

Total

  ￦21,333    ￦387  
  

 

 

   

 

 

 

Operating Lease

Details of operating lease assets as of December 31, 2014 and 2015, are as follows:

(in millions of Korean won)

  2014  2015 

Acquisition costs

  ￦2,698,249   ￦—  

Accumulated depreciation

   (754,531)   —  
  

 

 

  

 

 

 

Net balance 1

  ￦1,943,718   ￦—  
  

 

 

  

 

 

 

1Due to disposal of KT Rental, there are no operating lease assets as of December 31, 2015.

Details of future minimum lease payments as of December 31, 2014 and 2015, under operating lease contracts are summarized below:

(in millions of Korean won)

  2014   2015 

Within one year

  ￦547,194    ￦—  

From one year to five years

   673,117     —  
  

 

 

   

 

 

 

Total 1

  ￦1,220,311    ￦—  
  

 

 

   

 

 

 

1Due to disposal of KT Rental, there are no operating lease assets as of December 31, 2015.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

22.    Capital Stock

As of December 31, 2014 and 2015,2016, the Controlling Company’s number of authorized shares is one billion.

 

   2014   2015 
   Number of
outstanding
shares		   Par value
per share
(Korean won)		   Common stock
(in millions of
Korean won)		   Number of
outstanding
shares		   Par value
per share
(Korean won)		   Common stock
(in millions of
Korean won)		 

Common stock1

   261,111,808     ￦5,000     ￦1,564,499     261,111,808     ￦5,000     ￦1,564,499  
   2015   2016 
   

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 shares1

   261,111,808   ￦5,000   ￦1,564,499    261,111,808   ￦5,000   ￦1,564,499 

 

1The Controlling Company retired 51,787,959 treasury shares against retained earnings. Therefore, the common stockordinary shares amount differs from the amount resulting from multiplying the number of shares issued by￦5,000 par value per share of common stock.ordinary shares.

23.    Retained Earnings

22.Retained Earnings

Details of retained earnings as of December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014   2015 

Legal reserve 1

  ￦782,249    ￦782,249  

Voluntary reserves 2

   4,824,695     4,738,028  

Unappropriated retained earnings

   2,961,455     3,529,694  
  

 

 

   

 

 

 

Total

  ￦8,568,399    ￦9,049,971  
  

 

 

   

 

 

 
(In millions of Korean won)  2015   2016 

Legal reserve1

  ￦782,249   ￦782,249 

Voluntary reserves2

   4,738,028    4,651,362 

Unappropriated retained earnings

   3,529,694    4,210,872 
  

 

 

   

 

 

 

Total

  ￦9,049,971   ￦9,644,483 
  

 

 

   

 

 

 

 

1The 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 capital stock. The reserve is not available for the payment of cash dividends, but may be transferred to capital stock with the approval of the Group’sControlling Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Group’sControlling Company’s majority shareholders.

2The 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.

24.    Accumulated Other Comprehensive Income

KT Corporation and Other Components of EquitySubsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

23.Accumulated Other Comprehensive Income and Other Components of Equity

As of December 31, 20142015 and 2015,2016, the details of the Controlling Company’s accumulated other comprehensive income are as follows:

 

(in millions of Korean won)

  2014  2015 

Investments in associates and joint ventures

  ￦(8,955)  ￦(10,312) 

Loss on derivatives

   (37,158)   (23,234) 

Gain of valuation on available-for-sale

   76,725    52,415  

Foreign currency translation adjustment

   (4,822)   (4,999) 
  

 

 

  

 

 

 

Total

  ￦25,790   ￦13,870  
  

 

 

  

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

(In millions of Korean won)  2015  2016 

Changes in investments in associates and joint ventures

  ￦(10,312)  ￦(10,883) 

Loss on derivatives valuation

   (23,234)   (34,309) 

Gain of valuation onavailable-for-sale

   52,415   54,106 

Foreign currency translation adjustment

   (4,999)   (10,346) 
  

 

 

  

 

 

 

Total

  ￦13,870  ￦(1,432) 
  

 

 

  

 

 

 

Changes in accumulated other comprehensive income for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

   2014 

(in millions of Korean won)

  Beginning  Increase
/decrease		   Reclassification
as gain or loss		  Ending 

Investments in associates and joint ventures

  ￦(12,681)  ￦3,726    ￦ —   ￦(8,955) 

Gain or loss on derivatives

   (9,337)   16,974     (44,795)   (37,158) 

Gain or loss of valuation on available-for-sale

   55,836    20,889     —    76,725  

Foreign currency translation adjustment

   (9,280)   4,458     —    (4,822) 
  

 

 

  

 

 

   

 

 

  

 

 

 

Total

  ￦24,538   ￦46,047    ￦(44,795)  ￦25,790  
  

 

 

  

 

 

   

 

 

  

 

 

 
   2015 
(In millions of Korean won)  Beginning  Increase
/decrease		  Reclassified to
gain or loss		  Ending 

Changes in investments in associates and joint ventures

  ￦(8,955)  ￦(1,357)  ￦—    ￦(10,312) 

Gain or loss on derivatives valuation

   (37,158)   111,886   (97,962)   (23,234) 

Gain or loss of valuation onavailable-for-sale

   76,725   39,164   (63,474)   52,415 

Foreign currency translation adjustment

   (4,822)   (177)   —     (4,999) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  ￦25,790  ￦149,516  ￦(161,436)  ￦13,870 
  

 

 

  

 

 

  

 

 

  

 

 

 

 

   2015 

(in millions of Korean won)

  Beginning  Increase
/decrease		  Reclassification
as gain or loss		  Ending 

Investments in associates and joint ventures

  ￦(8,955)  ￦(1,357)  ￦ —   ￦(10,312) 

Gain or loss on derivatives

   (37,158)   49,920    (35,996)   (23,234) 

Gain or loss of valuation on available-for-sale

   76,725    (6,249)   (18,061)   52,415  

Foreign currency translation adjustment

   (4,822)   (177)   —    (4,999) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  ￦25,790   ￦42,137   ￦(54,057)  ￦13,870  
  

 

 

  

 

 

  

 

 

  

 

 

 
   2016 
(In millions of Korean won)  Beginning  Increase
/decrease		  Reclassified to
gain or loss		  Ending 

Changes in investments in associates and joint ventures

  ￦(10,312)  ￦(571)  ￦—    ￦(10,883) 

Gain or loss on derivatives valuation

   (23,234)   64,796   (75,871)   (34,309) 

Gain or loss of valuation onavailable-for-sale

   52,415   5,204   (3,513)   54,106 

Foreign currency translation adjustment

   (4,999)   (5,347)   —     (10,346) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  ￦13,870  ￦64,082  ￦(79,384)  ￦(1,432) 
  

 

 

  

 

 

  

 

 

  

 

 

 

As of December 31, 20142015 and 2015,2016, the other components of equity are as follows:

 

(in millions of Korean won)

  2014  2015 

Treasury stock 1

  ￦(866,316)  ￦(866,156) 

Loss on disposal of treasury stock 2

   (21,847)   2,869  

Share-based payments

   3,627    3,737  

Others 3

   (376,173)   (373,313) 
  

 

 

  

 

 

 

Total

  ￦(1,260,709)  ￦(1,232,863) 
  

 

 

  

 

 

 
(In millions of Korean won)  2015  2016 

Treasury stock1

  ￦(866,156)  ￦(859,789) 

Loss on disposal of treasury stock2

   2,869   607 

Share-based payments

   3,737   5,762 

Others3

   (373,313)   (364,514) 
  

 

 

  

 

 

 

Total

  ￦(1,232,863)  ￦(1,217,934) 
  

 

 

  

 

 

 

 

1During the year ended December 31, 2015,2016, the GroupControlling Company granted 136,351 treasury shares (2015: 3,008 treasury sharesshares) as share-based payment.

2The amount directly reflected in equity is￦16738 million (2014:(2015:￦916 million) as of December 31, 2015.2016.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

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

As of December 31, 20142015 and 2015,2016, the details of treasury stock are as follows:

 

  2014   2015   2015   2016 

Number of shares

   16,249,100     16,262,008     16,262,008    16,140,165 

Amounts(In millions of Korean won)

  ￦866,316    ￦866,156    ￦866,156   ￦859,789 

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

24.Share-based Payments

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

25.    Share-Based Payments

The detailsDetails of share-based payments as of December 31, 2015,2016, are as follows:

 

   

9th

10th

Grant date

  April 29, 2015July 28, 2016

Grantee

  CEO, 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)

  ￦30,90031,750

Total compensation costs (in Korean won)

  ￦3,7375,762 million

Estimated exercise date (exercise date)

  During 20162017

Valuation method

  Fair value method

The changesChanges in the number of stock options and the weighted-average exercise price as of December 31, 20142015 and 2015,2016, are as follows:

 

  2014   2015 
  Beginning   Granted   Expired   Forfeited   Exercised 1   Ending   Number of
shares
exercisable		   Beginning   Granted   Expired   Forfeited   Exercised1   Ending   Number of
shares
exercisable		 

7th grant

   282,228     —     278,175     —     4,053     —     —  

8th grant

   —     251,833     —     —     —     251,833     —     251,833    —      248,825    —      3,008    —      —   

9th grant

   —      263,123    —      —      —      263,123    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   282,228     251,833     278,175     —     4,053     251,833     —     251,833    263,123    248,825    —      3,008    263,123    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  2015   2016 
  Beginning   Granted   Expired   Forfeited   Exercised 1   Ending   Number of
shares
exercisable		   Beginning   Granted   Expired   Forfeited   Exercised1   Ending   Number of
shares
exercisable		 

8th grant

   251,833     —     248,825     —     3,008     —     —  

9th grant

   —     263,123     —     —     —     263,123     —     263,123    54,913    181,685    —      136,351    —      —   

10th grant

   —      318,506    —      —      —      318,506    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   251,833     263,123     248,825     —     3,008     263,123     —     263,123    373,419    181,685    —      136,351    318,506    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

1The weighted average price of common stockordinary shares at the time of exercise during 20152016 was￦30,900 (2014:31,750 (2015:￦32,500)30,900).

26.    Operating Revenues

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

25.Operating Revenues

Operating revenues for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2013   2014   2015 

Sales of services

  ￦18,878,487    ￦19,107,078    ￦19,455,693  

Sale of goods

   3,939,730     3,252,202     2,755,980  

Others

   327,803     253,433     488,183  
  

 

 

   

 

 

   

 

 

 

Total

  ￦23,146,020    ￦22,612,713    ￦22,699,856  
  

 

 

   

 

 

   

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

(In millions of Korean won)  2014   2015   2016 

Services provided

  ￦19,107,078   ￦19,455,693   ￦19,935,865 

Sale of goods

   3,252,202    2,755,980    2,819,141 

Others

   253,433    488,183    365,872 
  

 

 

   

 

 

   

 

 

 

Total

  ￦22,612,713   ￦22,699,856   ￦23,120,878 
  

 

 

   

 

 

   

 

 

 

 

27.    Operating Expenses

26.Operating Expenses

Operating expenses for the years ended December 31, 20132014, 2015 and 2014 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2013   2014   2015 
(In millions of Korean won)  2014   2015 2016 

Salaries and wages

  ￦3,220,022    ￦3,918,750    ￦3,303,484    ￦3,918,750   ￦3,303,484  ￦3,477,596 

Depreciation

   2,766,205     2,760,915     2,756,131     2,760,915    2,756,131  2,762,773 

Amortization of intangible assets

   438,063     564,779     582,467     564,779    582,467  582,493 

Commissions

   1,222,347     1,355,169     1,036,852     1,355,169    1,036,852  1,099,429 

Interconnection charges

   885,479     797,329     689,293     797,329    689,293  690,285 

International interconnection fee

   265,467     238,404     231,060     238,404    231,060  216,633 

Purchase of inventories

   3,503,838     3,508,689     3,963,036     3,508,689    3,963,036  3,407,263 

Changes of inventories

   261,415     254,735     (198,028)    254,735    (198,028)  162,323 

Sales commission

   2,313,861     2,628,978     1,856,595     2,628,978    1,856,595  1,968,035 

Service Cost

   1,834,438     1,280,506     1,163,887  

Service cost

   1,280,506    1,163,887  1,322,337 

Utilities

   309,142     313,329     319,303     313,329    319,303  323,406 

Taxes and Dues

   250,349     232,056     256,958  

Taxes and dues

   232,056    256,958  255,480 

Rent

   429,950     451,365     469,950     451,365    469,950  455,457 

Insurance premium

   262,712     210,711     211,104     210,711    211,104  178,231 

Installation fee

   260,498     317,684     249,413     317,684    249,413  156,669 

Advertising expenses

   153,387     152,122     177,348     152,122    177,348  185,560 

Research and development expenses

   171,487     192,034     183,821     192,034    183,821  167,881 

Card service cost

   2,702,278     2,883,060     2,959,765     2,883,060    2,959,765  3,049,559 

Provision

   158,881     119,431     97,935  

Others

   1,501,616     1,211,507     1,312,414     1,330,938    1,410,349  1,319,688 
  

 

   

 

   

 

   

 

   

 

  

 

 

Total

  ￦22,911,435    ￦23,391,553    ￦21,622,788    ￦23,391,553   ￦21,622,788  ￦21,781,098 
  

 

   

 

   

 

   

 

   

 

  

 

 

Details of salaries and wagesemployee benefits for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2013   2014   2015 

Short-term employee benefits

  ￦2,967,060    ￦2,627,785    ￦3,055,699  

Post-employment benefits (Defined benefit plan)

   212,517     857,172     202,814  

Post-employment benefits (Defined contribution plan)

   23,857     25,423     35,699  

Post-employment benefits (Others)

   12,506     404,743     5,535  

Share-based payment

   4,082     3,627     3,737  
  

 

 

   

 

 

   

 

 

 

Total

  ￦3,220,022    ￦3,918,750    ￦3,303,484  
  

 

 

   

 

 

   

 

 

 
(In millions of Korean won)  2014   2015   2016 

Short-term employee benefits

  ￦2,627,785   ￦3,055,699   ￦3,206,904 

Post-employment benefits(Defined benefit plan)

   857,172    202,814    208,942 

Post-employment benefits(Defined contribution plan)

   25,423    35,699    46,023 

Post-employment benefits(Others)

   404,743    5,535    8,017 

Share-based payment

   3,627    3,737    7,710 
  

 

 

   

 

 

   

 

 

 

Total

  ￦3,918,750   ￦3,303,484   ￦3,477,596 
  

 

 

   

 

 

   

 

 

 

28.

KT Corporation and Subsidiaries

Notes to Consolidated Financial IncomeStatements

December 31, 2014, 2015 and Expenses2016

27.Financial Income and Costs

Details of financial income for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2013   2014   2015 

Interest income

  ￦107,551    ￦80,244    ￦70,035  

Gain on foreign currency transactions

   37,368     37,226     18,766  

Gain on foreign currency translation

   106,102     34,749     11,280  

Gain on settlement of derivatives

   13,878     2,134     368  

Gain on valuation of derivatives

   627     93,235     141,512  

Gain on disposal of available-for-sale financial assets

   11,077     3,758     27,843  

Others

   1,366     1,743     3,056  
  

 

 

   

 

 

   

 

 

 

Total

  ￦277,969    ￦253,089    ￦272,860  
  

 

 

   

 

 

   

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

(In millions of Korean won)  2014   2015   2016 

Interest income

  ￦80,244   ￦70,035   ￦115,686 

Gain on foreign currency transactions

   37,226    18,766    24,915 

Gain on foreign currency translation

   34,749    11,280    12,165 

Gain on settlement of derivatives

   2,134    368    8,515 

Gain on valuation of derivatives

   93,235    141,512    109,436 

Others

   5,501    30,899    25,422 
  

 

 

   

 

 

   

 

 

 

Total

  ￦253,089   ￦272,860   ￦296,139 
  

 

 

   

 

 

   

 

 

 

Details of financial expenses for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

  2013   2014   2015 
(In millions of Korean won)  2014   2015   2016 

Interest expenses

  ￦436,374    ￦475,084    ￦385,925    ￦475,084   ￦385,925   ￦337,219 

Loss on foreign currency transactions

   31,563     25,961     42,831     25,961    42,831    37,936 

Loss on foreign currency translation

   17,367     126,074     175,613     126,074    175,613    121,949 

Loss on settlement of derivatives

   16,384     35,240     6,280     35,240    6,280    632 

Loss on valuation of derivatives

   105,690     25,357     1,733     25,357    1,733    138 

Loss on disposal of trade receivables

   8,009     16,464     2,539     16,464    2,539    15,838 

Impairment loss on available-for-sale financial assets

   5,053     70,022     1,805     70,022    1,805    966 

Others

   13,018     17,998     28,605     17,998    28,605    409 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  ￦792,200   ￦645,331   ￦515,087 
  ￦633,458    ￦792,200    ￦645,331    

 

   

 

   

 

 
  

 

   

 

   

 

 

29.    Deferred Income Tax and Income Tax Expense

28.Deferred Income Tax and Income Tax Expense

The analysesanalysis of deferred tax assets and deferred tax liabilities as of December 31, 20142015 and 2015, are2016, is as follows:

 

(in millions of Korean won)

  2014 2015 
(In millions of Korean won)  2015 2016 

Deferred tax assets

      

Deferred tax assets to be recovered within 12 months

  ￦273,120   ￦308,838    ￦308,838  ￦265,997 

Deferred tax assets to be recovered after more than 12 months

   1,416,347    1,182,043     1,182,043  1,124,420 
  

 

  

 

   

 

  

 

 
   1,689,497    1,490,881    ￦1,490,881  ￦1,390,417 
  

 

  

 

   

 

  

 

 

Deferred tax liabilities

      

Deferred tax liability to be recovered within 12 months

   (1,058)   (14,188)    (14,188)  (48,033) 

Deferred tax liability to be recovered after more than 12 months

   (753,581)   (760,946)    (760,946)  (778,655) 
  

 

  

 

   

 

  

 

 
   (754,639)   (775,134)    (775,134)  (826,688) 
  

 

  

 

   

 

  

 

 

Deferred tax assets after offsetting

  ￦1,078,792   ￦845,397    ￦845,397  ￦701,409 
  

 

  

 

 

Deferred tax liabilities after offsetting

  ￦143,964   ￦129,650    ￦129,650  ￦137,680 
  

 

  

 

   

 

  

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

The gross movements on the deferred income tax account for the years ended December 31, 20142015 and 2015,2016, are calculated as follows:

 

(in millions of Korean won)

  2014   2015 

Beginning

  ￦537,479    ￦934,828  

Charged (credited) to the income statement

   317,115     (232,134) 

Charged (credited) to othercomprehensive income

   75,104     21,977  

Changes in scope of consolidation

   5,130     (8,924) 
  

 

 

   

 

 

 

Ending

  ￦934,828    ￦715,747  
  

 

 

   

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

(In millions of Korean won)  2015  2016 

Beginning

  ￦934,828  ￦715,747 

Charged(credited) to the statement of operations

   (232,134)   (152,102) 

Charged(credited) to othercomprehensive income

   21,977   84 

Changes in scope of consolidation

   (8,924)   —   
  

 

 

  

 

 

 

Ending

  ￦715,747  ￦563,729 
  

 

 

  

 

 

 

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)

  2014 
  Beginning  Income
statement		  Other
comprehensive
income		  Changes in
scope of
consolidation		  Ending 

Deferred tax liabilities

      

Derivative financial assets

  ￦(413)  ￦(118)  ￦—   ￦109   ￦(422) 

Available-for-sale financial assets

   (33,852)   (71)   (7,076)   183    (40,816) 

Investment in joint venture and associates

   (32,572)   (10,986)   (1,120)   —    (44,678) 

Advanced depreciation provision

   (238,230)   100    —    —    (238,130) 

Depreciation

   (70,127)   17,889    —    (145)   (52,383) 

Deposits for severance benefits

   (267,163)   66,449    —    (4,272)   (204,986) 

Accrued income

   (1,608)   (67)   —    —    (1,675) 

Prepaid expenses

   290    128    —    9    427  

Reserve for technology and human resource development

   (43,889)   21,252    —    —    (22,637) 

Others

   (151,065)   9,790    —    (8,064)   (149,339) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   (838,629)   104,366    (8,196)   (12,180)   (754,639) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Deferred tax assets

      

Derivatives

  ￦32,595   ￦(23,298)  ￦8,877   ￦—   ￦18,174  

Allowance for doubtful accounts

   152,814    (10,434)   —    426    142,806  

Inventory valuation

   303    (106)   —    (216)   (19) 

Contribution for construction

   27,126    (5,086)   —    —    22,040  

Accrued expenses

   55,289    (7,719)   —    3,057    50,627  

Provisions

   33,720    (5,232)   —    (158)   28,330  

Property and equipment

   237,963    1,720    —    —    239,683  

Retirement benefit obligations

   319,117    (101,742)   75,549    4,573    297,497  

Withholding of facilities expenses

   8,340    (531)   —    —    7,809  

Accrued payroll expenses

   46,721    (26,121)   —    (824)   19,776  

Deduction of installment receivables

   7,045    (2,735)   —    —    4,310  

Present value discount

   4,969    (3,196)   —    (5)   1,768  

Assets retirement obligation

   19,246    (961)   —    77    18,362  

Gain or loss foreign currency translation

   10,236    6,850    —    (106)   16,980  

Deferred revenue

   64,439    167    —    43    64,649  

Real-estate sales

   5,414    (4,542)   —    —    872  

Tax credit carryforwards

   164,401    38,877    —    —    203,278  

Foreign operation translation difference

   3,162    —    (1,126)   —    2,036  

Tax loss carryforwards

   —    411,755    —    —    411,755  

Others

   183,208    (54,917)   —    10,443    138,734  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   1,376,108    212,749    83,300    17,310    1,689,467  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net balance

  ￦537,479   ￦317,115   ￦75,104   ￦5,130   ￦934,828  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
(In millions of Korean won) 2015 
  Beginning  

Statement of

operations

  Other
comprehensive
income		  Changes in
scope of
consolidation		  Ending 

Deferred tax liabilities

     

Derivative instruments

 ￦(422)  ￦(14,281)  ￦(4,454)  ￦2  ￦(19,155) 

Available-for-sale financial assets

  (40,816)   (42)   11,499   (71)   (29,430) 

Investment in subsidiaries, associates and joint ventures

  (44,678)   (6,630)   1,282   (209)   (50,235) 

Depreciation

  (52,383)   (1,489)   —     —     (53,872) 

Advanced depreciation provision

  (238,130)   6,438   —     —     (231,692) 

Deposits for severance benefits

  (204,986)   (50,730)   —     3,792   (251,924) 

Accrued income

  (1,675)   (173)   —     40   (1,808) 

Reserve for technology and human resource development

  (22,637)   21,421   —     —     (1,216) 

Others

  (148,912)   10,347   —     2,763   (135,802) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  (754,639)   (35,139)   8,327   6,317   (775,134) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Deferred tax assets

     

Derivatives instruments

  18,174   (18,174)   —     —     —   

Provisions for impairment on trade receivables

  142,806   (8,117)   —     2,054   136,743 

Inventory valuation

  (19)   75   —     —     56 

Contribution for construction

  22,040   (2,422)   —     —     19,618 

Accrued expenses

  50,627   13,669   —     (179)   64,117 

Provisions

  28,330   (4,048)   —     (3,929)   20,353 

Property, plant and equipment

  239,683   108   —     —     239,791 

Retirement benefit obligations

  297,497   25,686   12,091   (3,294)   331,980 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

    2015 

(in millions of Korean won)

  Beginning  Income
statement		  Other
comprehensive
income		  Changes in
scope of
consolidation		  Ending 

Deferred tax liabilities

      

Derivative financial liabilities

  ￦(422)  ￦(14,281)  ￦(4,454)  ￦2   ￦(19,155) 

Available-for-sale financial assets

   (40,816)   (42)   11,499    (71)   (29,430) 

Investment in joint ventures and associates

   (44,678)   (6,630)   1,282    (209)   (50,235) 

Depreciation

   (52,383)   (1,489)   —    —    (53,872) 

Advanced depreciation provision

   (238,130)   6,438    —    —    (231,692) 

Deposits for severance benefits

   (204,986)   (50,730)   —    3,792    (251,924) 

Accrued income

   (1,675)   (173)   —    40    (1,808) 

Prepaid expenses

   427    (35)   —    55    447  

Reserve for technology and human resource development

   (22,637)   21,421    —    —    (1,216) 

Others

   (149,339)   10,382    —    2,708    (136,249) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   (754,639)   (35,139)   8,327    6,317    (775,134) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Deferred tax assets

      

Derivatives financial assets

   18,174    (18,174)   —    —    —  

Allowance for doubtful accounts

   142,806    (8,117)   —    2,054    136,743  

Inventory valuation

   (19)   75    —    —    56  

Contribution for construction

   22,040    (2,422)   —    —    19,618  

Accrued expenses

   50,627    13,669    —    (179)   64,117  

Provisions

   28,330    (4,048)   —    (3,929)   20,353  

Property and equipment

   239,683    108    —    —    239,791  

Retirement benefit obligations

   297,497    25,686    12,091    (3,294)   331,980  

Withholding of facilities expenses

   7,809    (449)   —    —    7,360  

Accrued payroll expenses

   19,776    6,646    —    (4,788)   21,634  

Deduction of installment receivables

   4,310    6,203    —    —    10,513  

Present value discount

   1,768    (2,015)   —    —    (247) 

Assets retirement obligation

   18,362    (1,388)   —    —    16,974  

Gain or loss foreign currency translation

   16,980    26,303    —    —    43,283  

Deferred revenue

   64,649    (20,628)   —    (229)   43,792  

Real-estate sales

   872    2,108    —    —    2,980  

Foreign operation translation difference

   2,036    —    1,559    —    3,595  

Tax credit carryforwards

   203,278    9,542    —    —    212,820  

Tax loss carryforwards

   411,755    (304,270)   —    —    107,485  

Others

   138,734    74,176    —    (4,876)   208,034  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   1,689,467    (196,995)   13,650    (15,241)   1,490,881  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net balance

  ￦934,828   ￦(232,134)  ￦21,977   ￦(8,924)  ￦715,747  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(In millions of Korean won) 2015 
  Beginning  

Statement of

operations

  Other
comprehensive
income		  Changes in
scope of
consolidation		  Ending 

Withholding of facilities expenses

  7,809   (449)   —     —     7,360 

Accrued payroll expenses

  19,776   6,646   —     (4,788)   21,634 

Deduction of installment receivables

  4,310   6,203   —     —     10,513 

Assets retirement obligation

  18,362   (1,388)   —     —     16,974 

Gain or loss foreign currency translation

  16,980   26,303   —     —     43,283 

Deferred revenue

  64,649   (20,628)   —     (229)   43,792 

Real-estate sales

  872   2,108   —     —     2,980 

Tax credit carryforwards

  203,278   9,542   —     —     212,820 

Accumulated deficit

  411,755   (304,270)   —     —     107,485 

Others

  142,538   72,161   1,559   (4,876)   211,382 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  1,689,467   (196,995)   13,650   (15,241)   1,490,881 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net balance

 ￦934,828  ￦(232,134)  ￦21,977  ￦(8,924)  ￦715,747 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(In millions of Korean won)  2016 
   Beginning  

Statement of

operations

  Other
comprehensive
income		  Ending 

Deferred tax liabilities

     

Derivative instruments

  ￦(19,155)  ￦(33,569)  ￦3,536  ￦(49,188) 

Available-for-sale financial assets

   (29,430)   (10)   (2,262)   (31,702) 

Investment in subsidiaries, associates and joint ventures

   (50,235)   (666)   155   (50,746) 

Depreciation

   (53,872)   14,374   —     (39,498) 

Advanced depreciation provision

   (231,692)   6,005   —     (225,687) 

Deposits for severance benefits

   (251,924)   (55,806)   —     (307,730) 

Accrued income

   (1,808)   (216)   —     (2,024) 

Reserve for technology and human resource development

   (1,216)   469   —     (747) 

Others

   (135,802)   16,436   —     (119,366) 
  

 

 

  

 

 

  

 

 

  

 

 

 
   (775,134)   (52,983)   1,429   (826,688) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Deferred tax assets

     

Provisions for impairment on trade receivables

   136,743   (26,467)   —     110,276 

Inventory valuation

   56   (8)   —     48 

Contribution for construction

   19,618   (1,527)   —     18,091 

Accrued expenses

   64,117   16,239   —     80,356 

Provisions

   20,353   (132)   —     20,221 

Property, plant and equipment

   239,791   (6,876)   —     232,915 

Retirement benefit obligations

   331,980   41,857   (1,345)   372,492 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

(In millions of Korean won)  2016 
   Beginning   

Statement of

operations

  Other
comprehensive
income		  Ending 

Withholding of facilities expenses

   7,360    (450)   —     6,910 

Accrued payroll expenses

   21,634    4,281   —     25,915 

Deduction of installment receivables

   10,513    3,374   —     13,887 

Assets retirement obligation

   16,974    1,112   —     18,086 

Gain or loss foreign currency translation

   43,283    24,418   —     67,701 

Deferred revenue

   43,792    (17,679)   —     26,113 

Real-estate sales

   2,980    871   —     3,851 

Tax credit carryforwards

   212,820    (13,221)   —     199,599 

Accumulated deficit

   107,485    (107,485)   —     —   

Others

   211,382    (17,426)   —     193,956 
  

 

 

   

 

 

  

 

 

  

 

 

 
   1,490,881    (99,119)   (1,345)   1,390,417 
  

 

 

   

 

 

  

 

 

  

 

 

 

Net balance

  ￦715,747   ￦(152,102)  ￦84  ￦563,729 
  

 

 

   

 

 

  

 

 

  

 

 

 

The tax impacts recognized directly to equity as of December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

  2013  2014  2015 

(in millions of
Korean won)

 Before
recognition		  Tax
effect		  After
recognition		  Before
recognition		  Tax
effect		  After
recognition		  Before
recognition		  Tax
effect		  After
recognition		 

Available-for-sale valuation gain (loss)

 ￦74,317   ￦(17,985)  ￦56,332   ￦29,239   ￦(7,076)  ￦22,163   ￦(47,515)  ￦11,499   ￦(36,016) 

Hedge instruments valuation gain (loss)

  (6,195)   1,499    (4,696)   (36,682)   8,877    (27,805)   18,406    (4,454)   13,952  

Remeasurements from net defined benefit liabilities

  74,648    (18,065)   56,583    (312,186)   75,549    (236,637)   (49,963)   12,091    (37,872) 

Shares of gain (loss) of joint ventures and associates

  3,221    (780)   2,441    4,628    (1,120)   3,508    (5,297)   1,282    (4,015) 

Foreign operation translation difference

  (2,708)   655    (2,053)   4,652    (1,126)   3,526    (6,443)   1,559    (4,884) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 ￦143,283   ￦(34,676)  ￦108,607   ￦(310,349)  ￦75,104   ￦(235,245)  ￦(90,812)  ￦21,977   ￦(68,835) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  2014  2015  2016 
(In millions of
Korean won)		 

Before

recognition

  Tax
effect		  After
recognition		  

Before

recognition

  Tax
effect		  After
recognition		  

Before

recognition

  Tax
effect		  After
recognition		 

Available-for-sale valuation gain(loss)

 ￦29,239  ￦(7,076)  ￦22,163  ￦(47,515)  ￦11,499  ￦(36,016)  ￦9,347  ￦(2,262)  ￦7,085 

Hedge instruments valuation gain(loss)

  (36,682)   8,877   (27,805)   18,406   (4,454)   13,952   (14,611)   3,536   (11,075) 

Remeasurements from net defined benefit liabilities

  (312,186)   75,549   (236,637)   (49,963)   12,091   (37,872)   5,558   (1,345)   4,213 

Shares of gain(loss) of associates and joint ventures

  4,628   (1,120)   3,508   (5,297)   1,282   (4,015)   (641)   155   (486) 

Foreign Currency Translation adjustment

  4,652   (1,126)   3,526   (6,443)   1,559   (4,884)   (7,133)   1,726   (5,407) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 ￦(310,349)  ￦75,104  ￦(235,245)  ￦(90,812)  ￦21,977  ￦(68,835)  ￦(7,480)  ￦1,810  ￦(5,670) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Details of income tax expense (benefit) for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are calculated as follows:

 

(in millions of Korean won)

  2013  2014  2015 

Current income tax expenses

  ￦117,385   ￦45,674   ￦(5,003) 

Impact of change in deferred taxes

   (105,493)   (317,115)   232,134  
  

 

 

  

 

 

  

 

 

 

Income tax expense (benefit)

  ￦11,892   ￦(271,441)  ￦227,131  
  

 

 

  

 

 

  

 

 

 
(In millions of Korean won)  2014  2015  2016 

Current income tax expense(benefit)

  ￦45,674  ￦(5,003)  ￦176,212 

Impact of change in deferred taxes

   (317,115)   232,134   152,102 
  

 

 

  

 

 

  

 

 

 

Income tax expense(benefit)

  ￦(271,441)  ￦227,131  ￦328,314 
  

 

 

  

 

 

  

 

 

 

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:

 

  2013 2014 2015   2014 2015 2016 

Profit (loss) from continuing operations before income tax (benefit)

  ￦(113,915)  ￦(1,299,254)  ￦710,741  

Profit(loss) before income tax expense(benefit)

  ￦(1,299,254)  ￦710,741  ￦1,123,431 
  

 

  

 

  

 

   

 

  

 

  

 

 

Statutory income tax (benefit)

  ￦(27,567)  ￦(314,419)  ￦171,999  

Statutory income tax expense(benefit)

  ￦(314,419)  ￦171,999  ￦271,870 

Tax effect

        

Income not taxable for taxation purposes

   (25,130)   (44,145)   (21,881)    (44,145)  (21,881)  (28,093) 

Non deductible expenses

   87,220    72,315    72,486  

Non-deductible expenses

   39,071  28,849  21,947 

Tax credit

   (15,673)   (39,490)   (9,660)    (39,490)  (9,660)  (13,764) 

Additional payment of income taxes

   (5,910)   1,079    997     1,079  997  (4,780) 

Tax effect and adjustment on consolidation

   (4,251)   3,949    (11,368)     

Goodwill impairment

   851  23,185  31,847 

Eliminated dividend income from subsidiaries

   32,393  20,452  40,087 

Changes of out-side tax effect

   10,165  9,844  (567) 

Others

   3,203    49,270    24,558     43,054  3,346  9,767 
  

 

  

 

  

 

   

 

  

 

  

 

 

Income tax expense (benefit)

  ￦11,892   ￦(271,441)  ￦227,131  

Income tax expense(benefit)

  ￦(271,441)  ￦227,131  ￦328,314 
  

 

  

 

  

 

   

 

  

 

  

 

 

30.    Earnings Per Share

29.Earnings per Share

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

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

Basic earnings per share from operations for the years ended December 31, 2013, 2014, 2015 and 2015,2016, is calculated as follows:

 

   2013  2014  2015 

Net profit (loss) attributable to common stock
(In millions of Korean won)

  ￦(189,931)  ￦(1,030,240)  ￦546,361  

Profit (loss) from continuing operations attributable to common stock

   (215,843)   (1,094,177)   404,045  

Profit from discontinued operations attributable to common stock

   25,912    63,937    142,316  

Weighted average number of common stock outstanding
(in number of shares)

   243,737,431    244,443,771    244,854,364  

Basic earnings (loss) per share (in Korean won)

   (779)   (4,215)   2,231  

Basic earnings (loss) per share from continuing operations

   (885)   (4,477)   1,650  

Basic earnings per share from discontinued operations

   106    262    581  
   2014  2015   2016 

Profit(loss) attributable to ordinary shares(in millions of Korean won)

  ￦(1,030,240)  ￦546,361   ￦708,362 

Profit(loss) from continuing operations attributable to ordinary shares

   (1,094,177)   404,045    708,362 

Profit from discontinued operations attributable to ordinary shares

   63,937   142,316    —   

Weighted average number of ordinary shares outstanding(in number of shares)

   244,443,771   244,854,364    244,892,313 

Basic earnings(loss) per share(in Korean won)

   (4,215)   2,231    2,893 

Basic earnings(loss) per share from continuing operations

   (4,477)   1,650    2,893 

Basic earnings per share from discontinued operations

   262   581    —   

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Diluted earnings per share from operations is calculated by adjusting the weighted average number of common stocksordinary shares outstanding to assume conversion of all dilutive potential common stocks.ordinary shares. The GroupControlling Company has dilutive potential commonordinary shares from redeemable convertible preferred stocks from stock options.

Diluted earnings per share from operations for the years ended December 31, 2013, 2014, 2015 and 20152016 is calculated as follows:

 

   2013  2014  2015 

Net profit (loss) attributable to common stock
(In millions of Korean won)

  ￦(189,931)  ￦(1,030,240)  ￦546,361  

Adjusted net loss attributable to common stock
(In millions of Korean won)

   (554)   (13)   (75) 

Diluted profit (loss) attributable to common stock
(In millions of Korean won)

   (190,485)   (1,030,253)   546,286  

Diluted profit (loss) from continuing operations attributable to common stock

   (216,397)   (1,094,190)   403,970  

Diluted income from discontinued operations attributable to common stock

   25,912    63,937    142,316  

Number of dilutive potential common shares outstanding (in number of shares)

   —    —    1,104  

Weighted average number of common stock outstanding (in number of shares)

   243,737,431    244,443,771    244,855,468  

Diluted earnings (loss) per share (in Korean won)

   (782)   (4,215)   2,231  

Diluted earnings (loss) per share from continuing operations

   (888)   (4,477)   1,650  

Diluted earnings per share from discontinued operations

   106    262    581  
   2014  2015  2016 

Profit(loss) attributable to ordinary shares(in millions of Korean won)

  ￦(1,030,240)  ￦546,361  ￦708,362 

Adjusted net income attributable to ordinary shares(in millions of Korean won)

   (13)   (75)   (67) 

Diluted profit(loss) attributable to ordinary shares(in millions of Korean won)

   (1,030,253)   546,286   708,295 

Diluted profit(loss) from continuing operations attributable to ordinary shares

   (1,094,190)   403,970   708,295 

Diluted income from discontinued operations attributable to ordinary shares

   63,937   142,316   —   

Number of dilutive potential ordinary shares outstanding(in number of shares)

   —     1,104   84,245 

Weighted average number of ordinary shares outstanding(in number of shares)

   244,443,771   244,855,468   244,976,558 

Diluted earnings(loss) per share(in Korean won)

   (4,215)   2,231   2,891 

Diluted earnings(loss) per share from continuing operations

   (4,477)   1,650   2,891 

Diluted earnings per share from discontinued operations

   262   581   —   

31.    Dividend

30.Dividend

There were no dividends paid in 2015. The dividends paid by the GroupControlling Company in 20132016 and 2014 were￦487,445122,425 million (￦2,000500 per share) and￦195,112 million (￦800 per share), respectively. There were no dividends paid in 2015. A dividend in respect of the year ended December 31, 2015,2016, of￦500800 per share, amounting to a total dividend of￦122,425195,977 million, is to be proposedwas approved at the shareholders’ meeting on March 25, 2016. These financial statements do not reflect this dividend payable.24, 2017.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

32.    Cash Generated from Operations

31.Cash Generated from Operations

Cash flows from operating activities for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2013  2014  2015 

1. Profit (loss) for the year

  ￦(87,745)  ￦(941,413)  ￦624,685  

2. Adjustments to reconcile net income

    

Income tax expense (benefit)

   49,579    (266,335)   346,146  

Interest income

   (279,392)   (237,975)   (161,123) 

Interest expense

   548,129    578,210    445,814  

Dividends income

   (20,841)   (15,007)   (11,371) 

Depreciation

   3,141,846    3,242,346    3,030,821  

Amortization of intangible assets

   478,902    612,418    609,185  

Provision for severance benefits

   227,564    869,066    217,787  

Bad debt expenses

   189,665    231,934    161,448  

Gain from joint ventures and associates

   (10,222)   (24,361)   (5,562) 

Loss on disposal of joint ventures and associates

   1,254    8,036    (4,848) 

Impairment loss on jointly controlled entities and associates

   6,006    —    —  

Loss on disposal of subsidiaries

   —    11,028    (256,230) 

Loss on disposal of property and equipment and investment property

   393,567    133,374    129,466  

Loss on disposal of intangible assets

   52,008    17,528    33,978  

Loss on impairment of intangible assets

   36,207    87,275    292,345  

Loss on foreign currency translation

   (99,617)   91,362    164,374  

Loss on valuation of derivatives

   105,248    (34,011)   (306,538) 

Impairment losses on available-for-sale financial assets

   5,052    70,022    1,805  

Loss (gain) on disposal of available-for-sale financial assets

   (2,339)   13,495    (131,041) 

Others

   (56,620)   (26,101)   24,140  

3. Changes in operating assets and liabilities

    

Decrease in trade receivables

   938,495    13,008    112,674  

Decrease (increase) in other receivables

   (7,194)   170,497    (248,488) 

Decrease in loans receivable

   (156,418)   47,044    132,334  

Decrease in finance lease receivables

   147,735    138,208    94,405  

Decrease (increase) in other current assets

   40,905    271,475    (19,701) 

Increase in other non-current assets

   (762,032)   (1,200,843)   (137,532) 

Decrease (increase) in inventories

   169,567    301,210    (270,343) 

Decrease (increase) in trade payables

   (145,363)   (417,944)   81,295  

Decrease in other payables

   (69,265)   (260,421)   (48,680) 

Increase (decrease) in other current liabilities

   222,609    19,010    (9,452) 

Increase in other non-current liabilities

   (40,999)   38,030    119,836  

Increase (decrease) in provisions

   (150,457)   26,029    (8,902) 

Increase (decrease) in deferred revenue

   (66,519)   1,359    (82,582) 

Decrease (increase) in plan assets

   249,102    238,987    (223,194) 

Payment of severance benefits

   (371,157)   (1,427,229)   (117,691) 
  

 

 

  

 

 

  

 

 

 

4. Net cash provided by operating activities (1+2+3)

  ￦ 4,677,260   ￦2,379,311   ￦4,579,260  
  

 

 

  

 

 

  

 

 

 
(In millions of Korean won)  2014  2015  2016 

1. Profit(loss) for the year

  ￦(941,413)  ￦624,685  ￦795,117 

2. Adjustments to reconcile net income

    

Income tax expense(benefit)

   (266,335)   346,146   328,314 

Interest income

   (237,975)   (161,123)   (130,066) 

Interest expense

   578,210   445,814   337,219 

Dividends income

   (15,007)   (11,371)   (3,926) 

Depreciation

   3,242,346   3,030,821   2,821,779 

Amortization of intangible assets

   612,418   609,185   599,721 

Provision for severance benefits

   869,066   217,787   217,255 

Impairment losses on trade receivables

   231,934   161,448   92,711 

Share of net profit of associates and joint ventures

   (24,361)   (5,562)   (2,547) 

Gain on disposal of associates and joint ventures

   8,036   (4,848)   (1,450) 

Impairment loss of associates and joint ventures

   —     —     17,128 

Gain on disposal of subsidiaries

   11,028   (256,230)   —   

Loss on disposal of property, plant and equipment and investment in properties

   133,374   129,466   74,913 

Loss on disposal of intangible assets

   17,528   33,978   7,703 

Loss on impairment of intangible assets

   87,275   292,345   135,264 

Loss on foreign currency translation

   91,362   164,374   109,784 

Gain on valuation of derivatives

   (34,011)   (306,538)   (117,181) 

Impairment losses onavailable-for-sale financial assets

   70,022   1,805   966 

Gain on disposal ofavailable-for-sale financial assets

   13,495   (131,041)   (22,695) 

Others

   (26,101)   24,140   64,863 

3. Changes in operating assets and liabilities

    

Decrease in trade receivables

   13,008   112,674   252,196 

Decrease(increase) in other receivables

   355,749   (21,749)   (770,893) 

Decrease(increase) in other current assets

   271,475   (19,701)   48,549 

Increase in othernon-current assets

   (1,200,843)   (137,532)   (51,765) 

Decrease(increase) in inventories

   301,210   (270,343)   167,873 

Increase(decrease) in trade payables

   (417,944)   81,295   (114,838) 

Increase(decrease) in other payables

   (260,421)   (48,680)   705,807 

Increase(decrease) in other current liabilities

   19,010   (9,452)   37,798 

Increase in othernon-current liabilities

   38,030   119,836   30,762 

Increase(decrease) in provisions

   26,029   (8,902)   (12,583) 

Increase(decrease) in deferred revenue

   1,359   (82,582)   (69,179) 

Decrease(increase) in plan assets

   238,987   (223,194)   (224,244) 

Payment of severance benefits

   (1,427,229)   (117,691)   (121,835) 
  

 

 

  

 

 

  

 

 

 

4. Cash generated from operations (1+2+3)

  ￦2,379,311  ￦4,579,260  ￦5,202,520 
  

 

 

  

 

 

  

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

The Group made agreements with securitization specialty companies and disposed of its trade receivables related to handset sales (Note 20)19). Cash flows from the disposals are presented asin cash generated from operations.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

Significant transactions not affecting cash flows for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2013 2014   2015 

Reclassification of the current portion of bonds payable

  ￦1,791,454   ￦1,805,553    ￦1,551,300  

Reclassification of construction-in-progress to property and equipment

   2,314,925    2,478,164     2,373,023  

Reclassification of accounts payable from property and equipment

   181,816    310,270     78,663  
(In millions of Korean won)  2014   2015 2016 

Reclassification of the current portion of debentures

  ￦1,805,553   ￦1,551,300  ￦1,617,175 

Reclassification ofconstruction-in-progress to property, plant and equipment

   2,478,164    2,373,023  2,212,324 

Reclassification of accounts payable from property, plant and equipment

   310,270    78,663  91,407 

Reclassification of accounts payable from intangible assets

   567,550    179,395     170,870     179,395    (170,870)  668,564 

Reclassification of payable from defined benefit liability

   (84,689)   26,250     (1,675)    26,250    1,675  5,746 

Reclassification of payable from plan assets

   (79,177)   20,695     (13,717)    20,695    13,717  (9,731) 

Exercise of convertible bonds

   —    19,052     —     19,052    —     —   

33.    Segment Information

32.Segment Information

Management of the Group determines operating segments based on the information reported to the management for setting business strategy. The Group’s operating segments as of December 31, 2015, are as follows. During the current year, the Group has changed operating segments for the purpose of responding to changes in the market and enhancing telecommunication service synergy. The details of operating segments for the prior years are restated in line with the above changes.follows:

 

Details

  

Business service

Customer/Marketing

  Mobile/fixed line telecommunication service and convergence business

Finance

  Credit card loan, lease and othersbusiness

OthersSatellite TV

  

Satellite TV, facilitybroadcasting business

All other segments

Information technology business, security andbusiness, global business and other businesses operated by subsidiaries

Details of each segment for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

  2013   2014 

(in millions of Korean won)

  Operating
revenues		 Operating
income (loss)		 Depreciation
and Amortization		 
(In millions of Korean won)  

Operating

revenues

 

Operating

income(loss)

 

Depreciation

and
Amortization

 

Customer/Marketing

  ￦17,129,283   ￦ 261,397   ￦2,822,208    ￦16,784,511  ￦(426,786)  ￦2,913,221 

Finance

   3,102,968    154,904    24,368     3,296,273  166,302  24,346 

Others

   6,879,623    483,291    718,548  

Satellite TV1

   656,430  68,857  85,295 

All other segments1

   4,857,209  (558,122)  298,100 
  

 

  

 

  

 

   

 

  

 

  

 

 
   27,111,874    899,592    3,565,124     25,594,423  (749,749)  3,320,962 

Elimination

   (3,965,854)   (665,007)   1,050     (2,981,710)  (29,091)  4,732 
  

 

  

 

  

 

   

 

  

 

  

 

 

Consolidated amount

  ￦23,146,020   ￦ 234,585   ￦3,566,174    ￦22,612,713  ￦(778,840)  ￦3,325,694 
  

 

  

 

  

 

   

 

  

 

  

 

 
  2014 

(in millions of Korean won)

  Operating
revenues		 Operating
income (loss)		 Depreciation
and Amortization		 

Customer/Marketing

  ￦16,784,511   ￦(426,786)  ￦2,913,221  

Finance

   3,296,273    166,302    24,346  

Others

   5,513,639    (489,265)   383,395  
  

 

  

 

  

 

 
   25,594,423    (749,749)   3,320,962  

Elimination

   (2,981,710)   (29,091)   4,732  
  

 

  

 

  

 

 

Consolidated amount

  ￦22,612,713   ￦(778,840)  ￦3,325,694  
  

 

  

 

  

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

   2015 

(in millions of Korean won)

  Operating
revenues		  Operating
income (loss)		  Depreciation
and Amortization		 

Customer/Marketing

  ￦16,130,454   ￦816,679   ￦2,897,876  

Finance

   3,512,721    281,477    25,466  

Others

   6,784,041    (1,900)   410,642  
  

 

 

  

 

 

  

 

 

 
   26,427,216    1,096,256    3,333,984  

Elimination

   (3,727,360)   (19,188)   4,614  
  

 

 

  

 

 

  

 

 

 

Consolidated amount

  ￦22,699,856   ￦1,077,068   ￦3,338,598  
  

 

 

  

 

 

  

 

 

 

The regional segment information provided

   2015 
(In millions of Korean won)  

Operating

revenues

  

Operating

income(loss)

  

Depreciation

and Amortization

 

Customer/Marketing

  ￦16,130,454  ￦816,679  ￦2,897,876 

Finance

   3,512,721   281,477   25,466 

Satellite TV1

   668,521   97,701   95,951 

All other segments1

   6,115,520   (99,601)   314,691 
  

 

 

  

 

 

  

 

 

 
   26,427,216   1,096,256   3,333,984 

Elimination

   (3,727,360)   (19,188)   4,614 
  

 

 

  

 

 

  

 

 

 

Consolidated amount

  ￦22,699,856  ￦1,077,068  ￦3,338,598 
  

 

 

  

 

 

  

 

 

 

1The amounts of 2014, 2015 were revised due to change in reportable segments.

   2016 
(In millions of Korean won)  

Operating

revenues

  

Operating

income

  

Depreciation

and Amortization

 

Customer/Marketing

  ￦16,144,415  ￦1,050,053  ￦2,870,161 

Finance

   3,577,549   208,566   28,868 

Satellite TV

   668,945   79,987   98,895 

All other segments

   6,308,203   40,047   339,429 
  

 

 

  

 

 

  

 

 

 
   26,699,112   1,378,653   3,337,353 

Elimination

   (3,578,234)   (38,873)   7,913 
  

 

 

  

 

 

  

 

 

 

Consolidated amount

  ￦23,120,878  ￦1,339,780  ￦3,345,266 
  

 

 

  

 

 

  

 

 

 

Operating revenues for the managementyear ended December 31, 2014, 2015 and 2016 andnon-current assets as of December 31, 2014 and 2015 and for the years ended December 31, 2013, 2014 and 2015,2016 by geographical regions, are as follows:

 

(in millions of Korean won)

  Operating revenues   Non-current assets 1 
  2013   2014   2015   2014.12.31   2015.12.31 

(In millions of

Korean won)

  

Operating revenues

  

Non-current assets1

Location

            2014  2015  2016  2015.12.31  2016.12.31

Domestic

   ￦23,087,774     ￦22,531,190     ￦22,628,778     ￦20,867,205     ￦17,989,844    ￦22,531,190  ￦22,628,778  ￦23,026,255  ￦17,989,844  ￦18,308,310

Overseas

   58,246     81,523     71,078     204,654     190,891    81,523  71,078  94,623  190,891  174,648
  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

Total

   ￦23,146,020     ￦22,612,713     ￦22,699,856     ￦21,071,859     ￦18,180,735    ￦22,612,713  ￦22,699,856  ￦23,120,878  ￦18,180,735  ￦18,482,958
  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

1Non-current assets include property, plant and equipment, intangible assets and investment property.properties.

Assets and liabilities of each segments as of December 31, 2014 and 2015, are as follows:

   2014 

(in millions of Korean won)

  Non-finance   Finance   Total   Adjustment  Consolidated
amount		 

Assets

         

Current

  ￦6,047,980    ￦3,431,308    ￦9,479,288    ￦(705,453)  ￦8,773,835  

Trade and other receivables

   3,898,572     1,479,240     5,377,812     (566,762)   4,811,050  

Loans receivable

   —     759,684     759,684     (49,316)   710,368  

Inventories

   385,984     31,972     417,956     927    418,883  

Other assets

   1,763,424     1,160,412     2,923,836     (90,302)   2,833,534  

Non-current

   24,347,003     3,990,853     28,337,856     (3,312,416)   25,025,440  

Trade and other receivables

   856,756     59,701     916,457     (67,594)   848,863  

Loans receivable

   —     587,218     587,218     (2,304)   584,914  

Property, equipment and intangible assets (including investment property)

   18,111,139     2,230,419     20,341,558     730,301    21,071,859  

Other assets

   5,379,108     1,113,515     6,492,623     (3,972,819)   2,519,804  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total assets

  ￦30,394,983    ￦7,422,161    ￦37,817,144    ￦(4,017,869)  ￦33,799,275  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Liabilities

         

Current

  ￦7,683,942    ￦3,079,278    ￦10,763,220    ￦(776,073)  ￦9,987,147  

Trade and other payables

   5,108,735     1,967,354     7,076,089     (667,978)   6,408,111  

Borrowings

   1,954,166     1,001,478     2,955,644     —    2,955,644  

Other liabilities

   621,041     110,446     731,487     (108,095)   623,392  

Non-current

   9,341,308     2,814,518     12,155,826     (131,255)   12,024,571  

Trade and other payables

   703,587     229,276     932,863     (23,671)   909,192  

Borrowings

   7,418,747     2,447,310     9,866,057     (6,316)   9,859,741  

Other liabilities

   1,218,974     137,932     1,356,906     (101,268)   1,255,638  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities

  ￦17,025,250    ￦5,893,796    ￦22,919,046    ￦(907,328)  ￦22,011,718  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

   2015 

(in millions of Korean won)

  Non-finance   Finance   Total   Adjustment  Consolidated
amount		 

Assets

         

Current

  ￦6,892,052    ￦2,335,036    ￦9,227,088    ￦(583,353)  ￦8,643,735  

Trade and other receivables

   3,903,731     1,445,498     5,349,229     (501,336)   4,847,893  

Inventories

   599,247     22,261     621,508     (4,597)   616,911  

Other assets

   2,389,074     867,277     3,256,351     (77,420)   3,178,931  

Non-current

   23,200,230     702,496     23,902,726     (3,141,736)   20,760,990  

Trade and other receivables

   741,549     2,451     744,000     (64,249)   679,751  

Loans receivable

   —     16,487     16,487     (610)   15,877  

Property, equipment and intangible assets (including investment property)

   17,495,878     179,729     17,675,607     505,128    18,180,735  

Other assets

   4,962,803     503,829     5,466,632     (3,582,005)   1,884,627  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total assets

  ￦30,092,282    ￦3,037,532    ￦33,129,814    ￦(3,725,089)  ￦29,404,725  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Liabilities

         

Current

  ￦7,401,773    ￦1,894,217    ￦9,295,990    ￦(596,602)  ￦8,699,388  

Trade and other payables

   5,021,992     1,816,676     6,838,668     (564,816)   6,273,852  

Borrowings

   1,728,660     —     1,728,660     (2,562)   1,726,098  

Other liabilities

   651,121     77,541     728,662     (29,224)   699,438  

Non-current

   8,472,187     96,684     8,568,871     (19,665)   8,549,206  

Trade and other payables

   563,674     13,273     576,947     (2,996)   573,951  

Borrowings

   6,915,180     —     6,915,180     (6,381)   6,908,799  

Other liabilities

   993,333     83,411     1,076,744     (10,288)   1,066,456  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities

  ￦15,873,960    ￦1,990,901    ￦17,864,861    ￦(616,267)  ￦17,248,594  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

34.    Related Party Transactions

33.Related Party Transactions

The list of related party of the Group as of December 31, 2015,2016, is as follows:

 

Relationship

  

Related parties

Name of Entry

Associates and joint ventures

  Korea Information & Technology Investment Fund, KT WiBro Infra Co., Ltd., K-REALTY CR REIT 1,K-RealtyCR-REITs No.1, Mongolian Telecommunications,KT-SB Venture Investment Fund, Boston Global Film & Contents Fund L.P., QTT Global (Group) Company Limited, CU Industrial Development Co., Ltd., Smart Channel Co., Ltd., HooH Healthcare Inc., KD Living, Inc., ChungHoEZ-Cash Co., Ltd., JNK Retech Co., Ltd., MOS GS Co., Ltd., MOS Daegu Co., Ltd., MOS Chungcheong Co., Ltd., MOS Gangnam Co., Ltd., MOS GB Co., Ltd., MOS BS Co., Ltd., MOS Honam Co., Ltd., ANIMAX BROADCASTING KOREA Co., Ltd., Saehacoms Co., Ltd., Oscar Ent. Co., Ltd., Texno Pro Sistem,KT-CKP New Media Investment Fund, LoginD Co., Ltd., K-REALTY CR-REITK-REALTYCR-REIT 6,ISU-kth Contents Investment Fund, Daiwon Broadcasting Co., Ltd.,KT-DSC creative economy youthstart-up investment fund,Gyeonggi-KT Green Growth Fund, Korea electronic Vehicle charging service, PT. Mitra Transaksi Indonesia,K-REALTY RENTAL HOUSING REIT 2,KT-IBKC future investment fund 1, AI RESEARCH INSTITUTE,Gyeonggi-KT Yoojin Superman Fund, FUNDA Co., Ltd.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

The relatedOutstanding balances of receivables and payables in relations to transactions with related parties as of December 31, 20142015 and 2015,2016, are as follows:

 

 2014    2015 
 Receivables Payables    Receivables Payables 

(In millions of Korean won)

(In millions of Korean won)

 Trade
receivables		 Loans Other
receivables		 Trade
payables		 Other
payables		 (In millions of Korean won) Trade
receivables		 Loans Other
receivables		 Trade
payables		 

Other

payables

 

Associates and joint ventures

  KT Service Bukbu (formerly Information Technology Solution Bukbu Corporation) ￦137   ￦—   ￦11   ￦—   ￦7,427    KT Wibro Infra Co., Ltd. ￦—    ￦—    ￦—    ￦—    ￦86,507 
Information Technology Solution Nambu Corporation  132    —    9    —    5,062   Smart Channel Co., Ltd.1 8,684  46,914  39,950  995  1,308 
Information Technology Solution Seobu Corporation  18    —    12    —    4,977   K-RealtyCR-REITs No.1 927   —    34,200   —     —   
Information Technology Solution Busan Corporation  7    —    15    39    2,293   MOS GS Co., Ltd. 33   —    1   —    1,454 
KT Service Nambu (formerly Information Technology Solution Jungbu Corporation)  5    —    2    1    2,305   MOS Daegu Co., Ltd. 8   —    23   —    1,051 
Information Technology Solution Honam Corporation  203    —    4    1    5,159   MOS Chungcheong Co., Ltd. 4   —    1   —    1,184 
Information Technology Solution Daegu Corporation  3    —    —    —    2,278   MOS Gangnam Co., Ltd. 3   —    1   —     —   
KT Wibro Infra Co., Ltd.  —    —    —    —    129,294   MOS GB Co., Ltd. 6   —    1  108  2,801 
Smart Channel Co., Ltd.1  10,234    9,638    39,724    3,095    26   MOS BS Co., Ltd. 1   —    1   —    1,086 
K-REALTY CR REIT 1  948    —    35,850    —    —   MOS Honam Co., Ltd. 3   —     —     —    1,793 
MOS GS Co., Ltd.  36    —    1    —    852   Others 738   —    1,499  110  3,010 
MOS Daegu Co., Ltd.  3    —    26    —    1,507  
MOS Chungcheong Co., Ltd.  1    —    1    —    1,611  
MOS Gangnam Co., Ltd.  1    —    1    —    802  
MOS GB Co., Ltd.  115    —    5    —    1,142  
MOS BS Co., Ltd.  1    —    1    —    976  
MOS Honam Co., Ltd.  1    —    2    —    2,032  
Others  491    —    1,789    190    1,124  
   

 

  

 

  

 

  

 

  

 

    

 

  

 

  

 

  

 

  

 

 

Total

Total

 ￦10,407  ￦46,914  ￦75,677  ￦1,213  ￦100,194 
  

Total

 ￦12,336   ￦9,638   ￦77,453   ￦3,326   ￦168,867   

 

  

 

  

 

  

 

  

 

 
   

 

  

 

  

 

  

 

  

 

 

 

1The Group provided allowance for doubtful receivables of￦59,596 million against trade receivables, loans and other receivables from Smart Channel Co., Ltd.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

  2015 
  Receivables  Payables 

(In millions of Korean won)

 Trade
receivables		  Loans   Other
receivables		  Trade
payables		  Other
payables		 

Associates and joint ventures

  KT Wibro Infra Co., Ltd. ￦—   ￦—    ￦—   ￦—   ￦86,507  
  Smart Channel Co., Ltd.1  8,684    46,914     39,950    995    1,308  
  

K-REALTY CR REIT 1

  927    —     34,200    —    —  
  MOS GS Co., Ltd.  33    —     1    —    1,454  
  MOS Daegu Co., Ltd.  8    —     23    —    1,051  
  MOS Chungcheong Co., Ltd.  4    —     1    —    1,184  
  MOS Gangnam Co., Ltd.  3    —     1    —    —  
  MOS GB Co., Ltd.  6    —     1    108    2,801  
  MOS BS Co., Ltd.  1    —     1    —    1,086  
  MOS Honam Co., Ltd.  3    —     —    —    1,793  
  Others  738    —     1,499    110    3,010  
   

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 
  Total ￦10,407   ￦46,914    ￦75,677   ￦1,213   ￦100,194  
   

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 
1The Group provided allowance for doubtful receivablesaccounts of￦95,548 million against trade receivables, loans and other receivables from Smart Channel Co., Ltd.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

     2016 
     Receivables  Payables 
(In millions of Korean won) Trade
receivables		  Loans  Other
receivables		  Trade
payables		  

Other

payables

 

Associates and joint ventures

  KT Wibro Infra Co., Ltd. ￦—    ￦—    ￦—    ￦—    ￦43,394 
  K-RealtyCR-REITs No.1  882   —     33,110   —     —   
  MOS GS Co., Ltd.  9   —     1   —     1,494 
  MOS Daegu Co., Ltd.  1   —     —     —     1,082 
  MOS Chungcheong Co., Ltd.  6   —     1   —     2,065 
  MOS Gangnam Co., Ltd.  6   —     1   —     1,129 
  MOS GB Co., Ltd.  19   —     5   —     2,167 
  MOS BS Co., Ltd.  34   —     1   —     1,114 
  MOS Honam Co., Ltd.  2   —     —     —     1,289 
  Others  481   —     179   3   1,266 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 ￦1,440  ￦—    ￦33,298  ￦3  ￦55,000 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Significant transactions with related parties for the years ended December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

   2013 

(in millions of Korean won)

  Sales   Purchases 

Associates and Joint ventures

  ktcs Corporation  ￦45,172    ￦258,203  
  ktis Corporation   59,537     281,219  
  Information Technology Solution Bukbu Corporation   4,784     29,626  
  Information Technology Solution Nambu Corporation   4,871     33,232  
  Information Technology Solution Seobu Corporation   5,397     34,526  
  Information Technology Solution Busan Corporation   2,920     18,967  
  Information Technology Solution Jungbu Corporation   5,318     27,483  
  Information Technology Solution Honam Corporation   3,122     36,096  
  Information Technology Solution Daegu Corporation   2,048     13,462  
  KT Wibro Infra Co., Ltd.   9     1,660  
  Smart Channel Co., Ltd.   8,188     —    
  

K-REALTY CR REIT 1

   2,039     36,349  
  MOS GS Co., Ltd.   1,465     17,337  
  MOS Daegu Co., Ltd.   806     12,061  
  MOS Chungcheong Co., Ltd.   819     12,111  
  MOS Gangnam Co., Ltd.   749     15,078  
  MOS GB Co., Ltd.   1,981     22,858  
  MOS BS Co., Ltd.   914     15,117  
  MOS Honam Co., Ltd.,   948     13,803  
  Others   2,739     15,766  
    

 

 

   

 

 

 
    ￦153,826    ￦894,954  
    

 

 

   

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

  2014      2014 

(In millions of Korean won)

(In millions of Korean won)

  Sales   Purchases 2 (In millions of Korean won)  Sales   Purchases2 

Associates and

joint ventures

  ktcs Corporation 1   ￦59,739     ￦245,648    ktcs Corporation1  ￦59,739   ￦245,648 
ktis Corporation 1   78,546     243,336   ktis Corporation1   78,546    243,336 
KT Service Bukbu (formerly Information Technology Solution Bukbu Corporation)   6,787     54,450  
Information Technology Solution Nambu Corporation   7,574     45,940  
Information Technology Solution Seobu Corporation   6,388     40,251  
Information Technology Solution Busan Corporation   4,093     26,174  
KT Service Nambu (formerly Information Technology Solution Jungbu Corporation)   7,187     37,436  
Information Technology Solution Honam Corporation   4,976     36,081  
Information Technology Solution Daegu Corporation   3,460     21,006  
KT Wibro Infra Co., Ltd.   11     1,237  
Smart Channel Co., Ltd.   14,002     2  

K-REALTY CR REIT 1

   2,067     37,413  
MOS GS Co., Ltd.   1,593     17,063  
MOS Daegu Co., Ltd.   894     12,092  
MOS Chungcheong Co., Ltd.   867     12,105  
MOS Gangnam Co., Ltd.   775     16,209  
MOS GB Co., Ltd.   2,017     21,114  
MOS BS Co., Ltd.   858     15,762  
MOS Honam Co., Ltd.   780     14,417  
Others   4,401     11,903  
  

 

   

 

 
Total3   ￦207,015     ￦909,635  
    

 

   

 

   KT Service Bukbu   6,787    54,450 
  Information Technology Solution Nambu Corporation   7,574    45,940 
  Information Technology Solution Seobu Corporation   6,388    40,251 
  Information Technology Solution Busan Corporation   4,093    26,174 
  KT Service Nambu   7,187    37,436 
  Information Technology Solution Honam Corporation   4,976    36,081 
  Information Technology Solution Daegu Corporation   3,460    21,006 
  KT Wibro Infra Co., Ltd.   11    1,237 
  Smart Channel Co., Ltd.   14,002    2 
  K-RealtyCR-REITs No.1   2,067    37,413 
  MOS GS Co., Ltd.   1,593    17,063 
  MOS Daegu Co., Ltd.   894    12,092 
  MOS Chungcheong Co., Ltd.   867    12,105 
  MOS Gangnam Co., Ltd.   775    16,209 
  MOS GB Co., Ltd.   2,017    21,114 
  MOS BS Co., Ltd.   858    15,762 
  MOS Honam Co., Ltd.   780    14,417 
  Others   4,401    11,903 
    

 

   

 

 

Total3

Total3

  ￦207,015   ￦909,635 
    

 

   

 

 

 

1The transactions for the year ended December 31, 2014, before ktcs and kits were included in the consolidation scope.

2The amount includes acquisition of property, plant and equipment and others.

3Operating income and expenses of KT Capital Co., Ltd. and KT Rental that were classified as discontinued operations amounting to￦17,707 million and￦1,271 million, respectively, during the year ended December 31, 2014, is included.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

(In millions of Korean won)  2015 
  Sales   Purchases 2 

Associates and

joint ventures

  KT Service Bukbu (formerly Information Technology Solution Bukbu Corporation) 1   ￦2,143     ￦28,550  
  Information Technology Solution Nambu Corporation 1   2,707     24,025  
  Information Technology Solution Seobu Corporation 1   2,324     20,031  
  Information Technology Solution Busan Corporation 1   1,496     14,049  
  KT Service Nambu (formerly Information Technology Solution Jungbu Corporation) 1   1,972     21,133  
  Information Technology Solution Honam Corporation 1   2,050     29,538  
  Information Technology Solution Daegu Corporation 1   1,256     18,272  
  KT Wibro Infra Co., Ltd.   11     814  
  Smart Channel Co., Ltd.   6,545     4,722  
  K-Realty CR-REITs No.1   2,133     38,167  
  MOS GS Co., Ltd.   752     17,474  
  MOS Daegu Co., Ltd.   357     12,227  
  MOS Chungcheong Co., Ltd.   310     12,735  
  MOS Gangnam Co., Ltd.   454     15,829  
  MOS GB Co., Ltd.   964     21,582  
  MOS BS Co., Ltd.   453     15,482  
  MOS Honam Co., Ltd.   470     17,004  
  Others   4,394     13,510  
    

 

 

   

 

 

 
  Total3   ￦30,791     ￦325,144  
    

 

 

   

 

 

 

      2015 
(In millions of Korean won)  Sales   Purchases2 

Associates and

joint ventures

  KT Service Bukbu1  ￦2,143   ￦28,550 
  

Information Technology

Solution Nambu Corporation1

   2,707    24,025 
  Information Technology Solution Seobu Corporation1   2,324    20,031 
  Information Technology Solution Busan Corporation1   1,496    14,049 
  KT Service Nambu1   1,972    21,133 
  Information Technology Solution Honam Corporation1   2,050    29,538 
  Information Technology Solution Daegu Corporation1   1,256    18,272 
  KT Wibro Infra Co., Ltd.   11    814 
  Smart Channel Co., Ltd.   6,545    4,722 
  K- RealtyCR-REITs No.1   2,133    38,167 
  MOS GS Co., Ltd.   752    17,474 
  MOS Daegu Co., Ltd.   357    12,227 
  MOS Chungcheong Co., Ltd.   310    12,735 
  MOS Gangnam Co., Ltd.   454    15,829 
  MOS GB Co., Ltd.   964    21,582 
  MOS BS Co., Ltd.   453    15,482 
  MOS Honam Co., Ltd.   470    17,004 
  Others   4,394    13,510 
    

 

 

   

 

 

 
  

Total3

  ￦30,791   ￦325,144 
    

 

 

   

 

 

 

 

1

The transactions for the year ended December 31, 2015, after KT Service Bukbu Co., Ltd. and KT Service Nambu Co., Ltd. were merged and included in the consolidation scope.

2

The amount includes acquisition of property, plant and equipment, and others.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

3Operating income amounting to￦6,634 million of KT Capital Co., Ltd. and KT Rental that were classified as discontinued operations during the year ended December 31, 2015, is included.

      2016 
(In millions of Korean won)  Sales   Purchases2 

Associates and joint ventures

  KT Wibro Infra Co., Ltd.  ￦11   ￦391 
  Smart Channel Co., Ltd.1   766    —   
  K- RealtyCR-REITs No.1   1,989    37,469 
  MOS GS Co., Ltd.   663    17,361 
  MOS Daegu Co., Ltd.   291    12,220 
  MOS Chungcheong Co., Ltd.   408    13,469 
  MOS Gangnam Co., Ltd.   412    15,797 
  MOS GB Co., Ltd.   891    21,802 
  MOS BS Co., Ltd.   441    15,346 
  MOS Honam Co., Ltd.   418    14,389 
  Others   1,719    29,422 
    

 

 

   

 

 

 

Total

  ￦8,009   ￦177,666 
  

 

 

   

 

 

 

1The transactions for the year ended December 31, 2016, before Smart Channel Co., Ltd. was included in the consolidation scope.
2The amount includes acquisition of property, plant and equipment, and others.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Key management compensation for the years ended December 31, 2013, 2014, 2015 and 2015,2016, consists of:

 

(in millions of Korean won)

  2013   2014   2015 
(In millions of Korean won)  2014   2015   2016 

Salaries and other short-term benefits

  ￦3,203    ￦1,817    ￦2,455    ￦1,817   ￦2,455   ￦2,629 

Provision for severance benefits

   335     400     413  

Post-employment benefits

   400    413    381 

Stock-based compensation

   842     965     997     965    997    1,237 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  ￦4,380    ￦3,182    ￦3,865    ￦3,182   ￦3,865   ￦4,247 
  

 

   

 

   

 

   

 

   

 

   

 

 

Fund transactions with related parties for the years ended December 31, 20142015 and 2015,2016, are as followsfollows:

 

(in millions of Korean won)

  2014 
  Loan
transactions		   Borrowing
transactions		   Equity
contributions
in cash		   Dividends
income		 
  Loans   Repayment     

Associates and

joint ventures

        

2010 KIF-IMM IT Investment Fund

  ￦ —    ￦ —    ￦1,540    ￦ —  

HooH Healthcare Inc.

   —     401     3,370     —  

KT-CKP New Media Investment Fund

   —     —     2,250     —  

K-REALTY CR-REIT 6

   —     —     7,000     —  

ISU-kth Contents Investment Fund

   —     —     1,100     —  

KoFC KTC-ORIX Korea-Japan Partnership Private Equity Fund II

   —     —     136     —  

KTCS Corporation 1

   —     —     —     976  

KTIS Corporation 1

   —     —     —     744  

Korea Information & Technology Investment Fund

   —     —     —     494  

Exdell Corporation

   —     —     —     13  

KT Service Bukbu (formerly Information Technology Solution Bukbu Corporation)

   —     —     —     18  

Information Technology Solution Nambu Corporation

   —     —     —     18  

Information Technology Solution Seobu Corporation

   —     —     —     18  

Information Technology Solution Busan Corporation

   —     —     —     18  

KT Service Nambu (formerly Information Technology Solution Jungbu Corporation)

   —     —     —     18  

Information Technology Solution Honam Corporation

   —     —     —     18  

Information Technology Solution Daegu Corporation

   —     —     —     18  

KT-SB Venture Investment Fund

   —     —     —     4,238  

K-REALTY CR REIT 1

   —     —     —     2,394  

Metropol Property LLC

   —     —     —     3,319  

MOS GS Co., Ltd.

   —     —     —     8  

MOS Daegu Co., Ltd.

   —     —     —     8  

MOS Chungcheong Co., Ltd.

   —     —     —     8  

MOS Gangnam Co., Ltd.

   —     —     —     10  

MOS GB Co., Ltd.

   —     —     —     16  

MOS BS Co., Ltd.

   —     —     —     10  

MOS Honam Co., Ltd.

   —     —     —     10  

VANGUARD Private Equity Fund

   —     —     —     281  

How Smartmall Private Special Asset Investment Trust

   —     —     —     2,767  

KTC-NP-Growth Champ 2011-2 PEF

   —     —     —     63  

KoFC KTC-ORIX Korea-Japan Partnership Private Equity Fund II

   —     —     —     142  

Mirae Asset Good Company Investment Fund No.3

   —     —     —     1,320  

SPERA Private Equity Fund

   —     —     —     1,190  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦ —    ￦401    ￦15,396    ￦18,137  
  

 

 

   

 

 

   

 

 

   

 

 

 
(In millions of Korean won)  2015 
   Loan
transactions		   Borrowing
transactions		   Equity
contributions
in cash		   Dividend
income		 
   Loans   Repayment     

Associates and joint ventures

        

KT-DSC creative economy youthstart-up investment fund

  ￦—     ￦—     ￦4,000   ￦—   

Smart Channel Co., Ltd.1

   37,276    —      —      —   

Korea Electronic Vehicle Charging Service

   —      —      1,368    —   

2010KIF-IMM IT Investment Fund2

   —      —      617    —   

KTC-NP-Growth Champ2011-2 PEF2

   —      —      6,400    —   

Korea Information & Technology Investment Fund

   —      —      —      1,107 

Exdell Corporation

   —      —      —      13 

KT Service Bukbu3

   —      —      —      9 

Information Technology Solution Nambu Corporation3

   —      —      —      9 

Information Technology Solution Seobu Corporation3

   —      —      —      9 

Information Technology Solution Busan Corporation3

   —      —      —      9 

KT Service Nambu3

   —      —      —      9 

Information Technology Solution Honam Corporation2

   —      —      —      9 

Information Technology Solution Daegu Corporation2

   —      —      —      9 

KT-SB Venture Investment Fund

   —      —      —      11,795 

K-RealtyCR-REITs No.1

   —      —      —      3,345 

Mongolian Telecommunications

   —      —      —      35 

Daiwon Broadcasting Co., Ltd.

   —      —      —      85 

Others

   —      —      —      83 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦37,276   ￦—     ￦12,385   ￦16,526 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1The transactionsGroup provided Allowance for the year ended December 31, 2015, before KT Service Bukbudoubtful accounts of￦37,276 million against loans for Smart Channel Co., Ltd. and KT Service Nambu Co., Ltd. were merged and included in the consolidation scope.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

(in millions of Korean won)

  2015 
  Loan
transactions		   Borrowing
transactions		   Equity
contributions
in cash		   Dividend
income		 
  Loans   Repayment     

Associates

        

KT-DSC creative economy youth start-up investment fund

  ￦ —    ￦ —    ￦4,000    ￦ —  

Smart Channel Co., Ltd.

   37,276     —     —     —  

Korea Electronic Vehicle Charging Service

   —     —     1,368     —  

2010 KIF-IMM IT Investment Fund 1

   —     —     617     —  

KTC-NP-Growth Champ 2011-2 PEF 1

   —     —     6,400     —  

Korea Information & Technology Investment Fund

   —     —     —     1,107  

Exdell Corporation

   —     —     —     13  

KT Service Bukbu (formerly Information Technology Solution Bukbu Corporation) 2

   —     —     —     9  

Information Technology Solution Nambu Corporation 2

   —     —     —     9  

Information Technology Solution Seobu Corporation 2

   —     —     —     9  

Information Technology Solution Busan Corporation 2

   —     —     —     9  

KT Service Nambu (formerly Information Technology Solution Jungbu Corporation) 2

   —     —     —     9  

Information Technology Solution Honam Corporation 2

   —     —     —     9  

Information Technology Solution Daegu Corporation 2

   —     —     —     9  

KT-SB Venture Investment Fund

   —     —     —     11,795  

K-REALTY CR REIT 1

   —     —     —     3,345  

Mongolian Telecommunications

   —     —     —     35  

MOS GS Co., Ltd.

   —     —     —     8  

MOS Daegu Co., Ltd.

   —     —     —     8  

MOS Chungcheong Co., Ltd.

   —     —     —     8  

MOS Gangnam Co., Ltd.

   —     —     —     10  

MOS GB Co., Ltd.

   —     —     —     16  

MOS BS Co., Ltd.

   —     —     —     10  

MOS Honam Co., Ltd.

   —     —     —     10  

Daiwon Broadcasting Co., Ltd.

   —     —     —     85  

K-REALTY CR-REIT 6

   —     —     —     13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦37,276    ￦—    ￦12,385    ￦16,526  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

12The transactions related to KT Capital Co., Ltd. that was classified as disposal group held for sale during the year ended December 31, 2015, are included.

23The transactions for the year ended December 31, 2015, after KT Service Bukbu Co., Ltd. and KT Service Nambu Co., Ltd. were merged and included in the consolidation scope.

There are no collaterals and payment guarantees provided by the related parties.

(In millions of Korean won)  2016 
  Equity
contributions
in cash		   Dividend
income		 

Associates and joint ventures

    

KT-DSC creative economy youthstart-up investment fund

  ￦6,000   ￦—   

PT. Mitra Transaksi Indonesia

   16,626    —   

K-REALTY RENTAL HOUSING REIT 2

   5,500    —   

AI RESEARCH INSTITUTE

   3,000    —   

KT-IBKC future investment fund 1

   3,750    —   

Gyeonggi-KT Yoojin Superman Fund

   1,000    —   

FUNDA Co., Ltd.

   2,799    —   

K-RealtyCR-REITs No.1

   —      4,186 

Korea Information & Technology Investment Fund

   —      3,201 

Daiwon Broadcasting Co., Ltd.

   —      85 

Others

   —      82 
  

 

 

   

 

 

 

Total

  ￦38,675   ￦7,554 
  

 

 

   

 

 

 

35.    Financial risk management

34.Financial risk management

(1) Financial risk factors

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

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,

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

which identifies, evaluates and hedges financial risks. The treasury department in the Value Management Office considers various finance market conditions to estimate the effect from the market changes.

1) Market risk

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

(i) Sensitivity analysis

Sensitivity analysis is performed for each type of market risk to which the Group is exposed. Reasonably possible changes in the relevant risk variable such as prevailing market interest rates,

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

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 unaffecting the Group’s cash flows is not hedged but can be hedged at a particular situation.

As of December 31, 2013, 2014, 2015 and 2015,2016, if the foreign exchange rate had strengthened/weakened by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:

 

(in millions of Korean won)

  Fluctuation of
foreign exchange rate		 Income before tax Shareholders’ equity 

2013.12.31

   10%   (46,173)   (47,888) 
 -10%   46,173    47,888  
(In millions of Korean won)  Fluctuation of
foreign exchange
rate		 Income before tax Shareholders’ equity 

2014.12.31

   10%   (45,430)   (38,437)    10%  ￦(45,430)  ￦(38,437) 
 -10%   45,430    38,437    -10%  45,430  38,437 

2015.12.31

   10%   (52,157)   (45,632)    10%  (52,157)  (45,632) 
 -10%   52,157    45,632    -10%  52,157  45,632 

2016.12.31

   10%  (28,134)  (23,817) 
 -10%  28,134  23,817 

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 of December 31, 2014, 2015 and 2016, are as follows:

   2014   2015   2016 
(In thousands)  Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		 

USD

   197,221    2,532,614    183,254    2,351,003    210,474    2,536,090 

SDR1

   573    1,027    444    849    311    737 

JPY

   34,168    30,051,367    73,716    40,279,411    80,555    21,802,051 

GBP

   —      257    8    888    1    151 

EUR

   134    177    29    29    40    2,571 

DZD2

   929    —      —      —      471    —   

CNY

   3,957    —      15,562    107    15,262    381 

UZS3

   7,978,633    —      —      —      39,531    —   

RWF4

   13,593    —      —      —      1,203    —   

IDR5

   —      —      —      —      15,646,011    53,142,167 

MMK6

   —      —      —      —      2,750    —   

TZS7

   —      —      —      —      29,987    —   

BWP8

   —      —      —      —      15    —   

HKD

   158    —      9    —      254    —   

BDT9

   299    —      6    —      69,473    —   

COP10

   23,583    —      —      —      —      —   

PLN11

   28,195    —      207,273    —      106,025    —   

VND12

   273,313    93,756    270,000    —      515,412    —   

CHF

   —      78    —      —      —      —   

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

Details of foreign assets and liabilities of the Group as of December 31, 2013, 2014 and 2015, are as follows:

(in thousands)

  2013   2014   2015 
  Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		   Financial
assets		   Financial
liabilities		 

USD

   254,917     2,225,700     197,221     2,532,614     183,254     2,351,003  

SDR 1

   1,105     1,211     573     1,027     444     849  

JPY

   190,520     30,054,316     34,168     30,051,367     73,716     40,279,411  

GBP

   —     134     —     257     8     888  

EUR

   1,342     4,943     134     177     29     29  

DZD 2

   2,798     —     929     —     —     —  

CNY

   —     —     3,957     —     15,562     107  

UZS 3

   1,805,565     —     7,978,633     —     —     —  

RWF 4

   11,962     —     13,593     —     —     —  

HKD

   —     —     158     —     9     —  

BDT 5

   —     —     299     —     6     —  

COP 6

   —     —     23,583     —     —     —  

PLN 7

   —     —     28,195     —     207,273     —  

VND 8

   —     —     273,313     93,756     270,000     —  

CHF

   —     —     —     78     —     —  

 

1Special Drawing Rights.

2Algeria Dinar.

3Uzbekistan Sum.

4Rwanda Franc.

5Indonesia Rupiah.
6Myanmar Kyat.
7Tanzanian Shilling.
8Botswana Pula.
9Bangladesh Taka.

6Colombia10Columbia Peso.

711Polish Zloty.

812Vietnam Dong.

(iii) Price risk

As of December 31, 2013, 2014, 2015 and 2015,2016, the Group is exposed to equity securities price risk because the securities held by the Group are traded in active markets. If the market prices had increased/decreased by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:

 

(in millions of Korean won)

  Fluctuation of price Income before tax   Equity 

2013.12.31

   10%  ￦    —    ￦5,535  
   -10%   —     (5,535) 
(In millions of Korean won)  Fluctuation of price Income before tax   Equity 

2014.12.31

   10%  ￦ —    ￦6,593    10% ￦—     ￦6,593 
   -10%   —     (6,593) 

2014.12.31

 -10%  —      (6,593) 
   10%  ￦ —    ￦3,469    10% ￦—     ￦3,469 
   -10%   —     (3,469) 

2015.12.31

 -10%  —      (3,469) 
  10% ￦—     ￦539 

2016.12.31

 -10%  —      (539) 

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.

(iv) CashflowCash flow and fair value interest rate risk

The Group’s interest rate risk arises from liabilities in foreign currency such as foreign currency bonds payable. Bonds payabledebentures. Debentures in foreign currency issued at variable rates expose the Group to cash

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

flow interest rate risk which is partially offset by swap transactions. Bonds payableDebentures 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 of December 31, 2013, 2014, 2015 and 2015,2016, if the market interest rate had increased/decreased by 100 bp100bp with other variables held constant, the effects on profit before income tax and shareholders’ equity would be as follows:

 

(In millions of Korean won)

  Fluctuation of
interest rate		   Income before tax Shareholders’ equity   

Fluctuation of

interest rate

  Income before tax Shareholders’
equity		 

2013.12.31

   + 100 bp    ￦10,345   ￦12,846  
   - 100 bp     (17,201)   (19,017) 

2014.12.31

   + 100 bp    ￦(4,717)  ￦4,892    + 100 bp  ￦(4,717)  ￦4,892 
   - 100 bp     (4,632)   (11,064) 

2014.12.31

 - 100 bp   (4,632)  (11,064) 
   + 100 bp    ￦(3,601)  ￦(245)   + 100 bp  ￦(3,601)  ￦(245) 
   - 100 bp     3,615    (5,764) 

2015.12.31

 - 100 bp   3,615  (5,764) 
  + 100 bp  ￦(3,456)  ￦(1,673) 

2016.12.31

 - 100 bp   3,445  (5,025) 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

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

2) Credit risk

Credit risk is 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.

As of December 31, 20142015 and 2015,2016, maximum exposure to credit risk is as follows.

 

(In millions of Korean won)

  2014   2015   2015   2016 

Cash equivalents (except cash on hand)

  ￦1,884,745    ￦2,537,536  

Trade and other receivables1

   5,659,913     5,527,644  

Loans receivable

   1,295,282     15,877  

Finance lease receivables

   584,413     14,258  

Cash equivalents(except cash on hand)

  ￦2,537,536   ￦2,875,383 

Trade and other receivables

   5,557,779    6,036,363 

Other financial assets

        

Financial assets at fair value through the profit or loss

   6,983     18  

Financial assets at fair value through profit or loss

   18    6,277 

Derivative used for hedging

   41,540     139,088     139,088    227,318 

Time deposits and others

   455,622     434,093     434,093    716,769 

Available-for-sale financial assets

   27,870     21,388     21,388    26,684 

Held-to-maturity financial assets

   7,767     18,030     18,030    30,143 

Financial guarantee contracts2

   55,393     106,550  

Financial guarantee contracts1

   106,550    56,373 
  

 

   

 

   

 

   

 

 

Total

  ￦10,019,528    ￦8,814,482    ￦8,814,482   ￦9,975,310 
  

 

   

 

   

 

   

 

 

 

1As of December 31, 2015, the Group is provided with a payment guarantee of￦578,904 million from Seoul Guarantee Insurance related to the sale of certain accounts receivable arising from the handset sales.

21Total amounts guaranteed by the Group according to the guarantee contracts.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

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.

 

   2014.12.31 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than
5 years		   Total 

Trade and other payables

  ￦6,973,931    ￦1,028,043    ￦254,852    ￦8,256,826  

Finance lease payables

   22,516     37,382     —     59,898  

Borrowings (including bonds payable)

   2,986,372     6,508,681     4,162,910     13,657,963  

Other non-derivative financial liabilities

   405     3,441     —     3,846  

Financial guarantee contracts 1

   55,393     —     —     55,393  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦10,038,617    ￦7,577,547    ￦4,417,762    ￦22,033,926  
  

 

 

   

 

 

   

 

 

   

 

 

 
   2015.12.31 
(In millions of Korean won)  Less than 1 year   1-5 years   More than
5 years		   Total 

Trade and other payables

  ￦6,987,882   ￦695,167   ￦139,843   ￦7,822,892 

Borrowings(including debentures)

   1,768,171    5,859,467    1,981,497    9,609,135 

Othernon-derivative financial liabilities

   2,935    2,858    —      5,793 

Financial guarantee contracts1

   106,550    —      —      106,550 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦8,865,538   ￦6,557,492   ￦2,121,340   ￦17,544,370 
  

 

 

   

 

 

   

 

 

   

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

   2015.12.31 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than
5 years		   Total 

Trade and other payables

  ￦6,908,886    ￦589,612    ￦139,843    ￦7,638,341  

Finance lease payables

   78,996     105,555     —     184,551  

Borrowings(including bonds payable)

   1,768,171     5,859,467     1,981,497     9,609,135  

Other non-derivative financial liabilities

   2,935     2,858     —     5,793  

Financial guarantee contracts 1

   106,550     —     —     106,550  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦8,865,538    ￦6,557,492    ￦2,121,340    ￦17,544,370  
  

 

 

   

 

 

   

 

 

   

 

 

 

   2016.12.31 
(In millions of Korean won)  Less than 1 year   1-5 years   More than
5 years		   Total 

Trade and other payables

  ￦7,682,604   ￦1,121,452   ￦217,411   ￦9,021,467 

Borrowings(including debentures)

   2,034,524    4,834,151    2,458,749    9,327,424 

Othernon-derivative financial liabilities

   233    3,272    22,917    26,422 

Financial guarantee contracts1

   56,373    —      —      56,373 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ￦9,773,734   ￦5,958,875   ￦2,699,077   ￦18,431,686 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1Total amount guaranteed by the Group according to guarantee contracts. Cash flow from financial guarantee contracts is classified as the maturity group in the earliest period when the financial guarantee contracts can be executed.

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

 

  2013.12.31   2014.12.31 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than 5 years   Total 
(In millions of Korean won)  Less than 1 year   1-5 years   

More than

5 years

   Total 

Outflow

  ￦971,454    ￦1,377,071    ￦38,795    ￦2,387,320    ￦242,051   ￦2,282,242   ￦38,795   ￦2,563,088 

Inflow

   910,488     1,256,407     41,648     2,208,543     210,045    2,217,211    43,418    2,470,674 

 

  2014.12.31   2015.12.31 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than 5 years   Total 
(In millions of Korean won)  Less than 1 year   1-5 years   

More than

5 years

   Total 

Outflow

  ￦242,051    ￦2,282,242    ￦38,795    ￦2,563,088    ￦335,970   ￦2,138,379   ￦38,184   ￦2,512,533 

Inflow

   210,045     2,217,211     43,418     2,470,674     276,066    2,284,219    46,194    2,606,479 

 

  2015.12.31   2016.12.31 

(in millions of Korean won)

  Less than 1 year   1-5 years   More than 5 years   Total 
(In millions of Korean won)  Less than 1 year   1-5 years   

More than

5 years

   Total 

Outflow

  ￦288,046    ￦2,080,865    ￦37,549    ￦2,406,460    ￦1,174,147   ￦1,176,715   ￦536,005   ￦2,886,867 

Inflow

   227,107     2,212,297     44,770     2,484,174     1,302,112    1,306,199    588,559    3,196,870 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

(2) Disclosure of capital 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.

Thedebt-to-equity ratios as of December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014 2015 
(In millions of Korean won)  2015 2016 

Total liabilities

  ￦22,011,718   ￦17,248,594    ￦17,248,594  ￦17,881,580 

Total equity

   11,787,557    12,156,131     12,156,131  12,782,718 

Debt-to-equity ratio

   187%   142%    142%  140% 

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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

The gearing ratios as of December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won, %)

  2014 2015 
(In millions of Korean won, %)  2015 2016 

Total borrowings

  ￦12,870,392   ￦8,791,094    ￦8,791,094  ￦8,301,505 

Less: cash and cash equivalents

   (1,888,663)   (2,559,464)    (2,559,464)  (2,900,311) 
  

 

  

 

   

 

  

 

 

Net debt

   10,981,729    6,237,630     6,231,630  5,401,194 

Total equity

   11,787,557    12,156,131     12,156,131  12,782,718 

Total capital

   22,769,286    18,393,761     18,393,761  18,183,912 

Gearing ratio

   48%   34%    34%  30% 

(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:

 

   2014 

(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		   

Derivative assets for hedging purpose 1

  ￦3,225    ￦ —   ￦3,225    ￦(3,225)  ￦—    ￦—  

Trade receivables 2

   107,179     (1)   107,178     (103,704)   —     3,474  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  ￦110,404    ￦(1)  ￦110,403    ￦(106,929)  ￦—    ￦3,474  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

(In millions of Korean won)  2015 
   Gross
assets		   Gross
liabilities
offset		   

Net amounts
presented in
the statement
of financial

position

   Amounts not offset   Net
amount		 
        Financial
instruments		  Cash
collateral		   

Derivative assets for hedging purpose1

  ￦20,627   ￦—     ￦20,627   ￦(20,627)  ￦—     ￦—   

Trade receivables2

   90,448    —      90,448    (86,184)   —      4,264 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 

Total

  ￦111,075   ￦—     ￦111,075   ￦(106,811)  ￦—     ￦4,264 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 

 

   2015 

(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		   

Derivative assets for hedging purpose 1

  ￦20,627    ￦—    ￦20,627    ￦(20,627)  ￦—    ￦—  

Trade receivables 2

   90,448     —     90,448     (86,184)   —     4,264  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 
  ￦111,075    ￦—    ￦111,075    ￦(106,811)  ￦—    ￦4,264  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 
(In millions of Korean won)  2016 
   Gross
assets		   Gross
liabilities
offset		   

Net amounts
presented in
the statement
of financial

position

   Amounts not offset   Net
amount		 
        Financial
instruments		  Cash
collateral		   

Derivative assets for hedging purpose1

  ￦35,334   ￦—     ￦35,334   ￦(5,707)  ￦—     ￦29,627 

Trade receivables2

   95,865    —      95,865    (91,662)   —      4,203 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 

Total

  ￦131,199   ￦—     ￦131,199   ￦(97,369)  ￦—     ￦33,830 
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 

 

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

2The amount applied with netting arrangements under the reference offer of the telecommunication facility interconnection and sharing data among telecommunications companies.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

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

 

   2014 

(in millions of Korean won)

  Gross
liabilities		   Gross
assets
offset		  Net amounts
presented in
the statement
of financial
position		   Amounts not offset   Net
amount		 
       Financial
instruments		  Cash
collateral		   

Derivative liabilities for hedging purpose1

  ￦49,016    ￦—   ￦49,016    ￦(3,225)  ￦—    ￦45,791  

Trade payables 2

   108,669     —    108,669     (103,704)   —     4,965  

Other payables 2

   2     (1)   1     —    —     1  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  ￦157,687    ￦(1)  ￦157,686    ￦(106,929)  ￦—    ￦50,757  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
   2015 
(In millions of Korean won)  

Gross

liabilities

   

Gross

assets

offset

  

Net amounts
presented in
the statement
of financial

position

   Amounts not offset   

Net

amount

 
       Financial
instruments		  Cash
collateral		   

Derivative liabilities for hedging purpose1

  ￦28,544   ￦—    ￦28,544   ￦(20,627)  ￦—     ￦7,917 

Trade payables2

   87,093    —     87,093    (86,184)   —      909 

Other payables2

   102    (12)   90    —     —      90 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  ￦115,739   ￦(12)  ￦115,727   ￦(106,811)  ￦—     ￦8,916 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

   2015 

Korean won)

  Gross
liabilities		   Gross
assets
offset		  Net amounts
presented in
the statement
of financial
position		   Amounts not offset   Net
amount		 
       Financial
instruments		  Cash
collateral		   

Derivative liabilities for hedging purpose1

  ￦28,544    ￦—   ￦28,544    ￦(20,627)  ￦—    ￦7,917  

Trade payables 2

   87,093     —    87,093     (86,184)   —     909  

Other payables 2

   102     (12)   90     —    —     90  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
  ￦115,739    ￦(12)  ￦115,727    ￦(106,811)  ￦—    ￦8,916  
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 
   2016 
(In millions of Korean won)  

Gross

liabilities

   

Gross
assets

offset

  

Net amounts
presented in
the statement
of financial

position

   Amounts not offset   

Net

amount

 
       Financial
instruments		  Cash
collateral		   

Derivative liabilities for hedging purpose1

  ￦20,627   ￦—    ￦20,627   ￦(20,627)  ￦—     ￦—   

Trade payables2

   90,435    —     90,435    (86,184)   —      4,251 

Other payables2

   48    (4)   44    —     —      44 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  ￦111,110   ￦(4)  ￦111,106   ￦(106,811)  ￦—     ￦4,295 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

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

2The amount applied with netting arrangements under the reference offer of the telecommunication facility interconnection and sharing data among telecommunications companies.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

36.    Fair Value

35.Fair Value

36.1 Fair Value of Financial Instruments by Category

35.1Fair Value of Financial Instruments by Category

Carrying amount and fair value of financial instruments by category as of December 31, 20142015 and 2015,2016, are as follows:

 

  2014   2015   

2015

  

2016

(in millions of Korean won)

  Carrying
amount		   Fair value   Carrying
amount		   Fair value 
(In millions of Korean won)  

Carrying

amount

  Fair value  

Carrying

amount

  Fair value

Financial assets

                

Cash and cash equivalents 1

  ￦1,888,663    ￦1,888,663    ￦2,559,464    ￦2,559,464    ￦2,559,464  ￦2,559,464  ￦2,900,311  ￦2,900,311

Trade and other receivables 1

   5,659,913     5,659,913     5,527,644     5,527,644    5,557,779  5,557,779  6,036,363  6,036,363

Loans receivables 1

   710,368     710,368     —     —  

Finance lease receivables 1

   258,982     258,982     5,739     5,739  

Other financial assets

                

Financial instruments at fair value through profit or loss

   6,983     6,983     18     18    18  18  6,277  6,277

Derivative financial instruments for hedging purpose

   41,540     41,540     139,088     139,088    139,088  139,088  227,318  227,318

Time deposits and others 1

   455,622     455,622     434,093     434,093    434,093  434,093  716,769  716,769

Held-to-maturity

   7,767     7,767     18,030     18,030    18,030  18,030  30,143  30,143

Available-for-sale financial assets 2

   437,285     437,285     308,539     308,539    308,539  308,539  299,001  299,001
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  ￦9,467,123    ￦9,467,123    ￦8,992,615    ￦8,992,615    ￦9,017,011  ￦9,017,011  ￦10,216,182  ￦10,216,182
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

Financial liabilities

                

Trade and other liabilities1

  ￦7,317,303    ￦7,317,303    ￦6,847,803    ￦6,847,803    ￦7,004,000  ￦7,004,000  ￦8,328,082  ￦8,328,082

Finance lease liabilities

   55,007     55,007     156,197     156,197  

Borrowings

   12,815,385     12,821,442     8,634,897     8,684,886    8,634,897  8,684,886  8,120,791  8,184,195

Other financial liabilities

                

Financial instruments at fair value through profit or loss

   3,980     3,980     2,006     2,006    2,006  2,006  1,973  1,973

Derivative financial instruments for hedging purpose

   122,012     122,012     62,883     62,883    62,883  62,883  14,928  14,928

Financial guarantee liability 1

   5,434     5,434     —     —  

Other financial liabilities 1

   82,816     82,816     82,439     82,439  

Other1

  82,439  82,439  91,763  91,763
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  ￦20,401,937    ￦20,407,994    ￦15,786,225    ￦15,836,214    ￦15,786,225  ￦15,836,214  ￦16,557,537  ￦16,620,941
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

 

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

2Equity 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

35.2Financial Instruments Measured at Cost

36.2 Financial Instruments Measured at CostAvailable-for-sale

Available-for-sale financial assets measured at cost as of December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014   2015 

IBK-AUCTUS Green Growth Private Equity Fund

  ￦14,068    ￦11,134  

CBC II Fund

   9,548     10,150  

TRANSLINK No.2 Fund

   9,104     10,085  

KBS KT SPC

   7,000     —  

WALDEN No.6 Fund

   5,749     5,686  

Storm IV Fund

   5,162     6,602  

Enterprise DB (Convertible Preferred Stock)

   3,013     —  

AMOGREENTECH

   3,000     —  

Ars Magna Private Equity Fund

   3,000     —  

Kokam Co., Ltd.

   2,794     —  

KDBC-IMM No.1 Private Equity Fund

   2,499     —  

Nexenta Systems (Convertible Preferred Stock)

   2,260     —  

Nexenta Systems

   2,159     —  

BK Constant Recovery Private Equity Fund

   2,000     —  

HNNSC Private Equity Fund

   2,000     —  

KDBC-EN Agro Private Equity Fund

   2,000     —  

Eco 2014 Private Equity Fund

   2,000     —  

IMM Infra No.2

   2,000     —  

K- Realty CR-REITs No.6

   2,000     —  

Others

   6,915     7,841  
  

 

 

   

 

 

 
  ￦88,271    ￦51,498  
  

 

 

   

 

 

 
(In millions of Korean won)  2015   2016 

K-Bank

  ￦—     ￦36,500 

IBK-AUCTUS Green Growth Private Equity Fund

   11,134    9,506 

CBC II Fund

   10,150    8,601 

TRANSLINK No.2 Fund

   10,085    9,395 

WALDEN No.6 Fund

   5,686    4,710 

Storm IV Fund

   6,602    7,550 

Others

   7,841    29,511 
  

 

 

   

 

 

 

Total

  ￦51,498   ￦105,773 
  

 

 

   

 

 

 

The range of cashflowcash flow estimates is significant and the probabilities of the various estimates cannot be reasonably assessed and therefore, these instruments are measured at cost.

The Group does not have any plans to dispose of the above-mentioned equities instruments in the near future. These instruments will be measured at fair value when the Group can develop a reliable estimate of the fair value.

36.3 Fair Value Hierarchy

35.3Fair 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).

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 20152016

 

Fair value hierarchy classifications of the financial assets and financial liabilities that are measured at fair value or its fair value is disclosed as of December 31, 20142015 and 2015,2016, are as follows:

 

  2014  2015 

(in millions of Korean won)

  Level 1   Level 2   Level 3   Total 
(In millions of Korean won) Level 1 Level 2 Level 3 Total 

Recurring fair value measurements

            

Other financial assets

            

Financial assets at fair value through profit or loss

  ￦—    ￦—    ￦6,983    ￦6,983   ￦—    ￦—    ￦18  ￦18 

Derivative financial assets for hedging purpose

   —     34,198     7,342     41,540    —    139,088   —    139,088 

Available-for-sale financial assets

   65,932     42,093     329,260     437,285   41,202   —    267,337  308,539 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 
   65,932     76,291     343,585     485,808   41,202  139,088  267,355  447,645 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Disclosed fair value

            

Joint ventures and associates

   8,247     —     —     8,247  

Investment property 1

   —     —     2,277,234     2,277,234  

Associates and joint ventures

 4,884   —     —    4,884 

Investment properties1

  —     —    2,645,246  2,645,246 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 
   8,247     —     2,277,234     2,285,481   4,884   —    2,645,246  2,650,130 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 
  ￦74,179    ￦76,291    ￦2,620,819    ￦2,771,289   ￦46,086  ￦139,088  ￦2,912,601  ￦3,097,775 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Recurring fair value measurements

            

Other financial liabilities

            

Financial liabilities at fair value through profit or loss

  ￦—    ￦—    ￦3,980    ￦3,980   ￦—    ￦—    ￦2,006  ￦2,006 

Derivative financial liabilities for hedging purpose

   —     122,012     —     122,012    —    62,883   —    62,883 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 
   —     122,012     3,980     125,992    —    62,883  2,006  64,889 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Disclosed fair value

            

Borrowings

   —     —     12,821,442     12,821,442    —     —    8,684,886  8,684,886 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 
   —     —     12,821,442     12,821,442    —     —    8,684,886  8,684,886 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 
  ￦—    ￦122,012    ￦12,825,442    ￦12,947,434   ￦—    ￦62,883  ￦8,686,892  ￦8,749,775 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

 

   2015 

(in millions of Korean won)

  Level 1   Level 2   Level 3   Total 

Recurring fair value measurements

        

Other financial assets

        

Financial assets at fair value through profit or loss

  ￦—    ￦—    ￦18    ￦18  

Derivative financial assets for hedging purpose

   —     139,088     —     139,088  

Available-for-sale financial assets

   41,202     —     267,337     308,539  
  

 

 

   

 

 

   

 

 

   

 

 

 
   41,202     139,088     267,355     447,645  
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosed fair value

        

Joint ventures and associates

   4,884     —     —     4,884  

Investment property 1

   —     —     2,645,246     2,645,246  
  

 

 

   

 

 

   

 

 

   

 

 

 
   4,884     —     2,645,246     2,650,130  
  

 

 

   

 

 

   

 

 

   

 

 

 
  ￦46,086    ￦139,088    ￦2,912,601    ￦3,097,775  
  

 

 

   

 

 

   

 

 

   

 

 

 

Recurring fair value measurements

        

Other financial liabilities

        

Financial liabilities at fair value through profit or loss

  ￦—    ￦—    ￦2,006    ￦2,006  

Derivative financial liabilities for hedging purpose

   —     62,883     —     62,883  
  

 

 

   

 

 

   

 

 

   

 

 

 
   —     62,883     2,006     64,889  
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosed fair value

        

Borrowings

   —     —     8,684,886     8,684,886  
  

 

 

   

 

 

   

 

 

   

 

 

 
   —     —     8,684,886     8,684,886  
  

 

 

   

 

 

   

 

 

   

 

 

 
  ￦—    ￦62,883    ￦8,686,892    ￦8,749,775  
  

 

 

   

 

 

   

 

 

   

 

 

 

   2016 
(In millions of Korean won)  Level 1   Level 2   Level 3   Total 

Recurring fair value measurements

        

Other financial assets

        

Financial assets at fair value through profit or loss

  ￦—     ￦—     ￦6,277   ￦6,277 

Derivative financial assets for hedging purpose

   —      227,318    —      227,318 

Available-for-sale financial assets

   5,387    5,725    287,889    299,001 
  

 

 

   

 

 

   

 

 

   

 

 

 
   5,387    233,043    294,166    532,596 
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosed fair value

        

Associates and joint ventures

   3,940    —      —      3,940 

Investment properties1

   —      —      2,340,893    2,340,893 
  

 

 

   

 

 

   

 

 

   

 

 

 
   3,940    —      2,340,893    2,344,833 
  

 

 

   

 

 

   

 

 

   

 

 

 
  ￦9,327   ￦233,043   ￦2,635,059   ￦2,877,429 
  

 

 

   

 

 

   

 

 

   

 

 

 

Recurring fair value measurements

        

Other financial liabilities

        

Financial liabilities at fair value through profit or loss

  ￦—     ￦—     ￦1,973   ￦1,973 

Derivative financial liabilities for hedging purpose

   —      14,928    —      14,928 
  

 

 

   

 

 

   

 

 

   

 

 

 
   —      14,928    1,973    16,901 
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosed fair value

        

Borrowings

   —      —      8,184,195   ��8,184,195 
  

 

 

   

 

 

   

 

 

   

 

 

 
   —      —      8,184,195    8,184,195 
  

 

 

   

 

 

   

 

 

   

 

 

 
  ￦—     ￦14,928   ￦8,186,168   ￦8,201,096 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

35.4Transfers Between Fair Value Hierarchy Levels of Recurring Fair Value Measurements

 

36.4 Transfers Between Fair Value Hierarchy Levels of Recurring Fair Value Measurements

(a) Details of transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements are as follows:

(a)Details of transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements are as follows:

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

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

  2014 

(in millions of Korean won)

 Interest rate
swap		  Other
derivative
assets		  Derivative
financial
assets for
hedging
purpose		  Available-
for-sale		  Other
derivative
liabilities		  Financial
liabilities
designated
as at fair
value
through
profit or
loss		  Derivative
financial
liabilities
for
hedging
purpose		 

Beginning balance

 ￦7,239   ￦7,905   ￦3,496   ￦292,314   ￦148   ￦2,802   ￦36,632  

Reclassification

  —    —    —    (5,836)   —    —    —  

Amount recognized in profit or loss

  (1)   (395)   5,315    (3,483)   32    532    —  

Amount recognized in other comprehensive income

  —    —    (1,469)   21,006    —    —    —  

Purchases

  —    —    —    34,322    466    —    —  

Sales

  —    (527)   —    (26,512)   —    —    —  

Settlement

  (7,238)   —    —    —    —    —    (36,632) 

Transfer into Level 3(From Cost method)

  —    —    —    17,449    —    —    —  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 ￦—   ￦6,983   ￦7,342   ￦329,260   ￦646   ￦3,334   ￦ —  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   2015 

(in millions of Korean won)

  Other
derivative
assets		  Derivative
financial
assets for
hedging
purpose		  Available-
for-sale		  Other
derivative
liabilities		  Financial
liabilities
designated
as at fair
value
through
profit or
loss		 

Beginning balance

  ￦6,983   ￦7,342   ￦329,260   ￦646   ￦3,334  

Amount recognized in profit or loss

   171,990    (5,157)   (704)   2,006    —  

Amount recognized in other comprehensive income

   —    8,105    47,189    —    —  

Purchases

   —    —    40,707    —    —  

Sales

   —    —    (113,634)   (551)   (3,334) 

Settlement

   (176,681)   (10,290)   —    —    —  

Change in scope of consolidation

   (2,274)   —    (35,481)   (95)   —  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  ￦18   ￦—   ￦267,337   ￦2,006   ￦ —  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

36.5 Valuation Technique

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

   2015 
(In millions of Korean won)  

Financial assets
at fair value
through

profit or loss

  Derivative
financial assets
for hedging
purpose		  Available-for-sale  Other
derivative
liabilities		  Financial
liabilities
designated as
at fair value
through profit
or loss		 

Beginning balance

  ￦6,983  ￦7,342  ￦329,260  ￦646  ￦3,334 

Amount recognized in profit or loss

   171,990   (5,157)   (704)   2,006   —   

Amount recognized in other comprehensive income

   —     8,105   47,189   —     —   

Purchases

   —     —     40,707   —     —   

Sales

   —     —     (113,634)   (551)   (3,334) 

Settlement

   (176,681)   (10,290)   —     —     —   

Change in scope of consolidation

   (2,274)   —     (35,481)   (95)   —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  ￦18  ￦—    ￦267,337  ￦2,006  ￦—   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   2016 
(In millions of Korean won)  

Financial assets

at fair value
through

profit or loss

  Available-for-sale  

Other derivative

liabilities

 

Beginning balance

  ￦18  ￦267,337  ￦2,006 

Amount recognized in profit or loss

   (7,184)   (426)   (33) 

Amount recognized in other comprehensive income

   —     15,099   —   

Purchases

   13,461   1,561   —   

Sales

   (18)   (1,405)   —   

Reclassification

   —     5,723   —   
  

 

 

  

 

 

  

 

 

 

Ending balance

  ￦6,277  ￦287,889  ￦1,973 
  

 

 

  

 

 

  

 

 

 

KT Corporation and the InputsSubsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

35.5Valuation 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 of December 31, 20142015 and 2015,2016, are as follows:

 

   2014

(in millions of Korean won)

  Fair value   Level   

Valuation

techniques

Recurring fair value measurements

      

Other financial assets

      

Financial assets at fair value through profit or loss

      

Held for trading financial assets

      

Other derivative assets

  ￦6,983     3    

Monte-Carlo Simulation

Option model (binomial trees)

Derivative financial assets for hedging purpose

   34,198     2    Discounted cash flow model
   7,342     3    Hull-White model

Available-for-sale financial assets

   371,353     2,3    Discounted cash flow model

Disclosed fair value

      

Investment property 1

   2,277,234     3    Discounted cash flow model

Recurring fair value measurements

      

Other financial liabilities

      

Financial liabilities at fair value through profit or loss

      

Held for trading financial assets

      

Other derivatives

   646     3    Option model (binomial trees)

Financial liabilities designated as at fair value through profit or loss

   3,334     3    Option model (binomial trees)

Derivative financial liabilities for hedging purpose

   122,012     2    Discounted cash flow model

Disclosed fair value

      

Borrowings

   12,821,442     3    Discounted cash flow model

   2015
(In millions of Korean won)  Fair value   Level   Valuation techniques

Assets

      

Recurring fair value measurements

      

Other financial assets

      

Financial assets at fair value through profit or loss

      

Held for trading financial assets

      

Other derivative assets

  ￦18    3   Monte-Carlo Simulation Option model

Derivative financial assets for hedging purpose

   139,088    2   Discounted cash flow model

Available-for-sale financial assets

   267,337    3   Discounted cash flow model

Disclosed fair value

      

Investment properties

   2,645,246    3   Discounted cash flow model

Liabilities

      

Recurring fair value measurements

      

Other financial liabilities

      

Derivative financial liabilities for hedging purpose

   62,883    2   Discounted cash flow model

Other derivative financial liabilities

   2,006    3   

Discounted cash flow model

Comparable Company Analysis

Disclosed fair value

      

Borrowings

   8,684,886    3   Discounted cash flow model

   2015

(in millions of Korean won)

  Fair value   Level   

Valuation

techniques

Recurring fair value measurements

      

Other financial assets

      

Financial assets at fair value through profit or loss

      

Held for trading financial assets

      

Other derivative assets

  ￦18     3    

Monte-Carlo Simulation

Option model

Derivative financial assets for hedging purpose

   139,088     2    Discounted cash flow model

Available-for-sale financial assets

   267,337     3    Discounted cash flow model

Disclosed fair value

      

Investment property 1

   2,645,246     3    Discounted cash flow model

Recurring fair value measurements

      

Other financial liabilities

      

Derivative financial liabilities for hedging purpose

   62,883     2    Discounted cash flow model

Other derivative financial liabilities

   2,006     3    

Discounted cash flow model

Comparable Company Analysis

Disclosed fair value

      

Borrowings

   8,684,886     3    Discounted cash flow model

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

36.6 Valuation Processes for Fair Value Measurements Categorized Within Level 3

   2016
(In millions of Korean won)  Fair value   Level   Valuation techniques

Assets

      

Recurring fair value measurements

      

Other financial assets

      

Derivative financial assets for hedging purpose

  ￦227,318    2   Discounted cash flow model

Available-for-sale financial assets

   293,614    2,3   Discounted cash flow model

Others

   6,277    3   Discounted cash flow model

Disclosed fair value

      

Investment properties

   2,340,893    3   Discounted cash flow model

Liabilities

      

Recurring fair value measurements

      

Other financial liabilities

      

Derivative financial liabilities for hedging purpose

   14,928    2   Discounted cash flow model

Other derivative financial liabilities

   1,973    3   

Discounted cash flow model

Comparable Company Analysis

Disclosed fair value

      

Borrowings

   8,184,195    3   Discounted cash flow model

35.6Valuation 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 reporting dates.

36.7 Gains and losses on valuation at the transaction date

35.7Gains 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 instruments. 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

In relation to this, details and changes of the total deferred difference for the years ended December 31, 20142015 and 2015,2016, are as follows:

 

(in millions of Korean won)

  2014 2015 
Other derivative
financial
instruments		   Other derivative
financial liabilities		 Other derivative
financial
instruments		 Other derivative
financial liabilities		 
(In millions of Korean won)  2015 2016 
  Other derivative
financial assets		 Other derivative
financial liabilities		 Other derivative
financial assets		 Other derivative
financial liabilities		 

Beginning balance

  ￦—    ￦43,322   ￦ —   ￦32,492    ￦—    ￦32,492  ￦11,293  ￦—   

New transactions

   —     —    14,116    —     14,116   —     —     —   

Amortization

   —     (10,830)   (2,823)   —     (2,823)   —     —     —   

Disposal

   —     —    —    (32,492)    —     (32,492)   (2,823)   —   
  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Ending balance

  ￦—    ￦32,492   ￦11,293   ￦ —    ￦11,293  ￦—    ￦8,470  ￦—   
  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

 

36.Business Combination

(1) N SEARCH MARKETING Corporation

The Controlling Company acquired 17,393 shares (33.3%) of N SEARCH MARKETING Corporation for strengthen online advertisement business. Nasmedia, Inc. a subsidiary of the Group, acquired 34,787 shares (66.7%) of N SEARCH MARKETING Corp. on October 10, 2016.

N SEARCH MARKETING Corporation became a subsidiary as a result of this acquisition transaction accounted for in accordance with IFRS 3Business Combinations.

As a result of applying acquisition method, the Group recognized an identifiable intangible assets of￦18,049 million and goodwill of￦42,745 million. The goodwill of￦42,745 million arising from the acquisition is attributable to economies of scale expected from combining the operations of the Group and N SEARCH MARKETING Corporation.

Details of the consideration transferred, fair value of the acquired identifiable assets and liabilities and goodwill at the acquisition date are as follows:

(In millions of Korean won)

Consideration transferred (a)

￦61,830

Recognized amounts of assets acquired and liabilities assumed1

Cash and cash equivalents

￦15,731

Trade and other receivables

33,826

Other financial assets

772

Tangible assets

832

Intangible assets

18,477

Other assets

2,376

Trade and other payables

(30,045) 

Borrowings

(9,000) 

Current income tax liabilities

(605) 

Provisions

(355) 

Net defined benefit liabilities

(4,604) 

Other liabilities

(8,320) 

Total amounts of identifiable assets and liabilities measured at fair value (b)

￦19,085

Goodwill(a-b)

￦42,745

1The assets acquired and liabilities assumed are measured at fair value in accordance with IFRS 3Business Combination.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

After the acquisition date, the operating revenue and profit for the year for consolidation of N SEARCH MARKETING Corporation before the elimination of related party transactions with its subsidiaries are37.    Interests￦8,193 million and￦731 million, respectively. If N SEARCH MARKETING Corporation was consolidated on January 1, 2016, the operating revenue and profit for the year included in Unconsolidated Structured Entitiesconsolidated statements of profit or loss would have been￦31,418 million and￦4,927 million, respectively.

The fair value of trade accounts receivable and others acquired from N SEARCH MARKETING Corporation is￦33,826 million, and all are deemed collectible.

37.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:

 

Remarks

  

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 installmentinstalment 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 of December 31, 2015,2016, 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 of December 31, 2015,2016, 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Remarks

Nature, purpose, activities and others

M&A finance

  A structured entity incorporated for the purpose of supporting a certain company’sgroup’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 of December 31, 2015,2016, 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

  A transferor other than this entity transfers the assets, which are subject to securitization, to a structured entity incorporated by the transferor or other financial institutions other than the entity, and based on this as underlying assets, the structured entity is provided with funds by asset-backed borrowings and pays acquisition costs of the acquired underlying assets. As of December 31, 2015,2016, the entity is engaged in the structured entity, and generates revenues by receiving interest income as the entity provides asset-backed loans directly to the structured entity. When the structured entity has difficulty repaying loan principal, the transferor has obligation to cover the lack of funds. Consequently, the financial institutions including the entity are a priority over other parties in the preservation of claim. However, when the credit rating of transferor decreases, the said entity may be obliged to cover losses.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

Remarks

Nature, purpose, activities and others

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 companygroup 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

Details of scale of unconsolidated structured entities and nature of the risks associated with an entity’s interests in unconsolidated structured entities as of December 31, 20142015 and 2015,2016, are as follows:

 

 2014 

(in millions of Korean won)

 Real Estate
Finance		 PEF &
Investment
Fund		 Acquisition
Finance		 Asset-backed
Securitization		 Others Total 
(In millions of Korean won)  2015 
Real Estate Finance   PEF &Investment
Fund		   Asset-backed
Securitization		   Total 

Total amount of Unconsolidated Structured Entities

 ￦4,584,026   ￦3,894,693   ￦2,086,841   ￦4,828,936   ￦127,228   ￦15,521,724    ￦98,192   ￦3,498,552   ￦2,625,075   ￦6,221,819 

Assets recognized in statement of financial position

            

Loans

 ￦254,305   ￦360   ￦66,073   ￦170,826   ￦1,979   ￦493,543  

Other financial assets

  24,340    112,116    —    —    8,369    144,825    ￦—     ￦54,874   ￦—   ￦54,874 

Joint ventures and associates

  7,081    155,000    —    —    27,630    189,711  

Associates and joint ventures

   9,303    148,294    —    157,597 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total

 ￦285,726   ￦267,476   ￦66,073   ￦170,826   ￦37,978   ￦828,079    ￦9,303   ￦203,168   ￦—   ￦212,471 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Maximum loss exposure 1

    

Maximum loss exposure1

        

Investment Assets

 ￦285,726   ￦267,476   ￦66,073   ￦170,826   ￦37,978   ￦828,079    ￦9,303   ￦203,168   ￦—   ￦212,471 

Credit grants

  88,000    —    —    —    —    88,000  
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total

 ￦373,726   ￦267,476   ￦66,073   ￦170,826   ￦37,978   ￦916,079    ￦9,303   ￦203,168   ￦—   ￦212,471 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

 

  2015 

(in millions of Korean won)

  Real Estate
Finance		   PEF &
Investment
Fund		   Asset-backed
Securitization		   Total 
(In millions of Korean won )  2016 
Real Estate Finance   PEF &Investment
Fund		   Asset-backed
Securitization		   Total 

Total amount of Unconsolidated Structured Entities

  ￦98,192    ￦3,498,552    ￦2,625,075    ￦6,221,819    ￦1,075,471   ￦3,759,246   ￦2,841,886   ￦7,676,603 

Assets recognized in statement of financial position

                

Loans

  ￦—    ￦—    ￦—    ￦—  

Other financial assets

   —     54,874     —     54,874    ￦21,932   ￦60,782   ￦—     ￦82,714 

Joint ventures and associates

   9,303     148,294     —     157,597  

Associates and joint ventures

   10,086    165,638    —      175,724 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  ￦9,303    ￦203,168    ￦—    ￦212,471    ￦32,018   ￦226,420   ￦—     ￦258,438 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Maximum loss exposure 1

  ￦9,303    ￦203,168    ￦—    ￦212,471          

Investment Assets

   —     —     —     —    ￦32,018   ￦226,420   ￦—     ￦258,438 

Credit grants

   —     —     —     —  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  ￦9,303    ￦203,168    ￦—    ￦212,471    ￦32,018   ￦226,420   ￦—     ￦258,438 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

1Maximum exposure to loss 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.

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

38.    Information About Non-controlling Interests

38.Information AboutNon-controlling Interests

Changes in Accumulated Non-controlling Interests

38.1Changes in AccumulatedNon-controlling Interests

The profitProfit or loss allocated tonon-controlling interests and accumulatednon-controlling interests of subsidiaries that are material to the Group for the years ended December 31, 2013, 2014, 2015 and 20152016 is as follows:

 

 2013 

(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		 
(In millions of Korean won) 2014 

Non-

controlling
Interests
rate(%)

 Accumulated
non-controlling
interests at the
beginning of
the year		 Profit or loss
allocated to
non-controlling
interests		 

Dividend paid
tonon-

controlling
interests

 Others Accumulated
non-controlling
interests at the
end of the year		 

KT Skylife Co., Ltd.

  49.89%  ￦264,765   ￦29,081   ￦(8,662)  ￦(1,203)  ￦283,981   49.73%  ￦283,981  ￦26,828  ￦(10,538)  ￦(2,971)  ￦297,300 

BC Card Co., Ltd.

  34.49%   208,923    35,949    (10,890)   27,734    261,716   30.46%  261,716  31,414  (7,299)  7,100  292,931 

KT Rental

  42.00%   119,029    8,682    (2,986)   (1,057)   123,668   42.00%  123,668  15,538  (1,903)  (121)  137,182 

KT Powertel Co., Ltd.

  55.15%   66,323    3,007    (669)   (755)   67,906   55.15%  67,906  2,961  (631)  (5)  70,231 

KT Hitel Co., Ltd.

  36.30%   45,507    (670)   —    11,183    56,020  

KT Hitel Co.,Ltd.

 36.30%  56,020  2,195   —    (7,079)  51,136 

 

 2014 

(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		 
(In millions of Korean won) 2015 

Non-

controlling
Interests
rate(%)

 Accumulated
non-controlling
interests at the
beginning of
the year		 Profit or loss
allocated to
non-controlling
interests		 

Dividend paid
to non-

controlling
interests

 Others Accumulated
non-controlling
interests at the
end of the year		 

KT Skylife Co., Ltd.

  50.01%  ￦283,981   ￦26,828   ￦(10,538)  ￦(2,971)  ￦297,300   49.73%  ￦297,300  ￦27,032  ￦(8,325)  ￦873  ￦316,880 

BC Card Co., Ltd.

  30.46%   261,716    31,414    (7,299)   7,100    292,931   30.46%  292,931  62,943  (22,650)  (10,303)  322,921 

KT Rental

  42.00%   123,668    15,538    (1,903)   (121)   137,182  

KT Powertel Co., Ltd.

  55.15%   67,906    2,961    (631)   (5)   70,231   55.15%  70,231  (17,880)  (1,118)  (307)  50,926 

KT Hitel Co., Ltd.

  36.30%   56,020    2,195    —    (7,079)   51,136  

KT Hitel Co.,Ltd.

 36.30%  51,136  (608)   —    161  50,689 

KT Telecop Co., Ltd.

 13.18%  104,821  (1,000)   —    (393)  103,428 

 

 2015 

(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		 
(In millions of Korean won) 2016 

Non-

controlling
Interests
rate(%)

 Accumulated
non-controlling
interests at the
beginning of
the year		 Profit or loss
allocated to
non-controlling
interests		 

Dividend paid
to non-

controlling
interests

 Others Accumulated
non-controlling
interests at the
end of the year		 

KT Skylife Co., Ltd.

  50.01%  ￦297,300   ￦27,032   ￦(8,325)  ￦ 873   ￦316,880   49.73%  ￦316,880  ￦22,445  ￦(8,279)  ￦(1,370)  ￦329,676 

BC Card Co., Ltd.

  30.46%   292,931    62,943    (22,650)   (10,303)   322,921   30.46%  322,921  47,068  (44,637)  3,986  329,338 

KT Powertel Co., Ltd.

  55.15%   70,231    (17,880)   (1,118)   (307)   50,926   55.15%  50,926  112   —    713  51,751 

KT Hitel Co., Ltd.

  36.30%   51,136    (608)   —    161    50,689  

KT Hitel Co.,Ltd.

 35.27%  50,689  1,274   —    (165)  51,798 

KT Telecop Co., Ltd.

 13.18%  103,428  19   —    85  103,532 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

Summarized Financial Information on Subsidiaries

38.2Summarized Financial Information on Subsidiaries

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

Summarized consolidated statements of financial position as of December 31, 2013, 2014, 2015 and 2015,2016, are as follows:

 

  2013 

(in millions of Korean won)

 KT Skylife
Co., Ltd.		  BC Card
Co., Ltd.		  KT Rental  KT Powertel
Co., Ltd.		  KT Hitel
Co., Ltd.		 

Non-controlling Interests rate(%)

  49.89%   34.49%   42.00%   55.15%   36.30% 

Current assets

 ￦287,142   ￦2,292,323   ￦362,040   ￦87,932   ￦178,659  

Non-current assets

  397,509    672,427    1,826,231    79,199    115,006  

Current liabilities

  191,181    1,958,506    532,634    30,433    99,348  

Non-current liabilities

  91,887    216,505    1,363,625    13,579    3,296  

Equity

  401,583    789,738    292,013    123,119    191,021  

Accumulated non-controlling interests

  200,360    273,328    122,650    67,906    69,343  

Operating revenue

  630,469    3,102,968    886,959    112,905    582,925  

Profit or loss for the year

  72,724    128,475    32,400    5,453    3,551  

Total comprehensive income

  73,943    198,778    31,041    5,661    8,109  

The profit or loss allocated to non-controlling interests

  36,284    44,465    13,608    3,008    1,289  

Cash flows from operating activities

  141,282    273,904    (346,309)   16,010    11,108  

Cash flows from investing activities

  (218,797)   (17,335)   (39,246)   (15,794)   (18,199) 

Cash flows from financing activities before dividends paid to non-controlling interests

  (14,346)   10,216    392,098    (6,252)   13,192  

Dividends paid to non-controlling interests

  (8,344)   (10,051)   (2,075)   (1,538)   —  

Effect of exchange rate change on cash and cash equivalents

  —    —    (287)   —    (49) 

Net (decrease)/increase in cash and cash equivalents

  (100,205)   256,734    4,181    (7,574)   6,052  

  2014 
(In millions of Korean won) KT Skylife
Co., Ltd.		  

BC Card

Co., Ltd.

  KT Rental  

KT Powertel

Co., Ltd.

  

KT Hitel

Co., Ltd.

 

Non-controlling Interests rate(%)

  49.73%   30.46%   42.00%   55.15%   36.30% 

Current assets

 ￦260,391  ￦2,023,465  ￦377,916  ￦83,846  ￦119,957 

Non-current assets

  422,618   676,923   2,278,469   73,484   107,037 

Current liabilities

  226,878   1,723,966   718,852   21,787   29,748 

Non-current liabilities

  19,448   70,957   1,598,798   8,209   1,681 

Equity

  436,683   905,465   338,735   127,334   195,565 

Accumulatednon-controlling interests

  297,300   292,931   143,457   70,231   51,136 

Operating revenue

  656,430   3,297,308   1,074,569   105,250   494,455 

Profit or loss for the year

  55,162   134,450   51,388   5,368   12,205 

Total comprehensive income

  53,990   331,599   52,437   5,368   9,873 

The profit or loss allocated tonon-controlling interests

  26,828   31,414   19,543   2,961   2,195 

Cash flows from operating activities

  140,057   176,019   (346,743)   10,190   65,096 

Cash flows from investing activities

  (20,889)   (21,699)   (35,632)   (647)   (44,712) 

Cash flows from financing activities before dividend paid tonon-controlling interests

  (26,411)   (31,497)   359,510   (1,137)   —   

Dividend paid tonon-controlling interests

  (10,538)   (7,299)   (1,903)   (631)   —   

Effect of exchange rate change on cash and cash equivalents

  —     —     —     —     (12) 

Net (decrease)/increase in cash and cash equivalents

  82,219   115,524   (24,768)   7,775   20,372 

  2014 

(in millions of Korean won)

 KT Skylife
Co., Ltd.		  BC Card
Co., Ltd.		  KT Rental  KT Powertel
Co., Ltd.		  KT Hitel
Co., Ltd.		 

Non-controlling Interests rate(%)

  50.01%   30.46%   42.00%   55.15%   36.30% 

Current assets

 ￦260,391   ￦2,023,465   ￦377,916   ￦83,846   ￦119,957  

Non-current assets

  422,618    676,923    2,278,469    73,484    107,037  

Current liabilities

  226,878    1,723,966    718,852    21,787    29,748  

Non-current liabilities

  19,448    70,957    1,598,798    8,209    1,681  

Equity

  436,683    905,465    338,735    127,334    195,565  

Accumulated non-controlling interests

  297,300    292,931    143,457    70,231    51,136  

Operating revenue

  656,430    3,297,308    1,074,569    105,250    494,455  

Profit or loss for the year

  55,162    134,450    51,388    5,368    12,205  

Total comprehensive income

  53,990    331,599    52,437    5,368    9,873  

The profit or loss allocated to non-controlling interests

  26,828    31,414    19,543    2,961    2,195  

Cash flows from operating activities

  140,057    176,019    (346,743)   10,190    65,096  

Cash flows from investing activities

  (20,889)   (21,699)   (35,632)   (647)   (44,712) 

Cash flows from financing activities before dividends paid to non-controlling interests

  (26,411)   (31,497)   359,510    (1,137)   —  

Dividends paid to non-controlling interests

  (10,538)   (7,299)   (1,903)   (631)   —  

Effect of exchange rate change on cash and cash equivalents

  —    —    —    —    (12) 

Net (decrease)/increase in cash and cash equivalents

  82,219    115,524    (24,768)   7,775    20,372  

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014, 2015 and 2015

2016

 

  2015 

(in millions of Korean won)

 KT Skylife
Co., Ltd.		  BC Card
Co., Ltd.		  KT Powertel
Co., Ltd.		  KT Hitel
Co., Ltd.		 

Non-controlling Interests rate(%)

  50.01%   30.46%   55.15%   36.30% 

Current assets

 ￦279,480   ￦2,291,047   ￦65,739   ￦157,355  

Non-current assets

  431,814    672,905    47,776    78,402  

Current liabilities

  143,511    1,882,363    16,016    33,656  

Non-current liabilities

  74,339    63,271    5,166    282  

Equity

  493,444    1,018,318    92,333    201,819  

Accumulated non-controlling interests

  316,880    322,921    50,926    50,689  

Operating revenue

  668,521    3,504,946    104,527    162,155  

Profit or loss for the year

  72,987    218,969    (32,417)   7,258  

Total comprehensive income

  73,147    188,360    (32,417)   6,769  

The profit or loss allocated to non-controlling interests

  27,032    62,943    (17,880)   (608) 

Cash flows from operating activities

  157,762    128,927    (12,016)   22,556  

Cash flows from investing activities

  (92,350)   73,118    10,691    (19,949) 

Cash flows from financing activities before dividends paid to non-controlling interests

  (35,984)   (75,121)   (2,015)   —  

Dividends paid to non-controlling interests

  (8,325)   (22,650)   (1,118)   —  

Net (decrease)/increase in cash and cash equivalents

  139,703    827,523    11,005    33,708  

Transactions with Non-controlling Interests

  2015 
(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.

 

Non-controlling Interests rate(%)

  49.73%   30.46%   55.15%   36.30%   13.18% 

Current assets

 ￦279,480  ￦2,291,047  ￦65,739  ￦157,355  ￦58,457 

Non-current assets

  431,814   672,905   47,776   78,402   210,734 

Current liabilities

  143,511   1,882,363   16,016   33,656   82,353 

Non-current liabilities

  74,339   63,271   5,166   282   52,613 

Equity

  493,444   1,018,318   92,333   201,819   134,225 

Accumulatednon-controlling interests

  316,880   322,921   50,926   50,689   103,428 

Operating revenue

  668,521   3,504,946   104,527   162,155   302,844 

Profit or loss for the year

  72,987   218,969   (32,417)   7,258   (7,593) 

Total comprehensive income

  73,147   188,360   (32,417)   6,769   (7,593) 

The profit or loss allocated tonon-controlling interests

  27,032   62,943   (17,880)   (608)   (1,000) 

Cash flows from operating activities

  157,762   128,927   (12,016)   22,556   36,216 

Cash flows from investing activities

  (92,350)   73,118   10,691   (19,949)   (91,846) 

Cash flows from financing activities before dividend paid tonon-controlling interests

  (35,984)   (75,121)   (2,015)   —     (32,491) 

Dividend paid tonon-controlling interests

  (8,325)   (22,650)   (1,118)   —     —   

Net (decrease)/increase in cash and cash equivalents

  29,428   126,924   (3,340)   2,607   (88,121) 

  2016 
(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.

 

Non-controlling Interests rate(%)

  49.73%   30.46%   55.15%   35.27%   13.18% 

Current assets

 ￦352,980  ￦2,945,584  ￦69,046  ￦158,210  ￦63,802 

Non-current assets

  424,968   705,480   44,679   90,992   201,751 

Current liabilities

  151,329   2,530,832   17,910   45,277   53,903 

Non-current liabilities

  80,123   71,571   1,989   1,664   78,441 

Equity

  546,496   1,048,661   93,826   202,261   133,209 

Accumulatednon-controlling interests

  329,676   329,338   51,751   51,798   103,532 

Operating revenue

  668,945   3,567,512   81,390   198,994   315,948 

Profit or loss for the year

  68,863   163,131   202   4,298   143 

Total comprehensive income

  68,785   178,744   202   1,399   143 

The profit or loss allocated tonon-controlling interests

  22,445   47,068   112   1,274   19 

Cash flows from operating activities

  155,399   92,818   7,271   28,987   60,461 

Cash flows from investing activities

  (210,480)   (37,313)   (8,191)   (33,238)   (45,243) 

Cash flows from financing activities before dividend paid tonon-controlling interests

  (16,647)   (147,306)   —     —     —   

Dividend paid tonon-controlling interests

  (8,279)   (44,637)   —     —     —   

Gain or loss foreign currency translation

  —     (178)   —     3   —   

Net (decrease)/increase in cash and cash equivalents

  (71,728)   (91,801)   (920)   (4,251)   15,218 

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014, 2015 and 2016

38.3Transactions withNon-controlling Interests

The effect of changes in the ownership interest on the equity attributable to owners of the Group during 2013, 2014, 2015 and 20152016 is summarized as follows:

 

(in millions of Korean won)

  2013 2014 2015   2014 2015   2016 

Carrying amount of non-controlling interests acquired 1

  ￦14,353   ￦16,136   ￦—  

Consideration paid to non-controlling interests 2

   (16,202)   (9,764)   2,699  

Carrying amount ofnon-controlling interests acquired

  ￦16,136  ￦—     ￦8,564 

Consideration paid tonon-controlling interests

   (9,764)  2,699    6,986 
  

 

  

 

  

 

   

 

  

 

   

 

 

Excess of consideration paid recognized in parent’s equity

  ￦(1,849)  ￦6,372   ￦2,699    ￦6,372  ￦2,699   ￦15,550 
  

 

  

 

  

 

   

 

  

 

   

 

 

 

139.In 2013, the Group acquired the remaining 40% of the issued shares of KT Dutch B.V., a subsidiary, for￦3,980 million. The Group now holds 100% equity interest in KT Dutch B.V. The carrying amount of the non-controlling interests in KT Dutch B.V. at the date of acquisition was￦14,353 million. As a result, the Group derecognized non-controlling interests of￦14,353 million and recorded an increase in equity attributable to owners of the parent of￦10,373 million.Discontinued Operations

In 2014, the Group acquired the shares of BC Card Co., Ltd., which had been held by KT Capital Co., Ltd. as a result of spin-off and merger of certain division of KT Capital Co., Ltd. The Group’s effective percentage of ownership of BC Card Co., Ltd. increased from 65.51% to 69.54%. As a result, the carrying amount of controlling interest increased by￦16,136 million.

2In 2013, the Group’s non-controlling interest increased by 2.24% through an unequal capital increase of KT Hitel Co., Ltd. This resulted in an increase in the carrying amount of non-controlling interest of￦8,439 million. Also, on July 11, 2013, the Group’s non-controlling interest increased by 6.04% through an unequal capital increase of Nasmedia, Inc. As a result, the carrying amount of non-controlling interest increased by￦7,239 million.

In 2014, the convertible bonds issued by KT Music Corporation has been converted into common stocks, and as a result, common shares and share premium of the Group increased by￦20,349 million. The Group’s ownership decreased from 57.78% to 49.99%, and accordingly, the carrying amount of non-controlling interest increased by￦9,764 million.

In 2015, the Group participated in paid-in capital increase of KT Linkus Inc., a subsidiary. The Group’s effective ownership decreased to 91.4% from 93.8%, and the equity attributable to the owner of a consolidated company increased by￦392 million. In addition, non-controlling interest decreased by 47.2% due to reduction of capital stock without any refund and paid-in increased capital effect of KT Innoedu Co., Ltd., a subsidiary. Due to this transaction, the equity attributable to the owner of a consolidated company increased by￦2,277 million. Furthermore, as KT Corporation purchased the share of KT Sports Co., Ltd., a subsidiary of KT Rental Co., the non-controlling interest decreased by 2.5%. Due to this transaction, the equity attributable to the owner of a consolidated company increased to￦30 million. In the prior period, convertible bonds issued by KT Music Co., were converted to common stocks. Due to this conversion, common stock and capital in excess of

KT Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013, 2014 and 2015

par value amounting to￦20,349 million increased. Ownership interest of the consolidated company decreased to 49.9% from 57.8%, and the equity attributable to the owner of the consolidated company decreased by￦9,764 million.

39.    Discontinued Operations

The Group disposed of KT Rental, a subsidiary of the Group, on June 3, 2015, and KT Capital Co., Ltd. on August 20, 2015. The profit and loss on the related operations of KT Rental and KT Capital Co., Ltd. are presented as discontinued operations and the related financial information is as follows:

Profit and loss from discontinued operations for the years ended December 31, 2013, 2014 and 2015 are as follows:

 

(in millions of Korean won)

  2013   2014   2015 
(In millions of Korean won)  2014   2015 

Revenue

  ￦912,854    ￦1,115,977    ￦546,440    ￦1,115,977   ￦546,440 

Expenses

   837,104     1,024,472     534,383     1,024,472    534,383 

Profit on disposal of discontinued operations

   —     —     248,033     —      248,033 

Profit before tax of discontinued operations

   75,750     91,505     260,090     91,505    260,090 

Income tax expense

   37,688     5,105     119,015     5,105    119,015 
  

 

   

 

   

 

   

 

   

 

 

Profit for the period from discontinued operations

  ￦38,062    ￦86,400    ￦141,075    ￦86,400   ￦141,075 
  

 

   

 

   

 

   

 

   

 

 

Cash flows from discontinued operations for the years ended December 31, 2013, 2014 and 2015 are as follows:

 

(in millions of Korean won)

  2013  2014  2015 

Cash flows from operating activities

  ￦(382,953)  ￦(265,655)  ￦(134,226) 

Cash flows from investing activities

   (65,604)   (4,647)   24,157  

Cash flows from financing activities

   440,028    220,064    93,566  
  

 

 

  

 

 

  

 

 

 

Net cash flows

  ￦(8,529)  ￦(50,238)  ￦(16,503) 
  

 

 

  

 

 

  

 

 

 

40.    Event after the reporting period

Subsequent to December 31, 2015, the Group issued the following public bonds:

(In millions of Korean won)  2014  2015 

Cash flows from operating activities

  ￦(265,655)  ￦(134,226) 

Cash flows from investing activities

   (4,647)   24,157 

Cash flows from financing activities

   220,064   93,566 
  

 

 

  

 

 

 

Net cash flows

  ￦(50,238)  ￦(16,503) 
  

 

 

  

 

 

 

 

(in millions of Korean won)

  Issue date   Total par value   Coupon rate  Maturity date 

The 189-1st Public bond

   Jan. 28, 2016    ￦100,000     1.76%   Jan. 28, 2019  

The 189-2nd Public bond

   Jan. 28, 2016     130,000     1.94%   Jan. 28, 2021  

The 189-3rd Public bond

   Jan. 28, 2016     100,000     2.20%   Jan. 28, 2026  

The 189-4th Public bond

   Jan. 28, 2016     70,000     2.35%   Jan. 28, 2036  

F-100

F-99