20-F 1 d25917d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2021

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 20-F

 

 

(Mark One)

 

 

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

OR

 

 

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

 

    

For the fiscal year ended December 31, 2020

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 number 1-14418

SK Telecom Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

 

SK Telecom Co., Ltd.

(Translation of Registrant’s name into English)

The Republic of Korea

(Jurisdiction of incorporation or organization)

SK T-Tower

65, Eulji-ro, Jung-gu, Seoul, Korea

(Address of principal executive offices)

Mr. Wooseok Lee

65, Eulji-ro, Jung-gu, Seoul, Korea

Telephone No.: +82-2-6100-2114

Facsimile No.: +82-2-6100-7830

(Name, telephone, email 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

 

Trading Symbol(s)

 

Name of Each Exchange on Which  Registered

American Depositary Shares, each representing

one-ninth of one share of Common Stock

 

SKM

  New York Stock Exchange

Common Stock, par value ₩500 per share

 

SKM

  New York Stock Exchange*

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

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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

71,327,153 shares of common stock, par value 500 per share (not including 9,418,558 shares of common stock held by the company 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.    Yes      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      No  

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definitions of “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer                   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.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes      No  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP       International Financial Reporting Standards as issued by the International Accounting Standards Board       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 Rule 12b-2 of the Exchange Act).    Yes      No  

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

CERTAIN DEFINED TERMS AND CONVENTIONS  USED IN THIS ANNUAL REPORT

     1  

FORWARD-LOOKING STATEMENTS

     2  

Part I

     4  

Item 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT  AND ADVISERS

     4  

Item 1.A.

 

Directors and Senior Management

     4  

Item 1.B.

 

Advisers

     4  

Item 1.C.

 

Auditors

     4  

Item 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

     4  

Item 3.

 

KEY INFORMATION

     4  

Item 3.A.

 

Selected Financial Data

     4  

Item 3.B.

 

Capitalization and Indebtedness

     7  

Item 3.C.

 

Reasons for the Offer and Use of  Proceeds

     7  

Item 3.D.

 

Risk Factors

     7  

Item 4.

 

INFORMATION ON THE COMPANY

     24  

Item 4.A.

 

History and Development of the Company

     24  

Item 4.B.

 

Business Overview

     26  

Item 4.C.

 

Organizational Structure

     51  

Item 4.D.

 

Property, Plants and Equipment

     52  

Item 4A.

 

UNRESOLVED STAFF COMMENTS

     52  

Item 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     52  

Item 5.A.

 

Operating Results

     53  

Item 5.B.

 

Liquidity and Capital Resources

     70  

Item 5.C.

 

Research and Development, Patents and  Licenses, etc.

     75  

Item 5.D.

 

Trend Information

     76  

Item 5.E.

 

Off-Balance Sheet  Arrangements

     76  

Item 5.F.

 

Tabular Disclosure of Contractual Obligations

     76  

Item 5.G.

 

Safe Harbor

     76  

Item 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     76  

Item 6.A.

 

Directors and Senior Management

     76  

Item 6.B.

 

Compensation

     82  

Item 6.C.

 

Board Practices

     83  

Item 6.D.

 

Employees

     85  

Item 6.E.

 

Share Ownership

     86  

Item 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     88  

Item 7.A.

 

Major Shareholders

     88  

Item 7.B.

 

Related Party Transactions

     89  

Item 7.C.

 

Interests of Experts and Counsel

     89  

Item 8.

 

FINANCIAL INFORMATION

     89  

Item 8.A.

 

Consolidated Statements and Other Financial Information

     89  

Item 8.B.

 

Significant Changes

     92  

Item 9.

 

THE OFFER AND LISTING

     92  

Item 9.A.

 

Offering and Listing Details

     92  

Item 9.B.

 

Plan of Distribution

     92  

Item 9.C.

 

Markets

     92  

Item 9.D.

 

Selling Shareholders

     92  

Item 9.E.

 

Dilution

     92  

Item 9.F.

 

Expenses of the Issue

     92  

Item 10.

 

ADDITIONAL INFORMATION

     92  

Item 10.A.

 

Share Capital

     92  

Item 10.B.

 

Memorandum and Articles of Association

     92  

Item 10.C.

 

Material Contracts

     98  

 

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Table of Contents

Item 10.D.

  Exchange Controls      98  

Item 10.E.

  Taxation      103  

Item 10.F.

  Dividends and Paying Agents      108  

Item 10.G.

  Statements by Experts      108  

Item 10.H.

  Documents on Display      109  

Item 10.I.

  Subsidiary Information      109  

Item 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      109  

Item 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      110  

Item 12.A.

  Debt Securities      110  

Item 12.B.

  Warrants and Rights      110  

Item 12.C.

  Other Securities      110  

Item 12.D.

  American Depositary Shares      111  

Part II

     112  

Item 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      112  

Item 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      112  

Item 15.

  CONTROLS AND PROCEDURES      112  

Item 16.

  RESERVED      113  

Item 16A.

  AUDIT COMMITTEE FINANCIAL EXPERT      113  

Item 16B.

  CODE OF ETHICS      113  

Item 16C.

  PRINCIPAL ACCOUNTANT FEES AND SERVICES      113  

Item 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      114  

Item 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      114  

Item 16F.

  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      114  

Item 16G.

  CORPORATE GOVERNANCE      114  

Item 16H.

  MINE SAFETY DISCLOSURE      116  

Part III

     117  

Item 17.

  FINANCIAL STATEMENTS      117  

Item 18.

  FINANCIAL STATEMENTS      117  

Item 19.

  EXHIBITS      118  

 

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CERTAIN DEFINED TERMS AND CONVENTIONS USED IN THIS ANNUAL REPORT

All references to “Korea” contained in this annual report shall mean The Republic of Korea. All references to the “Government” shall mean the government of The Republic of Korea. All references to “we,” “us,” or “our” shall mean SK Telecom Co., Ltd. and, unless the context otherwise requires, its consolidated subsidiaries. References to “SK Telecom” shall mean SK Telecom Co., Ltd., but shall not include its consolidated subsidiaries. All references to “U.S.” shall mean the United States of America.

All references to “MHz” contained in this annual report shall mean megahertz, a unit of frequency denoting one million cycles per second. All references to “GHz” shall mean gigahertz, a unit of frequency denoting one billion cycles per second. All references to “Mbps” shall mean one million bits per second and all references to “Gbps” shall mean one billion bits per second. All references to “GB” shall mean gigabytes, which is one billion bytes. Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

All references to “Won,” or “₩” in this annual report are to the currency of Korea and all references to “Dollars”, “U.S. dollar” or “US$” are to the currency of the United States of America.

The Ministry of Science and ICT (the “MSIT”) is charged with regulating information and telecommunications, and the Korea Communications Commission (the “KCC”) is charged with regulating the public interest aspects of and fairness in broadcasting. Subscriber information for the wireless and fixed-line telecommunications industry set forth in this annual report are derived from information published by the MSIT unless expressly stated otherwise.

The consolidated financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (the “IASB”). As such, we make an explicit and unreserved statement of compliance with IFRS, as issued by the IASB, with respect to our consolidated financial statements as of December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019 and 2018 included in this annual report.

Unless expressly stated otherwise, all financial data included in this annual report are presented on a consolidated basis.

 

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FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements,” as defined in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our current expectations, assumptions, estimates and projections about our company and our industry. 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,” “considering,” “depends,” “estimate,” “expect,” “intend,” “plan,” “planning,” “planned,” “project” and similar expressions, or that certain events, actions or results “may,” “might,” “should” or “could” occur, be taken or be achieved.

Forward-looking statements in this annual report include, but are not limited to, statements about the following:

 

   

our ability to anticipate and respond to various competitive factors affecting the telecommunications industry, including new services that may be introduced, changes in consumer preferences, economic conditions and discount pricing strategies by competitors;

 

   

our implementation of fifth generation wireless technology, which we call “5G” technology;

 

   

our plans for capital expenditures in 2021 for a range of projects, including investments to expand and improve our newly implemented 5G network, investments to maintain our fourth generation long-term evolution (“LTE”) network and long-term evolution advanced (“LTE-A”) services, investments to improve and expand our Wi-Fi network, investments to develop our Internet of Things (“IoT”) solutions and platform services business portfolio, including artificial intelligence (“AI”) solutions, investments in data infrastructure, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding for mid- to long-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course;

 

   

our efforts to make significant investments to build, develop and broaden our businesses, including developing our next-generation growth businesses in media, security, commerce, mobility, IoT solutions and other innovative products and services offered through our platform services, including AI solutions, and to create synergies among our businesses, including through the adaptation of AI technology;

 

   

our ability to comply with governmental rules and regulations, including the regulations of the Government related to telecommunications providers, the Mobile Device Distribution Improvement Act (“MDDIA”), rules related to our status as a “market-dominating business entity” under the Korean Monopoly Regulation and Fair Trade Act (the “Fair Trade Act”) and the effectiveness of steps we have taken to comply with such regulations;

 

   

our ability to effectively manage our bandwidth and to timely and efficiently implement new bandwidth-efficient technologies and our intention to participate in, and acquire additional bandwidth pursuant to, frequency bandwidth auctions held, or other allocations of bandwidth, by the MSIT;

 

   

our expectations and estimates related to interconnection fees, rates charged by our competitors, regulatory fees, operating costs and expenditures, working capital requirements, principal repayment obligations with respect to long-term borrowings, bonds and short-term borrowings, and research and development expenditures and other financial estimates;

 

   

the success of our various joint ventures and investments, including SK Hynix, Inc. (“SK Hynix”), a memory-chip maker, and strategic alliances and cooperation;

 

   

our ability to successfully attract and retain subscribers of our telecommunications-related businesses and customers of our other businesses; and

 

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the growth of the telecommunications and other industries in which we operate in Korea and other markets and the effect that economic, political or social conditions have on our number of subscribers and customers and results of operations.

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. Risks and uncertainties associated with our business include, but are not limited to, risks related to changes in the regulatory environment, technology changes, potential litigation and governmental actions, changes in the competitive environment, political changes, foreign exchange currency risks, foreign ownership limitations, credit risks and other risks and uncertainties that are more fully described under the heading “Item 3.D. Risk Factors” and elsewhere in this annual report. 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.

 

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PART I

 

Item 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT 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

Not applicable.

 

Item 3.

KEY INFORMATION

 

Item 3.A.

Selected Financial Data

You should read the selected consolidated financial and operating data below in conjunction with the consolidated financial statements and the related notes included elsewhere in this annual report. The selected consolidated financial data set forth below as of and for each of the five years ended December 31, 2020 have been derived from our audited consolidated financial statements and related notes thereto, which have been prepared in accordance with IFRS as issued by the IASB.

In addition to preparing consolidated financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with Korean International Financial Reporting Standards (“K-IFRS”) as adopted by the Korean Accounting Standards Board (the “KASB”), which we are required to file with the Financial Services Commission of Korea (the “FSC”) and the Korea Exchange Inc. (the “Korea Exchange”) under the Financial Investment Services and Capital Markets Act (the “FSCMA”). English translations of such financial statements are furnished to the U.S. Securities and Exchange Commission (the “SEC”) on Form 6-K. K-IFRS requires operating profit, which is calculated as operating revenue less operating expense, to be separately presented on the consolidated statement of income. Operating expense represents expenses incurred in our main operating activities and includes cost of goods sold and selling, general and administrative expenses. The presentation of operating profit in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating profit in the consolidated statements of income prepared in accordance with K-IFRS for the corresponding periods in certain respects. For additional information, see “Item 5.A. Operating Results — Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

 

    Year Ended December 31,  
    2020(21)     2019(21)     2018(22)     2017     2016  
    (In billions of Won, except per share and number of shares data)  

STATEMENT OF INCOME DATA

         

Operating Revenue and Other Income

  18,724.3     17,843.5     16,945.9     17,552.0     17,158.3  

Revenue

    18,624.7       17,740.7       16,874.0       17,520.0       17,091.8  

Other income

    99.6       102.8       71.9       32.0       66.5  

Operating Expense

    17,619.7       16,836.2       16,112.1       16,327.4       15,854.9  

Operating Profit

    1,104.6       1,007.3       833.8       1,224.6       1,303.4  

Profit before Income Tax

    1,877.0       1,161.0       3,976.0       3,403.3       2,096.1  

Profit from Continuing Operations

    1,500.5       860.7       3,132.0       2,657.6       1,660.1  

Profit for the Year

    1,500.5       860.7       3,132.0       2,657.6       1,660.1  

Basic Earnings per Share(1)

    20,463       12,127       44,066       36,582       23,497  

 

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    Year Ended December 31,  
    2020(21)     2019(21)     2018(22)     2017     2016  
    (In billions of Won, except per share and number of shares data)  

Diluted Earnings per Share(2)

    20,459       12,127       44,066       36,582       23,497  

Basic Earnings per Share from Continuing Operations(1)

    20,463       12,127       44,066       36,582       23,497  

Diluted Earnings per Share from Continuing Operations(2)

    20,459       12,127       44,066       36,582       23,497  

Dividends Declared per Share (Won)

    10,000       10,000       10,000       10,000       10,000  

Dividends Declared per Share (US$)(3)

    9.2       8.7       9.0       9.4       8.3  

Weighted Average Number of Shares

    72,795,431       72,064,159       70,622,976       70,609,160       70,609,160  
    As of December 31,  
    2020(21)     2019(21)     2018(22)     2017     2016  
    (In billions of Won)  

STATEMENT OF FINANCIAL POSITION DATA

         

Working Capital (Deficit)(4)

  597.1     236.8     1,111.3     (907.3   (447.5

Property and Equipment, Net

    13,377.1       12,933.5       10,718.4       10,144.9       10,374.2  

Total Assets

    47,907.0       45,202.4       42,369.1       33,428.7       31,297.7  

Non-current Liabilities(5)

    15,332.7       14,533.8       13,172.3       8,290.4       8,737.1  

Share Capital

    44.6       44.6       44.6       44.6       44.6  

Total Equity

    24,396.2       22,816.9       22,349.3       18,029.2       16,116.4  
    As of December 31,  
    2020(21)     2019(21)     2018(22)     2017     2016  
    (In billions of Won, except percentage data)  

OTHER FINANCIAL DATA

         

Capital Expenditures(6)

    3,557.8       3,375.9       2,792.4       2,715.9       2,490.5  

Research and Development Expense

    416.4       391.3       387.7       395.3       344.8  

Depreciation and Amortization Expense(7)

    3,991.1       3,856.7       3,126.1       3,097.5       2,941.9  

Net Cash Provided by Operating Activities

    5,821.9       4,035.0       4,332.6       3,855.8       4,243.2  

Net Cash Used in Investing Activities

    (4,250.4     (3,581.6     (4,047.7     (3,070.6     (2,462.2

Net Cash Used in Financing Activities

    (1,457.6     (686.7     (238.3     (826.6     (1,044.8

Margins (% of Operating Revenue and Other Income):

         

Operating Margin(8)

    5.9     5.6     4.9     7.0     7.6

Net Margin(9)

    8.0     4.8     18.5     15.1     9.7

 

    As of or for the year ended December 31,  
    2020     2019     2018     2017     2016  

SELECTED OPERATING DATA

         

Population of Korea (in millions)(10)

    51.8       51.8       51.8       51.8       51.7  

Our Wireless Penetration(11)

    60.6     60.8     59.6     58.3     57.2

Number of Employees(12)

    41,097       40,543       39,909       30,608       25,844  

Our Wireless Subscribers (in thousands)(13)

    31,384       31,535       30,882       30,195       29,595  

Our 5G Subscribers (in thousands)(14)

    5,476       2,084                    

Our 5G Penetration(15)

    17.4     6.6                  

Our LTE Subscribers (in thousands)(16)

    22,848       25,022       24,796       22,865       21,078  

Our LTE Penetration(17)

    72.8     79.3     80.3     75.7     71.2

Average Monthly Data Usage per 5G Subscriber(18)

    26.6 GB       28.0 GB                    

Average Monthly Data Usage per LTE Subscriber(19)

    7.8 GB       8.2 GB       7.1 GB       6.0 GB       5.2 GB  

Average Monthly Churn Rate(20)

    1.2     1.2     1.2     1.5     1.5

Cell Sites

               57,932                  63,066                  54,203                  52,132                  54,986  

 

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(1)   Basic earnings per share is calculated by dividing profit attributable to owners of SK Telecom by the weighted average number of common shares outstanding during the period. Basic earnings per share from continuing operations is calculated by dividing profit from continuing operations attributable to owners of SK Telecom by the weighted average number of common shares outstanding during the period.

 

(2)   Diluted earnings per share is calculated by dividing profit attributable to owners of SK Telecom adjusted for dilution by the potential dilutive weighted average number of common shares outstanding during the period, taking into account the exercise of stock options granted to employees, if any. Diluted earnings per share from continuing operations is calculated by dividing profit from continuing operations attributable to owners of SK Telecom adjusted for dilution by the potential dilutive weighted average number of common shares outstanding during the period, taking into account the exercise of stock options granted to employees, if any.

 

(3)   The Dollar amounts shown for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 were translated at the rate of Won 1,086.1 to US$1.00, Won 1,155.5 to US$1.00, Won 1,112.9 to US$1.00, Won 1,067.4 to US$1.00 and Won 1,203.7 to US$1.00, respectively, the noon buying rates for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York in effect at the end of the respective years.

 

(4)   Working capital means current assets minus current liabilities.

 

(5)   Our monetary assets and liabilities denominated in foreign currencies are valued at the exchange rates prevailing at the end of each reporting period. See note 4(18) of the notes to our consolidated financial statements.

 

(6)   Consists of cash outflows for the acquisition of property and equipment.

 

(7)   Derived from our consolidated statements of income.

 

(8)   Operating margin represents operating profit divided by operating revenue and other income.

 

(9)   Net margin represents profit for the year divided by operating revenue and other income.

 

(10)   Population numbers reflect the number of registered residents as published by the Ministry of the Interior and Safety of Korea.

 

(11)   Our wireless penetration is determined by dividing our wireless subscribers by total estimated population, as of the end of the period.

 

(12)   Includes regular employees and temporary employees. See “Item 6.D. Employees.”

 

(13)   Wireless subscribers include those subscribers who are temporarily deactivated, including (i) subscribers who voluntarily deactivate temporarily for a period of up to three months no more than twice a year and (ii) subscribers with delinquent accounts who may be involuntarily deactivated up to two months before permanent deactivation, which we determine based on various factors, including prior payment history. The number of subscribers as of December 31, 2020, 2019, 2018, 2017 and 2016 include 2.3 million subscribers, 2.9 million subscribers, 3.5 million subscribers, 3.4 million subscribers and 3.2 million subscribers, respectively, of mobile virtual network operators (“MVNO”) that lease our wireless networks.

 

(14)   The number of 5G subscribers as of December 31, 2020 includes approximately 400 subscribers of MVNOs that lease our 5G network.

 

(15)   Our 5G wireless penetration is determined by dividing our 5G subscribers by our total wireless subscribers, as of the end of the period.

 

(16)   The number of LTE subscribers as of December 31, 2020, 2019, 2018, 2017 and 2016 include 0.7 million subscribers, 0.6 million subscribers, 0.6 million subscribers, 0.5 million subscribers and 0.3 million subscribers, respectively, of MVNOs that lease our LTE network.

 

(17)   Our LTE wireless penetration is determined by dividing our LTE subscribers by our total wireless subscribers, as of the end of the period.

 

(18)   Average monthly data usage per 5G subscriber is determined by dividing the total GBs of data usage for the last month of the period by the average number of 5G subscribers for such month.

 

(19)   Average monthly data usage per LTE subscriber is determined by dividing the total GBs of data usage for the last month of the period by the average number of LTE subscribers for such month.

 

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(20)   The average monthly churn rate for a period is the number calculated by dividing the sum of voluntary and involuntary deactivations during the period by the simple average of the number of subscribers at the beginning and end of the period, then dividing that number by the number of months in the period. Churn includes subscribers who upgrade to a next-generation service, such as 5G, by terminating their service and opening a new subscriber account.

 

(21)   We adopted IFRS 16, Leases, in the fiscal year beginning on January 1, 2019 using the modified retrospective method by recognizing the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of retained earnings as of such date. In the fiscal year beginning on January 1, 2020, we applied the agenda decision, Lease Term and Useful Life of Leasehold Improvements (IFRS 16 Leases and IAS 16 Property, Plant and Equipment)—November 2019, published by the International Financial Reporting Interpretations Committee (“IFRIC”) on December 16, 2019, as a change in accounting policy, and have retrospectively applied such change and restated our consolidated financial statements as of and for the year ended December 31, 2019. The comparative information presented for 2018, 2017 and 2016 has not been restated. See “Item 5.A. Operating Results — Recently Adopted International Financial Reporting Standards – IFRS 16” and note 3 of the notes to our consolidated financial statements.

 

(22)   We adopted IFRS 15, Revenue from Contracts with Customers, and IFRS 9, Financial Instruments, in the fiscal year beginning on January 1, 2018. We adopted IFRS 15 and IFRS 9 by recognizing the cumulative effect of initially applying IFRS 15 and IFRS 9 as adjustments to the opening balance of retained earnings as of January 1, 2018. The comparative information presented for 2017 and 2016 has not been restated.

 

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

Risks Relating to Our Business

Competition may reduce our market share and harm our results of operations and financial condition.

We face substantial competition across all our businesses, including our wireless telecommunications business. We expect competition to intensify as a result of the development of new technologies, products and services. We expect that such trends will continue to put downward pressure on the rates we can charge our subscribers.

Historically, there has been considerable consolidation in the telecommunications industry, resulting in the current competitive landscape comprising three mobile and fixed network operators in the Korean market, us, KT Corporation (“KT”) and LG Uplus Corp. (“LG U+”). Each of our competitors has substantial financial, technical, marketing and other resources to respond to our business offerings. The collective market share of KT and LG U+ amounts to approximately 54.9%, in terms of number of wireless subscribers (including an aggregate of 9.8% attributable to MVNOs that lease KT’s and LG U+’s respective networks), as of December 31, 2020.

Our competitors for subscriber activations include MVNOs, including MVNOs that lease our networks. MVNOs generally provide rate plans that are relatively cheaper than similar rate plans of the wireless network providers from which they lease their networks, including us. In addition, other companies may enter the wireless network services market. While new entries into such market have historically required obtaining requisite licenses from the MSIT, pursuant to an amendment to the Telecommunications Business Act that went into effect in June 2019, companies meeting certain regulatory criteria may become a network service provider by registering with the MSIT without a separate license requirement. Although such amendment has not yet resulted in any new entries into the Korean wireless network services market, it may have the effect of encouraging new entries in the future.

We believe that an increase in market share of MVNOs and the entrance of new mobile network operators, if any, in the wireless telecommunications market may further increase competition in the telecommunications sector,

 

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as well as cause downward price pressure on the fees we charge for our services, which, in turn, may have a material adverse effect on our results of operations, financial position and cash flows.

Our fixed-line telephone service competes with KT and LG U+, as well as other providers of voice over Internet protocol (“VoIP”) services. As of December 31, 2020, our market share of the fixed-line telephone and VoIP service market was 15.8% (including the services provided by SK Broadband Co., Ltd. (“SK Broadband”) and SK Telink Co., Ltd. (“SK Telink”)) in terms of number of subscribers compared to KT with 56.8% and LG U+ with 19.1%. In addition, our broadband Internet access, Internet protocol TV (“IPTV”) and cable TV services provided through SK Broadband compete with other providers of such services, including KT, LG U+ and cable companies. Furthermore, our IPTV and cable TV services are facing an increasing level of competition from global operators of online video streaming platforms, such as YouTube, Amazon Video and Netflix, and the video services offered by leading domestic online and mobile search and communications platforms including NAVER and Kakao, as such services continue to become increasingly popular to serve as a substitute to traditional television programming. As of December 31, 2020, our market share of the broadband Internet market was 29.0% in terms of number of subscribers compared to KT with 41.1% and LG U+ with 20.3%. As of December 31, 2020, our market share of the pay TV market (which includes IPTV, cable TV and satellite TV) was 24.4% compared to KT with 32.2% (including its IPTV and satellite TV services) and LG U+ with 25.0% (including its IPTV and cable TV services), and the collective market share of other pay TV providers was 18.4%.

Recently, the Korean fixed-line telecommunications industry has been going through significant consolidation involving major pay television service providers. In April 2020, we completed the merger of Tbroad Co., Ltd., a former leading cable television and other fixed-line telecommunication services provider in Korea, and two of its subsidiaries, Tbroad Dongdaemun Broadcasting Co., Ltd. and Korea Digital Cable Media Center Co. Ltd. (collectively, “Tbroad”), with and into SK Broadband. As a result of the merger and the issuance of SK Broadband’s shares to the former shareholders of Tbroad with an aggregate fair value of Won 862.1 billion as of April 30, 2020, we own approximately 74.3% of SK Broadband’s total outstanding shares as of December 31, 2020. In the same month, SK Telecom acquired a 55.0% equity interest in Broadband Nowon Co., Ltd. (formerly known as Tbroad Nowon Broadcasting Co., Ltd.), another subsidiary of Tbroad Co., Ltd., for a purchase price of Won 10.4 billion in cash. As a result of such transactions (the “Tbroad Merger”), we have become the third-largest pay TV provider in Korea in terms of number of subscribers as of December 31, 2020. In December 2019, LG U+ acquired a majority equity stake in CJ Hello Co., Ltd. and changed the acquired company’s name to LG HelloVision Co., Ltd. (“LG HelloVision”) to collectively become the second-largest pay TV provider in Korea in terms of number of subscribers as of December 31, 2020. Such transactions, as well as further consolidation in the fixed-line telecommunications industry, may result in increased competition, as the entities emerging from such consolidation and other remaining players in the industry may actively pursue expanding or protecting their respective market shares.

Furthermore, the Government has historically enforced regulations on cable TV and IPTV service providers that prohibited them from having a market share of more than one-third of the total number of subscribers in the relevant pay TV market on each of their respective platforms. In June 2015, the Government amended the regulation to impose the same limit on the market share of the entire pay TV market, including satellite TV service providers as well. Such amended regulation, however, expired in June 2018. There are bills currently pending in the National Assembly to abolish the previous market share regulations on cable TV and IPTV service providers. It is uncertain whether such bills will be passed.

Continued competition from other wireless and fixed-line service providers has also resulted in, and may continue to result in, a substantial level of deactivations among our subscribers. Subscriber deactivations, or churn, may significantly harm our business and results of operations. In 2020, the monthly churn rate in our wireless telecommunications business ranged from 1.1% to 1.4%, with an average monthly churn rate of 1.2%, which remained unchanged from 2019. Intensification of competition in the future may cause our churn rates to increase, which in turn may cause us to increase our marketing expenses as a percentage of sales to attract and retain subscribers.

Our physical security business competes with other large physical security service providers, including S-1 Corporation (“S-1”) and KT Telecop Co., Ltd. (“KT Telecop”). As of December 31, 2020, our market share of the physical security services market was 34% in terms of the aggregate revenue of these three companies, compared to

 

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S-1 with 55% and KT Telecop with 11%. Our information security services compete with other providers of similar products and services, such as Ahnlab, Inc., SECUi Corp. and Igloo Security, Inc.

With respect to the e-commerce business operated by Eleven Street Co., Ltd. (“Eleven Street”), 11st, our marketplace business, faces intense competition from various e-commerce providers, including online open marketplaces and social commerce operators such as Coupang, Gmarket, Auction and Interpark. We also face competition from leading online and mobile search and communication platform companies with e-commerce operations, including NAVER and Kakao, as well as traditional retailers with online and mobile shopping portals such as SSG.com and Lotte.com, home shopping providers with online and mobile shopping portals such as CJ Mall by CJ O Shopping, GS Shop by GS Homeshopping and Hyundai Hmall by Hyundai Homeshopping, and various online marketplaces for specific consumer segments or product groups. Our television shopping (“T-commerce”) business, SK stoa, primarily competes with other home shopping providers such as those listed above, as well as with various e-commerce providers and traditional retailers. The industries in which 11st and SK stoa compete are evolving rapidly and are intensely competitive, and we face a broad array of competitors domestically and increasingly, internationally.

Our ability to compete successfully in all of the businesses in which we operate will depend on our ability to anticipate and respond to various competitive factors affecting the respective industries, including new services that may be introduced, changes in consumer preferences, economic conditions and discount pricing strategies by competitors.

Inability to successfully implement or adapt our network and technology to meet the continuing technological advancements affecting the wireless telecommunications industry will likely have a material adverse effect on our financial condition, results of operation, cash flows and business.

The telecommunications industry has been characterized by continual improvement and advances in technology, and this trend is expected to continue. We and our competitors have continually implemented technology upgrades from our basic code division multiple access (“CDMA”) network to our wideband code division multiple access (“WCDMA”) network, and subsequently to LTE and 5G technologies. Our business could be harmed if we fail to implement, or adapt to, future technological advancements in the telecommunications sector in a timely manner, such as the continued implementation of 5G technology. We launched wireless service plans using the 5G network in April 2019 following the commencement of sales of the first 5G-compatible smartphones, and we are in the process of expanding our 5G network coverage, focusing on major commercial districts and other densely-populated areas in the Seoul metropolitan area and other cities. KT and LG U+ have also rolled out their respective 5G wireless service plans in April 2019. The more successful operation of a 5G network or development of improved 5G technology by a competitor, including better market acceptance of a competitor’s 5G services, could materially and adversely affect our existing wireless telecommunications businesses as well as the returns on future investments we may make in our 5G network or our other businesses.

In addition to introducing new technologies and offerings, we must phase out outdated and unprofitable technologies and services. For example, as of January 2019, we discontinued our wireless broadband Internet access (“WiBro”) services, and we also terminated our second generation CDMA wireless services in July 2020. If we are unable to do so on a cost-effective basis, our results of operations could be adversely affected.

Implementation of new wireless technology and enhancement of existing wireless technology have required, and may continue to require, significant capital and other expenditures, which we may not recoup.

We have made, and intend to continue to make, capital investments to develop, launch and enhance our wireless service. In 2020, 2019 and 2018, we spent Won 1,878.6 billion, 2,514.3 billion and Won 1,735.6 billion, respectively, in capital expenditures to build and enhance our wireless networks. Our continued implementation and expansion of 5G services, which use a higher frequency spectrum than our LTE services, will require additional cell sites and other infrastructure, which may result in an increase in our capital expenditures in the future. We also plan to make further capital investments related to our wireless services in the future, including services that can potentially leverage our 5G network. In addition, we plan to continue maintaining our LTE network, which we expect will continue to be used broadly by our subscriber base during the near future, as we and our competitors

 

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continue to build up 5G networks and services and wireless service users gradually migrate to the 5G network over time. Our wireless technology-related investment plans are subject to change, and will depend, in part, on market demand for 5G and LTE services, the competitive landscape for provision of such services and the development of competing technologies. There may not be sufficient demand for services based on our latest wireless technologies, as a result of competition or otherwise, to permit us to recoup or profit from our wireless technology-related capital investments.

Our businesses are subject to extensive Government regulation and any change in Government policy relating to the telecommunications industry could have a material adverse effect on our results of operations, financial condition and cash flows.

Most of our businesses are subject to extensive governmental supervision and regulation.

Rate Regulation. The Government has periodically reviewed the rates charged by wireless telecommunications service providers and has, from time to time, released public policy guidelines or suggested rate reductions. Although these guidelines or suggestions were not binding, we have implemented some rate reductions in response to them. For example, under the MDDIA, wireless telecommunications service providers are obliged to provide certain benefits, such as discounted rates, to subscribers who subscribe to their service without receiving subsidies. In June 2017, the State Affairs Planning Advisory Committee of Korea announced that it would encourage wireless telecommunications service providers, including us, to increase the applicable discount rate offered to subscribers from 20% to 25%, which we adopted in September 2017, and to offer additional discounts to low income customers, including those on government welfare programs and senior citizen recipients of the basic pension, which we implemented in December 2017 and July 2018, respectively. See “Item 4.B. Business Overview — Law and Regulation — Rate Regulation” and “Item 5.A. Operating Results — Overview — Rate Regulations.” Such discounts have contributed to a decrease in the monthly revenue per subscriber of our wireless telecommunications services. See “Item 5.A. Operating Results — Overview — Decrease in Monthly Revenue per Subscriber.” The Government may suggest other rate reductions in the future, including more affordable subscription plans for 5G wireless services, and any further rate reductions we make in response to such suggestion may adversely affect our results of operations.

Technology Standards. The Government also plays an active role in setting the timetable and quality standards for the adoption and implementation of new technologies to be used by telecommunications operators in Korea. For example, the Government provided such guidance in connection with the introduction of LTE and 5G technologies in the past. The Government may provide similar guidance or recommendations in connection with the adoption and implementation of technologies to be used in future telecommunications services, and it is possible that adherence to such guidance or recommendations promoted by the Government in the future may not provide the best commercial returns for us.

Frequency Allocation. The Government sets the policies regarding the use of frequencies and allocates the spectrum of frequencies used for wireless telecommunications. See “Item 4.B. Business Overview — Law and Regulation — Frequency Allocation.” The reallocation of the spectrum to our existing competitors could increase competition among wireless telecommunications service providers, which may have an adverse effect on our business.

MVNOs. Pursuant to the Telecommunications Business Act, certain wireless telecommunications service providers designated by the MSIT, which included only us, were required to lease their networks or allow use of their networks (collectively, a “wholesale lease”) to other network service providers, such as an MVNO, that have requested such a wholesale lease in order to provide their own services using the leased networks until September 2022. Currently, 14 MVNOs provide wireless telecommunications services using the networks leased from us. We believe that leasing a portion of our bandwidth capacity to an MVNO impairs our ability to use our bandwidth in ways that would generate maximum revenues and strengthens our MVNO competitors by granting them access and lowering their costs to enter into and operate in our markets. Accordingly, our profitability has and may continue to be adversely affected.

Interconnection. Our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and international fixed-line and other wireless networks. Our interconnection

 

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arrangements, including the interconnection rates we pay and interconnection rates we charge, affect our revenues and operating results. The MSIT determines the basic framework for interconnection arrangements, including policies relating to interconnection rates in Korea. The KCC, which determined such basic framework under the previous Government, changed the basic framework for interconnection arrangements several times. We cannot assure you that we will not be adversely affected by the MSIT’s interconnection policies and future changes to such policies. See “Item 4.B. Business Overview — Interconnection — Domestic Calls.”

Regulatory Action. The MSIT 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 KCC may levy a monetary penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years. For information about the penalties imposed on us for violating Governmental regulations, see “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings — KCC Proceedings.” Such penalties, which may include the revocation of cellular licenses, suspension of business or imposition of monetary penalties by the KCC, could have a material adverse effect on our business. We believe we are currently in compliance with the material terms of all our cellular licenses.

We are subject to additional regulations as a result of our dominant market position in the wireless telecommunications sector, which could harm our ability to compete effectively.

The Government endeavors to promote competition in the Korean telecommunications markets through measures designed to prevent a dominant service provider from exercising its market power and deterring the emergence and development of viable competitors. We have been designated by the MSIT as the “dominant network service provider” in respect of our wireless telecommunications business. As such, we are subject to additional regulations to which certain of our competitors are not subject. For example, beginning in December 2020, the MSIT has fifteen days to object to any new rates and terms of service reported by us, compared to the prior regulations that required us to obtain prior approval from the MSIT to raise our existing rates or introduce new rates. See “Item 4.B. Business Overview — Law and Regulation — Rate Regulation.” The MSIT could also require us to charge higher usage rates than our competitors for future services or to take certain actions earlier than our competitors, as when the KCC required us to introduce number portability earlier than our competitors, KT and LG U+.

We also qualify as a “market-dominating business entity” under the Fair Trade Act, which subjects us to additional regulations and we are prohibited from engaging in any act of abusing our position as a market-dominating entity. See “Item 4.B. Business Overview — Law and Regulation — Competition Regulation.” The additional regulations to which we are subject has affected our competitiveness in the past and may materially hurt our profitability and impede our ability to compete effectively against our competitors in the future.

The ongoing global pandemic of a new strain of coronavirus (“COVID-19”) and any possible recurrence of other types of widespread infectious diseases may adversely affect our business, financial condition or results of operations.

COVID-19, an infectious disease caused by severe acute respiratory syndrome coronavirus 2 that was first reported to have been transmitted to humans in late 2019 and has since spread globally, has materially and adversely affected the global economy and caused significant volatility in global financial markets to date as well as disrupted our business operations. The World Health Organization declared COVID-19 as a pandemic in March 2020. We have implemented remote work arrangements for most of our employees at our headquarters and certain other locations from time to time in light of the Government’s recommendation for social distancing. In addition, the travel restrictions imposed by governments in response to the COVID-19 pandemic has resulted in a decrease in revenue from roaming services, and the pandemic has also contributed to lower customer demand for new wireless devices, resulting in a decrease in our wireless device sales revenue. While we do not believe that the COVID 19 pandemic and the resulting temporary remote work arrangements or such decreases in revenue have had a material adverse impact on our business to date, a prolonged outbreak of COVID-19 may result in further disruption in the normal operations of our business, including implementation of further work arrangements requiring employees to work remotely and/or temporary closures of our facilities, which may, among others, lead to a reduction in labor

 

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productivity, as well as further decrease in revenue from roaming services or wireless device sales.

Other risks associated with a prolonged outbreak of COVID-19 or other types of widespread infectious diseases include:

 

   

an increase in unemployment among, and/or a decrease in disposable income of, our customers, who may not be able to meet payment obligations or otherwise choose to decrease their spending levels, which in turn may decrease demand for some of our products and services or cause an increase in delinquent subscriber accounts;

 

   

a slowdown in the rate of subscriber migration to our 5G service, which generally entails higher-priced subscription plans and wireless devices;

 

   

disruptions in operations, and/or a decrease in the demand for products and services, of our corporate customers, which in turn may decrease such customers’ demand for our services and products;

 

   

service disruptions, outages and performance problems due to capacity constraints caused by an overwhelming number of people accessing our services simultaneously;

 

   

disruptions in supply of mobile handsets or telecommunications equipment from our vendors as well as in the installation of our network infrastructure;

 

   

unstable global and Korean financial markets, which may adversely affect our ability to meet capital funding needs on a timely and cost-effective basis;

 

   

a decrease in the fair value of our investments in companies that may be adversely affected by the pandemic; and

 

   

depreciation of the Won against major foreign currencies, which in turn may increase the cost of imported equipment necessary for expansion and enhancement of our telecommunications infrastructure.

It is not possible to predict the duration or full magnitude of harm from COVID-19. In the event that COVID-19 or other types of widespread infectious diseases cannot be effectively and timely contained, our business, financial condition and results of operations may be adversely affected.

Declines in the market value of our equity holdings in SK Hynix and the results of operations of SK Hynix could have a material adverse effect on the market price of our common shares and American Depositary Shares (“ADSs”) as well as our results of operation.

As of December 31, 2020, we held a 20.1% equity interest in SK Hynix, which is listed on the KRX KOSPI Market of the Korea Exchange (the “KRX KOSPI Market”) and is one of the world’s largest memory-chip makers by revenue. As of December 31, 2020, the fair value of our holding in SK Hynix was Won 17,312.9 billion. We received dividend payments of Won 146.1 billion in 2020, Won 219.2 billion in 2019 and Won 146.1 billion in 2018 related to such shareholding.

From time to time, the memory semiconductor industry has experienced significant and sometimes prolonged downturns, which often occur in connection with a deterioration of global economic conditions, and is subject to intense competition. For example, SK Hynix and its subsidiaries, on a consolidated basis, incurred net losses of Won 158.8 billion and Won 56.0 billion in 2012 and 2011, respectively, primarily due to increased supply and weak demand for semiconductor products. Although the memory semiconductor industry has recovered since then and SK Hynix has been reporting net profits since 2013, the industry is subject to cyclical fluctuations, and we expect that there may be future downturns in the industry. Uncertainty in the global economy has increased in recent years, especially with global financial and capital markets experiencing substantial volatility in light of the ongoing global COVID-19 pandemic. Accordingly, SK Hynix’s operating results would be adversely affected if it fails to compete successfully or decrease manufacturing costs at an adequate level. Our share of any net losses incurred by SK Hynix would be reflected in our income statement as share of losses related to investments in associates.

Accordingly, declines in the market value of our equity holdings in SK Hynix and the results of operations of SK Hynix could have a material adverse effect on the market price of our common shares and ADSs as well as our results of operation.

 

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We may fail to successfully complete, integrate or realize the anticipated benefits of our new acquisitions, joint ventures or other strategic alternatives or corporate reorganizations, and such transactions may negatively impact our business.

We continue to seek opportunities to develop new businesses that we believe are complementary to our existing product and service portfolio and expand our global business through selective acquisitions. We also continue to seek ways to optimize our corporate structure to maximize the value of our traditional businesses on the one hand and newly developed businesses on the other. Accordingly, we are often engaged in evaluating potential transactions and other strategic alternatives as well as corporate reorganizations, some of which may be significant in size.

For example, we completed the Tbroad Merger in April 2020 and became the third-largest pay TV provider in Korea in terms of number of subscribers as of December 31, 2020. In addition, in June 2019, we acquired a 34.6% interest in Incross Co., Ltd. (“Incross”), a digital advertising company, for an aggregate purchase price of Won 53.7 billion, in light of potential synergies with our media and commerce businesses. Furthermore, in order to strengthen our security business and explore potential synergies with our wireless and fixed-line business portfolio, we acquired a 55.0% interest in Life & Security Holdings Co., Ltd. (“LSH”), which owned 100% of ADT CAPS Co., Ltd. (“Former ADT CAPS”), a leading Korean physical security service company, and two sister companies, CAPSTEC Co., Ltd. and ADT SECURITY Co., Ltd. (which subsequently merged with and into Former ADT CAPS), for Won 696.7 billion in October 2018; a 100% interest in SK Infosec Co., Ltd. (“SK Infosec”), Korea’s leading information security company, in a share exchange transaction pursuant to which we issued 1,260,668 treasury shares with an aggregate book value of Won 281.2 billion in exchange for all of the outstanding common shares of SK Infosec in December 2018 from SK Inc. (which changed its English name from SK Holdings Co., Ltd. to SK Inc. as of March 29, 2021), our largest shareholder; and additional shares of id Quantique SA (“id Quantique”), a leading provider of quantum cryptography solutions for data security based in Switzerland, with Won 55.2 billion in cash and Won 5.7 billion in contribution-in-kind in 2018 and through our participation in its capital increases in 2019 and 2020, as a result of which our equity interest in id Quantique was 68.1% as of December 31, 2020. We have subsequently combined LSH, Former ADT CAPS and SK Infosec into a single entity through a series of mergers that were completed in March 2021, and the surviving entity, SK Infosec, changed its name to ADT CAPS Co., Ltd. (“ADT CAPS”) and has become the principal consolidated subsidiary that operates our security business.

We have also pursued other strategic alternatives, such as forming a strategic alliance in October 2019 with Kakao Corp. (“Kakao”), a Korean Internet company and the operator of Korea’s most popular mobile messaging application, to collaborate in the information and communication technologies (“ICT”) sector through the sale of 1,266,620 of our treasury shares to Kakao, representing a 1.6% interest, for approximately Won 300.0 billion and a concurrent issuance by Kakao of 2,177,401 of its shares, representing a 2.5% interest, to us for approximately Won 302.3 billion. In addition, in September 2019, in furtherance of our efforts to enhance the competitiveness of our media business and to promote its future growth, we acquired a minority equity stake in Content Wavve Co., Ltd. (formerly known as Content Alliance Platform Inc.) (“Content Wavve”), a joint venture established by the three major terrestrial broadcasters in Korea that operated the mobile over-the-top (“OTT”) service “POOQ,” by investing Won 90.9 billion in cash and transferring our former mobile OTT service business “oksusu” to Content Wavve. Content Wavve combined oksusu and POOQ to launch a new integrated mobile OTT service “wavve” in September 2019. As of December 31, 2020, we held 30.0% of the total outstanding shares of Content Wavve. In addition, Eleven Street is currently in discussions with Amazon.com, Inc. regarding a potential partnership. For a more detailed description of our recent investments in new businesses, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Investments in New Growth Businesses.”

Furthermore, in December 2020, we spun off our mobility business into a new wholly-owned subsidiary, T map Mobility Co., Ltd. (“T Map Mobility”), in order to enhance its competitiveness and promote its future growth, and we have also formed a strategic partnership with Uber Technologies, Inc. (“Uber”) pursuant to which Uber has invested approximately US$50 million in T Map Mobility and approximately US$100 million in UT LLC, a joint venture formed in April 2021 between T Map Mobility and Uber in which we hold a 49.0% interest. Through UT LLC, we will launch a taxi hailing service that integrates our affiliated taxi driver network and mapping and AI technologies with Uber’s ride hailing technology. See “Item 4.B. Business Overview — Other Businesses — Miscellaneous Businesses — Mobility Business.”

 

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In order to pursue enhancement of shareholder value and acceleration of our growth, we are currently considering a potential corporate restructuring whereby we would split into a wireless and fixed-line telecommunications company (including our interest in, among others, SK Broadband) and a holding company that would hold interests in semiconductor and new ICT businesses (including our interest in, among others, SK Hynix, ADT CAPS, Eleven Street and T Map Mobility) (the “Spin-off Company”). Such restructuring would be implemented through a horizontal spin-off transaction (“injeok bunhal”) under Korean law, whereby the Spin-off Company would be newly incorporated and our existing shareholders would receive shares of the Spin-off Company on a pro rata basis. Further decisions regarding such potential spin-off, if any, are expected to be made in the first half of 2021.

While we are hoping to benefit from a range of synergies from our recent or future acquisitions and corporate reorganizations as well as develop new growth engines for our business, we may not be able to successfully complete or integrate such acquisitions, new businesses or reorganized entities and may fail to realize the expected benefits in the near term, or at all. For example, in June 2019, we disposed of our entire interest in our consolidated subsidiaries Shopkick Management Company, Inc. (“SMC”) and Shopkick, Inc. (“Shopkick”), a wholly-owned subsidiary of SMC which operates “shopkick,” a mobile reward points-based in-store shopping application, which we had acquired in October 2014, following a prolonged period of unprofitability of the shopkick business. Previously in 2018, we also recognized Won 153.4 billion and Won 52.4 billion of impairment losses for goodwill and intangible assets, respectively, in connection with Shopkick. In addition, when we enter into new businesses with partners through joint ventures or other strategic alliances, we and those partners may have disagreements with respect to strategic directions or other aspects of business, or may otherwise be unable to coordinate or cooperate with each other, any of which could materially and adversely affect our operations in such businesses. Our business may be negatively impacted if we fail to successfully integrate or realize the anticipated benefits of such transactions.

Due to the existing high penetration rate of wireless telecommunications services in Korea, we are unlikely to maintain our subscriber growth rate, which could adversely affect our results of operations.

According to data published by the MSIT and the historical population data published by the Ministry of the Interior and Safety, the penetration rate for the Korean wireless telecommunications industry as of December 31, 2020 was approximately 134.2%, which is relatively high compared to many industrialized countries. Therefore, we expect that the penetration rate for wireless telecommunications service in Korea will remain relatively stable. As a result of the already high penetration rate in Korea for wireless telecommunications services coupled with our leading market share, we expect our subscriber growth rate to decrease. Slowed growth in the penetration rate without a commensurate increase in revenues through the introduction of new services and increased use of our services by existing subscribers would likely have a material adverse effect on our financial condition, results of operations and cash flows.

Our business and results of operations may be adversely affected if we fail to acquire adequate additional frequency usage rights or use our bandwidth efficiently to accommodate subscriber growth and subscriber usage.

One of the principal limitations on a wireless network’s subscriber capacity is the amount of frequency spectrum available for use by the network. We have acquired a number of frequency usage rights to secure bandwidth capacity to provide our broad range of services, for which we typically make an initial payment as well as pay usage fees during the license period. We made frequency usage right fee payments of Won 136.6 billion in 2020, Won 133.1 billion in 2019 and Won 151.7 billion in 2018. For more information regarding the various bandwidths that we use and the usage right fees for such bandwidths, see “Item 4.B. Business Overview — Law and Regulation — Frequency Allocation,” “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures” and note 17 of the notes to our consolidated financial statements.

The growth of our wireless data businesses has been a significant factor in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. In particular, the increasing popularity of smartphones and data intensive applications among smartphone users has been a major factor for the high utilization of our bandwidth in recent years. Although such trend has been offset in

 

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part by the implementation of new technologies that enable more efficient usage of our bandwidth, we expect that the current trend of increased data transmission use by our subscribers will accelerate in the near future as more subscribers migrate to our 5G network and the volume and sophistication of the multimedia content we offer through our wireless data services continue to grow in the 5G environment. While we believe that we can address the capacity constraint issue through system upgrades and efficient allocation of bandwidth, inability to address such capacity constraints in a timely manner may adversely affect our business, results of operations, financial position and cash flows. In the event we are unable to maintain sufficient bandwidth capacity, our subscribers may perceive a general slowdown of wireless telecommunications services. Growth of our wireless telecommunications business will depend in part upon our ability to effectively manage our bandwidth capacity and to implement efficiently and in a timely manner new bandwidth-efficient technologies if they become available. We cannot assure you that bandwidth constraints will not adversely affect the growth of our wireless telecommunications business.

In November 2020, the MSIT announced plans to reallocate a total of 310 MHz of frequency bandwidths whose usage terms are due to expire in 2021 to KT, LG U+ and us, 95 MHz of which will be allocated to us. The final consideration to be paid by us for such reallocated bandwidths will depend on the number of 5G cell sites constructed by us until 2022, and the aggregate consideration to be paid by KT, LG U+ and us is expected to range between approximately Won 3.2 trillion and Won 3.8 trillion. We may be required to pay a substantial amount to acquire additional bandwidth capacity in the future in order to meet increasing bandwidth demand or renew the rights to use our existing bandwidth, and we may not be successful in acquiring the necessary bandwidth to meet such demand at commercially attractive terms or at all, which may adversely affect our financial condition and results of operations.

We rely on key researchers and engineers and senior management, and the loss of the services of any such personnel or the inability to attract and retain them may negatively affect our business.

Our success depends to a significant extent upon the continued service of our research and development and engineering personnel, and on our ability to continue to attract, retain and motivate qualified researchers and engineers. In particular, our focus on leading the market in introducing new services has meant that we must aggressively recruit engineers with expertise in cutting-edge technologies. We also depend on the services of experienced key senior management, and if we lose their services, it would be difficult to find and integrate replacement personnel in a timely manner, or at all.

The loss of the services of any of our key research and development and engineering personnel or senior management without adequate replacement, or the inability to attract new qualified personnel, would have a material adverse effect on our operations.

We need to observe certain financial and other covenants under the terms of our debt instruments, the failure to comply with which would put us in default under those instruments.

Certain of our debt instruments contain financial and other covenants with which we are required to comply on an annual and semi-annual basis. The financial covenants with respect to SK Telecom’s debt instruments include, but are not limited to, a maximum net debt-to-EBITDA ratio of 3.50 and a minimum EBITDA-to-total interest expense ratio of 4.00, each as determined on a separate financial statement basis. The debt arrangements also contain negative pledge provisions limiting our ability to provide liens on our assets as well as cross-default and cross-acceleration clauses, which give related creditors the right to accelerate the amounts due under such debt if an event of default or acceleration has occurred with respect to our existing or future indebtedness, or if any material part of our indebtedness or indebtedness of our subsidiaries is capable of being declared payable before the stated maturity date. In addition, such covenants restrict our ability to raise future debt financing.

If we breach our financial or other covenants, our financial condition will be adversely affected to the extent we are not able to cure such breaches or repay the relevant debt.

We may have to make further financing arrangements to meet our capital expenditure requirements and debt payment obligations.

We have had, and expect to continue to have, significant capital expenditure requirements as we continue to build out, maintain and upgrade our networks and invest in businesses that complement our wireless and fixed-line

 

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telecommunication businesses. We spent Won 3,557.8 billion for capital expenditures in 2020. We expect to spend a similar amount for capital expenditures in 2021 compared to 2020 for a range of projects, including investments to expand and improve our newly implemented 5G network, investments to maintain our LTE network and LTE-A services, investments to improve and expand our Wi-Fi network, investments to develop our IoT solutions and platform services business portfolio, including AI solutions, investments in data infrastructure, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding for mid- to long-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course. In November 2020, the MSIT announced plans to reallocate a total of 310 MHz of frequency bandwidths whose usage terms are due to expire in 2021 to KT, LG U+ and us, 95 MHz of which will be allocated to us. The final consideration to be paid by us for such reallocated bandwidths will depend on the number of 5G cell sites constructed by us until 2022, and the aggregate consideration to be paid by KT, LG U+ and us is expected to range between approximately Won 3.2 trillion and Won 3.8 trillion. We would be required to spend additional amounts on capital expenditures in connection with building out our networks on such reallocated bandwidths.

In particular, we continue to make significant capital investments to expand and upgrade our wireless networks in response to growing bandwidth demand by our subscribers. Bandwidth usage by our subscribers has rapidly increased in recent years primarily due to the increasing popularity of smartphones and data intensive applications among smartphone users. If heavy usage of bandwidth-intensive services grows beyond our current expectations, we may need to invest more capital than currently anticipated to expand the bandwidth capacity of our networks or our customers may have a suboptimal experience when using our services. Any of these events could adversely affect our competitive position and have a material adverse effect on our business, financial condition, results of operation and cash flow. For a more detailed discussion of our capital expenditure plans and a discussion of other factors that may affect our future capital expenditures, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures.”

As of December 31, 2020, we had Won 2,163.4 billion in contractual payment obligations due in 2021, which mostly involve repayment of debt obligations, payments related to lease liabilities and other short-term leases and leases of low-value assets and payments related to frequency licenses. See “Item 5.B. Liquidity and Capital Resources — Contractual Obligations and Commitments.”

We have not arranged firm financing for all of our current or future capital expenditure plans and contractual payment obligations. We have, in the past, obtained funds for our proposed capital expenditure and payment obligations from various sources, including our cash flow from operations as well as from financings, primarily debt and equity financings. Any material adverse change in our operational or financial condition could impact our ability to fund our capital expenditure plans and contractual payment obligations. Still volatile financial market conditions may also curtail our ability to obtain adequate funding. Inability to fund such capital expenditure requirements may have a material adverse effect on our financial condition, results of operations and business. In addition, although we currently anticipate that the capital expenditure levels estimated by us will be adequate to meet our business needs, such estimates may need to be adjusted based on developments in technology and markets. In the event we are unable to meet any such increased expenditure requirements or to obtain adequate financing for such requirements, on terms acceptable to us, or at all, this may have a material adverse effect on our financial condition, results of operations and business.

Termination or impairment of our relationship with a small number of key suppliers for network equipment and for leased lines could adversely affect our results of operations, financial position and cash flows.

We purchase wireless network equipment from a small number of suppliers. To date, we have purchased substantially all of the equipment for our networks from Samsung Electronics Co., Ltd. (“Samsung Electronics”), Ericsson-LG Co., Ltd. (“Ericsson-LG”) and Nokia Corporation (“Nokia”). We believe Samsung Electronics currently manufactures more than half of the wireless handsets sold to our subscribers. Although other manufacturers sell the equipment we require, sourcing such equipment from other manufacturers could result in unanticipated costs in the maintenance and enhancement of our wireless networks. Inability to obtain the equipment needed for our networks in a timely manner may have an adverse effect on our business, financial condition, results of operations and cash flows.

 

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We cannot assure you that we will be able to continue to obtain the necessary equipment from one or more of our suppliers. Any discontinuation or interruption in the availability of equipment from our suppliers for any reason could have an adverse effect on our results of operations. In addition, inability to lease adequate lines at commercially reasonable rates may impact the quality of the services we offer and may also damage our reputation and our business.

Our business relies on technology developed by us, and our business will suffer if we are unable to protect our proprietary rights.

We own numerous patents and trademarks worldwide, and have applications for patents pending in many countries. In addition to active research and development efforts, our success depends in part on our ability to obtain patents and other intellectual property rights covering our services.

We may be required to defend against charges of infringement of patent or other proprietary rights of third parties. Although we have not experienced any significant patent or other intellectual property disputes, we cannot be certain that any significant patent or other intellectual property disputes will not occur in the future. Defending our patent and other proprietary rights could require us to incur substantial expense and to divert significant resources of our technical and management personnel, and could result in our loss of rights to employ certain technologies to provide services.

Malicious and abusive Internet practices could impair our services and we may be subject to significant legal and financial exposure, damage to our reputation and a loss of confidence of our customers.

Our business involves the storage and transmission of large amounts of confidential information, and cybersecurity breaches expose us to a risk of loss of this information, which may lead to improper use or disclosure of such information, ensuing potential liability and litigation, any of which could harm our reputation and adversely affect our business.

Our cybersecurity measures may also be breached due to employee error, malfeasance or otherwise. Instituting appropriate access controls and safeguards across all our information technology infrastructure is challenging. Furthermore, outside parties may attempt to fraudulently induce employees to disclose sensitive information in order to gain access to our data or our customers’ data or accounts, or may otherwise obtain access to such data or accounts. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our cybersecurity occurs or the market perception of the effectiveness of our cybersecurity measures is harmed, we may incur significant legal and financial exposure, including legal claims and regulatory fines and penalties, damage to our reputation and a loss of confidence of our customers, which could have an adverse effect on our business, financial condition and results of operations.

In addition, our wireless and fixed-line subscribers increasingly utilize our network to access the Internet and, as a consequence, we or they may become victim to common malicious and abusive Internet activities, such as unsolicited mass advertising (i.e., “spam”), hacking of personal information and dissemination of viruses, worms and other destructive or disruptive software. These activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume to call centers and damage to our or our customers’ equipment and data. Significant incidents could lead to customer dissatisfaction and, ultimately, loss of customers or revenue, in addition to increased costs to us to service our customers and protect our network. Any significant loss of our subscribers or revenue due to incidents of malicious and abusive Internet practices or significant increase in costs of serving those subscribers could adversely affect our business, financial condition and results of operations.

Labor disputes may disrupt our operations.

Although we have never experienced any significant labor disputes, there can be no assurance that we will not experience labor disputes in the future, including protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operation.

 

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Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has a two-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. Although we consider our relations with our employees to be good, there can be no assurance that we will be able to maintain such a working relationship with our employees and will not experience labor disputes resulting from disagreements with the labor union in the future.

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 (the “IARC”), a part of the World Health Organization, 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 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 these 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. 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 our business by reducing the number of our subscribers or the usage per subscriber.

Our ability to deliver services may be disrupted due to a systems failure, shutdown in our networks or natural disaster.

Our services are currently carried through our wireless and fixed-line networks, which could be vulnerable to damage or interruptions in operations due to fires, floods, earthquakes, power losses, telecommunication failures, network software flaws, unauthorized access, computer viruses and similar events, which may occur from time to time. The occurrence of any of these events could impact our ability to deliver services, we may be liable for damages to our customers caused by such interruptions, our reputation may be damaged and our customers may lose confidence in us, which could have a negative effect on our results of operations.

Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on our results of operations and the market value of our common shares and ADSs.

Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect our results of 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; and

 

   

an increase, in Won terms, of the costs of equipment that we purchase from overseas sources which we pay for in Dollars or other foreign currencies.

Fluctuations in the exchange rate between the Won and the Dollar will affect the Dollar equivalent of the Won price of the our common shares on the KRX KOSPI Market. These fluctuations also will affect:

 

   

the amounts a registered holder or beneficial owner of ADSs will receive from the American Depositary Receipt (“ADR”) depositary in respect of dividends, which will be paid in Won to the ADR depositary and converted by the ADR depositary into Dollars;

 

   

the Dollar value of the proceeds that a holder will receive upon sale in Korea of our common shares; and

 

   

the secondary market price of our ADSs.

 

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If SK Inc. causes us to breach the foreign ownership limitations on our common shares by being deemed to be a foreign entity, we may experience a change of control.

The Telecommunications Business Act currently sets a 49.0% limit on the aggregate foreign ownership of our issued shares. Under the Telecommunications Business Act, as amended, a Korean entity, such as SK Inc., is deemed to be a foreign entity if its largest shareholder (determined by aggregating the shareholdings of such shareholder and its related parties) is a foreigner and such shareholder (together with the shareholdings of its related parties) holds 15.0% or more of the issued voting stock of the Korean entity. As of December 31, 2020, SK Inc. owned 21,624,120 shares of our common stock, or 26.8%, of our issued shares. SK Inc. is currently not deemed to be a foreign entity. However, should SK Inc. be considered to be a foreign shareholder in the future, then its shareholding in us would be included in the calculation of our aggregate foreign shareholding and our aggregate foreign shareholding (based on our foreign ownership level as of December 31, 2020, which we believe was 33.4%) would exceed the 49.0% ceiling on foreign shareholding. As of December 31, 2020, the two largest foreign shareholders of SK Inc. each held a 3.5% stake therein.

If our aggregate foreign shareholding limit is exceeded, the MSIT may issue a corrective order to us, the breaching shareholder (including SK Inc. if the breach is caused by an increase in foreign ownership of SK Inc.) and the foreign shareholder which owns in the aggregate 15.0% or more of SK Inc. Furthermore, if SK Inc. is considered a foreign shareholder, it will be prohibited from exercising its voting rights with respect to the shares held in excess of the 49.0% ceiling, which may result in a change in control of us. In addition, the MSIT will be prohibited from granting us licenses or permits necessary for entering into new telecommunications businesses until our aggregate foreign shareholding is reduced to below 49.0%. For a description of further actions that the MSIT could take, see “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements.”

Risks Relating to Korea

Unfavorable financial and economic developments in Korea may have an adverse effect on us.

We are incorporated in Korea, and a substantial portion of our operations and assets are located in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and starting in 2020, the overall Korean economy and the economies of Korea’s major trading partners have shown signs of deterioration due to the debilitating effects of the COVID-19 pandemic. See “— The ongoing global pandemic of a new strain of coronavirus (“COVID-19”) and any possible recurrence of other types of widespread infectious diseases may adversely affect our business, financial condition or results of operations.” As a result, future growth of the Korean economy is subject to many factors beyond our control, including developments in the global economy.

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the increasing weakness of the global economy, in particular due to the COVID-19 pandemic, have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. The value of the Won relative to major foreign currencies has fluctuated significantly and, as a result of deteriorating global and Korean economic conditions, there has been significant volatility in the stock prices of Korean companies recently. Future declines in the Korea Composite Stock Price Index (known as 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. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

Developments that could have an adverse impact on Korea’s economy include:

 

   

adverse conditions or developments in the economies of countries and regions that are important export markets for Korea, such as China, the United States, Europe and Japan, or in emerging market economies in Asia or elsewhere, including as a result of deteriorating economic and trade relations between the United States and China as well as increased uncertainties resulting from the United Kingdom’s exit from the European Union;

 

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increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;

 

   

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

 

   

the occurrence of severe health epidemics in Korea and other parts of the world (such as the ongoing global COVID-19 pandemic);

 

   

a continuing rise in the level of household debt and increasing delinquencies and credit defaults by retail or small- and medium-sized enterprise borrowers in Korea;

 

   

declines in consumer confidence and a slowdown in consumer spending, including as a result of the COVID-19 pandemic;

 

   

deterioration in the financial condition or performance of small- and medium-sized enterprises and other companies in Korea due to the Government’s policies to increase minimum wages and limit working hours of employees;

 

   

investigations of large Korean conglomerates and their senior management for possible misconduct;

 

   

social and labor unrest;

 

   

substantial changes in the market prices of Korean real estate;

 

   

a substantial decrease in tax revenues or a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs, in particular in light of the Government’s ongoing efforts to provide emergency relief payments to households and emergency loans to corporations in need of funding in light of COVID-19, which, together, would likely lead to a national budget deficit as well as an increase in the Government’s debt;

 

   

financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;

 

   

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues concerning certain Korean conglomerates;

 

   

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 or any changes to existing free trade agreements;

 

   

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

 

   

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

 

   

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 (such as the ongoing trade disputes with Japan);

 

   

political uncertainty or increasing strife among or within political parties in Korea;

 

   

hostilities or political or social tensions involving oil producing countries in the Middle East (including a potential escalation of hostilities between the U.S. and Iran) and North Africa and any material disruption in the global supply of oil or sudden increase in the price of oil;

 

   

political or social tensions involving Russia and any resulting adverse effects on the global supply of oil or the global financial markets; and

 

   

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

 

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Escalations in tensions with North Korea could have an adverse effect on us and the market value of our common shares and ADSs.

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

 

   

North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and has conducted six rounds of nuclear tests since October 2006, including claimed detonations of hydrogen bombs, which are more powerful than plutonium bombs, and warheads that can be mounted on ballistic missiles. Over the years, North Korea has also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it claims can reach the United States mainland. In response, the Government has repeatedly condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions. In February 2016, the Government also closed the inter-Korea Gaesong Industrial Complex in response to North Korea’s fourth nuclear test in January 2016. Internationally, the United Nations Security Council has passed a series of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea, most recently in December 2017 in response to North Korea’s intercontinental ballistic missile test in November 2017. Over the years, the United States and the European Union have also expanded their sanctions applicable to North Korea.

 

   

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 of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more 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, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges, which may further aggravate social and political pressures within North Korea. Although bilateral summit meetings were held between Korea and North Korea in April, May and September 2018 and between the United States and North Korea in June 2018, February 2019 and June 2019, there can be no assurance that the level of tensions affecting the Korean peninsula will not escalate in the future. Any increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea or the United States and North Korea break down or military hostilities occur, could have a material adverse effect on our business, results of operations and financial condition and the market value of our common shares and ADSs.

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, annual 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. 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.

 

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There are special risks involved with investing in securities of Korean companies, including the possibility of restrictions being imposed by the Government in emergency circumstances.

As we are a Korean company and operate in a business and cultural environment that is different from that of other countries, there are risks associated with investing in our securities that are not typical for investments in securities of companies in other jurisdictions.

Under the Korean Foreign Exchange Transactions Act, if the Government deems that certain emergency circumstances, including a significant disruption in the international balance of payments and international financial markets or extreme difficulty in carrying out currency, exchange rate or other macroeconomic policies due to the movement of capital between Korea and other countries, are likely to occur, it may impose any necessary restriction such as requiring Korean or foreign investors to obtain prior approval from the Ministry of Economy and Finance (the “MOEF”) for the acquisition of Korean securities or for the repatriation of interest, dividends or sales proceeds arising from Korean securities or from disposition of such securities or other transactions involving foreign exchange. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

Risks Relating to Securities

Sales of our shares by SK Inc. and/or other large shareholders may adversely affect the market value of our common shares and ADSs.

Sales of substantial amounts of our common shares, or the perception that such sales may occur, could adversely affect the prevailing market value of our common shares or ADSs or our ability to raise capital through an offering of our common shares.

As of December 31, 2020, SK Inc. owned 26.8% of our total issued common shares and has not agreed to any restrictions on its ability to dispose of our shares. See “Item 7.A. Major Shareholders.” We can make no prediction as to the timing or amount of any sales of our common shares. We cannot assure you that future sales of our common shares, or the availability of our common shares for future sale, will not adversely affect the prevailing market value of our common shares or ADSs from time to time.

We believe that we may be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ending December 31, 2020 and that there is a significant risk that we will be classified as a PFIC in the current and future taxable years, which could subject U.S. investors in our common shares or ADSs to significant adverse U.S. federal income tax consequences.

As a result of changes in the composition and value of our assets as implied by the price of our ADSs, we believe that we may be classified as a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes for our taxable year ending December 31, 2020, and that there is a significant risk that we will be a PFIC for the current and future taxable years.

A non-U.S. corporation will be a PFIC if, in any particular taxable year, either (a) 75% or more of its gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of its assets (generally determined on the basis of a quarterly average) is attributable to assets that produce or are held for the production of passive income.

If we are classified as a PFIC in any taxable year, a U.S. holder (as defined in “Item 10.E. Additional Information — Taxation — United States Federal Income Tax Considerations”) may incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of the common shares or ADSs and on the receipt of distributions on the common shares or ADSs to the extent such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax rules, and such U.S. holder may be subject to burdensome reporting requirements. The amount of income tax on any excess distributions will be increased by an interest charge to compensate for tax deferral, calculated as if the excess distributions were earned ratably over the period that the U.S. holder holds its common shares or ADSs. Further, if we are a PFIC for any year during which a U.S. holder holds our commons shares or ADSs, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our common shares or ADSs unless we cease to be a PFIC and the U.S. holder makes a special election.

 

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A U.S. holder may be able to avoid the unfavorable rules described above by electing to mark its ADSs to market, provided the ADSs are treated as “marketable stock.” The ADSs generally will be treated as marketable stock if the ADSs are “regularly traded” on a “qualified exchange or other market” (which includes the New York Stock Exchange). Further, it should be noted that only the ADSs and not the common shares are listed on the New York Stock Exchange. Consequently, a U.S. holder that holds common shares that are not represented by ADSs may not be eligible to make a mark-to-market election in respect of those common shares.

U.S. holders are strongly urged to consult their own tax advisors regarding our potential classification as a PFIC and regarding the U.S. federal income tax consequences of acquiring, holding, and disposing of our common shares or ADSs if we are so classified, including the advisability of making a “mark-to-market” election, if available. See “Item 10.E. Additional Information — Taxation — United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules” for more details.

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

Under the deposit agreement, holders of our common shares may deposit those shares with the ADR depositary’s custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the ADR depositary and receive our common shares. However, under the terms of the deposit agreement, as amended, the depositary bank is required to obtain our prior consent to any such deposit if, after giving effect to such deposit, the total number of our common shares represented by ADSs, which was 6,600,692 shares as of March 31, 2021, exceeds a specified maximum, which was 24,321,893 shares as of March 31, 2021, subject to adjustment under certain circumstances. In addition, the depositary bank or the custodian may not accept deposits of our common shares for issuance of ADSs under certain circumstances, including (1) if it has been determined by us that we should block the deposit to prevent a violation of applicable Korean laws and regulations or our articles of incorporation or (2) if a person intending to make a deposit has been identified as a holder of at least 4.0% of our common shares. It is possible that we may not give the consent. Consequently, an investor who has surrendered his or her ADSs and withdrawn the underlying shares may not be allowed to deposit the shares again to obtain ADSs.

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

The Korean Commercial Code 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 a right to subscribe for additional new common shares or any other rights of similar nature, the ADR depositary, 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 ADR depositary, 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 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 with respect to any ADSs. 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 or her preemptive rights for additional shares. As a result, ADS holders may suffer dilution of their equity interest in us.

Short selling of our ADSs by purchasers of securities convertible or exchangeable into our ADSs could materially adversely affect the market price of our ADSs.

SK Inc., through one or more special purpose vehicles, has engaged and may in the future engage in monetization transactions relating to its ownership interest in us. These transactions have included and may include offerings of securities that are convertible or exchangeable into our ADSs. Many investors in convertible or

 

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exchangeable securities seek to hedge their exposure in the underlying equity securities at the time of acquisition of the convertible or exchangeable securities, often through short selling of the underlying equity securities or similar transactions. Since a monetization transaction could involve debt securities linked to a significant number of our ADSs, we expect that a sufficient quantity of ADSs may not be immediately available for borrowing in the market to facilitate settlement of the likely volume of short selling activity that would accompany the commencement of a monetization transaction. This short selling and similar hedging activity could place significant downward pressure on the market price of our ADSs, thereby having a material adverse effect on the market value of ADSs owned by you.

A holder of our ADSs may not be able to enforce a judgment of a foreign court against us.

We are a corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this document reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this document and substantially all of our assets are located in Korea. As a result, it may not be possible for holders of our ADSs to effect service of process within the United States, or to enforce against us any judgments obtained from the United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

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

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies, which may differ in some respects from standards applicable in other countries, including the United States. As a reporting company registered with the SEC and listed on the New York Stock Exchange (the “NYSE”), we are subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). However, foreign private issuers, including us, are exempt from certain corporate governance requirements under the Sarbanes-Oxley Act or under the rules of the NYSE. There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public or non-public companies in other countries. Such differences in corporate governance standards and less public information available could result in corporate governance practices or disclosures that are perceived as less than satisfactory by investors in certain countries.

 

Item 4.

INFORMATION ON THE COMPANY

 

Item 4.A.

History and Development of the Company

As Korea’s first wireless telecommunications service provider, we have a recognized history of leadership and innovation in the domestic telecommunications sector. Today, we remain Korea’s leading wireless telecommunications services provider and have continued to pioneer the commercial development and implementation of state-of-the-art wireless technologies. We had 31.4 million wireless subscribers, including MVNO subscribers leasing our networks, as of December 31, 2020, representing a market share of 45.1%, the largest market share among Korean wireless telecommunications service providers. We believe we are also a leader in developing new products and services that reflect the increasing convergence of telecommunications technologies, as well as the growing synergies between the telecommunications sector and other industries, and are well-positioned to become Korea’s leading platform service provider through our next-generation growth businesses in media, security, commerce, mobility, IoT solutions and other innovative products offered through our platform services, including AI solutions.

In February 2012, we acquired an equity stake in SK Hynix, one of the world’s largest memory-chip makers by revenue, for an aggregate purchase price of Won 3.4 trillion, and became its largest shareholder. As of December 31, 2020, we held a 20.1% equity interest in SK Hynix.

On March 31, 2021, we had a market capitalization of approximately Won 22.2 trillion (US$19.7 billion, as translated at the noon buying rate of March 31, 2021) or approximately 1.0% of the total market capitalization on

 

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the KRX KOSPI Market, making us the 17th largest company listed on the KRX KOSPI Market based on market capitalization on that date. Our ADSs, each representing one-ninth of one share of our common stock, have traded on the NYSE since June 27, 1996.

We are a corporation with limited liability organized under the laws of Korea. We established our telecommunications business in March 1984 under the name Korea Mobile Telecommunications Co., Ltd. We changed our name to SK Telecom Co., Ltd., effective March 21, 1997. In January 2002, we merged with Shinsegi Telecom Co., Ltd. (“Shinsegi”), which was then the third-largest wireless telecommunications service provider in Korea. Our registered office is at SK T-Tower, 65, Eulji-ro, Jung-gu, Seoul 04539, Korea and our telephone number is +82-2-6100-2114. Our website address is http://www.sktelecom.com.

The SEC maintains a website (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Korean Telecommunications Industry

Established in March 1984, we became the first wireless telecommunications service provider in Korea. We remained the sole provider of wireless telecommunications services until April 1996, when Shinsegi commenced cellular service. The Government began to introduce competition into the fixed-line and wireless telecommunications services markets in the early 1990’s. During this period, the Government allowed new competitors to enter the fixed-line sector, sold a controlling stake in us to the SK Group, and granted a cellular license to our first competitor, Shinsegi. In October 1997, three additional companies began providing wireless telecommunications services under Government licenses to provide wireless telecommunications services. In 2000 and 2001, the Korean wireless telecommunications market experienced significant consolidation. In January 2002, Shinsegi was merged into us. Additionally, two of the other wireless telecommunications services providers merged.

There are currently three mobile network operators in Korea: our company, KT and LG U+. As of December 31, 2020, the market share of the Korean wireless telecommunications market, in terms of number of subscribers, of KT and LG U+ was approximately 31.4% and 23.5%, respectively (compared to our market share of 45.1%), each including MVNO subscribers leasing the respective networks. As of December 31, 2020, MVNOs had a combined market share of 13.1%, of which MVNOs leasing our networks represented 3.3%, MVNOs leasing KT’s networks represented 7.1% and MVNOs leasing LG U+’s networks represented 2.7%.

Telecommunications industry growth in Korea has been among the most rapid in the world, with fixed-line penetration being under five lines per 100 population in 1978 and increasing to 47.9 lines per 100 population as of December 31, 2006 before decreasing to 24.8 lines per 100 population as of December 31, 2020, and wireless penetration increasing from 7.0 subscribers per 100 population in 1996 to 134.2 subscribers per 100 population as of December 31, 2020. The table below sets forth certain subscription and penetration information regarding the Korean telecommunications industry as of the dates indicated:

 

     As of December 31,  
     2020      2019      2018      2017      2016  
     (In thousands, except for per population amounts)  

Population of Korea(1)

     51,829        51,850        51,826        51,779        51,696  

Wireless Subscribers(2)

     69,542        67,937        65,360        62,651        60,287  

Wireless Subscribers per 100 Population

     134.2        131.0        126.1        121.0        116.6  

Telephone Lines in Service

     12,859        13,600        14,334        15,039        15,746  

Telephone Lines per 100 Population

     24.8        26.2        27.7        29.0        30.5  

 

 

(1)

Source: The Ministry of the Interior and Safety.

(2)

Includes subscribers of non-mobile phone wireless services, including services for tablet computers, wearable devices, IoT devices and others.

Since the introduction of short text messaging in 1998, Korea’s wireless data market has grown rapidly. This growth has been driven, in part, by the rapid development of wireless Internet service since its introduction in 1999

 

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and the implementation of LTE and 5G technologies providing for fast data transmission speeds and large data transmission capacity. As of December 31, 2020, approximately 59.9 million Korean wireless subscribers owned Internet-enabled handsets capable of accessing wireless Internet services, including 52.2 million subscribers that own smartphones that have direct access to the Internet using mobile Internet technology. The table below sets forth certain penetration information regarding the number of Internet-enabled handsets, smartphones and wireless subscribers in Korea as of the dates indicated:

 

     As of December 31,  
     2020     2019     2018     2017     2016  
     (In thousands, except for percentage data)  

Number of Wireless Internet-Enabled Handsets

     59,886       58,812       58,074       56,576       55,085  

Number of Smartphones

     52,223       51,132       49,442       48,660       46,418  

Total Number of Wireless Subscribers(1)

     69,542       67,937       65,360       62,651       60,287  

Penetration of Wireless Internet-Enabled Handsets

     86.1     86.6     88.9     90.3     91.4

Penetration of Smartphones

     75.1     75.3     75.6     77.7     77.0

 

 

(1)

Includes subscribers of non-mobile phone wireless services, including services for tablet computers, wearable devices, IoT devices and others.

In addition to its well-developed wireless telecommunications sector, Korea has one of the largest Internet markets in the Asia Pacific region. From the end of 2010 to the end of 2020, the number of broadband Internet access subscribers increased from approximately 17.2 million to approximately 22.3 million. In connection with such growth in broadband Internet usage, the number of IPTV subscribers has also increased rapidly. The table below sets forth certain information regarding broadband Internet access subscribers and IPTV subscribers as of the dates indicated:

 

     As of December 31,  
     2020      2019      2018      2017      2016  
     (In thousands)  

Number of Broadband Internet Access Subscribers(1)

     22,330        21,906        20,989        20,349        19,818  

Number of IPTV Subscribers

     19,365        17,989        16,599        15,381        11,850  

 

 

(1)

Includes subscribers accessing Internet service using digital subscriber line, or xDSL, connections; cable modem connections; local area network, or LAN, connections; fiber-to-the-home, or FTTH, connections and satellite connections.

 

Item 4.B.

Business Overview

Overview

We are Korea’s leading wireless telecommunications services provider and continue to pioneer the commercial development and implementation of state-of-the-art wireless and fixed-line technologies and services as well as develop our next-generation growth businesses in media, security, commerce, mobility, IoT solutions and other innovative products offered through our platform services, including AI solutions. Our operations are reported in five segments:

 

   

cellular services, which include wireless voice and data transmission services, sales of wireless devices, IoT solutions and platform services;

 

   

fixed-line telecommunication services, which include fixed-line telephone services, broadband Internet services, advanced media platform services (including IPTV and cable TV services) and business communications services;

 

   

security services, which include physical security services and information security services;

 

   

commerce services, which include our open marketplace platform, 11st, our T-commerce business, SK stoa, and related ancillary services; and

 

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other businesses, which include our portal service, mobility business, marketing platform business and certain other miscellaneous businesses.

Our Business Strategy

We believe that the current trends in the Korean telecommunications industry are characterized by technological change, evolving consumer needs and increasing digital convergence. Against the backdrop of these industry trends, we aim to maintain our leading position in the Korean market for wireless telecommunications services and actively develop our next-generation growth businesses in media, security, commerce, mobility, IoT solutions and other innovative products offered through our platform services. We plan to further utilize our big data analysis capabilities to create products and services that are tailored to our customers’ evolving needs, as well as incorporate AI capabilities directly into many of the products and services we offer. By doing so, we strive to become a socially respected “New ICT Leader” as universally recognized by our customers, business partners and shareholders. To take advantage of evolving industry trends and further realize our corporate vision to become a “New ICT Leader,” we have undertaken the following strategic initiatives:

 

   

Maintain our leadership in the wireless services business by offering innovative 5G services and customer-oriented products and services and evolve into a subscription-based marketing company. We plan to maintain our leadership in the wireless services business by offering innovative 5G services that provide differentiated subscriber experiences. We also plan to promote the proliferation of 5G services by offering services and content that are specialized for the 5G environment, such as cloud gaming, hands-on experience services and e-sports. In addition, we will continue to analyze the needs of our subscribers leveraging our AI technology and provide products and services that meet such needs. Furthermore, we intend to broaden the range of our product and service offerings for subscription to new business areas such as rental, gaming and overseas shipment and further expand our subscriber base to promote our growth and evolve into a “subscription-based marketing company.”

 

   

Develop our next-generation growth businesses through hyper-collaboration. We believe that we have evolved from being a domestic telecommunications provider in Korea to possessing the fundamental capabilities that enable us to pursue a broad range of collaboration in the field of ICT with both domestic and international partners. We have formed strategic partnerships with industry leaders to create synergies in various areas, such as 5G cloud gaming, mobile edge computing (“MEC”) and e-sports, and we are continually expanding the areas for collaboration. We aim to create an environment for “hyper-collaboration” to develop and foster our next-generation growth businesses.

 

   

Develop our technological capabilities and new products and services to support our 5G network. We aim to continue developing cutting-edge technologies that will be adopted as the technological standard for 5G services. In addition, we will seek to apply our 5G infrastructure and capabilities to our various other key businesses such as media, security and commerce to create unique new products and services geared to serve evolving customer needs. Furthermore, we aim to collaborate with various partners to identify new business opportunities that can potentially leverage our 5G network.

 

   

Pursue sustainable management to seek mutual growth with the broader society. The SK Management System, which is the business philosophy and foundation of corporate culture of the SK Group, includes as a key component the goal of growing together with the broader society by contributing to its economic growth and creating social value. Based on a socially accountable governance system led by the Corporate Citizenship Committee of our board of directors, we aim to pursue the “double bottom line” of achieving long-term shareholder value as well as creating social value by leveraging our business capabilities, thereby contributing to the well-being of all stakeholders and the enhancement of our corporate value in the long-term.

As part of our ongoing efforts to pursue such strategies, we are currently considering a potential corporate restructuring whereby we would split into a wireless and fixed-line telecommunications company (including our interest in, among others, SK Broadband) and the Spin-off Company, which would hold interests in semiconductor and new ICT businesses (including our interest in, among others, SK Hynix, ADT CAPS, Eleven Street and T Map Mobility). Such restructuring would be implemented through a horizontal spin-off transaction (“injeok bunhal”)

 

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under Korean law, whereby the Spin-off Company would be newly incorporated and our existing shareholders would receive shares of the Spin-off Company on a pro rata basis. Further decisions regarding the potential spin-off, if any, are expected to be made in the first half of 2021.

Cellular Services

We offer wireless voice and data transmission services, sell wireless devices and provide IoT solutions and innovative platform services through our cellular services segment. Our wireless voice and data transmission services are offered through our backbone networks that collectively can be accessed by approximately 99.0% of the Korean population. We had 31.4 million wireless subscribers, including MVNO subscribers leasing our networks, as of December 31, 2020, representing a market share of 45.1%, the largest market share among Korean wireless telecommunications service providers. We launched our wireless services using our 5G network in April 2019, and we are continually expanding our 5G network coverage and enhancing service quality. The table below sets forth the number of subscribers, including subscribers of MVNOs that lease our wireless networks, using our various digital wireless networks as of the dates indicated:

 

     As of December 31,  
     2020      2019      2018      2017      2016  
     (in thousands)  

Network

              

5G

     5,476        2,084        —          —          —    

LTE

     22,848        25,022        24,796        22,865        21,078  

WCDMA

     2,920        3,986        5,174        5,842        6,491  

CDMA(1)

     139        443        912        1,488        2,026  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31,384        31,535        30,882        30,195        29,595  

 

 

(1)

In July 2020, we terminated our second generation wireless services using our CDMA network. CDMA subscribers as of December 31, 2020 consist of subscribers who have not upgraded to our other networks or terminated their subscriptions as of such date.

In 2020, 2019 and 2018, our cellular services segment revenue was Won 12,295.7 billion, Won 12,177.5 billion and Won 12,378.9 billion, respectively, representing 66.0%, 68.6% and 73.4%, respectively, of our consolidated revenue.

Wireless Services

We offer wireless voice transmission and data transmission services to our subscribers through our backbone networks. Our wireless telecommunications services are available to our subscribers receiving service under the SK Telecom brand. In addition, customers can obtain wireless telecommunications services that operate on our network from MVNOs that lease our wireless networks. We derive revenues from our wireless telecommunications service principally through monthly plan-based fees as described in “— Rate Plans” below.

We provide a voice-over-LTE service, known as our “HD Voice” service, to all of our LTE and 5G subscribers featuring high-quality voice transmission, fast call connection, voice-to-video call switching and digital content sharing during calls. We also offer our subscribers a wide range of wireless data transmissions services. Our messaging service allows our subscribers to send and receive text, graphic, audio and video messages. In addition, our subscribers can access a wide variety of digital content and services through mobile applications providing music, video, gaming, news, commerce and financial services as well as solutions that enable subscribers to access the Internet and e-mail. We intend to continue to build our wireless data services as a platform for growth, extending our portfolio of wireless data services and developing new content for our subscribers.

Through service agreements with various foreign wireless telecommunications service providers, we offer cellular global roaming services, branded as our “T-Roaming” service. Global roaming services allow subscribers traveling abroad to make and receive calls using their regular mobile phone numbers. In addition, we provide global roaming service to foreigners traveling to Korea. In such cases, we generally receive a fee from the traveler’s local wireless telecommunications service provider.

 

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Through SK Telink, we also operate our MVNO business under the brand “SK 7Mobile,” which we believe offers excellent quality at reasonable rates utilizing SK Telecom’s wireless networks. SK Telink is focused on developing low-cost distribution channels and targeting niche customer segments that have a lower average revenue per user than that of SK Telecom’s subscriber base.

In addition, we provide interconnection service to connect our networks to domestic and international fixed-line and other wireless networks. See “— Interconnection” below.

Wireless Device Sales

We offer several categories of wireless devices, including smartphones and basic phones, tablets and other Internet access devices and wearable devices that are sold through an extensive distribution network, which consists of authorized exclusive dealers and independent retailers, as well as branch offices and stores directly operated by us through our wholly-owned subsidiary, PS&Marketing Co., Ltd. (“PS&Marketing”). As of December 31, 2020, approximately 23.9 million, or 76.3%, of our subscribers (including MVNO subscribers leasing our networks) owned smartphones that have direct access to the Internet compared to approximately 23.6 million subscribers, or 74.8%, as of December 31, 2019. We purchase a substantial majority of our wireless devices from Samsung Electronics, Apple and LG Electronics.

Smartphones and Basic Phones.    We offer smartphones that are enabled to utilize our digital wireless networks and run on various operating systems, such as Apple iOS and Google Android. We also offer basic phones that have the ability to access wireless Internet services.

Tablets and Other Internet Devices.    We offer tablets which can access the Internet via our digital wireless networks and a Wi-Fi connection. The tablets run primarily on the Apple iOS and Google Android operating systems. In addition, we also offer “T Pocket-Fi” devices that provide a mobile LTE connection and are capable of connecting multiple Wi-Fi enabled devices to the Internet at one time. We offer targeted rate plans for our T Pocket-Fi device. See “— Rate Plans” below.

Wearable Devices.    We offer various wearable devices, which primarily comprise smart watches. These devices utilize our digital wireless networks and have specific features for the relevant target customer. We offer targeted rate plans that are specific to these wearable devices. See “— Rate Plans” below.

IoT Solutions

Through our IoT solutions business, we provide network access and enhanced services to support telemetry-type applications, which are characterized by massive machine-type communication (“mMTC”) wireless connections, to business customers. In order to promote the growth of our IoT solutions business, we deployed networks nationwide that are designed to support IoT devices, namely our high-speed LTE-M network in March 2016 and our low-cost Low-Power Wide-Area network based on LoRa technology (our “LoRa network”) in July 2016. In April 2018, we increased the battery efficiency of our IoT devices by launching our LTE Cat.M1 technology, and we have further enhanced our competitiveness in this business with our newly deployed 5G network.

We provide network access and customized IoT solutions to our business customers. Our IoT services support devices that are used in a variety of market segments, including retail, utilities, security, automotive, agriculture and data analytics. For example, our Cloud Energy Management Solution (“Cloud EMS”) business provides a one-stop cloud computing-based energy management platform that collects and analyzes energy usage data from business customers and offers solutions to optimize and reduce their energy consumption. As of December 31, 2020, Cloud EMS had approximately 220 customers, mostly from energy-intensive industries such as the petrochemical industry as well as the luxury retail industry.

Platform Services

Through our platform services business, we seek to provide innovative AI products and services that meet our customers’ evolving needs in an increasingly connected world. In September 2016, we launched NUGU, the first

 

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intelligent AI service launched in Korea with Korean language capabilities based on advanced voice recognition technologies. NUGU is one of the leading AI platforms in Korea, which offers a wide range of devices and services that enhance various aspects of everyday life of our customers, such as homes, cars and mobile phones. Through cloud-based deep-learning technology, NUGU is designed to evolve on its own as it collects more data about its users over time.

We offer a variety of smart devices based on NUGU, such as “NUGU candle,” an AI light that offers NUGU-based services and changes its color and brightness based on the user’s needs and preferences, “NUGU nemo,” a smart speaker with a touchscreen, “NUGU CHIPS,” a wireless charging dock compatible with certain Samsung Galaxy smartphones that automatically launches a mobile application converting the smartphone being charged into a NUGU-capable device, and “albert AI,” an educational device that teaches children how to code.

We have also integrated NUGU into our T map service as well as our B tv service as further discussed in “— Other Businesses — Miscellaneous Businesses — Mobility Business” and “— Fixed-line Telecommunication Services — Advanced Media Platform (including IPTV and Cable TV Services).”

In addition, we integrated NUGU into our “T phone” service, which offers our customers a number of convenient call functions, such as a spam-call blocking function and a search function that informs customers of the phone numbers of shops, hospitals and other facilities closest to the customer’s current location. The integrated “T phone × NUGU” service allows T phone users to search phone numbers, make calls, send text messages and experience other AI-based services through voice commands. Through Dreamus Company, we also offer “NUGU buds,” which are wireless earbuds that enable users to launch and operate “T phone × NUGU” while wearing them without touching their smartphones.

In 2018, we launched “NUGU developers,” a platform on which third-party manufacturers and developers can create and launch new services based on NUGU technology and incorporate NUGU capabilities into their applications or devices. In 2020, we launched “NUGU carecall” in response to the COVID-19 pandemic, which is a service that tracks and records symptoms of persons subject to monitoring through mobile phones. We continue to explore ways in which we can leverage our NUGU technology to launch new, and enhance our existing, products and services.

Other New Businesses

We are preparing to launch a variety of integrated cloud services based on our advanced 5G MEC technology and platform for business customers that require secure and ultra-low latency communications, focusing on the media, logistics, healthcare, finance and manufacturing industries. We completed the construction of MEC infrastructure at four strategic locations during 2020 and we launched our first MEC-based cloud service, “5GX Edge Cloud,” in collaboration with Amazon Web Services in December 2020. We have entered into strategic partnerships with Amazon Web Services and other leading cloud service providers to pursue further collaboration on MEC-based cloud services. We also plan to provide smart factory solutions that can leverage our 5G technology and MEC-based cloud services, beginning with SK Hynix, which we expect to result in enhanced efficiency for its semiconductor manufacturing process.

Rate Plans

We offer our wireless telecommunications services on both a postpaid and prepaid basis. Approximately 96.4% of our subscribers received our wireless telecommunications services on a postpaid basis as of December 31, 2020. Postpaid accounts primarily represent retail subscribers under contract with SK Telecom under which a subscriber is billed in advance a monthly fixed rate in return for a monthly network service allowance and usage for outgoing voice calls and wireless data services beyond the allowance is billed in arrears, where payment of the total amount of the bill is due at the end of the month. The standard contract period for our rate plans is 24 months, although our subscribers have the option to enter into shorter term contracts or no fixed-term contract at all. We provide various subsidies and discounts, including handset subsidies, depending on the length of the contract and the subscriber’s chosen rate plan. Our prepaid service enables individuals to obtain wireless telecommunications services without a fixed-term contract by paying for all services in advance according to expected usage. We do not charge our customers for incoming calls, although we do receive interconnection charges from KT and other

 

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companies for calls from the fixed-line network terminating on our networks and interconnection revenues from other wireless network operators. See “— Interconnection” below.

We also charge our customers a 10.0% value-added tax, which is included in the price of all of our rate plans. We can offset the value-added tax we collect from our customers against value-added tax refundable to us by the Korean tax authorities. We remit taxes we collect from our customers to the Korean tax authorities. We record revenues in our financial statements net of such taxes.

Basic Rate Plans.    We offer various postpaid account plans for smartphones and basic phones that are designed to meet a wide range of subscriber needs and interests. Our 5G services are provided through the “5GX” plans, which offer unlimited domestic voice minutes and text messaging and a fixed or unlimited data transmission allowance per month and range from Won 55,000 to Won 125,000 per month. As of December 31, 2020, approximately 4.5 million subscribers have subscribed to the “5GX” plans. Our representative smartphone rate plans for our LTE services are the “T” plans, which feature unlimited domestic voice minutes and text messaging and a fixed or unlimited data transmission allowance per month and range from Won 33,000 to Won 100,000 per month. In 2020, a majority of our new LTE subscribers have subscribed to the “T” plans. In January 2021, we also launched “Un-tact” plans that are exclusively available through our online distribution channel, ranging from Won 38,000 to Won 62,000 per month for 5G services and from Won 22,000 to Won 48,000 per month for LTE services. Our “Voice Free” plans are available for our basic phones and feature a fixed allowance of voice minutes and 50 text messages per month with rates that range from Won 20,900 to Won 103,400 per month. We also offer a standard rate plan for Won 12,100 per month, through which the subscriber is charged per usage amount, other than on text message usage up to 50 messages per month.

In addition, we provide a variety of differentiated rate plans for our customer segments such as our “0” plans for smartphone users who are 24 years old or younger featuring greater data allowance and premium benefits tailored for younger demographics, our “ZEM” plan for children who are 12 years old or younger, our “T Global” rate plans for foreigners featuring unlimited domestic voice minutes and text messaging, a fixed allowance of international voice minutes and data transmission per month and our “Weekend Ting” rate plans for teenagers featuring more data transmission allowance on weekends.

For our T Pocket-Fi device, we provide a fixed monthly data transmission allowance of 10 GB for Won 16,500 per month and 20 GB for Won 24,750 per month. With respect to the wearable devices that we offer, we offer targeted rate plans for smart watches that range from Won 11,000 to Won 12,100 per month.

Data Add-on Rate Plans.    We offer a variety of optional “add-on” rate plans that are designed to meet a wide range of subscriber needs with respect to increased data usage that followed the widespread use of smartphones and faster transmission speeds. For example, we offer data plans that offer unlimited data based on time, place and occasion such as our “Subway Free” plan, which offers unlimited wireless data usage on subway platforms and inside subways and our “Commuter Free” plan, which offers unlimited wireless data usage during rush hour, each for a fixed rate of Won 9,900 per month. For certain rate plan subscribers, we also offer unlimited access to wavve through our “wavve and Data Plus” plan at no additional cost or for Won 2,400 or Won 12,300 per month, depending on the subscribers’ basic rate plan. “Safe Option Premium” offers an additional daily data transmission allowance of 50 MB to subscribers who have used the maximum data transmission on their existing plan without incurring additional data transmission fees for a fixed rate of Won 8,800 per month. We also offer “T Data Coupons,” through which subscribers can purchase a fixed amount of data for a fixed price and can also be sent as “gifts” to family and friends that need additional data allowance.

Roaming Plans.    Our representative international roaming service plans include our “baro 3 GB,” “baro 4 GB and “baro 7 GB” plans for long-term travel, which provide fixed data transmission allowances of 3 GB, 4 GB or 7 GB that can be used over a specified number of days in approximately 180 countries for Won 29,000, Won 39,000 and Won 59,000, respectively, as well as our “baro OnePass 300” and “baro OnePass 500” plans suitable for short-term travel, which are fixed rate plans that provide data roaming of 300 MB for Won 9,900 per day and 500 MB for Won 16,500 per day, respectively, and are available in 180 countries. We also offer our “baro OnePass VIP” and “baro OnePass Data VIP” plans, which provide unlimited data roaming, 30 minutes of voice calls and 30 text messages per day for Won 19,000 per day and unlimited data roaming for Won 17,600 per day, respectively, in 94 countries. All of our “baro” plans include free high-quality data voice calls to Korea through our T phone

 

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application. We also provide to all of our roaming service subscribers an automatic roaming service called “Safe Automatic T Roaming,” which provides 30 minutes of voice calls per day (including three minutes of free voice calls) for a maximum of Won 10,000 (with voice calls in excess of 30 minutes per day incurring additional charges). With respect to international calls placed by a subscriber, unless the subscriber uses one of our fixed-rate international roaming plans, we bill the subscriber the international rate charged by the Korean international telephone service provider through which the call is routed. We remit to that provider the international charge less our usage charges. See “— Interconnection” below.

Digital Wireless Network

We offer wireless voice and data transmission services throughout Korea using digital wireless networks, primarily consisting of our 5G network, LTE network, WCDMA network, Wi-Fi network and LoRa network. We continually upgrade and increase the capacity of our wireless networks to keep pace with advancements in technology, the growth of our subscriber base and the increased usage of voice and wireless data services by our subscribers. For more information about our capital expenditures relating to our wireless networks, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures.”

5G Network.    5G is the state-of-the-art wireless network that enables data to be transmitted at speeds faster than our LTE network with lower latency. We began the operation of our 5G network in December 2018 on a limited basis for business customers, beginning with a few major commercial districts in Seoul and other metropolitan areas. In April 2019, we launched wireless service plans using the 5G network following the commencement of sales of the first 5G-compatible smartphones, and we are in the process of expanding our 5G network coverage, focusing on major commercial districts and other densely-populated areas in the Seoul metropolitan area and other cities. As part of this coverage expansion, as of December 31, 2020, we have established 189 “5G Clusters” with high 5G connectivity at strategic locations where customers are able to experience the full potential of our 5G network through augmented reality and virtual reality services, cloud gaming and other ICT products. Our 5G services provide a maximum data transmission speed of 2.75 Gbps, and our 5G penetration was 17.4% as of December 31, 2020. We have also deployed our 5G network for mMTC connections relating to our IoT solutions.

We believe that our 5G technology and network infrastructure enable us to provide the fastest 5G data transmission network nationwide. In December 2020, the MSIT announced that our 5G network provided the fastest upload and download speeds among the three mobile network operators, KT, LG U+ and us. The nationwide average download speed of our 5G network was 795.6 Mbps compared to 667.5 Mbps for KT’s 5G network and 608.5 Mbps for LG U+’s 5G network.

 

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LTE Network.    LTE technology has become widely accepted globally as the standard fourth generation technology and enables data to be transmitted at speeds faster than our WCDMA network. Since first commencing our LTE services in July 2011 and LTE-A services, which use carrier aggregation technology that combines spectrum frequencies to improve data transmission speeds, in June 2013, we have developed and launched various upgraded LTE networks and services providing faster network speeds, enhanced connectivity and broader coverage areas. In February 2018, we launched four-band LTE-A services utilizing 4x4 multiple-input multiple-output (“MIMO”) technology providing for data transmission speeds of up to 1 Gbps, and we commenced five-band LTE-A services using 4x4 MIMO technology that provide data transmission speeds of up to 1.15 Gbps in March 2019 and up to 1.25 Gbps in March 2020. With these developments in LTE technology, our LTE penetration increased to 72.8% as of December 31, 2020 compared to 49.3% as of December 31, 2013. We expect that wireless services based on LTE technology will continue to be used broadly by our users in the near future, as we and our competitors continue to build up 5G networks and services and wireless service users gradually migrate to the 5G network over time, and plan to continue to deploy improved LTE-A technology to increase the maximum data transmission speed of our services. For machine-to-machine connections relating to our IoT solutions, we launched our LTE-M services at speeds of up to 10 Mbps in March 2016, as well as our LTE Cat.M1 services at speeds of up to 0.03 Mbps in April 2018. Upgrades to our LTE technology in recent years have enabled even faster data transmission speeds, as shown below.

 

Wireless network technology

   Date of commencement of services    Maximum data transmission speed  

LTE

   July 2011      75 Mbps  

LTE-A

   June 2013      150 Mbps  

Wideband LTE-A

   June 2014      225 Mbps  

Tri-band LTE-A

   December 2014      300 Mbps  

Five-band LTE-A

   June 2017      700 Mbps  

Tri-band LTE-A with 4x4 MIMO

   June 2017      900 Mbps  

Four-band LTE-A with 4x4 MIMO

   February 2018      1 Gbps  

Five-band LTE-A with 4x4 MIMO

   March 2019      1.15 Gbps  

Five-band LTE-A with 4x4 MIMO

   March 2020      1.25 Gbps  

We believe that our advanced LTE technology and dense network infrastructure enable us to provide the fastest LTE data transmission network nationwide. In December 2020, the MSIT announced that our LTE network provided the fastest upload and download speeds among the three mobile network operators, KT, LG U+ and us. The nationwide average download speed of our LTE network was 207.7 Mbps compared to 142.1 Mbps for KT’s LTE network and 109.5 Mbps for LG U+’s LTE network.

The faster data transmission speed of our LTE network has allowed us to offer significantly improved wireless data transmission services, providing our subscribers with faster wireless access to multimedia content. We have been building new access networks and evolved packet cores for our LTE network, while we utilize our existing WCDMA network for other parts of our LTE network.

WCDMA and CDMA Networks.    WCDMA technology enables us to offer significantly faster and higher-quality voice and data transmission and supports more sophisticated wireless data transmission services than is possible through our former CDMA network. Since first commencing our WCDMA services in Seoul in 2003, we have expanded our WCDMA network nationwide and implemented various technologies to improve data transmission speeds within our WCDMA network.

CDMA technology is a continuous digital transmission technology that accommodates higher throughput than analog technology by using various coding sequences to allow concurrent transmission of voice and data signals for wireless communication. In January 1996, we launched our first wireless network based on CDMA technology and became the world’s first to commercialize second generation cellular services using the CDMA network. As a result of declining usage and the increasing difficulty of maintaining the network, we terminated our second generation CDMA wireless services in July 2020.

Wi-Fi Network.    Wi-Fi technology enables our subscribers with Wi-Fi-capable devices such as smartphones, laptops and tablet computers to access mobile Internet. We started to build Wi-Fi access points in 2010 and, as of

 

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December 31, 2020, we had more than 117,000 Wi-Fi access points in public areas such as shopping malls, restaurants, coffee shops, subways and airports where, generally, the demand for high-speed wireless Internet service is high. While each Wi-Fi access point typically has a radius of approximately 20-30 meters, some of our Wi-Fi hot zones, which have multiple Wi-Fi access points, including those installed at public transportation facilities and amusement parks, have much wider service areas.

LoRa Networks.    A Low-Power Wide-Area network based on LoRa technology is a type of telecommunications network designed to support communication among IoT devices. It can transmit data over tens of kilometers while consuming much less power than LTE networks, lowering costs for connectivity as well as lowering battery power usage. We completed the nationwide deployment of our LoRa network in July 2016. We expect that our LoRa network will provide the infrastructure necessary for the growth of not only our own IoT solutions business but also the IoT industry as a whole.

Network Infrastructure

The principal components of our wireless networks are:

 

   

cell sites, which are physical locations equipped with transmitters, receivers and other equipment that communicate by radio signals with wireless handsets within range of the cell (typically a 3 to 40 kilometer radius);

 

   

switching stations, which switch voice and data transmissions to their proper destinations, which may be, for instance, a mobile phone of one of our subscribers (for which transmissions would originate and terminate on our wireless networks), a mobile phone of a KT or LG U+ subscriber (for which transmissions would be routed to KT’s or LG U+’s wireless networks, as applicable), a fixed-line telephone number (for which calls would be routed to the public switched telephone network of a fixed-line network operator), an international number (for which calls would be routed to the network of a long distance service provider) or an Internet site; and

 

   

transmission lines, which link cell sites to switching stations and switching stations with other switching stations.

As of December 31, 2020, our 5G, LTE and WCDMA networks had an aggregate of 57,932 cell sites. As we continue to expand our 5G network coverage, the number of our cell sites is expected to increase accordingly.

We have purchased substantially all of the equipment for our networks from Samsung Electronics, Ericsson–LG and Nokia. Most of the transmission lines we use, including virtually all of the lines linking switching stations, as well as a portion of the lines linking cell sites to switching stations, comprise optical fiber lines that we own and operate directly. However, we have not undertaken to install optical fiber lines to link every cell site and switching station. In places where we have not installed our own transmission lines, we have leased lines from KT and LG U+. We intend to increase the efficiency of our network utilization and provide optimal services by internalizing transmission lines.

We use a wireless network surveillance system. This system oversees the operation of cell sites and allows us to monitor our main equipment located throughout the country from one monitoring station. The automatic inspection and testing provided to the cell sites lets the system immediately rebalance to the most suitable setting, and the surveillance system provides for automatic dispatch of repair teams and quick recovery in emergency situations.

Marketing, Distribution and Customer Service

Marketing.    Our marketing strategy is focused on offering solutions tailored to the needs of our various customer segments, promoting our brand and leveraging our extensive distribution network. Our marketing plan includes a coordinated program of television, print, radio, outdoor signage, Internet and point-of-sale media promotions designed to relay a consistent message across all of our markets. We market our wireless products and services under the “T” brand, which signifies the centrality of “Telecommunications” and “Technology” to our business and also seeks to emphasize our commitment to providing “Top” quality, “Trustworthy” products and services to our customers.

 

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We have implemented certain information technology improvements in connection with our marketing strategy, including customer management systems, as well as more effective information security controls. We believe these upgrades have enhanced our ability to process and utilize marketing- and subscriber-related data, which, in turn, has helped us to develop more effective and targeted marketing strategies. We currently operate a customer information system designed to provide us with an extensive customer database. Our customer information system includes a billing system that provides us with comprehensive account information for internal purposes and enables us to efficiently respond to customer requests. Our customers can also change their rate plans, verify the charges accrued on their accounts, receive their bills online and send text messages to our other subscribers through our website at www.tworld.co.kr and through our “T world” mobile application.

We strive to improve subscriber retention through our T Membership program, which is a membership service available to our wireless subscribers. Our T Membership program provides various membership benefits to its members such as discounts with our membership partners for dining, shopping, entertainment and travel, access to our online membership shopping mall and invitations to various promotional events. Although our competitors also have similar membership programs, we believe that our T Membership program has a competitive advantage over our competitors’ membership programs due to our large subscriber base and breadth of membership benefits.

Distribution.    We use a combination of an extensive network, including branch offices and stores, directly operated by us through our subsidiary, PS&Marketing, more than 3,200 authorized exclusive dealers and an extensive network of independent retailers in order to increase subscriber growth while reducing subscriber acquisition costs.

As part of our initiative to provide a differentiated customer service experience, we operate T Premium Stores that allow our potential and existing subscribers to experience certain of our services such as services that are available through our IoT solutions and platform services. As of December 31, 2020, we operated more than 600 T Premium Stores. In October 2020, we opened “T Factory,” a facility that offers a wide range of experiences with wireless devices as well as our subscription services and also includes an unmanned store that is open seven days a week and 24 hours a day.

In addition, we operate an online distribution channel, “T Direct Shop,” through which subscribers can conveniently purchase wireless devices and subscribe to our services online. We also operate a dedicated online shop on 11st, our e-commerce marketplace. We intend to continue to develop our online distribution channel to leverage our offline distribution capabilities to provide convenience and additional value to our subscribers. For example, subscribers purchasing wireless devices through T Direct Shop can opt to pick up their devices at one of our offline stores.

Currently, authorized dealers are entitled to an initial commission for each new subscriber registered by the dealer, as well as an average ongoing commission calculated as a percentage of that subscriber’s monthly plan-based rate for the first five years. In order to strengthen our relationships with our exclusive dealers, we offer a dealer financing plan, pursuant to which we provide to each authorized dealer a loan of up to Won 4.0 billion with a repayment period of up to three years. As of December 31, 2020, we had an aggregate of Won 96.8 billion outstanding in loans to authorized dealers.

Customer Service.    We provide high-quality customer service directly through our two subsidiaries, Service Ace Co., Ltd. and Service Top Co., Ltd., rather than rely on outsourcing. SK O&S Co., Ltd. operates our switching stations and related transmission and power facilities and offers quality customer service primarily to our business customers. We have held the top position with respect to our telecommunications service and retail sales service in Korea’s leading three customer satisfaction indices, the National Customer Satisfaction Index, the Korean Customer Satisfaction Index and the Korean Standard Service Quality Index, for 23 years, 23 years and 21 years, respectively.

 

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Fixed-line Telecommunication Services

We offer fixed-line telephone, broadband Internet and advanced media platform services (including IPTV and cable TV services) and business communications services through our fixed-line telecommunication services segment. Our fixed-line telecommunications services are provided by our subsidiaries, SK Broadband and SK Telink. The following table sets forth historical information about our subscriber base for our fixed-line telecommunication services for the periods indicated:

 

     As of December 31,  
     2020      2019      2018  

Fixed-Line Telephone (including VoIP)(1)

     3,753,246        3,913,274        4,132,265  

Broadband Internet

     6,475,930        5,613,200        5,404,866  

IPTV(2)

     5,657,328        5,193,329        4,729,238  

Cable TV

     2,928,912                

 

 

(1)

Includes subscribers to VoIP services of SK Broadband and SK Telink.

 

(2)

Includes subscribers to SK Broadband’s B tv service and video-on-demand only service subscribers.

In 2020, 2019 and 2018, our fixed-line telecommunication services segment revenue was Won 3,405.7 billion, Won 2,940.1 billion and Won 2,822.3 billion, respectively, representing 18.3%, 16.6% and 16.7%, respectively, of our consolidated revenue. Following the entry into an agreement to transfer SK Broadband’s 100% equity interest in SK stoa Co., Ltd. (“SK Stoa”) to SK Telecom in April 2019 (which transaction was completed in January 2020), the T-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in 2018, were reclassified as part of our commerce services segment for 2019. See “— Commerce Services.”

As part of our efforts to enhance our capabilities and increase our market share in the fixed-line business, we completed the Tbroad Merger in April 2020. We currently own approximately 74.3% of SK Broadband’s total outstanding shares. See “Item 3.D. Risk Factors — Risks Relating to Our Business — We may fail to successfully complete, integrate or realize the anticipated benefits of our new acquisitions, joint ventures or other strategic alternatives or corporate reorganizations, and such transactions may negatively impact our business.”

Fixed-line Telephone Services

Our fixed-line telephone services comprise local, domestic long distance, international long distance and VoIP services. VoIP is a technology that transmits voice data through an Internet Protocol network. As of December 31, 2020, we had approximately 3.8 million fixed-line telephone subscribers (including subscribers to VoIP services of SK Broadband and SK Telink). Our fixed-line telephone services are primarily offered under the “B phone” brand name. SK Telink also provides affordable international calling services under the brand name “00700.”

Broadband Internet Access Services

Our broadband Internet access network covered more than 86% of households in Korea as of December 31, 2020. As of December 31, 2020, we had approximately 6.5 million broadband Internet access subscribers. We offer broadband Internet access products with various throughput speeds, ranging from “Giga Premium,” which is up to 10 times faster than data transmission speeds on networks utilizing FTTH technology and allows for data transmission at a maximum speed of 1 Gbps, to “Giga Premium×10,” which provides data transmission speeds of up to 10 Gbps.

Advanced Media Platform (including IPTV and Cable TV Services)

As part of our initiative to be the leading next-generation platform provider, we provide an advanced media platform with various media content and service offerings.

We have offered video-on-demand services since 2006 and launched real-time IPTV services in 2009. We currently offer IPTV services under the brand name “B tv” with access to as many as 267 high definition channels

 

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depending on the subscription service as of December 31, 2020, as well as video-on-demand service providing a wide range of media content, including recent box office movie releases, popular U.S. and other foreign TV shows and various children’s TV programs. We also offer “B tv UHD,” which is an ultra-high definition IPTV service and has a resolution that is four times as high as the standard high definition broadcasting service in the IPTV industry. As of December 31, 2020, we had approximately 5.7 million IPTV subscribers. In January 2018, we launched B tv × NUGU, which is an all-in-one set top box that incorporates NUGU voice recognition technology and can search for and play media content as well as connect to our Smart Home service through voice commands. In July 2019 and August 2019, respectively, we launched an updated set top box called “Smart 3” set top box, which provides Google Assistant capabilities in addition to our NUGU technology, and “AI 2,” which integrates a stereo system with enhanced audio quality and improved NUGU voice recognition capabilities using beam forming technology.

Following the Tbroad Merger, we also offer cable TV services under the “B tv Cable” brand with access to as many as 213 channels. As of December 31, 2020, we had approximately 2.9 million cable TV subscribers.

In September 2019, we acquired a minority equity stake in Content Wavve, which operated the mobile OTT service “POOQ,” and transferred our former mobile OTT service business “oksusu” to Content Wavve. Content Wavve combined oksusu and POOQ to launch a new integrated mobile OTT service “wavve” in September 2019. See “— Other Investments and Relationships — Wavve” below.

We continue to expand the scope of our media services and content offerings to provide our subscribers with a vast library of high-quality content that can be accessed through our wireless networks and our fixed-line network.

Business Communications Services

We offer other business communications services to our business customers, including corporations and government entities. Our business communications services include leased line solutions, Internet data center solutions and network solution services.

Our leased line solutions are exclusive lines that allow point-to-point connection for voice and data traffic between two or more geographically separate points. We hold a license to operate leased line services on a nationwide basis in Korea and also use international transmission lines to provide leased line services to other countries. Our leased line services enable high volumes of data to be transmitted swiftly and reliably. We also provide back-up storage for transmitted data. Through our Internet data centers, we provide our business subscribers with server-based support including co-location, dedicated server hosting and cloud computing services. Our network solution service utilizes our network infrastructure and voice platform to provide 24-hour monitoring and control of our customers’ networks. Through this service, we conduct remote monitoring of our customers’ data and voice communications infrastructure and network and traffic conditions, and carry out preventive examinations and on-site visits.

Rate Plans

For our residential customers, we offer both bundled rate plans for a combination of our fixed-line service offerings as well as individual rate plans for each separate service offering. Bundled rate plans are offered at a discount compared to subscribing to the same services through individual rate plans. Approximately 86% of subscribers to our fixed-line services subscribe to two or more of our services through our bundled rate plans. Bundled rate plans for a combination of fixed-line telephone, broadband Internet access and IPTV or cable TV services, which are subject to a contract of one to three years, range from Won 30,800 to Won 67,650 per month, depending on the services included and the length of the contract. We also offer bundled rate plans combining our fixed-line communication services with our wireless services and physical security services, respectively.

Our “5,000 minute” plan for subscribers to our fixed-line telephone service features 5,000 voice minutes for domestic land-to-land calls for a fixed rate and range from Won 7,700 to Won 11,550 per month depending on whether or not the subscriber opts for a contract and if so, the length of the contract period. We offer individual fixed-rate plans for our broadband Internet access service that range from Won 25,410 to Won 104,500 per month depending on the data throughput speed and existence and length of a contract. We offer individual fixed-rate plans for our IPTV and cable TV services that range from Won 4,400 to Won 25,300 per month depending on the number

 

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of channels provided and existence and length of a contract. In addition, subscribers can purchase individual videos on demand or subscribe to certain paid content on a periodic basis.

With respect to our business communications services, we offer rates that are tailored to the specific needs of our business customers. We also charge certain installation fees and equipment rental fees as well as other ancillary fees with respect to certain of our fixed-line telecommunications services.

Marketing, Distribution and Customer Service

We focus on bringing our fixed-line telephone, broadband Internet and advanced media platform services (including IPTV and cable TV services) to residential users, and various business communications services to corporate users. We market our fixed-line telecommunications products and services under the “B” brand. Our “B” brand signifies the centrality of “Broadband” to our business and also seeks to emphasize our commitment to providing the “Best” quality products and services to our customers that go “Beyond” expectations, leading to a “Bravo” response. Our “B” brand also strengthens our shared identity with our wireless service’s “T” brand.

We currently outsource a significant portion of our retail sales force needs. We market our services and provide after-sales service support to customers through more than 60 customer centers and a network of more than 310 authorized exclusive dealers located throughout Korea. In addition, SK Telecom’s direct retail stores and authorized dealers for wireless telecommunications services also market our fixed-line telephone, broadband Internet and advanced media platform services (including IPTV and cable TV services), which we believe has contributed to the increase in the number of subscribers to such services. We have contracts with our customer centers to sell our services exclusively. These centers receive a commission for each service contract and installation contract secured. In addition, we pay these centers for the maintenance and repair work that they perform for our subscribers. Customer and service centers often enter into sub-contracts with smaller distribution outlets within their area to increase their sales coverage and engage in telemarketing efforts. Authorized dealers are entitled to an initial commission for each new subscriber registered by the dealer.

Sales to business subscribers are handled through our in-house sales group. Our sales teams focus on securing contracts with large commercial complexes, allowing us to install our remote terminals at their premises. After installation, sales teams direct their attention to individual business clients within these premises. Sales teams that have secured contracts with business clients remain the primary contacts for all aspects of the client’s needs, including further installation and customer and follow-up service.

Security Services

Our security business consists of physical security services and information security services provided by ADT CAPS. In 2020, 2019 and 2018, our security services segment revenue was Won 1,246.5 billion, Won 1,109.5 billion and Won 284.3 billion, respectively, representing 6.7%, 6.3% and 1.7%, respectively, of our consolidated revenue. Our security services businesses, which were previously part of our other businesses segment in 2018, were reclassified as a new security services segment in 2019.

ADP CAPS (formerly known as SK Infosec), the surviving entity resulting from the merger of LSH with and into SK Infosec in December 2020 and the merger of Former ADT CAPS with and into SK Infosec in March 2021, operates our security business. We currently own approximately 62.6% of the equity interest in ADT CAPS. We had acquired Former ADT CAPS, which operated our physical security business prior to such mergers, in October 2018 by acquiring a 55.0% interest in LSH, which owned 100% of Former ADT CAPS, for Won 696.7 billion. In December 2018, we merged NSOK Co., Ltd. (“NSOK”), which became our consolidated subsidiary in 2014 and provided residential and small business electronic security and other related alarm monitoring services, with and into Former ADT CAPS. We had acquired SK Infosec, which operated our information security business prior to the mergers, from SK Inc., our largest shareholder, in a share exchange transaction in December 2018, pursuant to which we transferred 1,260,668 treasury shares with an aggregate book value of Won 281.2 billion to SK Inc. in exchange for all of the issued and outstanding common shares of SK Infosec.

 

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Physical Security

We provide a variety of physical security services utilizing our flagship unmanned surveillance and dispatch platform called the Central Monitoring Services (“CMS”), which are tailored for residential and commercial needs and operate through a centralized monitoring system that provides offsite surveillance through cameras, sensors and emergency alarms. Upon detecting any suspicious activity through such system or upon request, security personnel is dispatched to the relevant subscriber location to provide further onsite manned security.

We provide services that utilize synergies between our security business and other key business segments, such as “T Safe Security,” a CMS-based video surveillance and security guard dispatch service offered through the distribution channels for our wireless services. In addition, we offer bundle-based discounted rate plans such as “T&CAPS” and “B&CAPS,” which bundle our wireless service and broadband Internet service, respectively, with our physical security service. Beginning in June 2019, with the launch of T map Parking, we also operate a parking management and security solutions business. See “— Other Businesses — Miscellaneous Businesses — Mobility Business” below.

In response to the COVID-19 pandemic, we have also launched a range of services in 2020 related to disease preventive measures as well as remote work arrangements, such as “CAPS Smart Check” and “CAPS Smart Walk-In,” access security solutions with face recognition and thermometer functions, “CAPS Cleancare,” a disinfection and extermination service, and “CAPS Office Home,” a remote work office solution with information technology and security infrastructure.

Information Security

Our information security services consist of information security consulting services, managed security services as well as cyber threat intelligence solutions. Our representative product is “Secudium IoT,” a convergence security service that combines information, physical and operational technology security services into a single platform.

Commerce Services

Our commerce services segment consists primarily of “11st,” our online marketplace business operated by Eleven Street, and “SK stoa,” our interactive T-commerce network. In 2020, 2019 and 2018, our commerce services segment revenue was Won 792.9 billion, Won 710.7 billion and Won 728.4 billion, respectively, representing 4.3%, 4.0% and 4.3%, respectively, of our consolidated revenue. Following the entry into an agreement to transfer SK Broadband’s 100% equity interest in SK Stoa to SK Telecom in April 2019 (which transaction was completed in January 2020), the T-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in 2018, were reclassified as part of our commerce services segment for 2019.

E-Commerce

11st is an online open marketplace that offers a wide range of products through an online and mobile platform. Individual consumers can buy a vast array of products such as clothes and accessories, beauty products, groceries, baby products, books, office supplies, furniture, home goods, outdoor and sporting goods, appliances, electronics, travel packages, entertainment tickets and local deals for restaurants and other services from small- to large-sized retailers that operate “mini malls” on the 11st platform. Eleven Street also operates SK Pay, a convenient and secure payment service through which users can register their credit card to simplify payments for online and mobile purchases for many of our services, including 11st.

As of December 31, 2020, 11st was the second-largest commerce platform in terms of the total number of unique visitors to its mobile and desktop versions, according to Nielsen Koreanclick. The mobile version of 11st, which has grown significantly in recent years, accounted for 68%, 64% and 62% of 11st’s annual gross merchandise volume, which represents the total annual monetary value of customer purchases of goods and services, net of estimated refunds. We intend to continue our efforts to increase usage of the mobile version of 11st, enhance the convenience of our 11st mobile and web user interface and create synergies with our other products and services.

 

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Eleven Street was spun-off as our new consolidated subsidiary from SK Planet Co., Ltd. (“SK Planet”) in September 2018. In connection with such spin-off, Eleven Street received a Won 500 billion equity investment in the form of redeemable convertible preferred shares from a group of financial investors led by H&Q Korea Partners, LLC, pursuant to which such financial investors held an 18.2% equity interest in Eleven Street as of December 31, 2020.

T-Commerce

We also operate a T-commerce network, “SK stoa,” through our consolidated subsidiary SK Stoa, which offers a broad assortment of goods and services through pre-recorded television programming. The goods and services promoted on SK stoa’s T-commerce programming can be purchased through telephone orders, SK stoa’s mobile application or online open marketplace, or a virtual application appearing on the television screen using the viewer’s remote controller. In March 2019, SK Stoa launched “SK stoa ON,” which offers searchable shopping programming that is available to viewers at their convenience by utilizing video-on-demand capabilities. In September 2019, SK Stoa launched “Hellen Karen,” its own private fashion brand. SK stoa also acts as the exclusive T-commerce distributor for certain products and services of SK Group companies, such as food, electronics, home appliances and car rentals.

Other Businesses

We strive to continually diversify our products and services and develop new growth engines that we believe are complementary to our existing products and services, which we include in our other businesses segment. In 2020, 2019 and 2018, our other businesses segment revenue was Won 883.9 billion, Won 803.0 billion and Won 660.1 billion, respectively, representing 4.7%, 4.5% and 3.9%, respectively, of our consolidated revenue.

Mobility Business

We provide mobility services through T Map Mobility, a wholly-owned subsidiary of SK Telecom created as a result of a spin-off of SK Telecom’s mobility business into a newly incorporated entity as of December 29, 2020. As a result of such spin-off, our mobility business, which was previously part of our cellular services segment, became a part of our other businesses segment beginning December 29, 2020.

Our mobility services is offered through our “T map” platform, which is the leading global positioning system (“GPS”) navigation service in Korea provided to our and our competitors’ wireless subscribers free of charge. T map uses GPS technology to transmit driving directions, real-time traffic updates and emergency rescue assistance to wireless devices. As of December 31, 2020, there were approximately 12.4 million monthly average users of our T map service. We have integrated our AI platform, NUGU, into our T map service to enable users to use voice commands to operate its navigation functions as well as their mobile devices, such as calling, text messaging and music streaming, while driving to enhance the convenience and safety of T map users.

T map also offers a taxi-hailing service called “T map Taxi,” as well as “T map Parking,” a parking service launched in June 2019 that combines our ICT technology with ADT CAPS’ parking management and security solutions to provide users with real-time information related to parking lot locations, availability, rates and discounts, in addition to automatic payment services in the case of select parking lots, including those operated by ADT CAPS, through a dedicated mobile application. As of December 31, 2020, T map Taxi and T map Parking had approximately 0.6 million and 0.1 million monthly active users, respectively.

We have entered into strategic partnerships with global ride-hailing service providers. In January 2019, we formed Grab Geo Holdings PTE. LTD., a joint venture in which we hold a 30.0% interest, with Grab, the leading ride-hailing service provider in Southeast Asia. Through this joint venture, we launched a navigation service for Grab drivers based on T map’s key technologies, including big data analysis algorithms and ultra-precise GPS solutions, in Singapore, and we plan to expand such service to other countries in which Grab operates. We also formed a strategic partnership with Uber pursuant to which Uber has invested approximately US$50 million in T Map Mobility and approximately US$100 million in UT LLC, a joint venture formed in April 2021 between T Map Mobility and Uber in which we hold a 49.0% interest. Through UT LLC, we will launch a taxi hailing service that integrates our affiliated taxi driver network and mapping and AI technologies with Uber’s ride hailing technology.

 

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In April 2021, T Map Mobility agreed to receive a Won 400 billion equity investment in the form of common shares from financial investors, Affirma Capital and EastBridge Partners, pursuant to which such financial investors will each hold a 14.0% equity interest in T Map Mobility. The transaction is expected to close in May 2021.

Marketing Platform Business

We provide marketing platform services through SK Planet, which include the following:

 

   

Syrup Wallet, a mobile wallet service that is the successor to our Smart Wallet service, allows users to conveniently manage membership card points and payment methods such as coupons, credit cards and gift vouchers on their mobile devices for both online and offline purchases and provides shopping information to users in certain shopping areas using advanced location-based technology; and

 

   

OK Cashbag, a loyalty points program which allows members to collect and redeem loyalty points at its partnering merchants and offers differentiated marketing services to such partnering merchants.

Portal Service

We offer a portal service under our “Nate” brand name through SK Communications. Nate can be accessed through its website, www.nate.com, or through its mobile application. Nate offers a wide variety of content and services, including Nate Search, an Internet search engine, Nate News, which provides a library of articles about current events, sports, entertainment and culture, Nate Pann, a user-generated content service as well as access to free e-mail accounts through Nate Mail.

Others

We offer high-end audio devices under the brand name “Astell&Kern” that are manufactured by our subsidiary, Dreamus Company (“Dreamus”). Dreamus also operates our personalized music platform “FLO,” which provides a music streaming service with customized music recommendations and user interfaces by analyzing individual user preferences with our AI technology. In 2018, we acquired an additional equity interest in Dreamus for Won 65.0 billion, and as of December 31, 2020, we had a 51.4% equity interest in Dreamus.

We also operate a mobile application marketplace, “One Store,” in collaboration with KT, LG U+ and NAVER Corporation. Through this joint collaboration, we expect to increase the competitiveness of One Store to compete with Google Playstore, the leading mobile application marketplace in Korea. In recent years, we have made offerings of mobile games as the focus of One Store in response to the rapid growth of the mobile game market in Korea. In November 2019, One Store Co., Ltd., our consolidated subsidiary that operates One Store, undertook a capital increase of approximately Won 97.5 billion by issuing convertible preferred shares to a consortium of financial investors including Kiwoom Investment and SKS Private Equity. As of December 31, 2020, we held 52.1% of the total outstanding shares of One Store Co., Ltd.

In addition, in order to strengthen our data security capabilities in light of expected increases in data transmission by wireless service subscribers and users of our IoT solutions through our 5G network, we acquired a controlling equity interest in id Quantique, a leading provider of quantum cryptography solutions for data security based in Switzerland, in 2018. As of December 31, 2020, we held a 68.1% equity interest in id Quantique.

In June 2019, we acquired a 34.6% interest in Incross, a digital advertising company that provides mobile, online and other forms of digital advertising solutions, for an aggregate purchase price of Won 53.7 billion, in light of potential synergies with our media and commerce businesses. Although we own less than a majority of Incross’s outstanding equity interest, Incross is deemed to be our consolidated subsidiary based on our management’s determination that we have sufficient control.

We also provide freight and logistics consulting services to corporate customers through FSK L&S Co. Ltd. (“FSK L&S”), a joint venture with a subsidiary of Foxconn Technology Group of Taiwan, in which we hold a 60.0% equity interest as of December 31, 2020. We acquired such 60.0% equity interest from SK Inc. in February 2018 for approximately Won 18.0 billion. We accounted for FSK L&S as an associate under the equity method in 2018, but following our determination that we have obtained control of FSK L&S during 2019, FSK L&S has become a consolidated subsidiary beginning in 2019.

 

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Interconnection

Our wireless and fixed-line networks interconnect with the public switched telephone networks operated by KT and SK Broadband and, through their networks, with the international gateways of KT and LG U+, as well as the networks of the other wireless telecommunications service providers in Korea. These connections enable our subscribers to make and receive calls from telephones outside our networks. Under Korean law, certain service providers, including us, are required to permit other service providers to interconnect to their networks. If a new service provider desires interconnection with the networks of an existing service provider but the parties are unable to reach an agreement within 90 days, the new service provider can appeal to the KCC.

Domestic Calls

Guidelines issued by the MSIT require that all interconnection charges levied by a regulated carrier take into account (i) the actual costs to that carrier of carrying a call or (ii) imputed costs. The MSIT determines interconnection rates applicable to each carrier based on changes in traffic volume, taking into account other factors such as research results, competition and trends in technology development.

Wireless-to-Fixed-line.    According to our interconnection arrangement with KT, for a call from our wireless network to KT’s fixed-line network, we collect the usage rate from our wireless subscriber and in turn pay KT the interconnection charges. Similarly, KT pays interconnection charges to SK Broadband for a call from KT’s wireless network to SK Broadband’s fixed-line network. The interconnection rate applicable to both KT and SK Broadband was Won 8.56 per minute, Won 9.15 per minute and Won 9.99 per minute for 2020, 2019 and 2018 respectively.

Fixed-line-to-Wireless.    The MSIT determines interconnection arrangements for calls from a fixed-line network to a wireless network. For a call initiated by a fixed-line user to one of our wireless subscribers, the fixed-line network operator collects our usage fee from the fixed-line user and remits to us an interconnection charge. Interconnection with KT accounts for substantially all of our fixed-line-to-wireless interconnection revenue and expenses. The interconnection rate paid by fixed-line network service providers to each wireless network service provider was Won 10.61 per minute, Won 11.64 per minute and Won 13.07 per minute for 2020, 2019 and 2018, respectively.

Wireless-to-Wireless.     Interconnection charges also apply to calls between wireless telephone networks in Korea. Under these arrangements, the operator originating the call pays an interconnection charge to the operator terminating the call. The applicable interconnection rate is the same as the fixed-line-to-wireless interconnection rate set out in the table above.

Our revenues from the wireless-to-wireless charge were Won 449.1 billion in 2020, Won 463.8 billion in 2019 and Won 498.5 billion in 2018. Our expenses from these charges were Won 451.6 billion in 2020, Won 464.1 billion in 2019 and Won 494.2 billion in 2018. The charges above were agreed among the parties involved and confirmed by the KCC.

International Calls and International Roaming Arrangements

With respect to international calls, if a call is initiated by our wireless subscribers, we bill the wireless subscriber for the international charges of KT, LG U+ or SK Broadband, and we receive interconnection charges from such operators. If an international call is received by our subscriber, KT, LG U+ or SK Broadband pays interconnection charges to us based on our imputed costs.

To complement the services we provide to our subscribers in Korea, we offer international voice and data roaming services. We charge our subscribers usage fees for global roaming service and, in turn, pay foreign wireless network operators fees for the corresponding usage of their network. For a more detailed discussion of our global roaming services, see “— Wireless Services” above.

Competition

We operate in highly saturated and competitive markets, and we believe that our subscriber growth is affected by many factors, including the expansion and technical enhancement of our networks, the development and deployment of new technologies, the effectiveness of our marketing and distribution strategy, the quality of our

 

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customer service, the introduction of new products and services, competitive pricing of our rate plans, new market entrants and regulatory changes.

Historically, there has been considerable consolidation in the telecommunications industry, resulting in the current competitive landscape comprising three mobile and fixed network operators in the Korean market, KT, LG U+ and us. Each of our competitors has substantial financial, technical, marketing and other resources to respond to our business offerings.

The following table shows the market share information, based on number of subscribers, as of December 31, 2020, for the following markets.

 

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

Wireless Service(1)

     45.1     31.4     23.5    

LTE Service(1)

     43.5       30.8       25.7        

5G Service(1)

     46.2       30.6       23.2        

Fixed-Line Telephone (including VoIP)

     15.8       56.8       19.1       8.3  

Broadband Internet

     29.0       41.1       20.3       9.6  

Pay TV(2)

     24.4 (3)      32.2 (4)      25.0 (5)      18.4  

 

 

(1)

Includes MVNO subscribers that lease the wireless networks of the respective mobile network operator.

 

(2)

Includes video-on-demand only service subscribers. Market share is expressed as a percentage of the pay TV market (which includes IPTV, cable TV and satellite TV).

 

(3)

Consists of 16.1% from our IPTV service and 8.3% from our cable TV service.

 

(4)

Consists of 24.9% from KT’s IPTV service and 7.3% from its satellite TV service provided through KT Skylife Co, Ltd., a subsidiary of KT.

 

(5)

Consists of 14.0% from LG U+’s IPTV service and 11.0% from its cable TV service provided through LG HelloVision, a subsidiary of LG U+.

Cellular Services

As of December 31, 2020, we had 31.4 million subscribers, representing a market share of approximately 45.1%, including MVNO subscribers leasing our networks. As of December 31, 2020, KT and LG U+ had 21.8 million and 16.3 million subscribers, respectively, representing approximately 31.4% and 23.5%, respectively, of the total number of wireless subscribers in Korea on such date, each including MVNO subscribers leasing its networks. As of December 31, 2020, we had 5.5 million 5G subscribers and KT and LG U+ had 3.6 million and 2.8 million 5G subscribers, respectively, each including MVNO subscribers leasing its networks. As of December 31, 2020, we had 22.8 million LTE subscribers and KT and LG U+ had 16.2 million and 13.5 million LTE subscribers, respectively, each including MVNO subscribers leasing its networks.

In 2020, we had 4.4 million activations and 4.5 million deactivations. For 2020, our monthly churn rate ranged from 1.1% to 1.4%, with an average monthly churn rate of 1.2%, which remained unchanged from 2019. In 2020, we gained 41.8% of the total number of new wireless subscribers and subscribers that migrated to a different wireless telecommunications service provider, compared to KT with 30.6% and LG U+ with 27.6%.

Our competitors for subscriber activations include MVNOs, including MVNOs that lease our networks. MVNOs generally provide rate plans that are relatively cheaper than similar rate plans of the wireless network providers from which they lease their networks, including us. Currently, 14 MVNOs provide wireless telecommunications services using the networks leased from us. As of December 31, 2020, MVNOs had a combined market share of 13.1%, of which MVNOs leasing our networks represented 3.3%, MVNOs leasing KT’s networks represented 7.1% and MVNOs leasing LG U+’s networks represented 2.7%.

In addition, other companies may enter the wireless network services market. New entries in such market have historically required obtaining requisite licenses from the MSIT. However, pursuant to an amendment to the Telecommunications Business Act that went into effect in June 2019, companies meeting certain regulatory criteria

 

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may become a network service provider by registering with the MSIT without a separate license requirement, which may have the effect of encouraging new entries into the Korean wireless network services market in the future. For a description of the risks associated with the competitive environment in which we operate, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Competition may reduce our market share and harm our results of operations and financial condition.”

Historically, competition in the wireless telecommunications business had caused us to significantly increase our marketing and advertising expenses from time to time depending on the prevailing competitive landscape, with our marketing expenses as a percentage of SK Telecom’s revenue, on a separate basis, reaching a peak of 28.2% in 2012. Such percentage was 24.5% in 2018, 25.6% in 2019 and 26.1% in 2020. We attribute such stabilization to the maturity of the overall wireless telecommunication market and the implementation of the MDDIA, which prohibits wireless telecommunications service providers from unfairly providing discriminatory subsidies based on certain criteria. For a more detailed discussion of the MDDIA, see “— Law and Regulation — Rate Regulation” below.

We face competition from KT and LG U+ as well as other platform service providers in our other cellular service businesses. For example, our Smart Home service competes with KT’s Giga IoT Home service and LG U+’s IoT@Home service.

Fixed-Line Telecommunication Services

Our fixed-line telephone service competes with KT and LG U+ as well as providers of other VoIP services. As of December 31, 2020, our market share of the fixed-line telephone and VoIP service market was 15.8% (including the services provided by SK Broadband and SK Telink) in terms of number of subscribers compared to KT with 56.8% and LG U+ with 19.1%.

We are the second largest provider of broadband Internet access services in Korea in terms of both revenue and subscribers, and our network covered more than 86% of households in Korea as of December 31, 2020. As of December 31, 2020, our market share of the broadband Internet market was 29.0% in terms of number of subscribers compared to KT with 41.1% and LG U+ with 20.3%.

Our IPTV and cable TV services compete with other providers of pay TV services, including KT, LG U+ and cable companies. As of December 31, 2020, our market share of the pay TV market (which includes IPTV, cable TV and satellite TV) in terms of number of subscribers was 24.4% compared to KT with 32.2% (including its IPTV and satellite TV services) and LG U+ with 25.0% (including its IPTV and cable TV services), and the collective market share of other pay TV providers was 18.4%. Furthermore, our IPTV and cable TV services are facing an increasing level of competition from global operators of online video streaming platforms, such as YouTube, Amazon Video and Netflix, and the video services offered by leading domestic online and mobile search and communications platforms including NAVER and Kakao, as such services continue to become increasingly popular to serve as a substitute to traditional television programming.

Recently, the Korean fixed-line telecommunications industry has been going through significant consolidation involving major pay television service providers. We completed the Tbroad Merger in April 2020, as a result of which we have become the third-largest pay TV provider in Korea in terms of number of subscribers as of December 31, 2020. In December 2019, LG U+ acquired a majority equity stake in LG HelloVision to become the second-largest pay TV provider in Korea in terms of number of subscribers as of December 31, 2020. Such transactions, as well as further consolidation in the fixed-line telecommunications industry, may result in increased competition, as the entities emerging from such consolidation and other remaining players in the industry may actively pursue expanding or protecting their respective market shares.

Furthermore, the Government has historically enforced regulations on cable TV and IPTV service providers that prohibited them from having a market share of more than one-third of the total number of subscribers in the relevant pay TV market on each of their respective platforms. In June 2015, the Government amended the regulation to impose the same limit on the market share of the entire pay TV market, including satellite TV service providers as well. Such amended regulation, however, expired in June 2018. There are bills currently pending in the National Assembly to abolish the previous market share regulations on cable TV and IPTV service providers. It is uncertain whether such bills will be passed.

 

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Security Services

The physical security services industry in Korea is expanding rapidly due to the relatively low penetration of physical security services as compared to other developed countries, growing demand for residential security services and the popularization of unmanned services. Our physical security business competes with other large physical security service providers, including S-1 and KT Telecop. As of December 31, 2020, our market share of the physical security services market was 34% in terms of the aggregate revenue of these three companies, compared to S-1 with 55% and KT Telecop with 11%.

The information security services market in Korea is also undergoing rapid growth as various industries become more digitalized and the risk of cybersecurity breaches heightens. Our information security services compete with other providers of similar products and services, such as Ahnlab, Inc., SECUi Corp. and Igloo Security, Inc.

Commerce Services

The commerce industry is evolving rapidly and is intensely competitive, and we face a broad array of competitors domestically and increasingly, internationally. Our marketplace business, 11st, faces intense competition from various e-commerce providers, including online open marketplaces and social commerce operators such as Coupang, Gmarket, Auction and Interpark. We also face competition from leading online and mobile search and communication platform companies with e-commerce operations, including NAVER and Kakao, as well as traditional retailers with online and mobile shopping portals such as SSG.com and Lotte.com, home shopping providers with online and mobile shopping portals such as CJ Mall by CJ O Shopping, GS Shop by GS Homeshopping and Hyundai Hmall by Hyundai Homeshopping, and various online marketplaces for specific consumer segments or product groups. Our T-commerce business, SK stoa, primarily competes with other home shopping providers such as those listed above, as well as with various e-commerce providers and traditional retailers.

Other Investments and Relationships

We have investments in several other businesses and companies and have entered into various business arrangements with other companies. Our principal investments include the following:

SK Hynix

As of December 31, 2020, we held a 20.1% equity interest in SK Hynix, one of the world’s largest memory-chip makers by revenue. SK Hynix designs, manufactures and sells advanced memory semiconductor products, including DRAM and NAND flash products, used in various electronic devices. SK Hynix operates four wafer fabrication facilities in Korea and China.

As of December 31, 2020, the fair value of our holding in SK Hynix was Won 17,312.9 billion. We received dividend payments of Won 146.1 billion in 2020, Won 219.2 billion in 2019 and Won 146.1 billion in 2018 related to such shareholding. In 2020, 2019 and 2018, SK Hynix and its subsidiaries, on a consolidated basis, reported revenues of Won 31,900.4 billion, Won 26,990.7 billion and Won 40,445.1 billion, respectively, profit before income tax of Won 6,237.0 billion, Won 2,432.6 billion and Won 21,341.0 billion, respectively, and profit for the year of Won 4,758.9 billion, Won 2,009.1 billion and Won 15,540.0 billion, respectively. The increase in SK Hynix’s revenues in 2020 was primarily due to increases in the demand for DRAM and NAND flash products, despite decreases in their average selling prices. As of December 31, 2020, 2019 and 2018, SK Hynix and its subsidiaries, on a consolidated basis, reported total assets of Won 71,173.9 billion, Won 65,248.4 billion and Won 63,658.3 billion, respectively, and total equity of Won 51,909.1 billion, Won 47,935.9 billion and Won 46,852.3 billion, respectively. For a more detailed discussion of the risks relating to our shareholding in SK Hynix, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Declines in the market value of our equity holdings in SK Hynix and the results of operations of SK Hynix could have a material adverse effect on the market price of our common shares and ADSs as well as our results of operation.”

 

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KEB HanaCard

In February 2010, we purchased shares newly issued by Hana SK Card Co., Ltd. (which was subsequently merged into KEB Card Co., Ltd. and renamed KEB HanaCard Co., Ltd. (“KEB HanaCard”) in November 2014), a credit card services provider, for a total purchase price of Won 400.0 billion. As of December 31, 2020, we held 15.0% of the total outstanding shares of KEB HanaCard. KEB HanaCard offers certain credit card products that provide for discounts on some of our wireless network services and integrate T Membership benefits, among other features.

Wavve

In September 2019, in furtherance of our efforts to enhance the competitiveness of our media business and to promote its future growth, we acquired a minority equity stake in Content Wavve (formerly known as Content Alliance Platform Inc.), a joint venture established by the three major terrestrial broadcasters in Korea that operated the mobile OTT service “POOQ,” by investing Won 90.9 billion in cash and transferring our former mobile OTT service business “oksusu” to Content Wavve. Content Wavve combined oksusu and POOQ to launch a new integrated mobile OTT service “wavve” in September 2019. As of December 31, 2020, we held 30.0% of the total outstanding shares of Content Wavve.

Wavve offers over 240,000 titles of video-on-demand contents, including a wide variety of real-time and on-demand terrestrial broadcast programs, movies, popular U.S. and other foreign TV shows and professional sporting events, to its subscribers that can be played on mobile devices, television, personal computer and/or Google’s Chromecast. Monthly subscription plans range from Won 7,900 to Won 13,900 per month, depending on the type and number of accessible devices. We also offer wavve-specific data add-on plans for our wireless service subscribers. Certain types of contents, such as movies, can also be purchased individually.

Law and Regulation

Overview

Korea’s telecommunications industry is subject to comprehensive regulation by the MSIT, which is responsible for information and telecommunications policies. The MSIT regulates and supervises a broad range of communications issues, including:

 

   

entry into the telecommunications industry;

 

   

scope of services provided by telecommunications service providers;

 

   

allocation of radio spectrum;

 

   

setting of technical standards and promotion of technical standardization;

 

   

rates, terms and practices of telecommunications service providers;

 

   

interconnection and revenue-sharing between telecommunications service providers;

 

   

research and development of policy formulation for information and telecommunications; and

 

   

competition among telecommunications service providers.

The MSIT is charged with regulating information and telecommunications and the KCC is charged with regulating the public interest aspects of and fairness in broadcasting.

Telecommunications service providers are currently classified into two categories: network service providers and value-added service providers. We are classified as a network service provider because we provide telecommunications services with our own telecommunications networks and related facilities. As a network service provider, we were previously required to obtain a license from the MSIT for the services we provide. However, an amendment to the Telecommunications Business Act, pursuant to which companies meeting certain regulatory criteria may become a network service provider without a separate license requirement, went into effect in June 2019. Our licenses permit us to provide cellular services, third generation wireless telecommunications services using WCDMA and WiBro technologies, fourth generation wireless telecommunications services using LTE technology and fifth generation wireless telecommunication services using 5G technology.

 

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The MSIT 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 and corrective orders issued in connection with any violation of rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the KCC may levy a monetary penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years. A network service provider that wants to cease its business or dissolve must notify its users 60 days prior to the scheduled date of cessation or dissolution and obtain MSIT approval.

In the past, the Government has stated that its policy was to promote competition in the Korean telecommunications market 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. While all network service providers are subject to MSIT regulation, we are subject to increased regulation because of our position as the dominant wireless telecommunications services provider in Korea.

Competition Regulation

The KCC is charged with ensuring that network service providers engage in fair competition and has broad powers to carry out this goal. If a network service provider is found to be in violation of the fair competition requirement, the KCC may take corrective measures it deems necessary, including, but not limited to, prohibiting further violations, requiring amendments to the articles of incorporation or to service contracts with customers, requiring the execution or performance of, or amendments to, interconnection agreements with other network service providers and prohibiting advertisements to solicit new subscribers. The KCC is required to take into account the opinion of the Minister of the MSIT before it takes certain corrective measures.

In addition, we qualify as a “market-dominating business entity” under the Fair Trade Act. Accordingly, we are prohibited from engaging in any act of abusing our position as a market-dominating entity, such as unreasonably determining, maintaining or altering service rates, unreasonably controlling the rendering of services, 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.

Because we are a member company of the SK Group, which is a large business group as designated by the FTC, we are subject to the following restrictions under the Fair Trade Act:

 

   

Restriction on debt guarantee among affiliates.    Any affiliate within the SK Group may not guarantee the debts of another domestic affiliate, except for certain guarantees prescribed in the Fair Trade Act, such as those relating to the debts of a company acquired for purposes of industrial rationalization, bid deposits for overseas construction work or technology development funds.

 

   

Restriction on cross-investment.    A member company of the SK Group may not acquire or hold shares in an affiliate belonging to the SK Group that owns shares in the member company.

 

   

Restrictions on circular investments.    A member company of the SK Group may not acquire or hold shares which would constitute “circular investments” in an affiliate company which also forms part of the SK Group where “circular investments” refer to a cross-affiliate shareholding relationship under which three or more affiliate companies become connected through cross affiliate shareholdings by owning shares in other affiliates or by becoming an entity whose shares are owned by other affiliates.

 

   

Public notice of board resolution on large-scale transactions with specially related persons.    If a member company of the SK Group engages in a transaction with a specially related person in the amount of 5.0% or more of the member company’s capital or paid-in capital or for Won 5.0 billion or more, the transaction must be approved by a resolution of the member company’s board of directors and the member company must publicly disclose the transaction.

 

   

Restrictions on investments by subsidiaries and sub-subsidiaries of holding companies.    The Fair Trade Act prohibits subsidiaries of holding companies from investing in, or holding shares of common stock of, domestic affiliates that belong to the same large business group, unless such domestic affiliates are their own subsidiaries. Furthermore, any subsidiaries of a holding company’s subsidiaries (“sub-subsidiaries”) are

 

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prohibited from investing in, or holding shares of common stock of, domestic affiliates that belong to the same large business group, unless all shares issued by the affiliates are held by the sub-subsidiary. Therefore, we and other subsidiaries of SK Inc. may not invest in any domestic affiliate that is also a member company of the SK Group, except in the case where we invest in our own subsidiary or where another subsidiary of SK Inc. invests in its own subsidiary.

 

   

Public notice of the current status of a business group.    Under the Fair Trade Act and the Enforcement Decree thereof, a member company of the SK Group must publicly disclose the general status of the SK Group, including the name, business scope and financial status of affiliates, information on the officers of affiliates, information on shareholding and cross-investments between member companies of the SK Group, information on transactions with certain related persons and, if a member company engages in a transaction with an affiliated company in the amount of 5.0% or more of the member company’s quarterly sales or Won 5.0 billion or more, information on transactions with such affiliated company on a quarterly basis.

Rate Regulation

Network service providers whose sales proceeds exceed the amount prescribed by law must report to the MSIT the rates and contractual terms for each type of service they provide. Prior to December 2020, as the dominant network service provider for specific services (based on having the largest market share in terms of number of subscribers and meeting certain revenue thresholds), we had to obtain prior approval of the MSIT on our rates and terms of service; provided, however, that such pre-approval of the MSIT was not required to reduce the rates for any type of services provided under the MSIT-approved contractual terms. The MSIT’s policy was to approve rates if they were appropriate, fair and reasonable (that is, if the rates had been reasonably calculated, considering supply costs, profits, classification of costs and profits for each service, cost savings through changes in the way services were provided and the influence on fair competition, among others). The MSIT could order changes in the submitted rates if it deemed the rates to be significantly unreasonable or against public policy. In December 2020, however, the Telecommunications Business Act was amended to change such approval requirement to a reporting requirement. Under the new reporting requirement, which does not apply to other network service providers, the MSIT has fifteen days to object to any new rates and terms of service reported by us, and we may implement such new rates and terms of service after the fifteen-day period expires in the absence of the MSIT’s objection.

Furthermore, in 2007, the Government announced a “road map” highlighting revisions in regulations to promote deregulation of the telecommunications industry. In accordance with the road map and pursuant to the Combined Sales Regulation, promulgated in May 2007, telecommunications service providers are now permitted to bundle their services, such as wireless data transmission service, wireless voice transmission service, broadband Internet access service, fixed-line telephone service and IPTV service, at a discounted rate; provided, however, that we and KT, as market-dominating business entities under the Telecommunications Business Act, allow other competitors to employ the services provided by us and KT, respectively, so that such competitors can provide similar discounted package services. In September 2007, the regulations and provisions under the Telecommunications Business Act were amended to permit licensed transmission service providers to offer local, domestic long-distance and international telephone services, as well as broadband Internet access and Internet phone services, without additional business licenses.

Moreover, an MVNO system under which the MSIT may designate and obligate certain wireless telecommunications services providers to allow an MVNO, at such MVNO’s request, to use their telecommunication network facilities at a rate mutually agreed upon that complies with the standards set by the MSIT became effective on March 14, 2017 under the amended Telecommunications Business Act. We were designated as the only wireless telecommunications services provider obligated to allow the other wireless telecommunications services provider to use our telecommunications network facilities. The expiration of such system has been extended to September 22, 2022 pursuant to an amendment to the Telecommunications Business Act. Currently, 14 MVNOs provide wireless telecommunications services using the networks leased from us.

On October 1, 2014, the MDDIA, enacted for the purpose of establishing a transparent and fair mobile distribution practice, became effective. The MDDIA limits the amount of subsidies a wireless telecommunications service provider can provide to subscribers in order to prevent excessive competition among wireless

 

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telecommunications service providers. Pursuant to the MDDIA, wireless telecommunications service providers are prohibited from (i) unfairly providing discriminatory subsidies based on criteria such as type of subscription, subscription plan and characteristics of the subscriber and (ii) entering into a separate agreement with subscribers imposing obligations to use a specific subscription plan as a condition for providing subsidies. See “Item 5.A. Operating Results — Overview — Rate Regulations.”

In addition, under the MDDIA, wireless telecommunications service providers are obliged to provide certain benefits, such as discounted rates, to subscribers who subscribe to their service without receiving subsidies. In June 2017, the State Affairs Planning Advisory Committee of Korea announced that it would encourage wireless telecommunications service providers, including us, to increase the applicable discount rate offered to subscribers from 20% to 25%, which we adopted in September 2017, and to offer additional discounts to low income customers, including those on government welfare programs and senior citizen recipients of the basic pension, which we implemented in December 2017 and July 2018, respectively. We cannot provide assurance that we will not provide other rate discounts in the future to comply with the Government’s public policy guidelines or suggestions.

Interconnection

Dominant network service providers such as ourselves that own essential infrastructure facilities or possess a certain market share are required to provide interconnection of their telecommunications network facilities to other service providers upon request. The MSIT sets and announces the standards for determining the scope, procedures, compensation and other terms and conditions of such provision, interconnection or co-use. We have entered into interconnection agreements with KT, LG U+ and other network service providers permitting these entities to interconnect with our network. We expect that we will be required to enter into additional agreements with new operators as the MSIT grants permits to additional telecommunications service providers.

Frequency Allocation

The MSIT has the discretion to allocate and adjust the frequency bandwidths for each type of service and may auction off the rights to certain frequency bandwidths. Upon allocation of new frequency bandwidths or adjustment of frequency bandwidths, the MSIT is required to give a public notice. The MSIT also regulates the frequency to be used by each radio station, including the transmission frequency used by equipment in our cell sites. All of our frequency allocations are for a definite term. We pay fees to the MSIT for our frequency usage that are determined based upon our number of subscribers, frequency usage by our networks and other factors. For 2020, 2019 and 2018, the fee amounted to Won 136.6 billion, Won 133.1 billion and Won 151.7 billion, respectively.

We currently use 10 MHz of bandwidth in the 2.1 GHz spectrum for our WCDMA services, 30 MHz of bandwidth in the 2.1 GHz spectrum, 20 MHz of bandwidth in the 800 MHz spectrum, 35 MHz of bandwidth in the 1.8 GHz spectrum and 60 MHz of bandwidth in the 2.6 GHz spectrum for our LTE services, as well as 100 MHz of bandwidth in the 3.5 GHz spectrum for our 5G services. We also plan to use 800 MHz of bandwidth in the 28 GHz spectrum for our 5G services in the future. In 2020, we recognized an impairment loss of Won 186.0 billion in connection with the frequency usage rights for the 800 MHz of bandwidth in the 28 GHz spectrum as the carrying amount exceeded the recoverable amount. For more information regarding the license fees for the various bandwidths that we use, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures” and note 17 of the notes to our consolidated financial statements.

In November 2020, the MSIT announced plans to reallocate a total of 310 MHz of frequency bandwidths whose usage terms are due to expire in 2021 to KT, LG U+ and us, 95 MHz of which will be allocated to us. The final consideration to be paid by us for such reallocated bandwidths will depend on the number of 5G cell sites constructed by us until 2022, and the aggregate consideration to be paid by KT, LG U+ and us is expected to range between approximately Won 3.2 trillion and Won 3.8 trillion.

For risks relating to the maintenance of adequate bandwidth capacity, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Our business and results of operations may be adversely affected if we fail to acquire adequate additional frequency usage rights or use our bandwidth efficiently to accommodate subscriber growth and subscriber usage.”

 

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Mandatory Contributions and Obligations

All telecommunications service providers other than value-added service providers and regional paging service providers or any telecommunications service providers whose net annual revenue is less than an amount determined by the MSIT (currently set at Won 30.0 billion) are required to provide “universal” telecommunications services including local telephone services, local public telephone services, telecommunications services for remote islands and wireless communication services for ships and telephone services for handicapped and low-income citizens, or contribute toward the supply of such universal services. The MSIT designates universal services and the service provider who is required to provide each service. Currently, under the MSIT guidelines, we are required to offer free subscription and a discount of between 30.0% to 50.0% of our monthly fee for wireless telecommunications services to handicapped and low-income citizens.

In addition to such universal services for handicapped and low-income citizens, we are also required to make certain annual monetary contributions to compensate for other service providers’ costs for the universal services. The size of a service provider’s contribution is based on its net annual revenue for the previous year (calculated pursuant to the MSIT guidelines, which differ from our accounting practices). We paid such contributions amounting to Won 17.4 billion, Won 16.1 billion and Won 16.7 billion in 2020, 2019 and 2018, respectively. As a wireless telecommunications services provider, we are not considered a provider of universal telecommunications services and do not receive funds for providing universal service. Other network service providers that do provide universal services make all or a portion of their “contribution” in the form of expenses related to the universal services they provide.

Foreign Ownership and Investment Restrictions and Requirements

Because we are a network service provider, and the exception for the foreign shareholding limit under the amended Telecommunications Business Act, which became effective on August 13, 2013, does not apply to us, foreign governments, individuals, and entities (including Korean entities that are deemed foreigners, as discussed below) are prohibited from owning more than 49.0% of our voting stock. Korean entities whose largest shareholder is a foreign government or a foreigner (together with any of its related parties) that owns 15.0% or more of the outstanding voting stock of such Korean entities are also deemed foreigners. If this 49.0% ownership limitation is violated, certain of our foreign shareholders will not be permitted to exercise voting rights in excess of the limitation, and the MSIT may require other corrective action.

As of December 31, 2020, SK Inc. owned 21,624,120 shares of our common stock, or 26.8% of our issued shares. As of December 31, 2020, the two largest foreign shareholders of SK Inc. each held a 3.9% stake therein. If such foreign shareholders increase their shareholdings in SK Inc. to 15% or more and any such foreign shareholder constitutes the largest shareholder of SK Inc., SK Inc. will be considered a foreign shareholder, and its shareholding in us would be included in the calculation of our aggregate foreign shareholding. If SK Inc.’s shareholding in us is included in the calculation of our aggregate foreign shareholding, then our aggregate foreign shareholding, assuming the foreign ownership level as of December 31, 2020 (which we believe was 33.4%), would reach 60.2%, exceeding the 49.0% ceiling on foreign shareholding.

If our aggregate foreign shareholding limit is exceeded, the MSIT may issue a corrective order to us, the breaching shareholder (including SK Inc. if the breach is caused by an increase in foreign ownership of SK Inc.) and the foreign shareholder which owns in the aggregate 15.0% or more of SK Inc. Furthermore, SK Inc. will be prohibited from exercising its voting rights with respect to the shares held in excess of the 49.0% ceiling, which may result in a change in control of us. In addition, the MSIT will be prohibited from granting us licenses or permits necessary for entering into new telecommunications businesses until our aggregate foreign shareholding is reduced to below 49.0%. If a corrective order is issued to us by the MSIT arising from the violation of the foregoing foreign ownership limit, and we do not comply within the prescribed period under such corrective order, the MSIT may:

 

   

revoke our business license;

 

   

suspend all or part of our business; or

 

   

if the suspension of business is deemed to result in significant inconvenience to our customers or to be detrimental to the public interest, impose a one-time administrative penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years.

 

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Additionally, the Telecommunications Business Act also authorizes the MSIT to assess monetary penalties of up to 0.3% of the purchase price of the shares for each day the corrective order is not complied with, as well as a prison term of up to three years or a penalty of Won 150 million. See “Item 3.D. Risk Factors — Risks Relating to Our Business — If SK Inc. causes us to breach the foreign ownership limitations on our common shares, we may experience a change of control.”

We are required under the Foreign Exchange Transaction Act to file a report with a designated foreign exchange bank or with the MOEF, in connection with any issue of foreign currency denominated securities by us in foreign countries. Issuances of US$30 million or less require the filing of a report with a designated foreign exchange bank, and issuances that are over US$30 million in the aggregate within one year from the filing of a report with a designated foreign exchange bank require the filing of a report with the MOEF.

The Telecommunications Business Act provides for the creation of a Public Interest Review Committee under the MSIT to review investments in or changes in the control of network service providers. The following events would be subject to review by the Public Interest Review Committee:

 

   

the acquisition by an entity (and its related parties) of 15.0% or more of the equity of a network service provider;

 

   

a change in the largest shareholder of a network service provider;

 

   

agreements by a network service provider or its shareholders with foreign governments or parties regarding important business matters of such network service provider, such as the appointment of officers and directors and transfer of businesses; and

 

   

a change in the shareholder that actually controls a network service provider.

If the Public Interest Review Committee determines that any of the foregoing transactions or events would be detrimental to the public interest, then the MSIT may issue orders to stop the transaction, amend any agreements, suspend voting rights, or divest the shares of the relevant network service provider. Additionally, if a dominant network service provider (which would currently include us and KT), together with its specially related persons (as defined under the FSCMA), holds more than 5.0% of the equity of another dominant network service provider, the voting rights on the shares held in excess of the 5.0% limit may not be exercised.

Patents and Licensed Technology

Access to the latest relevant technology is critical to our ability to offer the most advanced wireless telecommunications services and to design and manufacture competitive products. In addition to active internal and external research and development efforts as described in “Item 5.C. Research and Development, Patents and Licenses, etc.,” our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our products. We own numerous patents and trademarks worldwide, and have applications for patents pending in many countries. Our patents are mainly related to LTE and 5G technology and wireless Internet applications. We have also acquired a number of patents related to WCDMA and CDMA technologies. There are no licensed patents that are material to our business.

We are not currently involved in any material litigation regarding patent infringement. For a description of the risks associated with our reliance on intellectual property, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Our business relies on technology developed by us, and our business will suffer if we are unable to protect our proprietary rights.”

Seasonality of the Business

Our business is not affected by seasonality.

 

Item 4.C.

Organizational Structure

Organizational Structure

We are a member of the SK Group, based on the definition of “group” under the Fair Trade Act. As of December 31, 2020, SK Group members owned in aggregate 26.8% of the shares of our issued common stock. The

 

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SK Group is a diversified group of companies incorporated in Korea with interests in, among other things, telecommunications, trading, energy, chemicals, engineering and leisure industries.

Significant Subsidiaries

For information regarding our subsidiaries, see note 1(2) of the notes to our consolidated financial statements.

 

Item 4.D.

Property, Plants and Equipment

The following table sets forth certain information concerning our principal properties as of December 31, 2020:

 

Location

  

Primary Use

   Approximate Area
in Square Feet
 

Seoul Metropolitan Area

  

Corporate Headquarters

     988,447  
  

Regional Headquarters

     608,670  
  

Customer Service Centers

     107,277  
  

Training Centers

     279,372  
   Central Research and Development Center      319,789  
  

Others(1)

     2,110,168  

Gyeongsang Provinces

  

Regional Headquarters

     384,281  
  

Others(1)

     1,009,527  

Jeolla and Jeju Provinces

  

Regional Headquarters

     265,614  
  

Others(1)

     803,005  

Chungcheong Province

  

Regional Headquarters

     565,761  
  

Others(1)

     796,600  

 

 

(1)

Includes cell sites.

Our registered office and corporate headquarters, of which we have full ownership, are located at SK T-Tower, 65, Eulji-ro, Jung-gu, Seoul 04539, Korea, which occupy a total land area of approximately 64,515 square feet. In addition, we own or lease various locations for cell sites and switching equipment. We do not anticipate that we will encounter material difficulties in meeting our future needs for any existing or prospective leased space for our cell sites. See “Item 4.B. Business Overview — Cellular Services — Network Infrastructure.”

We maintain a range of insurance policies to cover our assets and employees, including our directors and officers. We are insured against business interruption, fire, lightning, flooding, theft, vandalism, public liability and certain other risks that may affect our assets and employees. We believe that the types and amounts of our insurance coverage are in accordance with general business practices in Korea.

 

Item 4A.

UNRESOLVED STAFF COMMENTS

We do not have any unresolved comments from the SEC staff regarding our periodic reports under the Exchange Act.

 

Item 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion together with our consolidated financial statements and the related notes thereto which appear elsewhere in this annual report. We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. In addition, you should read carefully the section titled “— Critical Accounting Policies, Estimates and Judgments” as well as notes 2(4) and 4 of the notes to our consolidated financial statements which provide summaries of certain critical accounting policies that require our management to make difficult, complex or subjective judgments relating to matters which are highly uncertain and that may have a material impact on our financial conditions and results of operations.

 

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Item 5.A.

Operating Results

Overview

Our operations are reported in five segments: (1) cellular services, which include wireless voice and data transmission services, sales of wireless devices, IoT solutions and platform services, (2) fixed-line telecommunication services, which include fixed-line telephone services, broadband Internet services, advanced media platform services (including IPTV and cable TV services) and business communications services, (3) security services, which include physical and information security services, (4) commerce services, which include our open marketplace platform, 11st, our T-commerce business, SK stoa, and related ancillary services, and (5) other businesses, which include our portal service, mobility business, marketing platform business and certain other miscellaneous businesses that do not meet the quantitative thresholds to be separately considered reportable segments.

In our cellular services segment, we earn revenue principally from our wireless voice and data transmission services through monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services and value-added service fees paid by our wireless subscribers as well as interconnection fees paid to us by other telecommunications operators for use of our wireless network by their customers and subscribers. We also derive revenue from sales of wireless devices by PS&Marketing. Other sources of revenue include revenue from our IoT solutions and platform services, including AI solutions, as well as other miscellaneous cellular services.

In our fixed-line telecommunication services segment, we earn revenue principally from our fixed-line telephone services and broadband Internet services and advanced media platform services (including IPTV and cable TV services) through monthly plan-based fees and usage charges as well as interconnection fees paid to us by other telecommunications operators for use of our fixed-line network by their customers and subscribers. In addition, we derive revenue from international calling services and our business communications services through customized fee arrangements with our business customers. Following the Tbroad Merger in April 2020, the cable TV and broadband Internet services of the former Tbroad have become a part of our fixed-telecommunication services segment.

In our security services segment, we generate revenue from our physical and information security services businesses through our subsidiary ADT CAPS. Revenue from our physical security services is generated through monthly plan-based fees and usage charges for value-added services paid by subscribers. Revenue from our information security services is derived primarily through consideration paid by customers under contracts for our information security platform and consulting services and solutions. ADT CAPS (formerly known as SK Infosec) is the surviving entity resulting from the merger of LSH with and into SK Infosec in December 2020 and the merger of Former ADT CAPS with and into SK Infosec in March 2021. We had acquired Former ADT CAPS, which operated our physical security business prior to such mergers, in October 2018 and SK Infosec, which operated our information security business prior to the mergers, in December 2018. See “Item 3.D. Risk Factors — Risks Relating to Our Business — We may fail to successfully complete, integrate or realize the anticipated benefits of our new acquisitions, joint ventures or other strategic alternatives or corporate reorganizations, and such transactions may negatively impact our business.”

In our commerce services segment, we derive revenue from our subsidiaries Eleven Street, which was spun-off as our new consolidated subsidiary from SK Planet in September 2018, and SK Stoa. Eleven Street generates revenue principally through third-party seller fees earned (including commissions) for transactions in which it acts as a selling agent to the “mini malls” on 11st, its online open marketplace platform, as well as advertising revenue and other commerce solutions from 11st. SK Stoa derives revenues through third-party seller fees earned (including commissions) for transactions in which it acts as a selling agent on SK stoa, its T-commerce network.

In our others segment, we earn revenue from the marketing platform business of SK Planet, the music streaming service and audio device manufacturing businesses of Dreamus, the mobility business of T Map Mobility and our “Nate” portal service operated by our subsidiary, SK Communications.

Following the spin-off of SK Telecom’s mobility business into T Map Mobility effective as of December 29, 2020, our mobility business, which was previously part of our cellular services segment, became a part of our others segment beginning on December 29, 2020.

 

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Furthermore, following the entry into an agreement to transfer SK Broadband’s 100% equity interest in SK Stoa to SK Telecom in April 2019 (which transaction was completed in January 2020), the T-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunication services segment in the year ended December 31, 2018, were reclassified as part of our commerce services segment for the year ended December 31, 2019. In addition, our security services businesses, which were previously part of our others segment in the year ended December 31, 2018, were reclassified as a new security services segment for the year ended December 31, 2019. The breakdown of our results of operations by operating segment for the year ended December 31, 2018 in our consolidated audited financial statements have been recast to retroactively apply such changes in segmentation.

Our cellular service revenue and fixed-line telecommunications service revenue depend principally upon the number of our subscribers, the rates we charge for our services, the frequency and volume of subscriber usage of our services and the terms of our interconnection with other telecommunications operators. Our security service revenue depends principally upon the number of our subscribers and customers and the rates we charge for our physical security services as well as the number and terms of the contracts pursuant to which our information security services are provided. Our commerce service revenue depends principally upon the gross merchandise volume, which is the total monetary value of customer purchases of goods and services, net of estimated refunds, of 11st and SK stoa and the number of merchants that utilize 11st and SK stoa to advertise and promote their products and services and the extent of such advertisement and promotion.

Among other factors, management uses operating profit of each reportable segment presented in accordance with K-IFRS (“segment operating profit”) in its assessment of the profitability of each reportable segment. The sum of segment operating profit for all five reportable segments differs from our operating profit presented in accordance with IFRS as issued by the IASB as segment operating profit does not include certain items such as donations, gain and loss from disposal of property and equipment and intangible assets and impairment loss on property and equipment and intangible assets. For a reconciliation of operating profit presented in accordance with IFRS as issued by the IASB and operating profit presented in accordance with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.” In addition to the information set forth below, see note 5 of the notes to our consolidated financial statements for more detailed information regarding each of our reportable segments.

A number of recent developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:

Rate Regulations.    Under the MDDIA, wireless telecommunications service providers are obliged to provide certain benefits, such as discounted rates, to subscribers who subscribe to their service without receiving handset subsidies. Handset subsidies are provided to subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. In June 2017, the State Affairs Planning Advisory Committee of Korea announced that it would encourage wireless telecommunications service providers, including us, to increase the applicable discount rate offered to subscribers from 20% to 25%, which we adopted in September 2017, and to offer additional discounts to low income customers, including those on government welfare programs and senior citizen recipients of the basic pension, which we implemented in December 2017 and July 2018, respectively.

In 2020, the total number of subscribers who had elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA increased due to greater public awareness of the availability of such discounted rates as well as the increase in the applicable discount rate to 25%. In 2020, approximately 71% of our new subscribers elected to receive discounted rates in lieu of handset subsidies compared to 55% in 2019. As of December 31, 2020, a substantial majority of our subscribers who elected to receive these discounted rates are receiving the increased 25% rate discount. These Government measures have adversely affected our revenues and results of operations as more subscribers elected to receive the 25% rate discount. On the other hand, this has also led to a reduction of, or partially offset increases in, our marketing expenses as the number of subscribers who have elected to receive handset subsidies has declined, and has contributed to maintaining a stable churn rate.

Failure to comply with the MDDIA may lead to suspension of our business or imposition of monetary penalties. For more information about the MDDIA and the penalties imposed for violating Government regulations, see “Item 4.B. Business Overview — Law and Regulation — Rate Regulation” and “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings — KCC Proceedings.”

 

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Decrease in Interconnection Fees.    Our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and international fixed-line and other wireless networks. Charges for interconnection affect our revenues and operating results. The MSIT determines the basic framework for interconnection arrangements, including policies relating to interconnection rates in Korea. Under our interconnection agreements, we are required to make payments in respect of calls which originate from our networks and terminate in the networks of other Korean telecommunications operators, and the other operators are required to make payments to us in respect of calls which originate in their networks and terminate in our network. The MSIT has continued to gradually decrease the interconnection rates in Korea, which has led to a continued decrease in our interconnection revenue as well as interconnection expenses from 2012 to 2020 and any further reduction in interconnection rates by the MSIT may continue to impact our results of operations. Beginning in 2017, a single interconnection rate paid by fixed-line network service providers for fixed-line to wireless calls applies to all wireless telecommunications service providers. For more information about our interconnection revenue and expenses, see “Item 4.B. Business Overview — Interconnection.”

Decrease in Monthly Revenue per Subscriber.    We measure monthly average revenue per subscriber using two metrics: average monthly revenue per subscriber excluding MVNO subscribers leasing our networks (“ARPU”) and average monthly revenue per subscriber including such MVNO subscribers (“ARPU including MVNO”). ARPU is derived by dividing the sum of total SK Telecom revenues on a separate basis from voice service and data service for the period (excluding revenue derived from MVNO subscribers leasing our networks) by the monthly average number of subscribers (excluding the number of MVNO subscribers) for the period, then dividing that number by the number of months in the period. ARPU including MVNO is derived by dividing the sum of total SK Telecom revenues on a separate basis from voice service and data service for the period (including revenue derived from MVNO subscribers) by the monthly average number of subscribers (including the number of MVNO subscribers) for the period, then dividing that number by the number of months in the period.

Our ARPU decreased by 1.0% to Won 30,314 in 2020 from Won 30,630 in 2019, which represented a decrease of 5.0% from Won 32,247 in 2018. Our ARPU including MVNO increased by 1.8% to Won 27,895 in 2020 from Won 27,412 in 2019, which represented a decrease of 4.2% from Won 28,615 in 2018. The decreases in ARPU and ARPU including MVNO in 2019 were primarily due to a decrease in revenue attributable to an increase in the number of subscribers who elected to receive discounted rates in lieu of receiving handset subsidies. The decrease in ARPU in 2020 was primarily due to an increase in subscriptions for IoT solutions by corporate customers, from which we derive lower revenue per subscriber. Such decreases were offset in part by an increase in subscribers that subscribe to our higher-priced unlimited data usage plans and 5G plans. The increase in ARPU including MVNO in 2020 was primarily attributable to the decrease in the proportion of MVNO subscribers, from whom we derive lower revenue per subscriber.

Effects of COVID-19.    Demand for our products and services may fluctuate in light of the overall economic conditions in Korea. The overall prospects for the Korean economy and, in turn, the market conditions for the industries in which we operate, remain uncertain, especially in light of the ongoing global COVID-19 pandemic, which has had, will likely continue to have, a significant negative effect on the Korean economy. For example, the travel restrictions imposed by governments in response to the COVID-19 pandemic has resulted in a decrease in revenue from roaming services, and the pandemic has contributed to lower customer demand for new wireless devices, resulting in a decrease in our wireless device sales revenue. In addition, an increase in unemployment among, and/or a decrease in disposable income of, our customers resulting from a deterioration of the Korean economy due to COVID-19 may decrease demand for some of our products and services or cause an increase in delinquent subscriber accounts. While it is not possible to predict the duration or full magnitude of harm from COVID-19, a continued and prolonged outbreak of COVID-19 may have a material adverse effect on our business, financial condition and results of operations. See “Item 3.D. Risk Factors—Risks Relating to Our Business — The ongoing global pandemic of COVID-19 and any possible recurrence of other types of widespread infectious diseases may adversely affect our business, financial condition or results of operations.”

Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS

In addition to preparing consolidated financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with K-IFRS as adopted by the KASB, which we are required to file with the FSC and the Korea Exchange under the FSCMA.

 

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K-IFRS requires operating profit, which is calculated as operating revenue less operating expense, to be separately presented on the consolidated statement of income. The presentation of operating profit in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating profit in the consolidated statements of income prepared in accordance with K-IFRS for the corresponding periods in certain respects. The table below sets forth a reconciliation of our operating profit as presented in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB for each of the three years ended December 31, 2020 to the operating profit as presented in the consolidated statements of income prepared in accordance with K-IFRS.

 

     For the Year Ended December 31,  
     2020     2019     2018  
     (In billions of Won)  

Operating profit pursuant to IFRS as issued by the IASB

   1,104.6     1,007.3     833.8  

Differences:

      

Other income pursuant to IFRS that are classified as other non-operating income pursuant to K-IFRS:

      

Gain on disposal of property and equipment and intangible assets

     (35.6     (8.5     (38.9

Others

     (64.0     (94.3     (33.0
     (99.6     (102.8     (71.9
  

 

 

   

 

 

   

 

 

 

Other operating expenses pursuant to IFRS that are classified as other non-operating expenses pursuant to K-IFRS:

      

Loss on impairment of property and equipment and intangible assets

     208.8       65.9       255.8  

Loss on disposal of property and equipment and intangible assets

     41.5       47.8       87.3  

Donations

     16.8       17.6       59.0  

Bad debt for accounts receivable — other

     10.6       5.8       7.7  

Others

     66.6       66.6       30.1  
  

 

 

   

 

 

   

 

 

 
     344.3       203.7       439.9  
  

 

 

   

 

 

   

 

 

 

Operating profit pursuant to K-IFRS

   1,349.3     1,108.2     1,201.8  
  

 

 

   

 

 

   

 

 

 

See note 5(2) of the notes to our consolidated financial statements. However, there is no impact on profit for the year or earnings per share for each of the three years ended December 31, 2020, 2019 and 2018.

Critical Accounting Policies, Estimates And Judgments

Our consolidated financial statements are prepared in accordance with IFRS as issued by the IASB. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments including those related to loss allowances, fair value measurements of financial instruments, estimated useful lives and impairment of long-lived assets, impairment of goodwill, provisions, retirement benefit plans and income taxes. We base our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment or complexity:

Loss Allowances

A loss allowance is provided based on a review of the status of individual receivable accounts at the end of the year. We maintain loss allowances for estimated losses that result from the inability of our customers to make required payments. We base our allowances on the likelihood of recoverability of accounts receivable based on the aging of accounts receivable at the end of the period, past customer default experience and their credit status, and economic and industrial factors. In addition, we use an “expected credit loss” impairment model to estimate our loss allowances based on the above-described criteria. Under such model, loss allowances are recorded prior to experiencing delinquency on our receivable accounts rather than upon actual delinquency. Loss allowance

 

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amounted to Won 365.1 billion as of December 31, 2020 and Won 346.4 billion as of December 31, 2019. If economic or specific industry trends worsen beyond our estimates, the loss allowances we have recorded may be materially adjusted in the future. See note 7 of the notes to our consolidated financial statements.

Fair Value Measurement of Financial Instruments

Subsequent to initial recognition, financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and derivative financial assets are stated at fair value with any gains or losses arising on remeasurement recognized in profit for the period or other comprehensive income. When measuring fair value, we use quoted prices in active markets to the extent such prices exist. The fair values of financial instruments, including derivative instruments, that are not traded in an active market are determined using valuation techniques that require management’s estimates of future cash flows and discount rates. 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. See notes 2(4) and 36(3) of the notes to our consolidated financial statements.

Impairment of Long-lived Assets Including Frequency Usage Rights

Long-lived assets generally consist of property and equipment and definite-lived intangible assets. We review our depreciation and amortization methods, estimated useful lives and residual values of long-lived assets at the end of each annual reporting period. If any such asset or cash-generating unit is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset or cash-generating unit exceeds the estimated recoverable 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, we review the recoverable amount of an individual asset or, if it is not possible to measure the individual recoverable amount of an asset, at the level of a cash-generating unit. The recoverable amounts of assets or cash-generating units may be determined based on value-in-use calculations, which require the use of estimates.

Our definite-lived intangible assets include our frequency usage rights, which have contractual lives of 5 to 10.25 years and are amortized from the date commercial service is initiated through the end of their contractual lives. Because the use of frequency usage rights is exposed to risks and challenges associated with our business, any or all of which, if realized or not properly addressed, may have a material adverse effect on our financial condition, results of operations and cash flows, we review the frequency usage rights for any indication of impairment on an annual basis. If any such indication exists, we test for impairment utilizing the estimated long-term revenue and cash flow forecasts. The use of different assumptions within our cash flow model could result in different recoverable amounts for our frequency usage rights. The results of our review using the testing method described above resulted in an impairment loss in the amount of Won 198.4 billion of our frequency usage rights in 2020. See note 17 of the notes to our consolidated financial statements.

Impairment of Goodwill

Goodwill is measured as the excess of the sum of: (1) the consideration transferred, (2) the amount of any non-controlling interests in the acquiree and (3) the fair value of the acquirer’s previously held equity interest in the acquiree (if any), over the net fair value of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Goodwill is not amortized, but tested for impairment at the end of each annual reporting period or whenever there is an indication that the asset may be impaired. Goodwill is carried at cost less accumulated impairment losses and the impairment losses are not reversed. For the purpose of impairment testing, we review the recoverable amount of an individual asset or, if it is not possible to measure the individual recoverable amount of an asset, at the level of a cash-generating unit. The recoverable amount of an asset or cash-generating unit to which goodwill has been allocated is the greater of its value in use and its fair value less costs to sell. The value in use calculation requires our management to estimate the future cash flows expected related to the respective cash-generating unit and the determination of an appropriate discount rate in order to calculate present value.

In 2020, we recognized Won 0.5 billion of impairment losses on goodwill compared to Won 21.1 billion of impairment losses on goodwill in 2019. Impairment losses on goodwill in 2020 were mainly due to our recognition

 

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of impairment losses on goodwill relating to our consolidated subsidiaries Dreamus and Incross. Impairment losses on goodwill in 2019 were mainly due to our recognition of impairment losses on goodwill relating to our consolidated subsidiary Life Design Company Inc. (“Life Design Company”), which operates a celebrity-related merchandise business in Japan.

As of December 31, 2020, the amount of goodwill allocated to our security services cash-generating unit, which is primarily derived from the acquisition of LSH, was Won 1,176.3 billion, which increased slightly from Won 1,173.4 billion as of December 31, 2019. Our management calculated the recoverable amount of such cash-generating unit based on its value in use using a discounted cash flow method. The discounted cash flow method was based on certain key assumptions with respect to relevant revenue growth rates, labor costs, perpetual growth rate and cash flow discount rate that were primarily derived from internal sources as well as historical performance, external market data and industry reports. The estimated revenue growth rates and labor costs were based on 5-year financial budgets that have been approved by management, which took into account external market data, market trends and expectations as well as historical performance. Cash flows beyond 2025 were projected to grow at a perpetual growth rate estimated at 1.0%. Estimating a perpetual growth rate requires significant management judgment about future business strategies as well as micro- and macro-economic environments that are inherently uncertain. Our 5-year cash flow projections with a terminal value were discounted at an appropriate weighted average cost of capital to 7.1%. Based on such calculation, the recoverable amount of the cash-generating unit exceeded its carrying amount, and no impairment loss was recognized on such goodwill in 2020. Future changes in one or more of such assumptions may cause the carrying amount of the cash-generating unit to exceed its recoverable amount, which would require us to recognize impairment losses on goodwill relating to such cash-generating unit as discussed in note 16(2) of the notes to our consolidated financial statements.

See notes 4(11) and 16 of the notes to our consolidated financial statements.

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 assessment of deferred tax assets for recoverability 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. As of December 31, 2020 and 2019, unused tax loss carryforwards of Won 1,042.1 billion and Won 1,023.9 billion, respectively, were not recognized as deferred tax assets because we did not believe that their realization would be probable. The increase of Won 18.2 billion in unrecognized tax loss carryforwards in 2020 compared to 2019 was primarily related to an increase in unrecognized tax loss carryforwards of SK Planet. See notes 4(24) and 32 of the notes to our consolidated financial statements.

Prepaid Expenses

We pay commissions to our retail stores and authorized dealers in connection with acquiring wireless and fixed-line telecommunications subscriber contracts, which would not have been paid if there were no binding contracts with subscribers. We capitalize certain costs associated with such commissions as prepaid expenses and amortize them over the expected periods over which we expect to maintain such subscribers under contract. Our management assesses such expected contract periods based on our historical experience on the duration of subscriber contracts. If we experience any changes in such historical experience, or if our management decides to use other factors for the determination of the expected contract periods, our estimate of the expected contract period will change, which in turn will affect the rate at which the applicable prepaid expenses are amortized and recognized as our operating expenses. See note 8 of the notes to our consolidated financial statements.

 

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Determination of Stand-Alone Selling Prices in Recognition of Revenue from Cellular Services

For contracts where we sell both a wireless device and subscription plan together to a single customer through our subsidiary PS&Marketing, we allocate revenue proportionately based on the relative stand-alone selling prices of the subscription plan and the device, and we recognize unbilled receivables from wireless device sales as contract assets. See note 9 of the notes to our consolidated financial statements. In determining the stand-alone selling price for the subscription plan, we apply the published price of such subscription plan net of any applicable rate discounts, based on our management’s judgment that such discounted price represents the appropriate stand-alone selling price of such plan. A significant change in the facts and circumstances upon which we made such judgment on the determination of stand-alone selling prices may have an impact on the allocation of revenues from our cellular services segment.

Determination of Lease Term

Under IFRS 16, we determine lease terms by including periods covered by an option to extend the lease if the lessee is reasonably certain to exercise such option and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise such option. Such determination requires us to assess the likelihood that the lessee will exercise such options, which assessment in turn is made in consideration of whether the lessee would incur a penalty on termination that is more than insignificant. See “— Recently Adopted International Financial Reporting Standards - IFRS 16.”

Based on such assessments, we have concluded that it is reasonably certain that the underlying lease assets or related assets will generally be used by the lessee for the period of their useful lives, and we determine the lease terms of such assets based on such useful lives. For example, in the case of circuits that are part of telecommunication equipment that are leased by us, we have determined their lease term to be eight years based on the useful life of such circuits. In the case of real estate leased by us to install network equipment, we have determined their lease term to be eight years in the case of those related to 5G services and six years for other networks based on their respective useful lives.

Customer Relationship

In connection with the Tbroad Merger, we recognized the acquired customer relationships arising from the business combination as an identifiable intangible asset in 2020. The fair value of such customer relationships amounted to Won 374.0 billion as of April 30, 2020, the acquisition date. The fair value was estimated based on the multi-period excess earnings method (“MPEEM”), which is a valuation technique under the income approach that estimates fair value by discounting the expected future excess earnings attributable to an intangible asset using a risk-adjusted discount rate. The MPEEM uses significant unobservable inputs including estimated revenue per subscriber, future churn rate and weighted average cost of capital, which require a significant degree of judgment by our management. See note 12 of the notes to our consolidated financial statements.

Recently Adopted International Financial Reporting Standards – IFRS 16

We adopted IFRS 16, Leases, in the fiscal year beginning on January 1, 2019 using the modified retrospective method by recognizing the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of retained earnings as of such date. IFRS 16 introduces a single, on-balance sheet accounting model for lessees. Pursuant to IFRS 16, we recognize right-of-use assets representing our rights to use the underlying assets and lease liabilities representing our obligation to make lease payments in relation to substantially all of our lease arrangements, except for certain short-term leases and leases of low-value assets. Lessor accounting remains similar to previous accounting policies.

In the fiscal year beginning on January 1, 2020, we changed our accounting policy by applying the agenda decision, Lease Term and Useful Life of Leasehold Improvements (IFRS 16 Leases and IAS 16 Property, Plant and Equipment)—November 2019, published by the IFRIC on December 16, 2019. Prior to such change in accounting policy, we determined a lease term based on the assumption that the right to extend or terminate the lease is no longer enforceable if the lease contract requires the counterparty’s consent to be extended. Under the new accounting policy, we determine the lease term based on the non-cancellable period of a lease in addition to

 

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(i) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option and (ii) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. In assessing the periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option, we consider whether we would incur a penalty on termination that is more than insignificant. We have retrospectively applied such change in accounting policy in connection with the IFRIC agenda decision and restated our consolidated financial statements as of January 1, 2019 and as of and for the year ended December 31, 2019.

The change in accounting policy had the effect of increasing our total assets and total liabilities as of December 31, 2019 by Won 590.7 billion and Won 597.4 billion, respectively. In the case of our consolidated statement of income for the year ended December 31, 2019, the change had the effect of decreasing our operating revenue and other income by Won 3.4 billion and decreasing operating expenses by Won 9.8 billion, resulting in an increase in operating profit by Won 6.4 billion and a decrease in profit before income tax by Won 1.7 billion. In addition, the change had the effect of decreasing our profit for the year by Won 1.2 billion and decreasing our income tax expense by Won 0.4 billion. In the case of our consolidated statement of cash flows for the year ended December 31, 2019, the change had the effect of increasing cash flows from operating activities by Won 48.9 billion, increasing cash flows from investing activities by Won 0.9 billion and decreasing cash flows from financing activities by Won 49.8 billion.

See notes 3 and 4(12) of the notes to our consolidated financial statements for further details regarding the effects of the change in accounting policy based on the IFRIC agenda decision and significant accounting policies related to leases.

Operating Results

The following table sets forth summary consolidated income statement information, including that expressed as a percentage of operating revenue and other income, for the periods indicated:

 

     For the year ended December 31,  
     2020     2019     2018  
     (In billions of Won, except percentages)  

Operating revenue and other income

   18,724.3       100.0   17,843.5       100.0   16,945.9        100.0

Revenue

     18,624.7       99.5       17,740.7       99.4       16,874.0        99.6  

Other income

     99.6       0.5       102.8       0.6       71.9        0.4  

Operating expenses

     17,619.7       94.1       16,836.2       94.4       16,112.1        95.1  

Operating profit

     1,104.6       5.9       1,007.3       5.6       833.8        4.9  

Profit before income tax

     1,877.0       10.0       1,161.0       6.5       3,976.0        23.5  

Income tax expense

     376.5       2.0       300.3       1.7       844.0        5.0  

Profit for the year

     1,500.5       8.0       860.7       4.8       3,132.0        18.5  

Attributable to:

             

Owners of the Parent Company

     1,504.4       8.0       888.7       5.0       3,127.9        18.5  

Non-controlling interests

     (3.8     (0.0     (28.0     (0.2     4.1        0.0  

 

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The following table sets forth additional information about our operations with respect to our reportable segments during the periods indicated:

 

    For the year ended December 31,  
    2020     2019     2018  
    Amount     Percentage of
Total Revenue
    Amount     Percentage of
Total Revenue
    Amount     Percentage of
Total Revenue
 
    (In billions of Won, except percentages)  

Cellular Services Revenue

           

Wireless Service(1)

  9,801.2       52.6   9,532.4       53.7   9,770.4       57.9

Cellular Interconnection

    472.3       2.6       494.3       2.8       532.2       3.2  

Wireless Device Sales

    975.2       5.2       1,032.1       5.8       989.1       5.9  

Miscellaneous(2)

    1,047.0       5.6       1,118.8       6.3       1,087.2       6.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cellular Services Revenue

    12,295.7       66.0       12,177.5       68.6       12,378.9       73.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed-line Telecommunication Services Revenue

           

Fixed-line Telephone Service

    215.8       1.2       224.5       1.3       371.3       2.2  

Fixed-line Interconnection

    85.1       0.5       92.3       0.5       95.8       0.6  

Broadband Internet Service and Advanced Media Platform Service(3)

    2,227.1       11.8       1,807.5       10.2       1,760.4       10.4  

International Calling Service

    160.3       0.9       137.3       0.8       152.9       0.9  

Miscellaneous(4)

    717.4       3.9       677.8       3.8       441.9       2.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Fixed-line Telecommunication Services Revenue

    3,405.7       18.3       2,940.1       16.6       2,822.3       16.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Security Services Revenue(5)

    1,246.5       6.7       1,109.5       6.3       284.3       1.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commerce Services Revenue(4) (6)

    792.9       4.3       710.7       4.0       728.4       4.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Others Revenue(5) (7)

    883.9       4.7       803.0       4.5       660.1       3.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

    18,624.7       100.0       17,740.7       100.0       16,874.0       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue Growth

    5.0       5.1       (3.7 )%   

Segment Operating Expense(8)

           

Cellular Services

    11,287.8       60.6       11,261.7       63.5       11,079.0       65.7  

Fixed-line Telecommunication Services

    3,161.6       17.0       2,804.4       15.8       2,576.8       15.3  

Security Services

    1,134.1       6.1       975.9       5.5       295.6       1.8  

Commerce Services

    781.9       4.2       708.7       4.0       813.4       4.8  

Others

    909.9       4.9       881.9       5.0       907.4       5.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Operating Expense

    17,275.3       92.8       16,632.5       93.8       15,672.2       92.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment Operating Profit

           

Cellular Services

    1,007.8       5.3       915.8       5.1       1,299.9       7.7  

Fixed-line Telecommunication Services

    244.1       1.3       135.7       0.8       245.5       1.5  

Security Services

    112.4       0.6       133.6       0.8       (11.3     (0.1

Commerce Services

    10.9       0.1       2.0       0.0       (85.0     (0.5

Others

    (25.9     (0.1     (78.9     (0.4     (247.3     (1.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Operating Profit

  1,349.3       7.2   1,108.2       6.2   1,201.8       7.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

Wireless service revenue includes revenue from wireless voice and data transmission services principally derived through monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services and value-added service fees paid by wireless subscribers.

 

(2)

Miscellaneous cellular services revenue includes revenue from our IoT solutions as well as other miscellaneous cellular services.

 

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(3)

Broadband internet service and advanced media platform service revenue includes revenues from our broadband Internet services as well as IPTV and cable TV services.

 

(4)

Miscellaneous fixed-line telecommunication services revenue includes revenues from business communications services (other than fixed-line telephone service) provided by SK Broadband and VoIP services provided by SK Telink. Following the entry into an agreement to transfer SK Broadband’s 100% equity interest in SK Stoa to SK Telecom in April 2019 (which transaction was completed in January 2020), the T-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in the year ended December 31, 2018, were reclassified as part of our commerce services segment for the year ended December 31, 2019. As a result, our results of operations for the year ended December 31, 2018 have been restated to retroactively apply such reclassification.

 

(5)

Security services revenue includes revenues from our former subsidiaries Former ADT CAPS and SK Infosec. Such revenues, which were previously part of our others segment in the year ended December 31, 2018, were separated into a new security services segment for the year ended December 31, 2019. As a result, our results of operations for the year ended December 31, 2018 have been restated to retroactively apply such new segmentation. We have subsequently combined LSH, Former ADT CAPS and SK Infosec into a single entity through a series of mergers that were completed in March 2021, and the combined entity, ADT CAPS, has become the principal consolidated subsidiary that operates our security business.

 

(6)

Commerce services revenue includes revenues from Eleven Street and SK Stoa.

 

(7)

Others revenue includes revenues from the marketing platform business operations of SK Planet, “Nate,” our online portal service operated by SK Communications, and other businesses. As a result of the spin-off of T Map Mobility, our mobility business, which was previously part of our cellular services segment, became a part of our other businesses segment beginning December 29, 2020.

 

(8)

“Segment operating expense” means operating expense for each reportable segment presented in accordance with K-IFRS and therefore does not include certain expenses that are classified as other non-operating expenses under K-IFRS. For more information on the differences between our consolidated operating expense pursuant to K-IFRS and pursuant to IFRS as issued by the IASB, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

2020 Compared to 2019

Operating Revenue and Other Income.    Our consolidated operating revenue and other income increased by 4.9% to Won 18,724.3 billion in 2020 from Won 17,843.5 billion in 2019 due to an increase in operating revenue, which was in small part offset by a decrease in other income, as discussed below.

Our consolidated operating revenue increased by 5.0% to Won 18,624.7 billion in 2020 from Won 17,740.7 billion in 2019, primarily due to increases in fixed-line telecommunications services revenue, security services revenue and cellular services revenue, and to a smaller extent, increases in commerce services revenue and others revenue.

Our consolidated other income decreased by 3.1% to Won 99.6 billion in 2020 from Won 102.8 billion in 2019, primarily due to a decrease in gain on business transfer in 2020 as compared to 2019. Such gain on business transfer in 2020 was mainly related to the transfer of the digital disease management business of Health Connect Co., Ltd. to Invites Healthcare Co., Ltd., while the gain in 2019 was mainly related to the transfer of our e-sports business to SK Telecom CS T1 Co., Ltd., a joint venture with Comcast Spectacor that was newly established in February 2019, as well as the transfer of our former mobile OTT service business, “oksusu,” to Content Wavve in September 2019.

The following sets forth additional information about our operating revenues with respect to each of our reportable segments.

 

   

Cellular services: The revenue of our cellular services segment, which is composed of revenues from wireless service, cellular interconnection, wireless device sales and miscellaneous cellular services, increased by 1.0% to Won 12,295.7 billion in 2020 from Won 12,177.5 billion in 2019. The increase in our cellular services revenue was due to an increase in wireless service revenue, partially offset by decreases in miscellaneous revenue, wireless device sales revenue and cellular interconnection revenue.

 

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Wireless service revenue increased by 2.8% to Won 9,801.2 billion in 2020 from Won 9,532.4 billion in 2019, primarily attributable to the increase in the number of subscribers who subscribe to our higher-priced 5G plans. The impact of such increase was partially offset by an increase in the percentage of wireless service subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA as well as a decrease in MNVO subscribers.

 

   

Miscellaneous cellular services revenue decreased by 6.4% to Won 1,047.0 billion in 2020 from Won 1,118.8 billion in 2019, primarily due to the termination of certain social commerce businesses in 2020.

 

   

Wireless device sales revenue decreased by 5.5% to Won 975.2 billion in 2020 from Won 1,032.1 billion in 2019, primarily due to a decrease in sales of handsets as a result of lower customer demand for new devices, which was partly attributable to the COVID-19 pandemic.

 

   

Cellular interconnection revenue decreased by 4.5% to Won 472.3 billion in 2020 from Won 494.3 billion in 2019. The decrease was primarily attributable to continued decreases in interconnection rates and land-to-mobile call volume.

 

   

Fixed-line telecommunications services: The revenue of our fixed-line telecommunication services segment, which is composed of revenues from broadband Internet service and advanced media platform service (including IPTV and cable TV services), fixed-line telephone service, international calling service, fixed-line interconnection and miscellaneous fixed-line telecommunication services, increased by 15.8% to Won 3,405.7 billion in 2020 from Won 2,940.1 billion in 2019, primarily due to increases in our broadband Internet service and advanced media platform service revenue and miscellaneous fixed-line telecommunication services revenue, partially offset by decreases in fixed-line telephone service revenue and fixed-line interconnection revenue.

 

   

Revenue from our broadband Internet service and advanced media platform service (including our IPTV and cable TV services) increased by 23.2% to Won 2,227.1 billion in 2020 from Won 1,807.5 billion in 2019, primarily due to the inclusion of revenue of the former Tbroad following the Tbroad Merger as well as an increase in the number of IPTV subscribers to 5.7 million subscribers as of December 31, 2020 from 5.2 million subscribers as of December 31, 2019.

 

   

Miscellaneous fixed-line telecommunication services revenue increased by 5.8% to Won 717.4 billion in 2020 from Won 677.8 billion in 2019, primarily due to an increase in revenue from our business communications services.

 

   

Fixed-line telephone service revenue decreased by 3.9% to Won 215.8 billion in 2020 from Won 224.5 billion in 2019, primarily due to decreases in the number of fixed-line telephone subscribers (including subscribers to VoIP services of SK Broadband and SK Telink) to 3.8 million as of December 31, 2020 from 3.9 million as of December 31, 2019 and residential calling volume as a result of shifting consumer preferences toward wireless communication.

 

   

Fixed-line interconnection revenue decreased by 7.8% to Won 85.1 billion in 2020 from Won 92.3 billion in 2019, primarily due to a decrease in interconnection rates, as well as decreases in the number of fixed-line telephone subscribers and residential calling volume as described above.

 

   

Security services: The revenue of our security services segment, which is composed of revenues from our former subsidiaries Former ADT CAPS and SK Infosec (prior to its merger with Former ADT CAPS), increased by 12.3% to Won 1,246.5 billion in 2020 from Won 1,109.5 billion in 2019, primarily due to an increase in the number of subscribers to our CMS products as well as our acquisition of the security equipment construction and security services business of SK hystec inc. in July 2020.

 

   

Commerce services: The revenue of our commerce services segment, which is composed of revenues from 11st, our open marketplace platform, and SK stoa, our T-commerce network, increased by 11.6% to

 

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Won 792.9 billion in 2020 from Won 710.7 billion in 2019, primarily due to the expansion of the customer base and product sourcing capabilities of our SK stoa business as well as the growth in general merchandise volume of 11st.

 

   

Others: The revenue of our others segment increased by 10.1% to Won 883.9 billion in 2020 from Won 803.0 billion in 2019, primarily due to increases in revenue of FSK L&S and One Store Co., Ltd.

Operating Expense.    Our consolidated operating expense increased by 4.7% to Won 17,619.7 billion in 2020 from Won 16,836.2 billion in 2019, primarily due to a 6.9% increase in commissions to Won 5,347.1 billion in 2020 from Won 5,002.1 billion in 2019, a 16.3% increase in other operating expenses to Won 1,996.4 billion in 2020 to Won 1,716.4 billion in 2019, a 6.5% increase in labor costs to Won 3,006.2 billion from Won 2,822.7 billion in 2019 and a 3.5% increase in depreciation and amortization expenses to Won 3,991.1 billion in 2020 from Won 3,856.7 billion in 2019, partially offset by a 12.3% decrease in cost of goods sold to Won 1,608.5 billion in 2020 from Won 1,833.4 billion in 2019.

The increase in commissions was primarily due to the inclusion of commissions of the former Tbroad following the Tbroad Merger.

The increase in other operating expenses was primarily due to an increase in impairment loss on property and equipment and intangible assets to Won 208.8 billion in 2020 from Won 65.9 billion in 2019, which amount in 2020 mainly reflected impairment losses we recognized on frequency usage rights.

The increase in labor costs was primarily due to the additional personnel on payroll in connection with the Tbroad Merger as well as the expansion of our security and commerce businesses.

The increase in depreciation and amortization expenses was primarily related to our equipment and frequency usage rights for our 5G network.

The decrease in cost of goods sold was primarily due to a decrease in the number of wireless devices sold in 2020.

The following sets forth additional information about our segment operating expense with respect to each of our reportable segments, which do not include certain expenses that are classified as other non-operating expenses under K-IFRS. For more information on the difference between our consolidated operating expense pursuant to K-IFRS and pursuant to IFRS as issued by the IASB, see “ — Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

   

Cellular services: The segment operating expense for our cellular services segment increased by 0.2% to Won 11,287.8 billion in 2020 from Won 11,261.7 billion in 2019, mainly attributable to an increase in marketing costs to promote our 5G services and increases in depreciation and amortization expenses of our equipment and frequency usage rights for our 5G network.

 

   

Fixed-line telecommunication services: The segment operating expense for our fixed-line telecommunication services segment increased by 12.7% to Won 3,161.6 billion in 2020 from Won 2,804.4 billion in 2019, primarily due to the inclusion of operating expenses of the former Tbroad following the Tbroad Merger.

 

   

Security services: The segment operating expense for our security services segment increased by 16.2% to Won 1,134.1 billion in 2020 from Won 975.9 billion in 2019, primarily due to an increase in expenses related to the launch of new security services in 2020.

 

   

Commerce services: The segment operating expense for our commerce services segment increased by 10.3% to Won 781.9 billion in 2020 from Won 708.7 billion in 2019, primarily due to increases in marketing expenses as well as commissions associated with the increase in general merchandise volume of our 11st business.

 

   

Others: The segment operating expense for our others segment increased by 3.2% to Won 909.9 billion in 2020 from Won 881.9 billion in 2019, primarily due to an increase in operating expense of FSK L&S.

Operating Profit.    Our consolidated operating profit increased by 9.7% to Won 1,104.6 billion in 2020 from Won 1,007.3 billion in 2019, as the increase in operating revenue and other income outpaced the increase in operating expense in 2020.

 

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The following sets forth additional information about our segment operating profit with respect to each of our reportable segments. Our segment operating profit with respect to each of our reportable segments is based on K-IFRS and the sum of segment operating profit for all five reportable segments differs from our consolidated operating profit presented in accordance with IFRS as issued by the IASB. For a reconciliation of operating profit presented in accordance with IFRS as issued by the IASB and operating profit presented in accordance with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

   

Cellular services: The segment operating profit of our cellular services segment increased by 10.0% to Won 1,007.8 billion in 2020 from Won 915.8 billion in 2019, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense, for the various reasons described above. The segment operating margin (which, with respect to each reportable segment, is segment operating profit (loss) divided by revenue from such segment, expressed as a percentage) of our cellular services segment increased to 8.2% in 2020 from 7.5% in 2019.

 

   

Fixed-line telecommunication services: The segment operating profit of our fixed-line telecommunication services segment increased by 79.9% to Won 244.1 billion in 2020 from Won 135.7 billion in 2019, mainly due to the aggregate impact of the Tbroad Merger as described above. As a result, the segment operating margin of our fixed-line telecommunication services segment increased to 7.2% in 2020 from 4.6% in 2019.

 

   

Security services: The segment operating profit of our security services segment decreased by 15.9% to Won 112.4 billion in 2020 from Won 133.6 billion in 2019, due to the greater increase in segment operating expense as compared to the increase in segment operating revenue, for the various reasons described above. As a result, the segment operating margin of our security services segment decreased to 9.0% in 2020 from 12.0% in 2019.

 

   

Commerce services: The segment operating profit of our commerce services segment increased by 445.0% to Won 10.9 billion in 2020 from Won 2.0 billion in 2019, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense, for the various reasons described above. As a result, the segment operating margin of our commerce services segment increased to 1.4% in 2020 from 0.3% in 2019.

 

   

Others: The segment operating loss of our others segment decreased by 67.2% to Won 25.9 billion in 2020 from Won 78.9 billion in 2019, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense as described above. As a result, the segment operating margin of our others segment improved to (2.9)% in 2020 from (9.8)% in 2019.

Finance Income and Finance Costs.    Our finance income increased by 69.7% to Won 241.2 billion in 2020 from Won 142.2 billion in 2019, primarily due to an increase in gain on valuation of derivatives to Won 101.3 billion in 2020 from Won 2.5 billion in 2019, which primarily related to an increase in valuation of warrants of Nano-X Imaging Ltd. held by SK Telecom TMT Investment Corp., as well as an increase in gain relating to financial assets at fair value through profit or loss to Won 35.8 billion in 2020 from Won 4.5 billion in 2019, primarily relating to shares of Oceanbridge Co., Ltd. held by Quantum Innovation Fund I. The effect of such increases was partially offset by a decrease in gain on settlement of derivatives to Won 7.8 billion in 2020 from Won 29.3 billion in 2019, which amount in 2019 was primarily related to the share exchange transaction with Kakao in October 2019.

Our finance costs increased by 13.5% to Won 497.2 billion in 2020 from Won 438.0 billion in 2019, primarily due to the incurrence of other financial fees of Won 44.7 billion in 2020 relating to the disposal of certain securities held for trading of Knet Culture and Contents Venture Fund, a consolidated subsidiary, and a loss on valuation of derivatives of Won 13.6 billion in 2020 primarily related to certain share subscription rights granted to financial investors of Eleven Street under an equity interest agreement, compared to no such costs incurred in 2019. The effect of such increases was partially offset by a decrease in interest expense to Won 399.2 billion in 2020 from Won 406.1 billion in 2019 as a result of a decrease in interest rates, as well as a loss on sale of other accounts receivable related to handset installment payments of Won 5.8 billion in 2019 compared to nil in 2020.

 

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Gains (Losses) Related to Investments in Associates and Joint Ventures. Gains related to investments in associates and joint ventures increased by 128.8% to Won 1,028.4 billion in 2020 from Won 449.5 billion in 2019, primarily due to an increase in share of profits of SK Hynix to Won 995.1 billion in 2020 from Won 416.2 billion in 2019. Such increase was due to an increase in SK Hynix’s profit for the year to Won 4,758.9 billion in 2020 from Won 2,009.1 billion in 2019.

Income Tax. Income tax expense increased by 25.4% to Won 376.5 billion in 2020 from Won 300.3 billion in 2019 primarily due to a 61.7% increase in profit before income tax to Won 1,877.0 billion in 2020 from Won 1,161.0 billion in 2019. Our effective tax rate in 2020 decreased to 20.1% from 25.9% in 2019, which was primarily attributable to an increase in the proportion of our gains related to investments in associates and joint ventures in our profit before income tax. When such gains are distributed to us in the form of dividends, the tax rate for such dividends is lower than our statutory tax rate. Our effective tax rates in 2020 and 2019 were lower than the maximum statutory tax rate of 27.5% for both years, primarily due to changes in unrecognized deferred taxes in 2020 and non-taxable income in 2019.

Profit for the Year. Principally as a result of the factors discussed above, our profit for the year increased by 74.3% to Won 1,500.5 billion in 2020 from Won 860.7 billion in 2019. Profit for the year as a percentage of operating revenue and other income was 8.0% in 2020 compared to 4.8% in 2019.

2019 Compared to 2018

Operating Revenue and Other Income. Our consolidated operating revenue and other income increased by 5.3% to Won 17,843.5 billion in 2019 from Won 16,945.9 billion in 2018, due to increases in both operating revenue and other income, as discussed below.

Our consolidated operating revenue increased by 5.1% to Won 17,740.7 billion in 2019 from Won 16,874.0 billion in 2018, primarily due to an increase in security services revenue, and to a much smaller extent, increases in others revenue and fixed-line telecommunications services revenue, which were partially offset by decreases in cellular services revenue and commerce services revenue.

Our consolidated other income increased by 43.0% to Won 102.8 billion in 2019 from Won 71.9 billion in 2018, primarily due to the gain on the transfer of our e-sports business to SK Telecom CS T1 Co., Ltd., a joint venture with Comcast Spectacor that was newly established in February 2019, as well as on the transfer of our former mobile OTT service business, “oksusu,” to Content Wavve in September 2019.

The following sets forth additional information about our operating revenues with respect to each of our reportable segments.

 

   

Cellular services: The revenue of our cellular services segment, which is composed of revenues from wireless service, cellular interconnection, wireless device sales and miscellaneous cellular services, decreased by 1.6% to Won 12,177.5 billion in 2019 from Won 12,378.9 billion in 2018. The decrease in our cellular services revenue was due to decreases in wireless service revenue and cellular interconnection revenue, partially offset by increases in wireless device sales revenue and miscellaneous cellular services revenue

 

   

Wireless service revenue decreased by 2.4% to Won 9,532.4 billion in 2019 from Won 9,770.4 billion in 2018, primarily attributable to the continued increase in the percentage of wireless service subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA. The impact of such decrease was partially offset by an increase in the number of subscribers that subscribe to our higher-priced unlimited data usage plans and 5G plans.

 

   

Cellular interconnection revenue decreased by 7.1% to Won 494.3 billion in 2019 from Won 532.2 billion in 2018. The decrease was primarily attributable to continued decreases in interconnection rates and land-to-mobile call volume.

 

   

Wireless device sales revenue increased by 4.3% to Won 1,032.1 billion in 2019 from Won 989.1 billion in 2018, primarily due to the launch of our 5G services in April 2019 and the ensuing sales of higher-priced 5G-compatible smartphones.

 

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Miscellaneous cellular services revenue increased by 2.9% to Won 1,118.8 billion in 2019 from Won 1,087.2 billion in 2018, primarily because of an increase in rental income from SK Telecom’s real properties, which is recognized as part of our cellular services segment revenue.

 

   

Fixed-line telecommunications services: The revenue of our fixed-line telecommunication services segment, which is composed of revenues from broadband Internet service and advanced media platform service (including IPTV), fixed-line telephone service, international calling service, fixed-line interconnection and miscellaneous fixed-line telecommunication services, increased by 4.2% to Won 2,940.1 billion in 2019 from Won 2,822.3 billion in 2018, primarily due to increases in our miscellaneous fixed-line telecommunications services revenue and broadband Internet service and advanced media platform service revenue, partially offset by a decrease in fixed-line telephone service revenue.

 

   

Miscellaneous fixed-line telecommunication services revenue increased by 53.4% to Won 677.8 billion in 2019 from Won 441.9 billion in 2018, primarily due to an increase in revenue from our business communications services.

 

   

Revenue from our broadband Internet service and advanced media platform service (including our IPTV service and former mobile OTT service, which was transferred to Content Wavve in September 2019) increased by 2.7% to Won 1,807.5 billion in 2019 from Won 1,760.4 billion in 2018, primarily due to an increase in the number of IPTV subscribers to 5.2 million subscribers as of December 31, 2019 from 4.7 million subscribers as of December 31, 2018 and an increase in the number of premium subscriptions with higher monthly rates and purchases of premium video-on-demand content.

 

   

Fixed-line telephone service revenue decreased by 39.5% to Won 224.5 billion in 2019 from Won 371.3 billion in 2018, primarily due to decreases in the number of fixed-line telephone subscribers (including subscribers to VoIP services of SK Broadband and SK Telink) to 3.9 million as of December 31, 2019 from 4.1 million as of December 31, 2018 and residential calling volume as a result of shifting consumer preferences toward wireless communication.

 

   

Security services: The revenue of our security services segment, which is composed of revenues from our former subsidiaries Former ADT CAPS and SK Infosec (prior to its merger with Former ADT CAPS), increased by 290.3% to Won 1,109.5 billion in 2019 from Won 284.3 billion in 2018. A substantial majority of such increase was due to the inclusion of revenue of Former ADT CAPS for a full year in 2019 compared to a partial year in 2018 following the addition of Former ADT CAPS as a new consolidated subsidiary in October 2018 and, to a much smaller extent, the inclusion of revenue of SK Infosec as a new consolidated subsidiary starting at the end of December 2018.

 

   

Commerce services: The revenue of our commerce services segment, which is composed of revenues from 11st, our open marketplace platform, and SK stoa, our T-commerce network, decreased by 2.4% to Won 710.7 billion in 2019 from Won 728.4 billion in 2018, primarily due to our continued strategic focus to optimize and improve the profitability of our 11st business.

 

   

Others: The revenue of our others segment increased by 21.6% to Won 803.0 billion in 2019 from Won 660.1 billion in 2018, primarily due to the inclusion of revenues of newly consolidated subsidiaries, such as FSK L&S and Incross.

Operating Expense.     Our consolidated operating expense increased by 4.5% to Won 16,836.2 billion in 2019 from Won 16,112.1 billion in 2018, primarily due to a 23.4% increase in depreciation and amortization expenses to Won 3,856.7 billion in 2019 from Won 3,126.1 billion in 2018 and a 23.3% increase in labor costs to Won 2,822.7 billion from Won 2,288.7 billion in 2018, partially offset by a 70.8% decrease in rent expenses to Won 154.8 billion in 2019 from Won 529.5 billion in 2018, a 3.7% decrease in other operating expenses to Won 1,716.4 billion in 2019 from Won 1,782.4 billion in 2018 and a 6.9% decrease in network interconnection expenses from Won 752.3 billion in 2019 from Won 808.4 billion in 2018.

The increase in depreciation and amortization expenses was primarily due to the recognition of depreciation expenses relating to our right-of-use assets following our adoption of IFRS 16, as well as the commencement of

 

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amortization of our frequency usage rights for our 5G services. See “— Recently Adopted International Financial Reporting Standards - IFRS 16.”

The increase in labor costs was primarily due to the additional personnel on payroll in connection with our acquisitions of Former ADT CAPS in October 2018 and former SK Infosec in December 2018, as well as the expansion of new businesses such as AI solutions and other platform services.

The decrease in rent expenses was primarily due to the adoption of IFRS 16, pursuant to which we recognized payments on certain of our leased real properties in 2019 as depreciation expenses on right-of-use assets instead of as rent expenses. See “— Recently Adopted International Financial Reporting Standards — IFRS 16.”

The decrease in other operating expenses was primarily due to a decrease in impairment loss on property and equipment and intangible assets to Won 65.9 billion in 2019 from Won 255.8 billion in 2018, which amount in 2018 mainly reflected impairment losses we recognized on the goodwill and intangible assets of our former subsidiary Shopkick.

The decrease in network interconnection expenses was mainly attributable to decreases in wireless-to-fixed-line and fixed-line-to-wireless interconnection rates, as well as decreases in the number of fixed-line telephone subscribers and calling volume.

The following sets forth additional information about our segment operating expense with respect to each of our reportable segments, which do not include certain expenses that are classified as other non-operating expenses under K-IFRS. For more information on the difference between our consolidated operating expense pursuant to K-IFRS and pursuant to IFRS as issued by the IASB, see “ — Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

   

Cellular services: The segment operating expense for our cellular services segment increased by 1.6% to Won 11,261.7 billion in 2019 from Won 11,079.0 billion in 2018, mainly attributable to an increase in marketing costs to promote our 5G services and the commencement of amortization of our frequency usage rights for our 5G services.

 

   

Fixed-line telecommunication services: The segment operating expense for our fixed-line telecommunication services segment increased by 8.8% to Won 2,804.4 billion in 2019 from Won 2,576.8 billion in 2018, primarily due to increases in labor costs, marketing costs to gain more subscribers to our ultra-high definition IPTV and high speed broadband Internet services and depreciation and amortization expenses.

 

   

Security services: The segment operating expense for our security services segment increased by 230.1% to Won 975.9 billion in 2019 from Won 295.6 billion in 2018, primarily due to the inclusion of operating expenses of Former ADT CAPS for a full year in 2019 compared to a partial year in 2018 following the addition of Former ADT CAPS as a new consolidated subsidiary in October 2018 and, to a much smaller extent, the inclusion of operating expenses of SK Infosec as a new consolidated subsidiary starting at the end of December 2018.

 

   

Commerce services: The segment operating expense for our commerce services segment decreased by 12.9% to Won 708.7 billion in 2019 from Won 813.4 billion in 2018, primarily due to our continued strategic focus to optimize and improve the profitability of our 11st business.

 

   

Others: The segment operating expense for our others segment decreased by 2.8% to Won 881.9 billion in 2019 from Won 907.4 billion in 2018, primarily as a result of cost-cutting efforts by SK Planet and other subsidiaries in this segment.

Operating Profit.    Our consolidated operating profit increased by 20.8% to Won 1,007.3 billion in 2019 from Won 833.8 billion in 2018, as the increase in operating revenue and other income outpaced the increase in operating expense in 2019.

The following sets forth additional information about our segment operating profit with respect to each of our reportable segments. Our segment operating profit with respect to each of our reportable segments is based on K-IFRS and the sum of segment operating profit for all five reportable segments differs from our consolidated

 

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operating profit presented in accordance with IFRS as issued by the IASB. For a reconciliation of operating profit presented in accordance with IFRS as issued by the IASB and operating profit presented in accordance with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

   

Cellular services: The segment operating profit of our cellular services segment decreased by 29.5% to Won 915.8 billion in 2019 from Won 1,299.9 billion in 2018, due to the decrease in segment operating revenue and the increase in segment operating expense, for the various reasons described above. As a result, the segment operating margin (which, with respect to each reportable segment, is segment operating profit (loss) divided by revenue from such segment, expressed as a percentage) of our cellular services segment decreased to 7.5% in 2019 from 10.5% in 2018.

 

   

Fixed-line telecommunication services: The segment operating profit of our fixed-line telecommunication services segment decreased by 44.7% to Won 135.7 billion in 2019 from Won 245.5 billion in 2018, due to the greater increase in segment operating expense as compared to the increase in segment operating revenue, for the reasons described above. As a result, the segment operating margin of our fixed-line telecommunication services segment decreased to 4.6% in 2019 from 8.7% in 2018.

 

   

Security services: Our security services segment had a segment operating profit of Won 133.6 billion in 2019 compared to a segment operating loss of Won 11.3 billion in 2018, due to the aggregate impact of our acquisitions of Former ADT CAPS and SK Infosec as described above. As a result, the segment operating margin of our security services segment improved to 12.0% in 2019 from (4.0)% in 2018.

 

   

Commerce services: Our commerce services segment had a segment operating profit of Won 2.0 billion in 2019 compared to a segment operating loss of Won 85.0 billion in 2018, due to the greater decrease in segment operating expense as compared to the decrease in segment operating revenue, for the reasons described above. As a result, the segment operating margin of our commerce services segment improved to 0.3% in 2019 from (11.7)% in 2018.

 

   

Others: The segment operating loss of our others segment decreased by 68.1% to Won 78.9 billion in 2019 from Won 247.3 billion in 2018, due to the increase in segment operating revenue and the decrease in segment operating expense as described above. As a result, the segment operating margin of our others segment improved to (9.8)% in 2019 from (37.5)% in 2018.

Finance Income and Finance Costs.    Our finance income decreased by 44.5% to Won 142.2 billion in 2019 from Won 256.4 billion in 2018, primarily due to a decrease in gain relating to financial assets at fair value through profit or loss to Won 4.5 billion in 2019 from Won 83.6 billion in 2018, primarily relating to our disposal of 200,000 redeemable convertible preference shares of KRAFTON Co., Ltd. (formerly known as Bluehole Inc.) (“Krafton”) in 2018, as well as a decrease in dividends to Won 10.0 billion in 2019 from Won 35.1 billion in 2018, which was primarily related to a decrease in dividend payments following SK Planet’s disposal of investments in certain real estate funds as well as our disposal of all of our shares of KB Financial Group Inc. in 2018. The effect of such decrease was partially offset by an increase in gain on settlement of derivatives to Won 29.3 billion in 2019 from Won 20.4 billion in 2018, primarily as a result of exchange rate fluctuations.

Our finance costs increased by 13.7% to Won 438.0 billion in 2019 from Won 385.2 billion in 2018, primarily due to an increase in interest expense to Won 406.1 billion in 2019 from Won 307.3 billion in 2018 as a result of an increase in the aggregate amount of our outstanding debentures, which was partially offset by a decrease in loss on foreign currency transactions to Won 12.7 billion in 2019 from Won 38.9 billion in 2018.

Gains (Losses) Related to Investments in Associates and Joint Ventures.    Gains related to investments in associates and joint ventures decreased by 86.3% to Won 449.5 billion in 2019 from Won 3,270.9 billion in 2018, primarily due to a decrease in share of profits of SK Hynix to Won 416.2 billion in 2019 from Won 3,238.1 billion in 2018. Such decrease was primarily due to a decrease in SK Hynix’s profit for the year to Won 2,009.1 billion in 2019 from Won 15,540.0 billion in 2018.

Income Tax.    Income tax expense decreased by 64.4% to Won 300.3 billion in 2019 from Won 844.0 billion in 2018 primarily due to a 70.8% decrease in profit before income tax to Won 1,161.0 billion in 2019 from Won 3,976.0 billion in 2018. Our effective tax rate in 2019 increased to 25.9% from 21.2% in 2018. Our

 

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effective tax rates in 2019 and 2018 were lower than the maximum statutory tax rate of 27.5% for both years, primarily due to non-taxable income in 2019 and changes in unrecognized deferred taxes in 2018.

Profit for the Year.    Principally as a result of the factors discussed above, our profit for the year decreased by 72.5% to Won 860.7 billion in 2019 from Won 3,132.0 billion in 2018. Profit for the year as a percentage of operating revenue and other income was 4.8% in 2019 compared to 18.5% in 2018.

Inflation

We do not consider inflation in Korea to have had a material impact on our results of operations in recent years. According to the Korean Statistical Information Service, annual inflation in Korea was 0.5% in 2020, 0.4% in 2019 and 1.5% in 2018.

 

Item 5.B.

Liquidity and Capital Resources

Liquidity

We had a working capital surplus (current assets in excess of current liabilities) of Won 597.1 billion as of December 31, 2020 and Won 236.8 billion as of December 31, 2019. The increase in our working capital as of December 31, 2020 compared to December 31, 2019 was primarily attributable to an increase in short-term financial instruments, which was mainly due to the replacement of certain time deposits with short-term financial instruments upon their maturity. We plan to fund our current liabilities with the cash flow generated by our operations, proceeds from the disposal of investment securities or property and equipment that are no longer deemed profitable and proceeds from additional borrowings, as necessary.

We had cash and cash equivalents, short-term financial instruments and short-term investment securities of Won 2,947.0 billion as of December 31, 2020 and Won 2,268.1 billion as of December 31, 2019. We had outstanding short-term borrowings and current portion of long-term debt of Won 1,049.2 billion as of December 31, 2020 and 1,037.9 billion as of December 31, 2019. As of December 31, 2020, we had credit lines with several local banks that provided for borrowing of up to Won 480.0 billion, all of which was available for borrowing.

Cash flows from operating activities and debt financing have been our principal sources of liquidity. We had cash and cash equivalents of Won 1,369.6 billion as of December 31, 2020 and Won 1,270.8 billion as of December 31, 2019. We believe 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.

 

    Year ended December 31,     Change  
    2020     2019     2018     2019 to 2020     2018 to 2019  
    (In billions of Won, except percentages)  

Net cash provided by operating activities

  5,821.9     4,035.0     4,332.6     1,786.9       44.3   (297.6     (6.9 )% 

Net cash used in investing activities

    (4,250.4     (3,581.6     (4,047.7     (668.8     18.7       466.1       (11.5

Net cash used in financing activities

    (1,457.6     (686.7     (238.3     (770.9     112.3       (448.4     188.2  

Net increase (decrease) in cash and cash equivalents

    113.9       (233.3     46.6       347.2       N.A.       (279.9     N.A.  

Effect of exchange rate changes on cash and cash equivalents held in foreign currencies

    (15.1     (2.6     2.4       (12.5     480.8       (5.0     N.A.  

Cash and cash equivalents at beginning of period

    1,270.8       1,506.7       1,457.7       (235.9     (15.7     49.0       3.4  

Cash and cash equivalents at end of period

    1,369.6       1,270.8       1,506.7       98.8       7.8       (235.9     (15.7

 

N.A.

= Not available

 

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Cash Flows from Operating Activities.     Net cash provided by operating activities was Won 5,821.9 billion in 2020, Won 4,035.0 billion in 2019 and Won 4,332.6 billion in 2018. Profit for the year was Won 1,500.5 billion in 2020, Won 860.7 billion in 2019 and Won 3,132.0 billion in 2018. Net cash provided by operating activities in 2020 increased by 44.3% from 2019 primarily due to the increase in profit for the year as well as a decrease in accounts payable — other at the year-end 2020 compared to the year-end 2019. Net cash provided by operating activities in 2019 decreased by 6.9% from 2018 primarily due to an increase in prepaid expenses at the year-end 2019 compared to the year-end 2018.

Cash Flows from Investing Activities.     Net cash used in investing activities was Won 4,250.4 billion in 2020, Won 3,581.6 billion in 2019 and Won 4,047.7 billion in 2018. Cash inflows from investing activities were Won 428.9 billion in 2020, Won 755.2 billion in 2019 and Won 686.1 billion in 2018. Cash inflows in 2020 were primarily attributable to the net cash inflows from business combinations, which mainly related to the Tbroad Merger, as well as proceeds from disposals of property and equipment, primarily related to the disposal of certain training facilities to SK Hynix. Cash inflows in 2019 were primarily attributable to a decrease in short-term financial instruments, net of Won 254.0 billion, which was mainly in connection with funding our investments in property and equipment, and proceeds from disposals of long-term investment securities of Won 234.7 billion, which was primarily in connection with the disposal of 6,109,000 common shares of Hana Financial Group Inc. for Won 221.1 billion in cash. Cash inflows in 2018 were primarily attributable to proceeds from disposals of long-term investment securities of Won 371.8 billion, primarily in connection with the disposal of all of our shares of KB Financial Group Inc. for Won 179.6 billion in cash and the disposal of redeemable convertible preferred shares of Krafton for Won 130.0 billion in cash and the collection of short-term loans of Won 117.6 billion.

Cash outflows for investing activities were Won 4,679.3 billion in 2020, Won 4,336.8 billion in 2019 and Won 4,733.8 billion in 2018. Cash outflows in 2020, 2019 and 2018 were primarily attributable to expenditures related to the acquisition of property and equipment of Won 3,557.8 billion, Won 3,375.9 billion and Won 2,792.4 billion, respectively, primarily in connection with the acquisition of 5G and LTE equipment, the expansion of our 5G network and the maintenance of our LTE network.

Cash Flows from Financing Activities.     Net cash used in financing activities was Won 1,457.6 billion in 2020, Won 686.7 billion in 2019 and Won 238.3 billion in 2018. Cash inflows from financing activities were Won 3,499.6 billion in 2020, Won 2,047.3 billion in 2019 and Won 4,651.7 billion in 2018. Such inflows were primarily driven by proceeds from long-term borrowings, which provided cash of Won 1,947.8 billion in 2020, nil in 2019 and Won 1,920.1 billion in 2018, and the issuance of debentures, which provided cash of Won 1,421.0 billion in 2020, Won 1,633.4 billion in 2019 and Won 1,809.6 billion in 2018. In 2019, we also received proceeds of Won 300.0 billion from the disposal of our treasury shares to Kakao.

Cash outflows for financing activities were Won 4,957.2 billion in 2020, Won 2,733.9 billion in 2019 and Won 4,890.0 billion in 2018. Cash outflows for financing activities included repayment of long-term borrowings, repayment of debentures, payment of dividends, repayments of other long-term payables and acquisition of treasury shares, among other items. Repayment of long-term borrowings were Won 1,950.9 billion in 2020, Won 89.9 billion in 2019 and Won 1,780.7 billion in 2018. Repayment of debentures were Won 975.5 billion in 2020, Won 940.0 billion in 2019 and Won 1,488.0 billion in 2018. Payment of dividends were Won 742.1 billion in 2020, Won 718.7 billion in 2019 and Won 706.1 billion in 2018. Repayments of other long-term payables were Won 428.1 billion in 2020, Won 428.2 billion in 2019 and Won 305.6 billion in 2018. Acquisition of treasury shares was Won 426.7 billion in 2020.

As of December 31, 2020, we had total long term debt (excluding current portion) outstanding of Won 9,669.5 billion, which included debentures in the amount of Won 7,690.2 billion and bank and institutional borrowings in the amount of Won 1,979.3 billion. As of December 31, 2019, we had total long-term debt (excluding current portion) outstanding of Won 9,226.0 billion, which included debentures in the amount of Won 7,253.9 billion and bank and institutional borrowings in the amount of Won 1,972.1 billion. For a description of our long-term debt, see note 18 of the notes to our consolidated financial statements.

As of December 31, 2020, we had (i) Won 6,974.8 billion aggregate principal amount of Korean Won-denominated debentures outstanding, of which SK Telecom issued Won 5,590.0 billion, SK Broadband issued Won 1,360.0 billion and SK Infosec issued Won 24.8 billion, and (ii) Won 1,632.0 billion aggregate principal

 

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amount of debentures outstanding denominated in U.S. dollars. The fixed interest rates of our debentures range from 1.40% to 6.63% depending on the offering size, maturity, interest rate environment at the time of the offering and currency, among other factors. We have a diversified maturity profile with respect to our debentures. See “— Contractual Obligations and Commitments” for more details.

As of December 31, 2020, substantially all of our foreign currency-denominated long-term borrowings and debentures, which in the aggregate amounted to 15.5% of our total outstanding long-term debt, including the current portion and present value discount as of such date, was denominated in Dollars. However, substantially all of our revenue and operating expenses are denominated in Won. We generally pay for imported capital equipment in Dollars. Appreciation of the Won against the Dollar will result in net foreign currency transaction and translation gains, while depreciation of the Won against the Dollar will result in net foreign currency transaction and translation losses. Changes in foreign currency exchange rates will also affect our liquidity because of the effect of such changes on the amount of funds required for us to make interest and principal payments on our foreign currency-denominated debt. For a description of swap or derivative transactions we have entered into, among other transactions, to mitigate the effects of such losses, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Capital Requirements

Historically, capital expenditures, repayment of outstanding debt, frequency usage payments and research and development expenditures have represented our most significant use of funds. In recent years, we have also increasingly dedicated capital resources to develop and invest in new growth engines, including our next-generation growth businesses in media, security, commerce, IoT solutions and other innovative products and services offered through our platform services, including AI solutions, and to create synergies among our businesses, including through the adaptation of AI technology.

To fund our scheduled debt repayment and planned capital expenditures over the next several years, we intend to rely primarily on cash flows from operating activities, as well as bank and institutional borrowings, and offerings of debt or equity in the domestic or international markets. We believe that these sources will be sufficient to fund our planned capital expenditures for 2021. Our ability to rely on these alternatives could be affected by the liquidity of the Korean financial markets or by Government policies regarding Won and foreign currency borrowings and the issuance of equity and debt. Our failure to make needed expenditures would adversely affect our ability to sustain subscriber growth and provide quality services and, consequently, our results of operations.

Capital Expenditures.     The following table sets forth our actual capital expenditures for 2020, 2019 and 2018:

 

     Year ended December 31,  
     2020      2019      2018  
     (In billions of Won)  

Wireless Networks(1)

   1,878.6      2,514.3      1,735.6  

Fixed-line Network(2)

     818.3        815.8        776.8  

Others(3)

     860.9        45.8        280.0  
  

 

 

    

 

 

    

 

 

 

Total

   3,557.8      3,375.9      2,792.4  
  

 

 

    

 

 

    

 

 

 

 

 

(1)

Includes investments in wireless networks, primarily our 5G, LTE and Wi-Fi networks, as well as other capital expenditures related to our networks.

 

(2)

Includes all capital expenditures made by SK Broadband.

 

(3)

Includes non-network related investments such as capital expenditures for product development, upgrades of our information technology systems and equipment and investments in data infrastructure.

We set our capital expenditure budget for each upcoming year on an annual basis. Our actual capital expenditures in 2020, 2019 and 2018 were Won 3,557.8 billion, Won 3,375.9 billion and Won 2,792.4 billion, respectively. Of such amounts, we spent approximately 52.8%, 74.5% and 62.2% in 2020, 2019 and 2018,

 

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respectively, on capital expenditures related to building and enhancing our wireless networks. Our other non-network related capital expenditures in 2020, 2019 and 2018 primarily related to developing new products, upgrades to our information technology systems and equipment and investments in data infrastructure.

In particular, we have been making capital expenditures to build and expand our 5G network. We commenced commercial 5G services in April 2019. We have also been making capital expenditures to improve our LTE network. For a more detailed description of our 5G and LTE networks, see “Item 4.B. Business Overview — Cellular Services — Digital Wireless Network.” We plan to continue to make capital investments in 2021 to build and expand our 5G network and develop related technologies, as well as to further improve and maintain our LTE network.

The following table sets forth our payment obligations relating to our acquisitions of frequency usage rights.

 

Spectrum   Technology (width)   Date of Acquisition  

Initial Payment

Amount

(in billions of Won)

   

Initial

Payment Year

   

Annual Payment

Amount

(in billions of Won)

   

Annual

Payment Term

 

1.8 GHz

 

  LTE (35 MHz)

 

  20 MHz   Dec. 2011   248.8       2011     74.6       2012-2021  
  15 MHz   Sept. 2013     115.3       2013       43.2       2014-2021  

2.1 GHz

  LTE (30 MHz)   Dec. 2016     141.2       2016       85.3       2017-2021  
  WCDMA (10 MHz)

2.6 GHz

  LTE (40 MHz + 20 MHz)   Aug. 2016     332.5       2016       99.8       2017-2026  

3.5 GHz

  5G (100 MHz)   Dec. 2018     304.6       2018       91.4       2019-2028  

28 GHz

  5G (800 MHz)   Dec. 2018     51.8       2018       31.1       2019-2023  

In case of the 800 MHz spectrum, for which our frequency usage rights were acquired in June 2011 and will expire in June 2021, we make annual payments amounting to 1.6% of the revenues generated from such spectrum in the previous year. In 2020, we made such annual payment in the amount of Won 27.8 billion. For more information, see note 17 of the notes to our consolidated financial statements.

We expect to spend a similar amount for capital expenditures in 2021 compared to 2020 for a range of projects, including investments to expand and improve our newly implemented 5G network, investments to maintain our LTE network and LTE-A services, investments to improve and expand our Wi-Fi network, investments to develop our IoT solutions and platform services business portfolio, including AI solutions, investments in data infrastructure, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding for mid- to long-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course. In November 2020, the MSIT announced plans to reallocate a total of 310 MHz of frequency bandwidths whose usage terms are due to expire in 2021 to KT, LG U+ and us, 95 MHz of which will be allocated to us. The final consideration to be paid by us for such reallocated bandwidths will depend on the number of 5G cell sites constructed by us until 2022, and the aggregate consideration to be paid by KT, LG U+ and us is expected to range between approximately Won 3.2 trillion and Won 3.8 trillion. We would be required to spend additional amounts on capital expenditures in connection with building out our networks on such reallocated bandwidths. However, our overall expenditure levels and our allocation among projects remain subject to many uncertainties. We may increase, reduce or suspend our planned capital expenditures for 2021 or change the timing and area of our capital expenditure spending from the estimates described above in response to market conditions or for other reasons. We may also make additional capital expenditure investments as opportunities arise. Accordingly, we periodically review the amount of our capital expenditures and may make adjustments based on the current progress of capital expenditure projects and market conditions. No assurance can be given that we will be able to meet any such increased expenditure requirements or obtain adequate financing for such requirements, on terms acceptable to us, or at all.

 

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Repayment of Outstanding Debt.     As of December 31, 2020, our principal repayment obligations with respect to long-term borrowings, bonds and short-term borrowings outstanding were as follows for the periods indicated:

 

Year Ending December 31,

   Total  
     (In billions of Won)  

2021

   1,049.8  

2022

     1,421.2  

2023

     1,737.7  

2024 and thereafter

     6,552.8  

Investments in New Growth Businesses.     We may also require capital for investments to support our development of new growth businesses.

We made a capital contribution of Won 65.0 billion in 2018 to Dreamus, a manufacturer of digital audio players and other portable media devices of which we had first acquired a 39.3% equity interest in August 2014. Dreamus also operates our music streaming service platform, FLO. As of December 31, 2020, we had a 51.4% equity interest in Dreamus.

In October 2018, we acquired Former ADT CAPS by acquiring a 55.0% interest in LSH, which owned 100% of Former ADT CAPS, for Won 696.7 billion. In December 2018, we merged NSOK with and into Former ADT CAPS. In December 2018, we acquired SK Infosec, Korea’s leading information security company, in a share exchange transaction pursuant to which we issued 1,260,668 treasury shares with an aggregate book value of Won 281.2 billion in exchange for all of the outstanding common shares of SK Infosec from SK Inc. In December 2020, we merged LSH with and into SK Infosec and held a 62.6% equity interest in SK Infosec as of December 31, 2020. We have subsequently merged Former ADT CAPS with and into SK Infosec in March 2021, and the surviving entity, SK Infosec, changed its name to ADT CAPS and has become the principal consolidated subsidiary that operates our security business.

We also increased our interest in id Quantique through the acquisition of additional shares with Won 55.2 billion in cash and Won 5.7 billion in contribution-in-kind in 2018 and capital contributions in cash amounting to Won 12.2 billion in 2019 and Won 6.4 billion in 2020, respectively. As of December 31, 2020, we held a 68.1% equity interest in id Quantique.

In June 2019, we acquired a 34.6% interest in Incross, a digital advertising company, for an aggregate purchase price of Won 53.7 billion, in light of potential synergies with our media and commerce businesses.

From time to time, we may make other investments in telecommunications or other businesses, in Korea or abroad, where we perceive attractive opportunities for investment. From time to time, we may also dispose of existing investments when we believe that doing so would be in our best interest.

Severance Payments.     The defined benefit obligation, which is the total accrued and unpaid retirement and severance benefits for our employees, as of December 31, 2020 was Won 154.9 billion. This amount was reflected in our consolidated financial statements as a liability, which is net of deposits with insurance companies totaling Won 1,127.2 billion to fund a portion of the employees’ severance indemnities.

Also see “Item 6.D. Employees — Employee Benefits” and note 21 of the notes to our consolidated financial statements.

Dividends.     Total cash outflows for payments of dividends amounted to Won 742.1 billion in 2020, Won 718.7 billion in 2019 and Won 706.1 billion in 2018.

In April 2021, we distributed annual dividends at Won 9,000 per share (exclusive of an interim dividend of Won 1,000 per share) to our shareholders for an aggregate payout amount of Won 641.9 billion.

 

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Contractual Obligations and Commitments

The following summarizes our contractual cash obligations at December 31, 2020, and the effect such obligations are expected to have on liquidity and cash flow in future periods:

 

    Payments Due by Period(1)  
    Total     Less Than
1 Year
    1-3 Years     4-5 Years     More Than
5 Years
 
    (In billions of Won)  

Bonds

         

Principal

  8,606.8     890.0     3,115.2     2,026.4     2,575.2  

Interest

    1,143.0       216.5       334.7       204.1       387.7  

Long-term borrowings

         

Principal

    2,044.7       49.8       43.7       1,951.2        

Interest

    313.3       65.9       185.0       62.4        

Lease liabilities

         

Principal

    1,451.5       354.4       486.9       295.3       314.9  

Interest

    85.7       11.5       22.3       21.8       30.1  

Short-term leases and leases of low-value assets

    23.4       23.4                    

Facility deposits

    14.3       10.0                   4.3  

Derivatives

    43.1       1.7       3.3       38.1        

Other long-term payables(2)

         

Principal

    1,626.0       425.3       444.5       382.3       373.9  

Interest

    17.2       4.9       6.5       3.9       1.9  

Short-term borrowings

    110.0       110.0                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual cash obligations

  15,479.0     2,163.4     4,642.1     4,985.5     3,688.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

We are contractually obligated to make severance payments to eligible employees we have employed for more than one year, upon termination of their employment, regardless of whether such termination is voluntary or involuntary. Accruals for severance indemnities are recorded based on the amount we would be required to pay in the event the employment of all our employees were to terminate at the balance date. However, we have not yet estimated cash flows for future periods. Accordingly, payments due in connection with severance indemnities have been excluded from this table.

 

(2)

Related to acquisition of frequency licenses. See note 19 of the notes to our consolidated financial statements.

See note 38 of the notes to our consolidated financial statements for details related to our other commitments and contingencies.

 

Item 5.C.

Research and Development, Patents and Licenses, etc.

We maintain a high level of spending on our research and development activity. We also donate funds to several Korean research institutes and educational organizations that focus on research and development activity. We believe that we must maintain a substantial in-house technology capability to achieve our strategic goals.

 

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The main focus of our research and development activity is the development of new wireless technologies and services and value-added technologies and services for our 5G network and LTE network, such as wireless data communications, as well as the development of new technologies that reflect the growing convergence between telecommunications and other industries, such as AI, big data analytics, media, security and mobility. SK Telecom’s research and development activity is centered at our T3K Center, located at our SK T-Tower corporate headquarters in Seoul and our Bundang office in Bundang-gu, Seongnam-si, Gyeonggi-do, Korea, which we established in May 2020 by reorganizing our former AIX Center. To more efficiently manage our research and development resources, our T3K Center is organized as follows:

 

Organization

  

Recent Areas of Focus

ESG Tech Product Hub    Planning and development of products based on technologies in environmental, social and corporate governance (“ESG”) areas; establishment of product-focused research and development system
5GX Intelligence CO    Development and standardization of new 5G technologies; development of MEC products and location-based technologies
AI Transformation CO    Transformation of mobile network operation business based on AI technology; planning and development of products based on AI and big data
T3K Innovation CO    Development of vertical full-stack products and vision AI technologies; discovery of new growth opportunities based on technology and enhancement of technological and corporate value
Loonshot Task Force    Discovery of future growth engines based on technology (including development of Korean-language model and development and commercialization of AI semiconductors)

Each business unit also has its own research team that can concentrate on specific short-term research needs, and some of our consolidated subsidiaries also have their own research and development organizations to focus on activities related to their respective business areas. Such research teams permit our research center to concentrate on long-term, technology-intensive research projects. We aim to establish strategic alliances with selected domestic and foreign companies with a view to exchanging or jointly developing technologies, products and services.

 

Item 5.D.

Trend Information

These matters are discussed under “Item 5.A. Operating Results” and “Item 5.B. Liquidity and Capital Resources” above where relevant.

 

Item 5.E.

Off-Balance Sheet Arrangements

None.

 

Item 5.F.

Tabular Disclosure of Contractual Obligations

These matters are discussed under “Item 5.B. Liquidity and Capital Resources” above where relevant.

 

Item 5.G.

Safe Harbor

These matters are discussed under “Forward-Looking Statements.”

 

Item 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

Item 6.A.

Directors and Senior Management

Directors and Senior Management

Our board of directors has ultimate responsibility for the management of our affairs. Under our articles of incorporation, our board is to consist of at least three but no more than twelve directors, more than half of whom

 

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must be independent non-executive directors. We currently have a total of eight directors, five of whom are independent non-executive directors. We elect our directors at a general meeting of shareholders with the approval of at least a majority of those shares present or represented at such meeting. Such majority must represent at least one-fourth of our total issued and outstanding shares with voting rights.

As required under relevant Korean laws and our articles of incorporation, we have a committee for recommendation of independent non-executive directors within the board of directors, the Independent Director Nomination Committee. Independent non-executive directors are appointed from among those candidates recommended by the Independent Director Nomination Committee.

The term of offices for directors is until the close of the third annual general shareholders meeting convened after he or she commences his or her term. Our directors may serve consecutive terms. The total term of office of independent directors may not exceed six years, and when combined with the term of office at our affiliates, may not exceed nine years. Our shareholders may remove them from office by a resolution at a general meeting of shareholders adopted by the holders of at least two-thirds of the voting shares present or represented at the meeting, and such affirmative votes also represent at least one-third of our total voting shares then issued and outstanding.

Representative directors are directors elected by the board of directors with the statutory power to represent our company.

The following are the names and positions of our standing and non-standing directors. The business address of all of our directors is the address of our registered office at SK T-Tower, 65, Eulji-ro, Jung-gu, Seoul 04539, Korea.

Standing directors are our directors who also serve as our executive officers, and they also comprise the senior management, or the key personnel who manage us. Their names, dates of birth and positions at our company, other positions and business experience are set forth below:

 

Name

  Month and
Year of
Birth
     Director
Since
     Expiration
of Term
    

Position

  

Other Positions

  

Business Experience

Jung Ho Park

    May 1963        2017        2023      Executive Director, President and Chief Executive Officer    Chairman of the Board of Directors, SK Hynix; Director, Nano-X Imaging Ltd.    Chief Executive Officer, SK Inc.; Head of Corporate Development Office, SK C&C Co., Ltd.; Head of Business Development Office, SK Telecom

Young Sang Ryu

    May 1970        2018        2024      Executive Director and President of Mobile Network Operations Division       Executive Vice President of Business Development Group, SK Inc.; Senior Vice President of Business Development Office, SK Telecom; Head of Corporate Center, SK Telecom

Our current non-standing directors are as set forth below:

 

Name

   Month and
Year of
Birth
     Director
Since
     Expiration
of Term
    

Position

  

Other Positions

  

Business Experience

Dae Sik Cho

     Nov. 1960        2017        2023      Non-executive Director    Chairman, SK SUPEX Council    Chief Executive Officer, SK Inc.; Chief Finance Officer, Head of Finance Division and Risk Management & Corporate Auditing Office, SK Inc.; Head of Business Management, SK Inc.

Jung Ho Ahn

     Feb. 1978        2017        2023      Independent Non-executive Director    Professor, Graduate School of Convergence Science and Technology,    Visiting Scholar, Google Inc.; Senior Research Scientist, Exascale Computing Lab, HP Labs

 

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Name

   Month and
Year of
Birth
     Director
Since
     Expiration
of Term
    

Position

  

Other Positions

  

Business Experience

               Seoul National University   

Youngmin Yoon

     Dec. 1963        2018        2024      Independent Non-executive Director    Dean of School of Media and Communications and Graduate School of Journalism and Mass Communication, Korea University    Professor, School of Media & Communication, Korea University; Vice-chair, Korean Academic Society for Public Relations; Advisor, Ministry of Land, Infrastructure and Transport Public Relations Division; Advisor, Korea Media Rating Board

Seok-Dong Kim

     May 1953        2019        2022      Independent Non-executive Director    Chairman, JIPYONG Institute of Humanities and Society    Chairman, Financial Services Commission; Vice Minister, Ministry of Finance and Economy; Vice Chairman, Financial Supervisory Commission

Yong-Hak Kim

     Jan. 1953        2020        2023      Independent Non-executive Director    Professor Emeritus, Yonsei University    President, Yonsei University; BK Planning Committee, Ministry of Education; Member, Presidential Advisory Council of Policy Planning; Professor of Sociology, Yonsei University

Junmo Kim

     Sept. 1976        2020        2023      Independent Non-executive Director    Associate Professor of Electrical Engineering, KAIST    Assistant Professor of Electrical Engineering, KAIST; Senior Researcher, Samsung Advanced Institute of Technology

Other Executive Officers

In addition to our standing directors, we currently have the following executive officers:

 

Name

 

Month and
Year of
Birth

 

Position

 

Business Experience

Jong Ryeol Kang   Oct. 1964   Head of ICT Infrastructure Center   Head of Corporate Culture Division
Chungsik Kang   Nov. 1971   PR Officer, Public Relations Office   Project Leader, Communication Committee PR Team
Dae Hwan Ko   Sept. 1961   Director of SK Academy   Head of Business Support Office, SK Incheon Petrochem
Chang Gook Ko   Jan. 1966   Officer of Corporate Relations Team, SUPEX Council Project   Head of CPR Office 1, SK C&C
Gyeong Nam Kim   Jan. 1974   Head of S&C Technology Group   PI/Project Manager, HRL Laboratories
Seong Soo Kim   Jun. 1966   Head of Mobile CO   Head of Distribution Support Office
Seong Joon Kim   Jul. 1970   Distribution, Mobile CO   Representative, Service Top
Yeong Joon Kim   Sept. 1972   Head of AI Technology Unit   Head of AI Technology Unit
Yoon Kim   Jun. 1971   Head of T3K   Siri Manager, Apple
Jeong Gyu Kim   Sept. 1976   Officer of Malaysia Regional HQ   Project Leader, Global Business Development, SUPEX Council Project
Jeong Bok Kim   Oct. 1965   Head of Metropolitan Infrastructure Office   Head of Central Infrastructure Office

 

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Name

 

Month and
Year of
Birth

 

Position

 

Business Experience

Jung Hoon Kim   Nov. 1963   Head of Cloud Infrastructure Group   Naver Business Platform
Jiwon Kim   Jun. 1985   Head of Vision AI Labs, T3K Innovation CO   Professional Researcher, Samsung Advanced Institute of Technology
Jinwoo Kim   Feb. 1971   Head of Global Business Group   Head of Global Business Office, SK Planet
Jinwon Kim   Sept. 1966   Head of Financial Strategy & Management Group   Representative, SK USA
Hyuk Kim   Sept. 1967   Global Media Support, MNO Business   Head of Media Business Support Group
Hyeon Kook Kim   Dec. 1966   Daegu Regional CP   Head of Metropolitan Area Marketing Office
Hyeong Chan Kim   Aug. 1962   PD of SK Research Institute for SUPEX Management   Telecommunications Policy Research, Korea Information Society Development Institute
Heesup Kim   Oct. 1968   Head of Communication Center   AD Office, Chosun Ilbo
SukKwon Na   Nov. 1966   PD of SK Research Institute for SUPEX Management   Director of Statistical Policy, Statistics Korea
Chan Kyu Noh   Jul. 1965   Officer of Public Relations Team, SUPEX Council Project   Brand Team, SK Inc.
Man Gang Ra   Jan. 1972   Head of Motivation Group   Head of Talent Management Team, HR Office
Byung Hoon Ryu   Oct. 1980   Head of Corporate Strategy Group   PM Group PM2 CoE
Jung Hwan Ryu   Jun. 1970   Head of 5GX Infrastructure Group   Head of Infrastructure Support Group
Gap In Moon   May 1969   Head of Smart Device Group   Head of Service Strategy Division Policy Group
Myung Soon Park   Feb. 1969   Head of Infrastructure Value Innovation Group   Head of Growth Technology Institute
Min Hyung Park   Oct. 1968   Representative, SKTA   Motorola Inc.
Yong Joo Park   May 1965   Head of Compliance and Legal Group   Seoul Central District Prosecutor’s Office
Jong Kwan Park   Jul. 1970   Head of 5GX Intelligence CO   Head of Core Network Lab, Network Technology Institute
Jong Suk Park   Nov. 1971   Head of Business Planning Group   Head of Business Planning Office, SK Broadband
Ji Soo Park   Jun. 1976   Officer of Talent Development CoE, SUPEX Council Project   Project Leader, HR Support Team, SUPEX Council Project
Jin Woo So   Dec. 1961   Chairman of Talent Development Committee, SUPEX Council Project   Representative, SK Planet
Suk Ham Sung   Apr. 1970   Growth Business Support, CR & Growth Business Support Office   Evaluation Manager of Performance Evaluation Office, MSIT
Jin Soo Seong   May 1968   Head of Infrastructure Engineering Group   Head of Daegu Infrastructure Office
Gwang Hyeon Song   Mar. 1970   Head of Digital Communication Office   Head of Business PR Team, Communication Office
Jae Seung Song   Mar. 1979   Head of Corporate Development Group   Director, Praxis Capital Partners
Sang Kyu Shin   Nov. 1970   Head of Corporate Culture Center   Head of HR Office
Yongsik Shin   Aug. 1971   Head of IoT CO   Head of Energy Business Team
Sang Soo Sim   Aug. 1965   Head of Western Infrastructure Office   Head of Infrastructure Division Network Business Support Group

 

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Name

 

Month and
Year of
Birth

 

Position

 

Business Experience

Jeong Yeol Ahn   Aug. 1969   Head of Supply Chain Management Group   Head of Corporate Center, Eleven Street
Junehyeon Ahn   Nov. 1969   Officer of Public Relations Team, SUPEX Council Project   Corporate Relations Team, SUPEX Council Project Communication Committee
Maeng Seog Yang   Mar. 1969   MR Business, MR Service CO   Head of 5GX MNO Business Group
Ji Young Yeo   Sept. 1966   Open Collaboration, ESG Innovation Group   Head of New Business Promotion Division Design Thinking Team
Sung Jin Yeum   Oct. 1972   CR Support, CR & Growth Business Support Office   Head of CR Support Team
Yong-Seop Yum   Oct. 1962   Head of SK Research Institute for SUPEX Management   Head of Future Research Office
Hui Gang Ye   Oct. 1970   Head of Creative Communication Group   Head of Brand 2 Office, Hyundai Card
Kyung Sik Oh   Mar. 1966   Head of Sports Marketing Group   Head of Sports Marketing Group
Sehyeon Oh   Jul. 1963   Head of Authentication CO   Head of C&C DT Business Development Division
Woong Hwan Ryu   May 1971   Head of ESG Innovation Group   Head of Open Collaboration Center
Sung Eun Yoon   Jan. 1973   Officer of PR, Public Relations Office   Head of Corporate Relations Strategy Office Policy System Team
Yong Chul Yoon   May 1965   Officer of PR, Public Relations Office   Head of Department, MBC Newsroom
Poong Young Yoon   Nov. 1974   Head of Corporate Center 1   Head of PM Group
Gab Jae Lee   Feb. 1973   Central Regional CP   Head of Central Marketing Office
Kang Won Lee   Feb. 1970   Cloud Technology, Cloud CO   Manager of Mobile N/W Analytics, IBM T.J. Watson Research Center
Kiyoon Lee   Dec. 1969   Head of Customer Value Innovation Office   PL of Customer Value Innovation Office
Sang Gu Lee   Jul. 1970   Head of Messaging CO   Head of MNO Data Business Team
Sang Heon Lee   Aug. 1965   Head of Policy Development Office   Head of Corporate Relations Strategy Office
Jongmin Lee   Jul. 1978   Head of T3K Innovation CO   Head of Media Technology Institute
Joon Ho Lee   Aug. 1968   ESG Business, ESG Innovation Group   Head of Public Relation Office 2
Joong Ho Lee   Nov. 1967   Head of Metropolitan Area CP   Head of Busan Marketing Office
HyunA Lee   Aug. 1971   Head of AI&CO   Head of Conversational Commerce Division, SK Planet
Bong Ho Lim   Dec. 1966   Head of Regional CP   Head of Metropolitan Area Marketing Office
Hyoung Do Lim   Jun. 1968   Head of Change Management Office   Head of Policy Cooperation Office
Hong Sung Chang   Mar. 1969   Head of Advertising/Data CO   Head of Data Technology Institute
Jinsoo Jeon   Apr. 1975   Head of MR Service CO   Head of Media Labs
Dae Dug Jeong   Sept. 1967   Tax, Finance Group   Head of Tax Team
Doh Hee Jung   Sept. 1974   AI Transformation Products & Business, AI Transformation CO   Head of Data CoE Data Analysis Team 2
Jae Heon Chung   Jun. 1968   Head of New Business Legal Group   Chief Judge, Seoul Central District Court
Jae Hyun Chung   Dec. 1959   Officer of ICT Advisory Board   Head of ICT System TF
Chang Gweon Chung   Jul. 1970   Head of Infrastructure Business   Head of Infrastructure Engineering Group
Dong Hwan Cho   Nov. 1970   Head of Cloud Transformation Center   Head of Data CoE
Young Log Cho   Jun. 1971   Head of CR & Growth Business Support Office   Assistant to Head of External Cooperation Office

 

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Name

 

Month and
Year of
Birth

 

Position

 

Business Experience

Jae Yoo Cho   Dec. 1979   Games, MR Service CO   Representative, LINE Games Japan
Jongwhi Cha   Nov. 1974   Head of Brand Foundation Group   Head of UX & Design Lab, Hyundai Card
Zonggeun Chai   Jul. 1968   Head of Ethics Management Office   Head of Compliance Team
Nag Hun Choi   Nov. 1972   Head of Smart Factory CO   Head of IoT Business Support Group
Woo Seong Chey   Jan. 1974   Representative, SK Telecom Japan   PL of Unicorn Labs Tokyo Office
Eun Sik Choi   Feb. 1969   Western Regional CP   Head of Distribution Innovation Support Group
Il Gyu Choi   Nov. 1970   Head of Cloud CO   Head of Public Business Unit
Jeong Hwan Choi   Jun. 1968   Asset Optimization, Corporate Development Group   Head of IR, Corporate Development Center
Chang Won Chey   Aug. 1964   Vice President of SK Research Institute for SUPEX Management   Chief Executive Officer, SK Chemical
Pan Chul Choi   Jan. 1969   Cloud Business, Cloud CO   Head of Enterprise Business Division Financial Business Team
Min Yong Ha   Sept. 1970   Officer, Innovation Suite   Head of Global Alliance Group
Seong Ho Ha   Sept. 1968   Head of Corporate Relations Center   Head of Corporate Relations Strategy Office
Hyoung Il Ha   Aug. 1970   Head of Corporate Center 2   Head of Service Innovation Support Division
Myung Jin Han   Oct. 1973   Head of Subscription Service CO   Head of Global Alliance Group
Geunman Heo   Aug. 1966   Head of Infrastructure Solutions Group   Head of Gangnam Quality Solution Team
Seok Joon Huh   May 1973   Head of Private Placement Group   Managing Director, L Catterton Asia (Singapore)
Eunah Hyun   Nov. 1974   Head of Growth Legal, Corporate Center 2   Global Business Support Team, SK Inc.
Eric Hartman Davis   Oct. 1980   Head of Loonshot TF Language Superintelligence Labs   Head of Global AI Development Group
So Jeong Choi   Apr. 1982   Subscription Media, Subscription Service CO   Mobile Streaming, MNO Marketing Group
Gwan Woo Lee   Jun. 1973   Head of Cloud Application Group   Head of Data Development Operations Group
Tae Wan Kim   Jan. 1979.   Strategic Alliance, Global Business Group   Strategic Alliance, Integrated Service Group
Yeong Sang Kwon   Mar. 1971   Head of Policy Cooperation Office   Head of Policy Cooperation Office
Seung Tae Hong   Jul. 1971   RPA, Business Planning Group   Leader, Portfolio Innovation Team, Business Strategy Group
Gyu Sik Lee   Jan. 1970   Head of Competency Group   Leader, Change 1 Cell, Change Office
Yong Jin Choi   Feb. 1977   Head of AI Transformation CO   Head of MNO DT Labs, AI/DT Technology Group
Jeong Tae Kim   Aug. 1972   Head of Learning Center   Head of Learning Center
Jihoon Kim   Sept. 1978   Officer, Future Business Team, SUPEX Council Project   Leader, Bundled Product Offering Team
Jaeho Yoo   Dec. 1973   Portfolio Innovation   Growth Business Group, Eleven Street
Jeong Hoon Lee   May 1974   SKTA Business Development   Investment Center 2 Group, SK Inc.
Yong Seok Lee   Nov. 1961   Head of ESG Group, SK Research Institute for SUPEX Management   PD, SK Research Institute for SUPEX Management

 

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Item 6.B.

Compensation

The aggregate of the remuneration paid and in-kind benefits granted to our directors (all standing directors, who also serve as our executive officers, and non-standing directors) during the year ended December 31, 2020 totaled approximately Won 10.0 billion.

The compensation of our directors who received total annual compensation exceeding Won 500 million in 2020 was as follows:

 

Name

 

Position

  Composition of Total Compensation     Total
Compensation
 
  Salary     Bonus     Other Earned
Income
    Severance  
        (in millions of Won)  

Jung Ho Park

  Executive Director, President and Chief Executive Officer    1,700      5,679     1           7,380  

Young Sang Ryu

  Executive Director and President of Mobile Network Operations Division     540       1,668       21             2,229  

Remuneration for our directors is determined by shareholder resolution. Severance allowances for our directors are determined by the board of directors in accordance with our regulation on severance allowances for officers, which was adopted by shareholder resolution. The regulation provides for monthly salary, performance bonus, severance payment and fringe benefits. The amount of performance bonuses is independently decided by a resolution of the board of directors.

The aggregate of the remuneration paid and in-kind benefits granted to our executive officers (excluding all standing directors, who also serve as our executive officers) during the year ended December 31, 2020 totaled approximately Won 49.8 billion.

The compensation of the five individuals who received the highest compensation among those who received total annual compensation exceeding Won 500 million in 2020 was as follows:

 

Name

  

Position

  Composition of Total Compensation     Total
Compensation
 
  Salary     Bonus     Other Earned
Income
    Severance  
         (in millions of Won)  

Jung Ho Park

   Executive Director, President and Chief Executive Officer    1,700      5,679      1           7,380  

Jin Woo So

   Chairman of Talent Development Committee, SUPEX Council Project     1,200       1,163       2             2,365  

Young Sang Ryu

   Executive Director and President of Mobile Network Operations Division     540       1,668       21             2,229  

Yoon Kim

   Head of T3K     430       1,127       83             1,640  

Poong Young Yoon

   Head of Corporate Center 1     400       1,105       43             1,548  

 

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On February 20, 2020, our board of directors resolved to grant options to purchase shares of our common stock to certain directors and executive officers, which was approved by shareholder resolution on March 26, 2020. On February 25, 2021, our board of directors resolved to grant options to purchase shares of our common stock to certain directors and executive officers, which was approved by shareholder resolution on March 25, 2021. The following table summarizes the exercisable stock options granted to our directors and executive officers as of March 31, 2021:

 

Recipient

  Position   Grant date   Exercise period   Exercise price
(per share)
    Number of
shares issuable
 
  From   To

Jung Ho Park

  Executive Director,
President and
Chief Executive
Officer
  March 24, 2017   March 25, 2019   March 24, 2022    246,750       22,168  
  March 25, 2020   March 24, 2023     266,490       22,168  
  March 25, 2021   March 24, 2024     287,810       22,168  
  March 26, 2020   March 27, 2023   March 26, 2027     192,260       111,106  

Young Sang Ryu

  Executive Director
and President of
Mobile Network
Operations
Division
  February 20, 2018   February 21, 2020   February 20, 2023     254,120       1,358  
  March 26, 2019   March 27, 2021   March 26, 2024     254,310       1,734  
  March 26, 2020   March 27, 2023   March 26, 2027     192,260       2,353  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       5,990  

Seong Ho Ha

  Head of Corporate
Relations Center
  February 22, 2019   February 23, 2021   February 22, 2024     265,260       1,369  
  March 26, 2020   March 27, 2023   March 26, 2027     192,260       1,656  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       1,920  

Hyoung Il Ha

  Head of Corporate
Center 2
  February 22, 2019   February 23, 2021   February 22, 2024     265,260       1,564  
  March 26, 2020   March 27, 2023   March 26, 2027     192,260       1,961  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       3,760  

Poong Young Yoon

  Head of Corporate
Center 1
  February 22, 2019   February 23, 2021   February 22, 2024     265,260       1,244  
  March 26, 2020   March 27, 2023   March 26, 2027     192,260       1,743  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       3,360  

Jong Ryeol Kang

  Head of ICT
Infrastructure
Center
  March 26, 2020   March 27, 2023   March 26, 2027     192,260       2,048  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       2,350  

Yoon Kim

  Head of T3K   March 26, 2020   March 27, 2023   March 26, 2027     192,260       1,874  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       2,110  

Seok Joon Huh

  Head of Private
Placement Group
  March 26, 2020   March 27, 2023   March 26, 2027     192,260       1,852  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       2,260  

Dong Hwan Cho

  Head of Cloud
Transformation
Center
  March 26, 2020   March 27, 2023   March 26, 2027     192,260       1,525  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       1,770  

HyunA Lee

  Head of AI&CO   March 26, 2020   March 27, 2023   March 26, 2027     192,260       1,525  
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       2,880  

Sang Kyu Shin

  Head of Corporate
Culture Center
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       1,530  

Jae Seung Song

  Head of Corporate
Development
Croup
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       2,650  

Myung Jin Han

  Head of
Subscription
Service CO
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       1,450  

Byung Hoon Ryu

  Head of Corporate
Strategy Group
  March 25, 2021   March 26, 2023   March 25, 2026     251,380       1,250  

 

Item 6.C.

Board Practices

For information regarding the expiration of each director’s term of appointment, as well as the period from which each director has served in such capacity, see the table set out under “Item 6.A. Directors and Senior Management” above.

 

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Termination of Directors’ Services

Directors are given a retirement and severance payment upon termination of employment in accordance with our internal regulations on severance payments. Upon retirement, directors who have made significant contributions to our company during their term may be appointed to serve either as an advisor to us or as an officer of an affiliate company.

Audit Committee

Under relevant Korean laws and our articles of incorporation, we are required to have an audit committee under the board of directors. The committee is composed of at least three members, two-thirds of whom must be independent non-executive directors in accordance with applicable rules. The members of the audit committee are appointed annually by a resolution of the general meeting of shareholders. They are required to:

 

   

examine the agenda for the general meeting of shareholders;

 

   

examine financial statements and other reports to be submitted by the board of directors to the general meeting of shareholders;

 

   

review the administration by the board of directors of our affairs; and

 

   

examine the operations and asset status of us and our subsidiaries.

In addition, the audit committee must appoint independent auditors to examine our financial statements. An audit and review of our financial statements by independent auditors is required for the purposes of a securities report. Listed companies must provide such report on an annual, semi-annual and quarterly basis to the FSC and the KRX KOSPI Market.

Our audit committee is composed of four independent non-executive directors: Seok-Dong Kim, Yong-Hak Kim, Jung Ho Ahn and Youngmin Yoon, each of whom is financially literate and independent under the rules of the NYSE as applicable. Seok-Dong Kim is the chairman of the committee. The board of directors has determined that Seok-Dong Kim is an “audit committee financial expert” as defined under the applicable rules of the SEC. See “Item 16A. Audit Committee Financial Expert.”

Independent Director Nomination Committee

This committee is devoted to recommending independent non-executive directors for the board of directors. The objective of the committee is to help promote fairness and transparency in the nomination of candidates for these positions. The board of directors decides from time to time who will comprise the members of this committee. The committee is comprised of one executive director, Jung Ho Park, and two independent directors, Seok-Dong Kim and Jung Ho Ahn. Seok-Dong Kim is the chairman of the committee.

Capex Review Committee

This committee is responsible for reviewing our business plan (including the budget). It also examines major capital expenditure revisions, and routinely monitors capital expenditure decisions that have already been executed. The committee is comprised of one executive director, Young Sang Ryu, and five independent directors, Yong-Hak Kim, Seok-Dong Kim, Jung Ho Ahn and Youngmin Yoon and Junmo Kim. Jung Ho Ahn is the chairman of the committee.

Compensation Review Committee

This committee oversees our overall compensation scheme for top-level executives and directors. It is responsible for reviewing both the criteria for and level of compensation. It is comprised of three independent directors, Yong-Hak Kim, Seok-Dong Kim and Junmo Kim. Yong-Hak Kim is the chairman of the committee.

Corporate Citizenship Committee

This committee was established to help us achieve world-class sustainable growth and to help us fulfill our corporate social responsibilities. It is comprised of three independent directors, Jung Ho Ahn, Youngmin Yoon and Junmo Kim. Youngmin Yoon is the chairwoman of the committee.

 

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Table of Contents
Item 6.D.

Employees

The following table sets forth the numbers of our regular employees, temporary employees and total employees as of the dates indicated:

 

     Regular
Employees
     Temporary
Employees
     Total  

December 31, 2018

     33,999        5,910        39,909  

December 31, 2019

     34,548        5,995        40,543  

December 31, 2020

     34,847        6,250        41,097  

Labor Relations

As of December 31, 2020, SK Telecom had a company union consisting of 2,591 regular employees out of 5,232 total regular employees. We have never experienced a work stoppage of a serious nature. Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has a two-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. Our wage negotiations for 2018 were completed in September 2018 and resulted in an average monthly wage increase of 2.5% for SK Telecom employees. Our wage negotiations for 2019 were completed in September 2019 and resulted in an average monthly wage increase of 2.0% for SK Telecom employees. Our wage negotiations for 2020 were completed in September 2020 and resulted in an average monthly wage increase of 2.0% for SK Telecom employees. Our wage negotiations for 2021 were completed in March 2021 and resulted in an average monthly wage increase of 3.0% for SK Telecom employees. We consider our relations with our employees to be good.

Employee Benefits

Since April 1999, we have been required to contribute an amount equal to 4.5% of employee wages toward a national pension plan. Employees are eligible to participate in an employee stock ownership association. We are not required to, and we do not, make any contributions to the employee stock ownership association, although we subsidize the employee stock ownership association through the Employee Welfare Fund by providing low interest rate loans to employees who desire to purchase our stock through the plan in the event of a capitalization by the association.

We are required to pay a severance amount to eligible employees who voluntarily or involuntarily cease employment with us, including through retirement. This severance amount is based upon the employee’s length of service with us and the employee’s salary level at the time of severance. As of December 31, 2020, the defined benefit obligation, which is the accrued and unpaid retirement and severance benefits, of Won 1,278.6 billion for all of our employees are reflected in our consolidated financial statements as a liability, of which a total of Won 1,127.2 billion was funded. Under Korean laws and regulations, we are prevented from involuntarily terminating a full-time employee except under certain limited circumstances. In September 2000, we entered into an employment stabilization agreement with the union. Among other things, in the event that we reorganize a department into a separate entity or we outsource an employee to a separate entity where the wage is lower, this agreement provides for a guarantee of the same wage level for the year that such an event occurs.

Under the Basic Labor Welfare Act, we may also contribute up to 5.0% of our annual earnings before tax for employee welfare. Contribution amounts are determined annually following negotiation with the union. The contribution amount for 2020 was set at 5.00% of SK Telecom’s profit before income tax on a separate basis, or Won 50.0 billion. The contribution amount for 2019 was set at 3.63% of SK Telecom’s profit before income tax on a separate basis, or Won 43.0 billion. The contribution amount for 2018 was set at 3.52% of SK Telecom’s profit before income tax on a separate basis, or Won 43.0 billion.

In addition, we provide our employees with miscellaneous other fringe benefits including medical cost subsidies, family camp programs and sabbatical programs for long-term employees.

 

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Item 6.E.

Share Ownership

The following table sets forth the share ownership by our directors and executive officers as of March 31, 2021:

 

Name

 

Position

  Number of
Shares
Owned
    Percentage of
Total Shares
Outstanding
    Special
Voting
Rights
    Options  

Directors:

         

Jung Ho Park

  Executive Director, President and Chief Executive Officer     3,500           None       177,610  

Young Sang Ryu

  Executive Director and President of Mobile Network Operations Division     1,000           None       11,435  

Executive Officers:

         

Jong Ryeol Kang

  Head of ICT Infrastructure Center     784           None       4,398  

Gyeong Nam Kim

  Head of S&C Technology Group     206           None        

Seong Soo Kim

  Head of Mobile CO     300           None        

Seong Joon Kim

  Distribution, Mobile CO     300           None        

Yeong Joon Kim

  Head of AI Technology Unit     200           None        

Yoon Kim

  Head of T3K     1,000           None       3,984  

Jeong Bok Kim

  Head of Metropolitan Infrastructure Office     673           None        

Jung Hoon Kim

  Head of Cloud Infrastructure Group     150           None        

Jiwon Kim

  Head of Vision AI Labs, T3K Innovation CO     300           None        

Jinwoo Kim

  Head of Global Business Group     150           None        

Jinwon Kim

  Head of Financial Strategy & Management Group     700           None        

Hyuk Kim

  Global Media Support, MNO Business     300           None        

Hyeon Kook Kim

  Daegu Regional CP     500           None        

Heesup Kim

  Head of Communication Center     200           None        

Man Gang Ra

  Head of Motivation Group     500           None        

Byung Hoon Ryu

  Head of Corporate Strategy Group     500           None       1,250  

Jung Hwan Ryu

  Head of 5GX Infrastructure Group     450           None        

Gap In Moon

  Head of Smart Device Group     200           None        

Myung Soon Park

  Head of Infrastructure Value Innovation Group     150           None        

Yong Joo Park

  Head of Compliance and Legal Group     1,200           None        

Jong Kwan Park

  Head of 5GX Intelligence CO     200           None        

Jong Suk Park

  Head of Business Planning Group     500           None        

Suk Ham Sung

  Growth Business Support, CR & Growth Business Support Office     500           None        

Jin Soo Seong

  Head of Infrastructure Engineering Group     1,036           None        

Jae Seung Song

  Head of Corporate Development Group     200           None       2,650  

Gwang Hyeon Song

  Head of Digital Communication Office     200           None        

Sang Kyu Shin

  Head of Corporate Culture Center     500           None       1,530  

Yongsik Shin

  Head of IoT CO     408           None        

Sang Soo Sim

  Head of Western Infrastructure Office     300           None        

Jeong Yeol Ahn

  Head of Supply Chain Management Group     421           None        

Maeng Seog Yang

  MR Business, MR Service CO     200           None        

Ji Young Yeo

  Open Collaboration, ESG Innovation Group     316           None        

Sung Jin Yeum

  CR Support, CR & Growth Business Support Office     1,000           None        

Hui Gang Ye

  Head of Creative Communication Group     200           None        

Kyung Sik Oh

  Head of Sports Marketing Group     350           None        

Sehyeon Oh

  Head of Authentication CO     100           None        

Woong Hwan Ryu

  Head of ESG Innovation Group     200           None        

 

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Table of Contents

Name

 

Position

  Number of
Shares
Owned
    Percentage of
Total Shares
Outstanding
    Special
Voting
Rights
    Options  

Sung Eun Yoon

  Officer of PR, Public Relations Office     200           None        

Poong Young Yoon

  Head of Corporate Center 1     800           None       6,347  

Gab Jae Lee

  Central Regional CP     300           None        

Kang Won Lee

  Cloud Technology, Cloud CO     100           None        

Kiyoon Lee

  Head of Customer Value Innovation Office     765           None        

Sang Gu Lee

  Head of Messaging CO     350           None        

Sang Heon Lee

  Head of Policy Development Office     377           None        

Jongmin Lee

  Head of T3K Innovation CO     200           None        

Joon Ho Lee

  ESG Business, ESG Innovation Group     300           None        

Joong Ho Lee

  Head of Metropolitan Area CP     200           None        

HyunA Lee

  Head of AI&CO     100           None       4,405  

Bong Ho Lim

  Head of Regional CP     150           None        

Hyoung Do Lim

  Head of Change Management Office     275           None        

Hong Sung Chang

  Head of Advertising/Data CO     250           None        

Jinsoo Jeon

  Head of MR Service CO     1,000           None        

Dae Dug Jeong

  Tax, Finance Group     350           None        

Doh Hee Jung

  AI Transformation Products & Business, AI Transformation CO     100           None        

Jae Heon Chung

  Head of New Business Legal Group     400           None        

Chang Gweon Chung

  Head of Infrastructure Business     450           None        

Dong Hwan Cho

  Head of Cloud Transformation Center     700           None       3,295  

Young Log Cho

  Head of CR & Growth Business Support Office     700           None        

Jae Yoo Cho

  Games, MR Service CO     600           None        

Jongwhi Cha

  Head of Brand Foundation Group     100           None        

Zonggeun Chai

  Head of Ethics Management Office     900           None        

Nag Hun Choi

  Head of Smart Factory CO     600           None        

Eun Sik Choi

  Western Regional CP     250           None        

Il Gyu Choi

  Head of Cloud CO     150           None        

Jeong Hwan Choi

  Asset Optimization, Corporate Development Group     400           None        

Pan Chul Choi

  Cloud Business, Cloud CO     100           None        

Min Yong Ha

  Officer, Innovation Suite     300           None        

Seong Ho Ha

  Head of Corporate Relations Center     1,000           None       4,945  

Hyoung Il Ha

  Head of Corporate Center 2     1,000           None       7,285  

Geunman Heo

  Head of Infrastructure Solutions Group     300           None        

Eunah Hyun

  Head of Growth Legal, Corporate Center 2     200           None        

Myung Jin Han

  Head of Subscription Service CO     1,000           None       1,450  

Seok Joon Huh

  Head of Private Placement Group     700           None       4,112  

Seung Tae Hong

  RPA, Business Planning Group     150           None        

Gyu Sik Lee

  Head of Competency Group     200           None        

So Jeong Choi

  Subscription Media, Subscription Service CO     100           None        

Gwan Woo Lee

  Head of Cloud Application Group     250           None        

Tae Wan Kim

  Strategic Alliance, Global Business Group     280           None        

Yeong Sang Kwon

  Head of Policy Cooperation Office     250           None        

Yong Jin Choi

  Head of AI Transformation CO     200           None        

Jihoon Kim

  Officer, Future Business Team, SUPEX Council Project     67           None        

Jaeho Yoo

  Portfolio Innovation     120           None        
   

 

 

   

 

 

     

 

 

 

Total

    37,178             234,696  

 

 

*

Less than 1%.

 

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Table of Contents

See “Item 6.B. Compensation” for information regarding the exercisable stock options granted to our directors and executive officers.

 

Item 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

Item 7.A.

Major Shareholders

As of the close of our shareholders’ registry on December 31, 2020, approximately 66.7% of our issued shares were held in Korea by approximately 154,707 shareholders. According to Citibank, N.A. (“Citibank”), depositary for our ADRs, as of December 31, 2020, there were at least 100 record holders of our ADRs evidencing ADSs resident in the United States to the best of Citibank’s knowledge, and 6,791,254 shares of our common stock were held in the form of ADSs. As of such date, outstanding ADSs represented approximately 8.4% of our outstanding common shares.

The following table sets forth certain information as of December 31, 2020 with respect to any person known to us to be the beneficial owner of more than 5.0% of our common shares:

 

Shareholder

   Number of
Shares
     Percentage of
Total Shares
Issued(3)
    Percentage of
Total Shares
Outstanding(4)
 

SK Inc.

     21,624,120        26.8     30.3

National Pension Service

     8,853,906        11.0       12.4  

Treasury shares(1) (2)

     9,418,558        11.7        

 

 

(1)

Treasury shares do not have any voting rights. In 2020, we repurchased 1,809,295 common shares under a share repurchase agreement with SK Securities Co., Ltd., a securities brokerage firm, dated August 28, 2020 (the “Share Repurchase Agreement”).

 

(2)

We repurchased an additional 288,000 common shares under the Share Repurchase Agreement in January 2021 and disposed of 120,990 treasury shares as bonus payment to certain of our officers and employees in February 2021. As of March 31, 2021, we held 9,585,568 shares in treasury.

 

(3)

Calculated based on 80,745,711 total issued shares, which include 9,418,558 treasury shares, as of December 31, 2020.

 

(4)

Calculated based on 71,327,153 total outstanding shares as of December 31, 2020.

The following table sets forth significant changes in the percentage ownership held by our major shareholders during the past three years:

 

     As of December 31,  

Shareholder

   2020     2019     2018  
    

(As a percentage of total

issued shares)(1)

 

SK Group(2)

     26.8     26.8     26.8

SK Inc.

     26.8       26.8       26.8  

National Pension Service

     11.0       11.1       9.8  

 

 

(1)

Includes 9,418,558 shares, 7,609,263 shares and 8,875,883 shares held in treasury as of December 31, 2020, 2019 and 2018, respectively. In December 2018, we exchanged 1,260,668 treasury shares for all of the outstanding common shares of SK Infosec in a share exchange transaction with SK Inc. In November 2019, we sold 1,266,620 treasury shares to Kakao for approximately Won 300.0 billion. In 2020, we repurchased 1,809,295 common shares under the Share Repurchase Agreement.

 

(2)

SK Group’s ownership interest as of December 31, 2020, 2019 and 2018 consisted of the ownership interest of SK Inc. only.

 

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Except as described above, other than companies in the SK Group, no other persons or entities known by us to be acting in concert, directly or indirectly, jointly or severally, own in excess of 5.0% of our total shares outstanding or exercise control or could exercise control over our business.

As of March 31, 2021, SK Inc. held 26.8% of our total issued shares of common stock. For a description of our foreign ownership limitation, see “Item 3.D. Risk Factors — Risks Relating to Our Business — If SK Inc. causes us to breach the foreign ownership limitations on our common shares, we may experience a change of control.” and “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements.” In the event that SK Inc. announces plans of a sale of our shares, we expect to be able to discuss the details of such sale with them in advance and will endeavor to minimize any adverse effects on our share prices as a result of such sale.

As of March 31, 2021, the total number of our common shares outstanding was 71,160,143.

Other than as disclosed herein, there are no other arrangements, to the best of our knowledge, which would result in a material change in the control of us. Our major shareholders do not have different voting rights.

 

Item 7.B.

Related Party Transactions

We are part of the SK Group of affiliated companies. See “Item 7.A. Major Shareholders.” As disclosed in note 37 of the notes to our consolidated financial statements, we had related party transactions with a number of affiliated companies of the SK Group during the year ended December 31, 2020.

SK Networks

As of December 31, 2020, we had Won 2.2 billion of accounts receivable from SK Networks. As of the same date, we had Won 108.2 billion of accounts payable to SK Networks, mainly relating to payments for wireless devices by PS&Marketing. The aggregate fees we paid to SK Networks for dealer commissions amounted to Won 1,023.0 billion in 2020, Won 1,088.4 billion in 2019 and Won 1,189.4 billion in 2018.

SK Inc.

We enter into agreements with SK Inc. from time to time for specific information technology-related projects, and we also pay SK Inc. for use of the SK brand. The aggregate fees we paid to SK Inc. for such information technology services and the use of the SK brand amounted to Won 380.3 billion in 2020, Won 396.0 billion in 2019 and Won 397.5 billion in 2018. We also purchase various information technology-related equipment from SK Inc. from time to time. The total amount of such purchases was Won 76.5 billion in 2020, Won 95.4 billion in 2019 and Won 151.5 billion in 2018. We are a party to several service agreements with SK Inc. relating to the development and maintenance of our information technologies systems.

In December 2018, we acquired SK Infosec from SK Inc. in a share exchange transaction, pursuant to which we transferred 1,260,668 treasury shares with an aggregate book value of Won 281.2 billion to SK Inc. in exchange for all of the issued and outstanding common shares of SK Infosec.

SK TNS

SK TNS Co., Ltd. (“SK TNS”) provides us with network construction and maintenance services and related equipment. The total amount of network equipment purchased from SK TNS was Won 496.5 billion in 2020, Won 607.5 billion in 2019 and Won 493.8 billion in 2018. As of December 31, 2020, we had Won 89.9 billion of accounts payable to SK TNS, mainly relating to payments for such services and equipment.

 

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 pages F-1 through G-99.

 

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Legal Proceedings

FTC Proceedings

On February 24, 2021, the FTC imposed a fine of Won 6.4 billion on us and issued a correctional order in connection with the payment by SK Telecom of a portion of sales commissions for IPTV services of SK Broadband in the course of selling bundled rate plans that combine our wireless services with IPTV services in violation of the Fair Trade Act. While we expect to pay the fine by the due date, we plan to apply for a stay of execution of the correctional order and initiate administrative proceedings in connection with the correctional order and the fine.

KCC Proceedings

On January 24, 2018, the KCC imposed an aggregate fine of Won 21.4 billion on us for providing discriminatory subsidies in violation of the MDDIA.

On March 20, 2019, the KCC imposed a fine of Won 975 million on us and issued a correctional order for providing discriminatory subsidies in violation of the MDDIA. On June 26, 2019, the KCC imposed a fine of Won 231 million on us and issued a correctional order relating to restrictions on subscription cancelations. On July 9, 2019, the KCC imposed a fine of Won 1.5 million on us and issued a correctional order for failing to maintain the amount of subsidies for the minimum period in violation of the MDDIA.

On June 4, 2020, the KCC imposed a fine of Won 4 million on us and issued a correctional order for obtaining consent from subscribers for collection of personal information through contracts with material omissions in violation of the Location Information Act of Korea. On July 8, 2020, the KCC imposed a fine of Won 22.3 billion on us and issued a correctional order for providing handset subsidies that were in excess of their officially announced amounts and were discriminatory in nature, as well as unlawfully requiring subscribers to enroll to certain subscription plans or purchase certain value-added services in return, in connection with attracting new subscribers of 5G wireless services during the period between April 2019 and August 2019 in violation of the MDDIA. On September 9, 2020, the KCC imposed a fine of Won 76 million on us and issued a correctional order for false, exaggerated or deceptive advertising in violation of the Telecommunications Business Act.

With respect to the fines imposed by the KCC set forth above, we have paid such fines in full. With respect to the correctional orders issued by the KCC set forth above, we have implemented remedial measures pursuant to such correctional orders and reported to the KCC on the implementation of such measures.

Except as described above, neither we nor any of our subsidiaries are involved in any litigation, arbitration or administrative proceedings relating to claims which may have, or have had during the twelve months preceding the date hereof, a significant effect on our financial position or the financial position of our subsidiaries taken as a whole, and, so far as we are aware, no such litigation, arbitration or administrative proceedings are pending or threatened.

Dividends

Annual dividends, if any, on our outstanding shares must be approved at the annual general meeting of shareholders. This meeting is generally held in March of the following year, and the annual dividend is generally paid shortly after the meeting. Since our shareholders have discretion to declare annual dividends, we cannot give any assurance as to the amount of dividends per share or that any dividends will be declared at all. Interim dividends, if any, could be approved by a resolution of our board of directors. We replaced the interim dividend system with a quarterly dividend system pursuant to an amendment to our articles of incorporation at our annual general meeting of shareholders held on March 25, 2021. Once declared, dividends must be claimed within five years, after which the right to receive the dividends is extinguished and reverted to us.

We pay cash dividends to the ADR depositary in Won. Under the terms of the deposit agreement, cash dividends received by the ADR depositary generally are to be converted by the ADR depositary into Dollars and distributed to the holders of the ADSs, less withholding tax, other governmental charges and the ADR depositary’s fees and expenses. The ADR depositary’s designated bank in Korea must approve this conversion and remittance of cash dividends. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

 

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The following table sets forth the dividend per share and the aggregate total amount of dividends declared (including any interim dividends), as well as the number of outstanding shares entitled to dividends, with respect to the years indicated. The dividends set out for each of the years below were paid in the immediately following year.

 

Year Ended December 31,

   Dividend
per Share
     Total Amount of
Dividends
     Number of
Shares Entitled
to Dividend
 
     (In Won)      (In billions of Won)         

2016

   10,000      706.1        70,609,160  

2017

     10,000        706.1        70,609,160  

2018

     10,000        717.4        71,869,828 (1) 

2019

     10,000        730.1        73,136,448 (2) 

2020

     10,000        715.1        71,327,153 (3) 

 

 

(1)

The number of shares entitled to the interim dividend was 70,609,160.

 

(2)

The number of shares entitled to the interim dividend was 71,869,828.

 

(3)

The number of shares entitled to the interim dividend was 73,136,448.

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. Our common shares represented by the ADSs have the same dividend rights as other outstanding common shares.

Holders of non-voting shares are entitled to receive dividends in priority to the holders of common shares. The dividend on the non-voting shares is between 9.0% and 25.0% of the par value as determined by the board of directors at the time of their issuance. If the dividends for common shares exceed the dividends for non-voting shares, the holders of non-voting shares will be entitled to participate in the distribution of such excess amount with the holders of common shares. If the amount available for dividends is less than the aggregate amount of the minimum required dividend, holders of non-voting shares will be entitled to receive such accumulated unpaid dividend from dividends payable in the next fiscal year before holders of common shares. There are no non-voting shares issued or outstanding.

We declare dividends annually at the annual general meeting of shareholders which is generally 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 or registered pledges 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. Dividends in shares may not exceed one-half of the annual dividend. Our obligation to pay dividend expires if no claim to dividend is made for five years from the payment date.

Under the Korean Commercial Code, we may pay an annual dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of (1) our stated capital, (2) the total amount of our capital surplus reserve, (3) legal reserve accumulated up to the end of the relevant dividend period and (4) the increase in our net asset value resulting from the evaluation of our assets and liabilities that has not been offset against unrealized losses. In addition, we may not pay an annual dividend unless we have set aside as a legal reserve an amount equal to at least 10.0% of the cash portion of the annual dividend or until we have accumulated a legal reserve of not less than one-half of our stated capital. We may not use our legal reserve to pay cash dividends but may transfer amounts from our legal reserve to capital stock or use our legal reserve to reduce an accumulated deficit.

In addition, the FSCMA and our articles of incorporation provide that, in addition to annual dividends, we may pay quarterly dividends. Unlike annual dividends, the decision to pay quarterly dividends can be made by a resolution of the board of directors and is not subject to shareholder approval. Any quarterly dividends must be paid in cash to the shareholders of record as of March 31, June 30 or September 30 of the relevant fiscal year.

Under the FSCMA, the total amount of quarterly dividends payable in a fiscal year shall not be more than the net assets on the balance sheet of the immediately preceding fiscal year, after deducting (1) a company’s capital in the immediately preceding fiscal year, (2) the aggregate amount of its capital reserves and legal reserves accumulated up to the immediately preceding fiscal year, (3) the amount of earnings for dividend payments confirmed at the general shareholders’ meeting with respect to the immediately preceding fiscal year and (4) the

 

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amount of legal reserve that should be set aside for the current fiscal year following the quarterly dividend payment. Furthermore, the rate of quarterly dividends for non-voting shares must be the same as that for our common shares. In addition, no quarterly dividends can be paid if there is a concern over the net assets of the current fiscal year falling short of the aggregate sum of (1) our stated capital, (2) the total amount of our capital surplus reserve, (3) legal reserve accumulated up to the end of the current fiscal year and (4) the increase in our net asset value resulting from the evaluation of our assets and liabilities that has not been offset against unrealized losses.

Our obligation to pay quarterly dividends expires if no claims to such dividends are made for a period of five years from the payment date.

 

Item 8.B.

Significant Changes

None.

 

Item 9.

THE OFFER AND LISTING

 

Item 9.A.

Offering and Listing Details

These matters are described under “Item 9.C. Markets” below where relevant.

 

Item 9.B.

Plan of Distribution

Not applicable.

 

Item 9.C.

Markets

The principal trading market for our common shares is the KRX KOSPI Market. Our common shares are traded on the KRX KOSPI Market under the identification code 017670. As of March 31, 2021, 71,160,143 shares of our common stock were outstanding.

The ADSs are traded on the NYSE and the London Stock Exchange. The ADSs have been issued by the ADR depositary and are traded on the NYSE under the ticker symbol “SKM.” Each ADS represents one-ninth of one share of our common stock. As of March 31, 2021, ADSs representing 6,600,692 shares of our common stock were outstanding.

 

Item 9.D.

Selling Shareholders

Not applicable.

 

Item 9.E.

Dilution

Not applicable.

 

Item 9.F.

Expenses of the Issue

Not applicable.

 

Item 10.

ADDITIONAL INFORMATION

 

Item 10.A.

Share Capital

Not applicable.

 

Item 10.B.

Memorandum and Articles of Association

Description of Capital Stock

This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the FSCMA, the Korean Commercial Code, the Telecommunications Business Act 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 FSCMA, the Korean Commercial Code and the Telecommunications Business Act. We have filed a copy of our articles of incorporation as an exhibit to our annual reports on Form 20-F.

 

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General

The name of our company is SK Telecom Co., Ltd. We are registered under the laws of Korea under the commercial registry number of 110111-0371346. As specified in Article 2 (Objectives) of our articles of incorporation, as amended, our objectives are the rational management of the telecommunications business, development of telecommunications technology, and contribution to public welfare and convenience. In order to achieve these objectives, we are engaged in the following:

 

   

information and communication business;

 

   

sale and lease of subscriber handsets;

 

   

new media business;

 

   

advertising business;

 

   

mail order sales business;

 

   

real estate business (development, management and leasing, etc.) and chattel leasing business;

 

   

research and technology development relating to the first four items above;

 

   

overseas and import/export business relating to the first four items above;

 

   

manufacture and distribution business relating to the first four items above;

 

   

travel business;

 

   

electronic financial services business;

 

   

film business (production, import, distribution and screening);

 

   

lifetime education and management of lifetime educational facilities;

 

   

electric engineering business;

 

   

information- and communication-related engineering business;

 

   

ubiquitous city construction and related service business;

 

   

any related business through investment, management and operation of our Korean or offshore subsidiaries and investment companies;

 

   

construction business, including the machine and equipment business;

 

   

export/import business and export/import intermediation/agency business;

 

   

electrical business such as intelligent electrical grid business; and

 

   

any business or undertaking incidental or conducive to the attainment of the objectives stated above.

Currently, our authorized share capital is 220,000,000 shares, which consists of shares of common stock, par value Won 500 per share, and shares of non-voting stock, par value Won 500 per share (common shares and non-voting shares together are referred to as “shares”). Under our articles of incorporation, we are authorized to issue up to 5,500,000 non-voting preferred shares. As of March 31, 2021, 80,745,711 common shares were issued, of which 9,585,568 shares were held by us in treasury. From September 2020 to January 2021, we repurchased 2,097,295 common shares under the Share Repurchase Agreement, and we disposed of 120,990 treasury shares as bonus payment to certain of our officers and employees in February 2021. We have never issued any non-voting preferred shares. All of the issued and outstanding common shares are fully-paid and non-assessable and are in registered form.

Board of Directors

Meetings of the board of directors are convened by the representative director as he or she deems necessary or upon the request of three or more directors. The board of directors determines all important matters relating to our

 

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business. In addition, the prior approval of the majority of the independent non-executive directors is required for certain matters, which include:

 

   

investment by us or any of our subsidiaries in a foreign company in equity or acquisition of such foreign company’s other overseas assets in an amount equal to 5.0% or more of our equity under our most recent balance sheet; and

 

   

contribution of capital, loans or guarantees, acquisition of our subsidiaries’ assets or similar transactions with our affiliated companies in excess of Won 10.0 billion through one or a series of transactions.

Resolutions of the board are adopted in the presence of a majority of the directors in office and by the affirmative vote of a majority of the directors present. No director who has an interest in a matter for resolution may exercise his or her vote upon such matter.

There are no specific shareholding requirements for director’s qualification. Directors are elected at a general meeting of shareholders if the approval of the holders of the majority of the voting shares present at such meeting is obtained and if such majority also represents at least one-fourth of the total number of shares outstanding. Under the Korean Commercial Code, unless otherwise stated in the articles of incorporation, holders of an aggregate of 1.0% or more of the outstanding shares with voting rights may request cumulative voting in any election for two or more directors. Our articles of incorporation do not permit cumulative voting for the election of directors.

The term of office for directors is until the close of the third annual general shareholders meeting convened after he or she commences his or her term. Our directors may serve consecutive terms and our shareholders may remove them from office at any time by a special resolution adopted at a general meeting of shareholders. The total term of office of independent directors may not exceed six years, and when combined with the term of office at our affiliates, may not exceed nine years.

Dividends

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. Our common shares represented by the ADSs have the same dividend rights as other outstanding common shares. For a detailed discussion of our dividend policy, see “Item 8.A. Consolidated Statements and Other Financial Information — Dividends.”

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 our capital surplus or 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 at times issue authorized but unissued shares, unless otherwise provided in the Korean Commercial Code, on terms determined by our board of directors. All our shareholders are generally entitled to subscribe to 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’ registry as of the relevant record date. We must give public notice of the 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 Korean Commercial Code and our articles of incorporation, we may issue new shares pursuant to a board resolution to persons other than existing shareholders only if (1) the new shares are issued for the purpose of issuing depositary receipts in accordance with the relevant regulations or through an offering to public investors and (2) the purpose of such issuance is deemed necessary by us to achieve a business purpose, including, but not limited to, the introduction of new technology or the improvement of our financial condition. If we make an allotment of new shares to persons other than our existing shareholders, we are required by the Korean Commercial Code to notify our existing shareholders of (a) the class and number of new shares, (b) the issuance price of new shares and

 

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the date set for the payment thereof, (c) in cases of no par value shares, the amount to be included in the paid-up capital out of the issuance price of new shares and (d) the method of subscription to new shares by no later than two weeks before the date of payment of the subscription price, or publicly announce such information. Under our articles of incorporation, only our board of directors is authorized to set the terms and conditions with respect to such issuance of new shares.

In addition, under our articles of incorporation, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of Won 400.0 billion, to persons other than existing shareholders, where such issuance is deemed necessary by us to achieve a business purpose, including, but not limited to, the introduction of new technology or the improvement of our financial condition.

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 FSCMA. 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 exceed 20.0% of the sum of the number of shares then outstanding and the number of newly-issued shares.

General Meeting of Shareholders

We generally 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 holders of an aggregate of 3.0% or more of our outstanding common shares;

 

   

at the request of shareholders holding an aggregate of 1.5% or more of our outstanding shares and preferred shares for at least six months; or

 

   

at the request of our audit committee.

Holders of non-voting preferred shares may request a general meeting of shareholders only after the non-voting shares become entitled to vote or “enfranchised,” as described under “— Voting Rights” below.

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 voting 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 The Korea Economic Daily News and Maeil Business Newspaper, both published in Seoul, for this purpose, but we may give notice in the future through electronic means. Shareholders who are not on the shareholders’ registry 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 of non-voting preferred shares, unless enfranchised, are not entitled to receive notice of or vote at general meetings of shareholders.

Our general meetings of shareholders have historically been held in or near Seoul.

Voting Rights

Holders of our common shares are entitled to one vote for each common share, except that voting rights of common shares held by us (including treasury shares and shares held by bank trust funds controlled by us), or by a corporate shareholder in which we own more than 10.0% equity interest, either directly or indirectly, may not be exercised. The Korean Commercial Code, unless otherwise stated in the articles of incorporation, permits cumulative voting, which would allow each shareholder to have multiple voting rights corresponding to the number of directors to be appointed in the voting and to exercise all voting rights cumulatively to elect one director. Our articles of incorporation do not permit cumulative voting for the election of directors.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting if such affirmative votes also represent at least one-fourth of our total

 

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voting shares then issued and outstanding. However, under the Korean Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting shares present or represented at a meeting, and such affirmative votes must also represent at least one-third of our total voting shares then issued and outstanding:

 

   

amending our articles of incorporation;

 

   

removing a director;

 

   

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 a part of the business of any other company having a material effect on our business;

 

   

reducing our capital; or

 

   

issuing any new shares at a price lower than their par value.

In general, holders of non-voting preferred shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders.

However, in case of amendments to our articles of incorporation, or any merger or consolidation of us, or in some other cases which affect the rights or interests of the non-voting preferred shares, approval of the holders of non-voting preferred shares is required. We may obtain the approval by a resolution of holders of at least two-thirds of the non-voting preferred shares present or represented at a class meeting of the holders of non-voting preferred shares, where the affirmative votes also represent at least one-third of our total issued and outstanding non-voting shares. In addition, if we are unable to pay dividends on non-voting preferred shares as provided in our articles of incorporation, the holders of non-voting shares will become enfranchised and will be entitled to exercise voting rights beginning at the next general meeting of shareholders to be held after the declaration of non-payment of dividends is made until such dividends are paid. The holders of enfranchised non-voting preferred shares will have the same rights as holders of common shares to request, receive notice of, attend and vote at a general meeting of shareholders.

Shareholders may exercise their voting rights by proxy. A shareholder may give proxies only to another shareholder, except that a corporate shareholder may give proxies to its officers or employees.

Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying common shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote our common shares underlying their ADSs.

Limitation on Shareholdings

The Telecommunications Business Act prohibits foreign governments, individuals, and entities (including Korean entities that are deemed foreigners, as discussed below) from owning more than 49.0% of our voting stock. Korean entities whose largest shareholder is a foreign government or a foreigner (together with any of its related parties) that owns 15.0% or more of such Korean entities’ outstanding voting stock are deemed foreigners. A foreigner who has acquired shares of our voting stock in excess of such limitation may not exercise the voting rights with respect to the shares exceeding such limitation and may be subject to the MSIT’s corrective orders.

Rights of Dissenting Shareholders

Under Financial Investment Services and Capital Market Act, in some limited circumstances, including the transfer of all or a significant part of our business or our merger or consolidation with another company (with certain exceptions), dissenting shareholders have the right to require us to purchase their shares. To exercise this right, shareholders, including holders of non-voting shares, must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Then, 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

 

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purchase the shares of such dissenting shareholders within one month after the expiration of the 20-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 the two-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 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 resolution. However, a court may determine the purchase price if we or dissenting shareholders do not accept the purchase price.

Registry of Shareholders and Record Dates

Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It records and registers transfers of shares on the register of shareholders.

The record date for annual dividends is December 31. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the shares, we may set a record date with at least two weeks’ prior public notice by a resolution of our board of directors.

Annual Report

When sending a written notice for the general meeting of shareholders, we must attach our annual report prepared under the FSCMA and audit report prepared under the Act on External Audit of Stock Companies. Alternatively, we may inform the shareholders of the annual report and audit report by email or uploading them to our website one week before the general meeting of shareholders. Furthermore, at least one week before the annual general meeting of shareholders, we must make our business reports and audited non-consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of business reports, the audited non-consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

Under the FSCMA, we must file with the FSC and the Korea Exchange (1) an annual report within 90 days after the end of our fiscal year, (2) a mid-year report within 45 days after the end of the first six months of our fiscal year, and (3) quarterly reports within 45 days after the end of the third month and the ninth month of our fiscal year. Copies of these reports are or will be available for public inspection at the FSC and the Korea Exchange.

Transfer of Shares

Under the Korean Commercial Code and the Act on Electronic Registration of Stocks, Bonds, etc., the transfer of shares is effected by registration on the electronic registration ledger. However, to assert shareholders’ rights against us, the transferee must have his or her name, seal and address registered on our registry of shareholders, maintained by our transfer agent. A non-Korean shareholder may file a sample signature in place of a seal, unless he or she is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent in Korea authorized to receive notices on his or her behalf and file his or her mailing address in Korea.

Under current Korean regulations, the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and internationally recognized custodians may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of shares by non-residents or non-Korean citizens. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

Our transfer agent is Kookmin Bank, located at 24, Gukjegeumyung-ro, Yeongdeungpo-gu, Seoul, Korea.

Restrictions Applicable to Shares

Pursuant to the Telecommunications Business Act, the maximum aggregate foreign shareholding in us is limited to 49.0%. See “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment

 

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Restrictions and Requirements.” In addition, certain foreign exchange controls and securities regulations apply to the acquisition of securities by non-residents or non-Korean citizens. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

Acquisition of Shares by Us

We may acquire our own shares pursuant to an approval at the general meeting of shareholders, through purchases on the Korea Exchange or a tender offer, or by acquiring the interests in a trust account holding our own shares through agreements with trust companies and asset management companies. The aggregate purchase price for the shares may not exceed the total amount available for distribution as dividends as of the end of the preceding fiscal year less the amount of dividends and mandatory reserves required to be set aside for that fiscal year, subject to certain procedural requirements.

Under the Korean Commercial Code, we may resell or transfer any shares acquired by us to a third party pursuant to an approval by the Board of Directors. In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our common stock. Under the FSCMA, we are subject to certain selling restrictions with respect to the shares acquired by us.

Liquidation Rights

In the event of our liquidation, remaining assets after payment of all debts, liquidation expenses and taxes will be distributed among shareholders in proportion to their shareholdings. Holders of non-voting preferred shares have no preference in liquidation. Holders of debt securities have no preference over other creditors in the event of liquidation.

 

Item 10.C.

Material Contracts

We have not entered into any material contracts during the two years immediately preceding the date of this annual report, other than in the ordinary course of our business. For information regarding our agreements and transactions with entities affiliated with the SK Group, see “Item 7.B. Related Party Transactions” and note 37 of the notes to our consolidated financial statements. For a description of certain agreements entered into during the past three years related to our capital commitments and obligations, see “Item 5.B. Liquidity and Capital Resources.”

 

Item 10.D.

Exchange Controls

Korean Foreign Exchange Controls and Securities Regulations

General

The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree, collectively referred to as the Foreign Exchange Transaction Laws, regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Non-residents may invest in Korean securities pursuant to the Foreign Exchange Transaction Laws. The FSC has also adopted, pursuant to its authority under the FSCMA, regulations that restrict investment by foreigners in Korean securities and regulate issuance of securities outside Korea by Korean companies.

Subject to certain limitations, the MOEF has authority to take the following actions under the Foreign Exchange Transaction Laws:

 

   

if the Government deems it necessary on account of war, armed conflict, natural disaster or grave and sudden and significant changes in domestic or foreign economic circumstances or similar events or circumstances, the MOEF may temporarily suspend performance under any or all foreign exchange transactions, in whole or in part, to which the Foreign Exchange Transaction Laws apply (including suspension of payment and receipt of foreign exchange), impose an obligation to deposit, safe-keep or sell any means of payment to The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies or impose an obligation on a resident that holds a claim against a non-resident to collect such claim to enable the recovery of the relevant debt back to Korea; and

 

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if the Government concludes that the international balance of payments and international financial markets are experiencing or are likely to experience significant disruption or that the movement of capital between Korea and other countries are likely to adversely affect the Won, exchange rate or other macroeconomic policies, the MOEF may take action to require any person who intends to effect or effects a capital transaction to deposit all or a portion of the means of payment acquired in such transactions with The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies.

Under the regulations of the FSC amended on February 4, 2009, (1) if a company listed on the KRX KOSPI Market or a company listed on the KRX KOSDAQ Market has submitted a public disclosure of material matters to a foreign financial investment supervisory authority pursuant to the laws of the foreign jurisdiction, then it must submit a copy of the public disclosure and a Korean translation thereof to the FSC and the Korea Exchange, and (2) if a KRX KOSPI Market-listed company or KRX KOSDAQ Market-listed company is approved for listing on a foreign stock market or determined to be de-listed from the foreign stock market or actually listed on, or de-listed from a foreign stock market, then it must submit a copy of any document, which it submitted to or received from the relevant foreign government, foreign financial investment supervisory authority or the foreign stock market, and a Korean translation thereof to the FSC and the Korea Exchange.

Government Review of Issuances of ADSs

In order for us to issue ADSs in excess of US$30 million, we are required to submit a report to the MOEF with respect to the issuance of the ADSs prior to and after such issuance; provided that such US$30 million threshold amount would be reduced by the aggregate principal amount of any foreign currency loans borrowed, and any securities offered and issued, outside Korea during the one-year period immediately preceding the report’s submission date. The MOEF may at its discretion direct us to take necessary measures to avoid exchange rate fluctuation in connection with its acceptance of report of the issuance of the ADSs.

 

   

Under current Korean laws and regulations, the depositary is required to obtain our prior consent for any proposed deposit of common shares if the number of shares to be deposited in such proposed deposit exceeds the number of common shares initially deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent issuances of ADSs by us or with our consent and stock dividends or other distributions related to the ADSs).

 

   

In addition to such restrictions under Korean laws and regulations, there are also restrictions on the deposits of our common shares for issuance of ADSs. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.

We submitted a report to and obtained acceptance thereof by the MOEF for the issuance of ADSs up to an amount corresponding to 24,321,893 common shares. No additional Korean governmental approval is necessary for the issuance of ADSs except that if the total number of our common shares on deposit for conversion into ADSs exceeds 24,321,893 common shares, we may be required to file a report to and obtain acceptance thereof by the MOEF with respect to the increase of such limit and the issuance of additional ADSs.

Reporting Requirements for Holders of Substantial Interests

Under the FSCMA, any person whose direct or beneficial ownership of shares with voting rights, certificates representing the rights to subscribe for shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively referred to as “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 outstanding equity securities is required to report the status and purpose (in terms of whether the purpose of shareholding is to affect control over management of the issuer) of the holdings to the FSC and the Korea Exchange within five business days after reaching the 5.0% ownership interest threshold and promptly deliver a copy of such report to the issuer. In addition, any change (1) in the ownership interest subsequent to the report which equals or exceeds 1.0% of the total outstanding equity securities, or (2) in the shareholding purpose is required to be reported to the FSC and the Korea Exchange within five business days from the date of the change. However, the reporting deadline of such reporting requirement is extended for (1) certain professional investors, as specified under the

 

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FSCMA, or (2) persons who hold shares for purposes other than management control by up to the tenth day of the month immediately following the last month of the quarter in which the share acquisition or change in their shareholding occurred. Those who reported the purpose of shareholding is to affect control over management of the issuer are prohibited from exercising their voting rights and acquiring additional shares for five days subsequent to the report under the FSCMA.

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 ownership of unreported equity securities exceeding 5.0%. Furthermore, the FSC may issue an order to dispose of such non-reported equity securities.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of our common shares accounts for 10.0% or more of the total issued and outstanding shares with voting rights (a “major shareholder”) must report the status of his or her shareholding to the Securities and Futures Commission and the Korea Exchange within five business days after he or she becomes a major shareholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Securities and Futures Commission and the Korea Exchange by the fifth business day of any changes in his or her shareholding. Violations of these reporting requirements may subject a person to criminal sanctions, such as fines or imprisonment.

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 of shares in Korea in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the Financial Supervisory Service of Korea (the “FSS”), as described below. The acquisition of the shares by a foreigner must be reported by the foreigner or his or her standing proxy in Korea immediately to the Governor of the FSS (the “Governor”).

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.

In addition, we are required to file a securities registration statement with the FSC and such securities registration statement has to become effective pursuant to the FSCMA in order for us to issue shares represented by ADSs, except in certain limited circumstances.

Restrictions Applicable to Shares

As a result of amendments to the Foreign Exchange Transaction Laws and the regulations of the FSC, together referred to as the Investment Rules, adopted in connection with the stock market opening from January 1992 and after that date, 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, among others:

 

   

odd-lot trading of shares;

 

   

acquisition of shares by a foreign company as a result of a merger;

 

   

acquisition or disposal of shares in connection with a tender offer;

 

   

acquisition of shares by exercise of warrant, conversion right under convertible bonds, exchange right under exchangeable bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company (“converted shares”);

 

   

acquisition of shares through exercise of rights under securities issued outside of Korea;

 

   

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;

 

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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;

 

   

acquisition of shares by direct investment under the Foreign Investment Promotion Law;

 

   

acquisition and disposal of shares on an overseas stock exchange market, if such shares are simultaneously listed on the KRX KOSPI Market or KRX KOSDAQ Market and such overseas stock exchange;

 

   

arm’s length transactions between foreigners in the event all such foreigners belong to an investment group managed by the same person; and

 

   

acquisition and disposal of shares through alternative trading systems.

For over-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, a financial investment company with a brokerage license 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 financial investment company with a dealing license in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from financial investment companies 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 for the first time on the KRX KOSPI Market or the KRX KOSDAQ Market (including converted shares) and shares being publicly offered for initial listing on the KRX KOSPI Market or the KRX KOSDAQ Market to register its identity with the FSS 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 an over-the-counter transaction or dispose of shares where such acquisition or disposal is deemed to be a foreign direct investment pursuant to the Foreign Investment Promotion Law. Upon registration, the FSS will issue to the foreign investor an investment registration card which must be presented each time the foreign investor opens a brokerage account with a financial investment company or financial institution in Korea. Foreigners eligible to obtain an investment registration card include foreign nationals who have not been residing in Korea for a consecutive period of six months or longer, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree promulgated under the FSCMA. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea for the purpose of investment registration. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards 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 card system is designed to control and oversee foreign investment through a computer system. However, where a foreign investor acquires or sells shares outside the KRX KOSPI Market and the KRX KOSDAQ Market, such acquisition or sale of shares must be reported by the foreign investor or such foreign investor’s standing proxy to the Governor at the time of each such acquisition or sale; provided, however, that a foreign investor must ensure that any acquisition or sale 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 by the Korea Securities Depository, financial investment companies with a dealing or brokerage license or securities finance companies engaged to facilitate such transaction. In the event a foreign investor desires to acquire or sell shares outside the KRX KOSPI Market or the KRX KOSDAQ Market and the circumstances in connection with such sale or acquisition do not fall within the exceptions made for certain limited circumstances described above, then the foreign investor must obtain the prior approval of the Governor. In addition, in the event a foreign investor acquires or sells shares outside the KRX KOSPI Market or the KRX KOSDAQ Market, a prior report to the Bank of Korea may also be required in certain circumstances. A foreign investor must appoint one or more standing proxies among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment

 

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companies with a dealing, brokerage or collective investment license and certain eligible foreign custodians which will act as a standing proxy to exercise shareholders’ rights, or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. Generally, a foreign investor may not permit any person, other than his, her or its standing proxy, to exercise rights relating to its shares or perform any tasks related thereto on his, her or its behalf. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.

Shares of Korean companies must be electronically registered with an eligible custodian in Korea. The Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and certain eligible foreign custodians are eligible to act as a custodian of shares for a non-resident or 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. Designated public corporations may set a ceiling on the acquisition of shares by a single person within 3.0% of the total number of shares in their articles of incorporation. 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 outstanding shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Law, which is, in general, subject to the report to, and acceptance by, the Ministry of Trade, Industry and Energy of Korea, which delegates its authority to foreign exchange banks or the Korea Trade-Investment Promotion Agency under the relevant regulations. The acquisition of our shares by a foreign investor is also subject to the restrictions prescribed in the Telecommunications Business Act. The Telecommunications Business Act generally limits the maximum aggregate foreign shareholdings in us to 49.0% of the outstanding shares. A foreigner who has acquired shares in excess of such restriction described above may not exercise the voting rights with respect to the shares exceeding such limitations and may be subject to corrective orders.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to make a portfolio investment in shares of a Korean company listed on the KRX KOSPI Market or the KRX KOSDAQ Market must designate a foreign exchange bank at which he, she or it 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 a securities company. 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 such shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any such shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s financial investment companies with a securities dealing, brokerage or collective investment license or the investor’s Won account. Funds in the investor’s Won account may be transferred to such investor’s foreign currency account or withdrawn for local living expenses, provided that any withdrawal of local living expenses in excess of a certain amount is reported to the tax authorities by the foreign exchange bank at which the Won account is maintained. Funds in the investor’s 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.

Financial investment companies with a securities dealing, brokerage or collective investment license are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these financial investment companies 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.

 

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Item 10.E.

Taxation

United States Taxation

This summary describes certain U.S. federal income tax consequences for a U.S. holder (as defined below) of acquiring, owning, and disposing of common shares or ADSs. This summary applies to you only if you hold our common shares or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:

 

   

a dealer in securities or currencies;

 

   

a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;

 

   

a bank or other financial institution;

 

   

a life insurance company;

 

   

a tax-exempt organization;

 

   

a person that holds common shares or ADSs that are a hedge or that are hedged against interest rate or currency risks;

 

   

a person that holds common shares or ADSs as part of a straddle or conversion transaction for tax purposes;

 

   

a person whose functional currency for tax purposes is not the U.S. dollar;

 

   

a person that owns or is deemed to own 10.0% or more of any class of our stock (by vote or value); or

 

   

an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes (or partners therein).

This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, and published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

Please consult your own tax advisers concerning the U.S. federal, state, local, and other tax consequences of purchasing, owning, and disposing of common shares or ADSs in your particular circumstances.

For purposes of this summary, you are a “U.S. holder” if you are the beneficial owner of a common share or an ADS and are:

 

   

a citizen or resident of the United States;

 

   

a U.S. domestic corporation; or

 

   

otherwise subject to U.S. federal income tax on a net income basis with respect to income from the common share or ADS.

In general, if you are the beneficial owner of ADSs, you will be treated as the beneficial owner of the common shares represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the common share represented by that ADS.

Dividends

The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source “passive income” dividend income and will not be eligible for the dividends received deduction. Dividends paid in Won will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your receipt of the dividend, in the case of common shares, or the depositary’s receipt, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual with respect to the ADSs will be subject to taxation at a preferential rate if the dividends are

 

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“qualified dividends”. Dividends paid on the ADSs will be treated as qualified dividends if (1) the ADSs are readily tradable on an established securities market in the United States and (2) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company as defined for U.S. federal income tax purposes (“PFIC”), as discussed below under “Passive Foreign Investment Company Rules.” The ADSs are listed on the NYSE, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. As described below under “Passive Foreign Investment Company Rules”, we believe that we may be classified as a PFIC with respect to our taxable year ending December 31, 2020 and that there is a significant risk that we will be a PFIC for the current and future taxable years. Accordingly, U.S. holders of commons shares or ADSs should consult their own tax advisors regarding the availability of the reduced dividend tax rate for dividends with respect to our common shares or ADSs.

Distributions of additional shares in respect of common shares or ADSs that are made as part of a pro-rata distribution to all of our stockholders generally will not be subject to U.S. federal income tax.

Sale or Other Disposition

Subject to the discussion below under “Passive Foreign Investment Company Rules,” for U.S. federal income tax purposes, gain or loss you realize on a sale or other disposition of common shares or ADSs generally will be treated as U.S. source capital gain or loss, and will be long-term capital gain or loss if the common shares or ADSs were held for more than one year. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at reduced rates.

Passive Foreign Investment Company Rules

Special U.S. tax rules apply to companies that are considered to be PFICs. We will be classified as a PFIC in a particular taxable year if either (i) 75 percent or more of our gross income for the taxable year is passive income; or (ii) the average percentage of the value of our assets that produce or are held for the production of passive income is at least 50 percent. Investments in companies in which we own less than 25 percent of the stock (by value) are considered to be assets that produce passive income.

The determination whether we are a PFIC is made annually based on the particular facts and circumstances, such as the composition of our income and the valuation of our assets. Due to fluctuations in our stock price and changes in the value and composition of our assets, including our substantial investment in the stock of SK Hynix, which is treated as a passive asset for this purpose, we believe that we may be classified as a PFIC for U.S. federal income tax purposes for our taxable year ending December 31, 2020 and that there is a significant risk that we will be a PFIC for the current and future taxable years. Recent stock market volatility could exacerbate these considerations. See “Item 3.D. Risk Factors — Risks Relating to Our Business — The ongoing global pandemic of a new strain of coronavirus (“COVID-19”) and any possible recurrence of other types of widespread infectious diseases may adversely affect our business, financial condition or results of operations.” and “Item 3.D. Risk Factors — Risks Relating to Our Business — Declines in the market value of our equity holdings in SK Hynix and the results of operations of SK Hynix could have a material adverse effect on the market price of our common shares and American Depositary Shares (“ADSs”) as well as our results of operation.”

You should consult your own tax advisors regarding our classification as a PFIC for 2020 or in the current or future years.

If we are classified as a PFIC, and you do not make a mark-to-market election, as described in the following paragraph, you will be subject to a special tax at ordinary income tax rates on “excess distributions” (generally, any distributions that you receive in a taxable year that are greater than 125 percent of the average annual distributions that you have received in the preceding three taxable years, or your holding period, if shorter), including gain that you recognize on the sale of your shares or ADSs. The amount of income tax on any excess distributions will be increased by an interest charge to compensate for tax deferral, calculated as if the excess distributions were earned ratably over the period you hold your shares or ADSs. Classification as a PFIC may also have other adverse tax consequences, including, in the case of individuals, the denial of a step-up in the basis of your shares or ADSs at death.

 

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Although the determination of whether we are a PFIC is made annually, if we are a PFIC for any taxable year during which a U.S. holder holds our common shares or ADSs, such U.S. holder will generally be subject to the unfavorable rules described above for that year and for each subsequent year in which such U.S. holder holds the common shares or ADSs (even if we do not qualify as a PFIC in such subsequent years). However, if we cease to be a PFIC, a U.S. holder can avoid the continuing impact of the PFIC rules by making a special election to recognize gain as if such U.S. holder’s common shares or ADSs had been sold on the last day of the last taxable year during which we were a PFIC. U.S. holders should consult their own tax advisor about the advisability of making this election.

A U.S. holder may be able to avoid the unfavorable rules described above by electing to mark its ADSs to market, provided the ADSs are treated as “marketable stock.” The ADSs generally will be treated as marketable stock if the ADSs are “regularly traded” on a “qualified exchange or other market” (which includes the New York Stock Exchange). Further, it should also be noted that only the ADSs and not the common shares are listed on the New York Stock Exchange. Consequently, a U.S. holder that holds common shares that are not represented by ADSs may not be eligible to make a mark-to-market election in respect of those common shares. If the U.S. holder makes a mark-to-market election, the U.S. holder will be required in any year in which we are a PFIC to include as ordinary income the excess of the fair market value of its ADSs at year-end over the U.S. holder’s basis in those ADSs. If at the end of the U.S. holder’s taxable year, the U.S. holder’s basis in the shares or ADSs exceeds their fair market value, the U.S. holder will be entitled to deduct the excess as an ordinary loss, but only to the extent of the U.S. holder’s net mark-to-market gains from previous years. A U.S. holder’s adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. In addition, any gain the U.S. holder recognizes upon the sale of the U.S. holder’s ADSs in a year in which we are a PFIC will be taxed as ordinary income in the year of sale and any loss will be treated as an ordinary loss to the extent of the U.S. holder’s net mark-to-market gains from previous years. If a U.S. holder makes a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a “qualified exchange or other market” or the Internal Revenue Service (“IRS”) consents to the revocation of the election. If a U.S. holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the U.S. holder will not be required to take into account the mark-to-market gain or loss described above during any period that such corporation is not classified as a PFIC. Because a mark-to-market election generally cannot be made for any lower-tier PFICs that we may own (unless shares of such lower-tier PFIC are themselves “marketable”), a U.S. holder who makes a mark-to-market election with respect to our common shares may continue to be subject to the general PFIC rules with respect to such U.S. holder’s indirect interest in any of our non-United States subsidiaries that is classified as a PFIC. U.S. holders are urged to consult their own tax advisors about the availability of the mark-to-market election, the consequences of not making a mark-to-market election for the first year during which a U.S. holder holds interests in our common shares or ADSs and we are a PFIC, and whether making the election would be advisable in their particular circumstances.

Although a U.S. holder can also avoid the unfavorable PFIC rules described above by electing to treat its common shares or ADSs as interests in a qualified electing fund (“QEF”), we do not intend to provide the information that would allow a U.S. holder to make such an election. Accordingly, in the event that we are treated as a PFIC, a U.S. holder will not be able to make a “QEF election.”

A U.S. holder that owns an equity interest in a PFIC must annually file IRS Form 8621, and may be required to file other IRS forms. A failure to file one or more of these forms as required may toll the running of the statute of limitations in respect of each of the U.S. holder’s taxable years for which such form is required to be filed. As a result, the taxable years with respect to which the U.S. holder fails to file the form may remain open to assessment by the IRS indefinitely, until the form is filed.

The U.S. federal income tax rules relating to PFICs are complex. U.S. holders are strongly urged to consult their own tax advisors regarding our potential classification as a PFIC and regarding the U.S. federal income tax consequences of acquiring, holding and disposing of our common shares or ADSs if we are so classified, including the advisability of making a mark-to-market election, if available.

 

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Foreign Tax Credit Considerations

You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you may claim a credit against your U.S. federal income tax liability for Korean taxes withheld from dividends on the common shares or ADSs, so long as you have owned our common shares or ADSs (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may, if you so elect, deduct such Korean taxes in computing your taxable income, subject to generally applicable limitations under U.S. tax law.

Any Korean securities transaction tax or agricultural and fishery special surtax that you pay will not be creditable for foreign tax credit purposes.

Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities and may not be allowed in respect of arrangements in which a U.S. holder’s expected economic profit is insubstantial.

The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.

Specified Foreign Financial Assets

Certain U.S. holders that own “specified foreign financial assets” with an aggregate value in excess of U.S.$50,000 on the last day of the taxable year or U.S.$75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on IRS Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer (which would include the common shares or ADSs) that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report the required information could be subject to substantial penalties. Prospective investors should consult their own tax advisers concerning the application of these rules to their investment in the common shares or ADSs, including the application of the rules to their particular circumstances.

U.S. Information Reporting and Backup Withholding Rules

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient and demonstrates this when required or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.

Korean Taxation

The following is a summary of the principal Korean tax consequences to owners of the common shares or ADSs, as the case may be, who are non-resident individuals or non-Korean corporations without a permanent establishment in Korea to which the relevant income is attributable or with which the relevant income is effectively connected (“Non-resident Holders”). The statements regarding Korean tax laws set forth below are based on the laws in force and as interpreted by the Korean taxation authorities as of the date hereof. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor and potential investors are advised to satisfy themselves as to the overall tax consequences of the acquisition, ownership and disposition of the

 

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common shares or ADSs, including specifically the tax consequences under Korean law, the laws of the jurisdiction of which they are resident, and any tax treaty between Korea and their country of residence, by consulting their own tax advisors.

Tax on Dividends

Dividends on the common shares or ADSs paid (whether in cash or in shares) to a Non-resident Holder will be subject to Korean withholding taxes at the rate of 22.0% (including local income tax) or such lower rate as is applicable under a treaty between Korea and such Non-resident Holder’s country of tax residence. Free distributions of shares representing a capitalization of certain capital surplus reserves may be subject to Korean withholding taxes.

The tax is withheld by the payer of the dividend. While it is the payer that is required to withhold the tax, Korean law generally entitles the person who was subject to the withholding of Korean tax to recover from the Government any part of the Korean tax withheld upon providing evidence that it was entitled to have tax withheld at a lower rate if certain conditions are met.

Tax on Capital Gains

As a general rule, capital gains earned by Non-resident Holders upon transfer of the common shares or ADSs are subject to Korean withholding tax at the lower of (1) 11.0% (including local income tax) of the gross proceeds realized or (2) 22.0% (including local income tax) of the net realized gains (subject to the production of satisfactory evidence of the acquisition costs and certain direct transaction costs), unless exempt from Korean income taxation under the effective Korean tax treaty with the Non-resident Holder’s country of tax residence.

However, a Non-resident Holder will not be subject to Korean income taxation on capital gains realized upon the sale of the common shares through the KRX KOSPI Market if the Non-resident Holder (1) has no permanent establishment in Korea and (2) did not or has not owned (together with any shares owned by any entity with certain special relationship with such Non-resident Holder) 25.0% or more of the total issued and outstanding shares of us at any time during the calendar year in which the sale occurs and during the five calendar years prior to the calendar year in which the sale occurs.

It should be noted that capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from a transfer of ADSs outside Korea will generally be exempt from Korean income taxation, provided that the ADSs are deemed to have been issued overseas. If and when an owner of the underlying common shares transfers the ADSs following the conversion of the underlying shares for ADSs, such person will not be exempt from Korean income taxation.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (1) all assets (wherever located) of the deceased if at the time of his death he was a tax resident of Korea and (2) 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. The taxes are imposed if the value of the relevant property is above a certain limit and vary depending on the value of the property and the identity of the parties involved.

Under Korean inheritance and gift tax laws, securities issued by a Korean corporation are deemed to be located in Korea irrespective of where they are physically located or by whom they are owned.

Securities Transaction Tax

Securities transaction tax is imposed on the transfer of shares issued by a Korean corporation or the right to subscribe for such shares generally at the rate of 0.43% of the sales price (or 0.5% of the sales price if such shares were sold before April 1, 2020; 0.45% of the sales price if such shares were sold before January 1, 2021). In the case of the transfer of shares listed on the KRX KOSPI Market (such as our common shares), the securities transaction tax is imposed generally at the rate of (1) 0.23% of the sales price of such shares (or 0.25% of the sales price if such shares were sold after June 3, 2019 and before January 1, 2021) (including agricultural and fishery

 

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special surtax thereon) if traded on the KRX KOSPI Market or (2) subject to certain exceptions, 0.43% of the sales price of such shares (or 0.5% of the sales price of such shares were sold before April 1, 2020; 0.45% of the sales price if such shares were sold before January 1, 2021) if traded outside the KRX KOSPI Market.

Securities transaction tax or the agricultural and fishery special surtax is not applicable if (1) the shares or rights to subscribe for shares are listed on a designated foreign stock exchange and (2) the sale of the shares takes place on such exchange.

Securities transaction tax, if applicable, must be paid by the transferor of the shares or rights, in principle. When the transfer is effected through a securities settlement company, such settlement company is generally required to withhold and pay (to the tax authority) the tax, and when such transfer is made through a financial investment company with a brokerage license only, such company is required to withhold and pay the tax. Where the transfer is effected by a Non-resident Holder without a permanent establishment in Korea, other than through a securities settlement company or a financial investment company with a brokerage license, the transferee is required to withhold the securities transaction tax. Failure to do so will result in the imposition of penalties equal to the sum of (1) between 10.0% to 40.0% of the tax amount due, depending on the nature of the improper reporting, and (2) 9.125% per annum on the tax amount due for the default period.

Tax Treaties

Currently, Korea has income tax treaties with a number of countries, inter alia, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Luxembourg, Ireland, the Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, the United Kingdom and the United States under which the rate of withholding tax on dividend and interest is reduced, generally to between 5.0% and 16.5% (including local income tax), and the tax on capital gains derived by a non-resident from the transfer of securities issued by a Korean company is often eliminated.

Each Non-resident Holder of common shares should inquire for itself whether it is entitled to the benefits of a tax treaty with Korea. It is the responsibility of the party claiming the benefits of a tax treaty in respect of interest, dividend, capital gains or “other income” to submit to us (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, prior to or at the time of payment, such evidence of tax residence of the party claiming the treaty benefit as the Korean tax authorities may require in support of its claim for treaty protection. In the absence of sufficient proof, we (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, must withhold tax at the normal rates.

Furthermore, in order for a non-resident of Korea to obtain the benefits of tax exemption on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires such non-resident (or its agent) to submit to the payer of such Korean source income an application for a tax exemption along with a certificate of tax residency of such non-resident issued by a competent authority of the non-resident’s country of tax residence, subject to certain exceptions. The payer of such Korean source income, in turn, is required to submit such application to the relevant district tax office by the ninth day of the month following the date of the first payment of such income.

For a non-resident of Korea to obtain the benefits of treaty-reduced tax rates on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires such non-resident (or its agents) to submit to the payer of such Korean source income an application for treaty-reduced tax rates prior to receipt of such Korean source income; provided, however, that an owner of ADSs who is a non-resident of Korea is not required to submit such application, if the Korean source income on the ADSs is paid through an account opened at the Korea Securities Depository by a foreign depository.

At present, Korea has not entered into any tax treaty relating to inheritance or gift tax.

 

Item 10.F.

Dividends and Paying Agents

Not applicable.

 

Item 10.G.

Statements by Experts

Not applicable.

 

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Item 10.H.

Documents on Display

We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any filings we make electronically will be available to the public over the Internet at the SEC’s Website at http://www.sec.gov.

Documents filed with annual reports and documents filed or submitted to the SEC are also available for inspection at our principal business office during normal business hours. Our principal business office is located at SK T-Tower, 65, Eulji-ro, Jung-gu, Seoul 04539, Korea.

 

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 risk primarily associated with underlying liabilities and to equity price risk as a result of our investment in equity instruments.

We have entered into a floating-to-fixed cross currency interest rate swap contract to hedge foreign currency and interest rate risks with respect to US$300 million of bonds issued in March 2020. In addition, we have entered into fixed-to-fixed cross currency swap contracts to hedge the foreign currency risks of US$400 million of bonds issued in July 2007, US$17.2 million of borrowings from December 2013, US$500 million of bonds issued in April 2018 and US$300 million of bonds issued in August 2018. We also entered into floating-to-fixed interest rate swap contracts to hedge interest rate risks with respect to Won 12.3 billion of borrowings from December 2016, Won 25.0 billion of borrowings from December 2017 and Won 37.5 billion of borrowings from December 2018. See note 22 of the notes to our consolidated financial statements. We may consider in the future entering into other such transactions solely for hedging purposes.

The following discussion and tables, which constitute “forward looking statements” that involve risks and uncertainties, summarize our market-sensitive financial instruments including fair value, maturity and contract terms. These tables address market risk only and do not present other risks which we face in the normal course of business, including country risk, credit risk and legal risk.

Exchange Rate Risk

Korea is our main market and, therefore, substantially all of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities. These liabilities relate primarily to foreign currency denominated debt, primarily in Dollars. A 10.0% increase in the exchange rate between the Won and all foreign currencies would result in an increase in profit before income tax of Won 7.5 billion, with a decrease of 10.0% in the exchange rate having the opposite effect, as of December 31, 2020. For a further discussion of our exchange rate risk exposures, see note 36(1) of the notes to our consolidated financial statements.

 

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Interest Rate Risk

We are also subject to market risk exposure arising from changing interest rates. The following table summarizes the carrying amounts and fair values, maturity and contract terms of our exchange rate and interest sensitive short-term and long-term liabilities as of December 31, 2020:

 

    Maturities  
    2021     2022     2023     2024     2025     Thereafter     Total     Fair Value  
    (In billions of Won, except for percentage data)  

Local currency:

               

Fixed-rate

  952.6     1,387.8     2,787.4     848.1     847.4     2,133.5     8,956.8     9,431.4  

Average weighted rate(1)

    2.66     2.20     2.93     2.41     1.92     2.38    

Variable rate

    84.3      

 
    37.4                         121.7       121.7  

Average weighted rate(1)

    2.22           1.48                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    1,036.9       1,387.8       2,824.8       848.1       847.4       2,133.5       9,078.5       9,553.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency:

               

Fixed-rate

    12.4       6.2       865.5                   431.3       1,315.4       1,489.8  

Average weighted rate(1)

    1.70     1.70     3.80                 6.63    

Variable rate

                            324.8             324.8       324.8  

Average weighted rate(1)

                            1.15          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    12.4       6.2       865.5             324.8       431.3       1,640.2       1,814.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  1,049.3     1,394.0     3,690.3     848.1     1,172.2     2,564.8     10,718.7     11,367.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

Weighted average rates of the portfolio at the period end.

A 1.0% point increase in interest rates would result in a decrease in profit before income tax of Won 0.5 billion with a 1.0% point decrease in interest rates having the opposite effect, as of December 31, 2020. For a further discussion of our interest rate risk exposures, see note 36(1) of the notes to our consolidated financial statements.

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, 2020, 2019 and 2018, a 10.0% increase in the equity indices where our equity investments at fair value through other comprehensive income are listed, with all other variables held constant, would have increased our total equity by Won 94.6 billion, Won 40.8 billion and Won 29.4 billion, respectively, with a 10.0% 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 equity investments at fair value through other comprehensive income 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.

 

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Item 12.D.

American Depositary Shares

Fees and Charges under Deposit Agreement

The ADR depositary will charge the party receiving ADSs up to US$5.00 per 100 ADSs (or fraction thereof), provided that the ADR depositary has agreed to waive such fee as would have been payable by us in the case of (1) an offering of ADSs by us or (2) any distribution of shares of common stock or any rights to subscribe for additional shares of common stock. The ADR depositary will not charge the party to whom ADSs are delivered against deposits. The ADR depositary will charge the party surrendering ADSs for delivery of deposited securities up to US$5.00 per 100 ADSs (or fraction thereof) surrendered. The ADR depositary will also charge the party to whom any cash distribution, or for whom the sale or exercise of rights or other corporate action involving distributions to shareholders, is made with respect to ADSs up to US$0.02 per ADS held plus the expenses of the ADR depositary on a per-ADS basis. We will pay the expenses of the ADR depositary and any entity acting as registrar for the shares only as specified in the deposit agreement. The ADR depositary will pay any other charges and expenses of the ADR depositary and the entity acting as registrar for the shares.

Holders of ADRs must pay (1) taxes and other governmental charges, (2) share transfer registration fees on deposits of shares of common stock, (3) such cable, telex, facsimile transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of persons depositing shares of common stock or holders of ADRs and (4) such reasonable expenses as are incurred by the ADR depositary in the conversion of foreign currency into United States dollars.

Notwithstanding any other provision of the deposit agreement, in the event that the ADR depositary determines that any distribution in property (including shares or rights to subscribe therefor or other securities) is subject to any tax or governmental charges which the ADR depositary is obligated to withhold, the ADR depositary may dispose of all or a portion of such property (including shares and rights to subscribe therefor) in such amounts and in such manner as the ADR depositary deems necessary and practicable to pay such taxes or governmental charges, including by public or private sale, and the ADR depositary will distribute the net proceeds of any such sale or the balance of any such property after deduction of such taxes or governmental charges to the holders of ADSs entitled thereto in proportion to the number of ADSs held by them respectively.

All such charges may be changed by agreement between the ADR depositary and us at any time and from time to time, subject to the deposit agreement. The right of the ADR depositary to receive payment of fees, charges and expenses shall survive the termination of this deposit agreement and, as to any depositary, the resignation or removal of such depositary pursuant to the deposit agreement.

Payments made by ADR Depositary

The ADR depositary reimburses us for certain expenses we incur in connection with our ADR program, subject to certain ceilings. These reimbursable expenses currently include expenses relating to the preparation of SEC filings and submissions, listing fees, education and training fees, corporate action expenses and other miscellaneous fees. In the fiscal year 2020, we received US$782,300 from the ADR depositary in connection with such reimbursements.

 

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PART II

 

Item 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

 

Item 14.

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

None.

 

Item 15.

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 Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2020. 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 such date. 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 SEC’s rules and forms, and that it 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, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as of December 31, 2020. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated 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. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS as issued by the IASB. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.

Report of the Independent Registered Public Accounting Firm on the Effectiveness of Our Internal Control Over Financial Reporting

The report of our independent registered public accounting firm, KPMG Samjong Accounting Corp. (“KPMG Samjong”), on the effectiveness of our internal control over financial reporting as of December 31, 2020 is included in Item 18 of this Form 20-F.

Changes in Internal Control Over Financial Reporting

Beginning January 1, 2020, we changed our accounting policy by applying the agenda decision, Lease Term and Useful Life of Leasehold Improvements (IFRS 16 Leases and IAS 16 Property, Plant and Equipment) — November 2019, published by the IFRIC on December 16, 2019 and implemented significant new systems, processes and internal controls over lease accounting to assist us in the application of such change. Other than as

 

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discussed above, there has been no change in our internal control over financial reporting during 2020 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

Seok-Dong Kim is the chairman of our audit committee and determined to be an “audit committee financial expert” within the meaning of this Item 16A by the board of directors. The board of directors have further determined that Seok-Dong Kim is independent within the meaning of applicable SEC rules and the listing standards of the NYSE. See “Item 6.C. Board Practices — Audit Committee” for additional information regarding our audit committee.

 

Item 16B.

CODE OF ETHICS

Code of Ethics for Chief Executive Officer, Chief Financial Officer and Controller

We have a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, senior accounting officers and employees. We also have internal control and disclosure policy designed to promote full, fair, accurate, timely and understandable disclosure in all of our reports and publicly filed documents. A copy of our code of ethics is available on our website at www.sktelecom.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

The table sets forth the fees we paid to our independent registered public accounting firm KPMG Samjong and its affiliates for the years ended December 31, 2020 and 2019:

 

     Year Ended December 31,  
     2020      2019  
     (In millions of Won)  

Audit Fees

   5,157      4,299  

Audit-Related Fees

     16        3  

Tax Fees

     372        305  

All Other Fees

     93         
  

 

 

    

 

 

 

Total

   5,638      4,607  

“Audit Fees” are the aggregate fees billed by KPMG Samjong for the audit of our consolidated annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements.

“Audit-Related Fees” are fees charged by KPMG Samjong for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” This category comprises fees billed for audit services of documents related to the use of certain government grants in 2020 and assurance services, including verification of the consistency of financial information submitted to relevant governmental authorities with our consolidated annual financial statements, in 2019.

“Tax Fees” are fees for professional services rendered by KPMG Samjong for tax compliance, tax advice on actual or contemplated transactions and tax planning services.

“All Other Fees” are fees billed by KPMG Samjong for benchmarking services related to new types of business association models for the purpose of enhancing social values in 2020.

Pre-Approval of Audit and Non-Audit Services Provided by Independent Registered Public Accounting Firm

Our audit committee pre-approves all audit services to be provided by KPMG Samjong, our independent registered public accounting firm. Our audit committee’s policy regarding the pre-approval of non-audit services to

 

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be provided to us by our independent auditors is that all such services shall be pre-approved by our audit committee. Non-audit services that are prohibited to be provided to us by our independent auditors under the rules of the SEC and applicable law may not be pre-approved. In addition, prior to the granting of any pre-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.

Our audit committee did not pre-approve any non-audit services under the de minimis exception of Rule 2-01 (c)(7)(i)(C) of Regulation S-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 information regarding purchases by us of our common shares during the fiscal year ended December 31, 2020.

 

Period

   Total Number of
Shares Purchased(1)
     Average Price Paid
per Share(2)
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Approximate Value
of Shares that May
Yet Be Purchased
Under the Plans or
Programs(3)
 
                          (In billions of Won)  

September 1, 2020 – September 30, 2020

     496,870      239,411        496,870      381.0  

October 1, 2020 – October 31, 2020

     612,425        234,594        612,425        237.4  

November 1, 2020 – November 30, 2020

     420,000        228,741        420,000        141.3  

December 1, 2020 – December 31, 2020

     280,000        242,734        280,000        73.3  
  

 

 

       

 

 

    

Total

     1,809,295      235,818        1,809,295      73.3  
  

 

 

       

 

 

    

 

 

(1)

Repurchases made in the open market pursuant to the Share Repurchase Agreement, pursuant to which we are authorized to repurchase up to Won 500 billion of our common shares from August 28, 2020 to August 27, 2021.

 

(2)

Average price paid per share is a weighted average calculation using the aggregate price, excluding commissions and fees.

 

(3)

Remaining under the Share Repurchase Agreement at the end of the period.

 

Item 16F.

CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT

Not applicable.

 

Item 16G.

CORPORATE GOVERNANCE

The following is a summary of the significant differences between the NYSE’s corporate governance standards and those that we follow under Korean law.

 

NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

Director Independence

  
Listed companies must have a majority of independent directors.    Of the eight members of our board of directors, five are independent directors.

 

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NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

Executive Session

  
Non-management directors must meet in regularly scheduled executive sessions without management. Independent directors should meet alone in an executive session at least once a year.    Our audit committee, which is comprised solely of four independent directors, holds meetings whenever there are matters related to management directors, and such meetings are generally held once every month.

Nomination/Corporate Governance Committee

  
Listed companies must have a nomination/corporate governance committee composed entirely of independent directors. The committee must have a charter that addresses the purpose, responsibilities (including development of corporate governance guidelines) and annual performance evaluation of the committee.    Although we do not have a separate nomination/corporate governance committee, we maintain an independent director nomination committee composed of two independent directors and one management director.

Compensation Committee

  
Listed companies must have a compensation committee composed entirely of independent directors. The committee must have a charter that addresses the purpose, responsibilities and annual performance evaluation of the committee. The charter must be made available on the company’s website. In addition, in accordance with the SEC rules adopted pursuant to Section 952 of the Dodd-Frank Act, the NYSE listing standards were amended to expand the factors relevant in determining whether a committee member has a relationship with the company.    We maintain a compensation review committee comprised of three independent directors.

Audit Committee

  
Listed companies must have an audit committee that satisfies the independence and other requirements of Rule 10A-3 under the Exchange Act. All members must be independent. The committee must have a charter addressing the committee’s purpose, an annual performance evaluation of the committee, and the duties and responsibilities of the committee. The charter must be made available on the company’s website.    We maintain an audit committee comprised solely of four independent directors.

Audit Committee Additional Requirements

  
Listed companies must have an audit committee that is composed of at least three directors.    Our audit committee has four independent directors.

Shareholder Approval of Equity Compensation Plan

  
Listed companies must allow its 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: a stock option plan for officers and directors and employee stock ownership plan for employees (“ESOP”). We manage such compensation plans in compliance with the applicable laws and our articles of incorporation, provided that, under certain limited circumstances, the grant of stock options or matters relating to ESOP are not subject to shareholders’ approval under Korean law.

Shareholder Approval of Equity Offerings

  
Listed companies must allow its shareholders to exercise their voting rights with respect to equity offerings that do not qualify as public offerings for cash, and offerings of equity of related parties.    Pursuant to the Korean Commercial Code and the FSCMA, our shareholders are generally entitled to preemptive rights with respect to the issuance of new shares. Exceptions include public offerings as prescribed in the FSCMA and allotments to third

 

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NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

   parties in cases necessary for the achievement of a business purpose, such as the introduction of new technology and the improvement of our financial condition.

Corporate Governance Guidelines

  
Listed companies must adopt and disclose corporate governance guidelines.    We have adopted a Corporate Governance Charter, which is available (in Korean) on our website at www.sktelecom.com. We are also in compliance with the Korean Commercial Code in connection with such matters, including the governance of the board of directors.

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 directors or executive officers.    We have adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees, and such code is also available on our website at www.sktelecom.com.

 

Item 16H.

MINE SAFETY DISCLOSURE

Not applicable.

 

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PART III

 

Item 17.

FINANCIAL STATEMENTS

Not applicable.

 

Item 18.

FINANCIAL STATEMENTS

 

Index to Financial Statements

    F-1  

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

    F-2  

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

    F-5  

Consolidated Statements of Financial Position as of December  31, 2020 and 2019

    F-6  

Consolidated Statements of Income for the years ended December  31, 2020, 2019 and 2018

    F-8  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018

    F-9  

Consolidated Statements of Changes in Equity for the years ended December 31, 2020, 2019 and 2018

    F-10  

Consolidated Statements of Cash Flows for the years ended December  31, 2020, 2019 and 2018

    F-13  

Notes to the Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018

    F-15  

Financial Statements of SK Hynix

 

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

    G-1  

Consolidated Statements of Financial Position as of December  31, 2020 and 2019

    G-3  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018

    G-5  

Consolidated Statements of Changes in Equity for the years ended December 31, 2020, 2019 and 2018

    G-6  

Consolidated Statements of Cash Flows for the years ended December  31, 2020, 2019 and 2018

    G-8  

Notes to the Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018

    G-9  

 

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Item 19.

EXHIBITS

 

Number

  

Description

  1.1    Articles of Incorporation
  2.1    Deposit Agreement dated as of May 31, 1996, as amended by Amendment No. 1 dated as of March 15, 1999, Amendment No.  2 dated as of April 24, 2000 and Amendment No. 3 dated as of July  24, 2002, entered into among SK Telecom Co., Ltd., Citibank, N.A., as Depositary, and all Holders and Beneficial Owners of American Depositary Shares (incorporated by reference to Exhibit 2.1 to the Registrant’s Annual Report on Form 20-F filed on June 30, 2006)
  2.2    Description of Capital Stock (See Item 10.B. Memorandum and Articles of Association)
  2.3    Description of American Depositary Shares (incorporated by reference to Exhibit 2.3 to the Registrant’s Annual Report on Form 20-F filed on April 29, 2020)
  8.1    List of Subsidiaries of SK Telecom Co., Ltd.
12.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1    Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

SK TELECOM CO., LTD.
(Registrant)

/s/ Joongsuk Oh

Name:     Joongsuk Oh
Title:     Senior Vice President, Head of IR Planning

Date: April 29, 2021

 

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INDEX TO FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

     F-2  

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

     F-5  

Consolidated Statements of Financial Position

     F-6  

Consolidated Statements of Income

     F-8  

Consolidated Statements of Comprehensive Income

     F-9  

Consolidated Statements of Changes in Equity

     F-10  

Consolidated Statements of Cash Flows

     F-13  

Notes to the Consolidated Financial Statements

     F-15  

Financial Statements of SK Hynix

  

Report of Independent Registered Public Accounting Firm

     G-1  

Consolidated Statements of Financial Position

     G-3  

Consolidated Statements of Comprehensive Income

     G-5  

Consolidated Statements of Changes in Equity

     G-6  

Consolidated Statements of Cash Flows

     G-8  

Notes to the Consolidated Financial Statements

     G-9  

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

SK Telecom Co., Ltd.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of SK Telecom Co., Ltd. and subsidiaries (the Group) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Group’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 29, 2021 expressed an unqualified opinion on the effectiveness of the Group’s internal control over financial reporting.

Changes in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, during 2019 and 2020, the Group changed its method of accounting for leases as of January 1, 2019 due to the adoption of IFRS 16, Leases, and the related interpretations published by International Financial Reporting Interpretations Committee, respectively.

Basis for Opinion

These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error of fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

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Table of Contents

(i)    Evaluation of impairment analysis for goodwill in the security services cash generating unit

As discussed in Notes 4 (11) and 16 to the consolidated financial statements, the amount of goodwill that is allocated to the security services cash generating unit (“CGU”) amounts to ₩1,176,274 million as of December 31, 2020. The Group performs impairment test for goodwill at least annually or when there is an indication of possible impairment by comparing the recoverable amount and the carrying amount of a CGU to which goodwill is allocated. The recoverable amount of security services CGU was determined based on value-in-use (“VIU”).

We identified the evaluation of impairment analysis for goodwill in the security services CGU as a critical audit matter. Estimation of key assumptions involves a high degree of subjectivity and uncertainty and therefore, involved a high degree of subjective and complex auditor judgment. Specifically, estimates of revenue growth rates, labor costs, perpetual growth rate and discount rate used to estimate the VIU of the security services CGU were challenging to test.

The following are the primary procedures we performed to address this critical audit matter.

 

   

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Group’s goodwill impairment analysis. This included controls related to the development of revenue growth rates, labor costs, perpetual growth rate and discount rate assumptions.

 

   

We performed sensitivity analyses over both the discount rate and the perpetual growth rate applied to the discounted cash flow forecast to assess the impact of changes in these key assumptions on the Group’s determination of the VIU of the security services CGU.

 

   

We evaluated estimated revenue growth rates and labor costs by comparison with the financial budgets approved by the Group and comparing the forecasted revenue growth rates and forecasted labor costs prepared in prior year with the actual results to assess the Group’s ability to accurately forecast.

 

   

We involved our valuation professionals with specialized skills and knowledge, who assisted in (1) evaluating estimated revenue growth rates, labor costs and perpetual growth rate by comparison with industry reports as well as historical performance and (2) evaluating the discount rate by comparing with the discount rate that was independently developed using publicly available market data for comparable entities.

(ii)    Evaluation of fair value of intangible assets - Customer relationships

As discussed in Note 12 (1) to the consolidated financial statements, as a result of the merger between SK Broadband Co., Ltd., a subsidiary of SK Telecom Co., Ltd., and Tbroad Co., Ltd. and Tbroad Dongdaemun Broadcasting Co., Ltd., the Group recognized customer relationships as identifiable intangible assets. The fair value of customer relationships amounts to ₩374,019 million as of April 30, 2020, the acquisition date. The Group estimated the fair value of customer relationships using the multi-period excess earnings method (“MPEEM”), which estimates fair value by discounting the expected future excess earnings attributable to an intangible asset using risk adjusted discount rate.

We identified the evaluation of fair value of customer relationships as a critical audit matter. The evaluation of the fair value involved a high degree of challenging and complex auditor judgements. Specifically, the estimated revenue per user of relevant revenue streams, estimated future churn rates and discount rates used to estimate the fair value of customer relationships were challenging to test as minor changes to those assumptions would have had a significant impact on the fair value of the customer relationships.

 

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Table of Contents

The following are the primary procedures we performed to address this critical audit matter:

 

   

We evaluated the design and tested operating effectiveness of certain internal controls related to the Group’s process for determining the fair value of customer relationships. This included controls related to determination of estimated revenue per user of relevant revenue streams, estimated future churn rates and discount rates.

 

   

We assessed estimated revenue per user of relevant revenue streams and future churn rates by comparing them with the actual results subsequent to the acquisition date.

 

   

We performed sensitivity analyses over both the estimated revenue per user of relevant revenue streams and estimated future churn rates applied to the discounted expected future excess earnings to assess the impact of changes in these key assumptions on the Group’s determination of the fair value of customer relationships.

 

   

We involved our valuation professionals with specialized skills and knowledge, who assisted in (1) assessing the estimated revenue per user of relevant revenue streams and future churn rates by comparing them with the acquirees’ historical performance; and (2) assessing the discount rates by comparing with the discount rates that were independently developed using publicly available market data for comparable entities.

/s/ KPMG Samjong Accounting Corp.

We have served as the Group’s auditor since 2012.

Seoul, Korea

April 29, 2021

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

On Internal Control Over Financial Reporting

To the Shareholders and the Board of Directors

SK Telecom Co., Ltd.:

Opinion on Internal Control Over Financial Reporting

We have audited SK Telecom Co., Ltd. and subsidiaries’ (the Group) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Group as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements) and our report dated April 29, 2021, expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (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 receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) 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/ KPMG Samjong Accounting Corp.

Seoul, Korea

April 29, 2021

 

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SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2020 and 2019

 

(In millions of won)    Note      December 31,
2020
     December 31,
2019
 

Assets

        

Current Assets:

        

Cash and cash equivalents

     35,36       1,369,653        1,270,824  

Short-term financial instruments

     6,35,36,38        1,426,952        830,647  

Short-term investment securities

     11,35,36        150,392        166,666  

Accounts receivable — trade, net

     7,35,36,37        2,188,893        2,230,979  

Short-term loans, net

     7,35,36,37        97,464        66,123  

Accounts receivable — other, net

     3,7,35,36,37,38        979,044        903,509  

Contract assets

     9,36        100,606        127,499  

Prepaid expenses

     3,8        2,128,349        2,018,690  

Prepaid income taxes

     32        1,984        63,748  

Derivative financial assets

     22,35,36,39        8,704        26,253  

Inventories, net

     10        171,443        162,882  

Advanced payments and others

     3,7,35,36        151,602        220,687  
     

 

 

    

 

 

 
        8,775,086        8,088,507  
     

 

 

    

 

 

 

Non-Current Assets:

        

Long-term financial instruments

     6,35,36        893        990  

Long-term investment securities

     11,35,36        1,648,837        857,215  

Investments in associates and joint ventures

     13        14,354,113        13,385,264  

Property and equipment, net

     3,14,15,37,38        13,377,077        12,933,460  

Goodwill

     12,16        3,357,524        2,949,530  

Intangible assets, net

     17        4,436,194        4,866,092  

Long-term contract assets

     9,36        47,675        64,359  

Long-term loans, net

     7,35,36,37        40,233        33,760  

Long-term accounts receivable — other

     3,7,35,36,37,38        332,803        351,663  

Long-term prepaid expenses

     3,8        1,063,711        1,239,865  

Guarantee deposits

     3,7,35,36,37        172,474        164,652  

Long-term derivative financial assets

     22,35,36,39        155,991        124,707  

Deferred tax assets

     32        105,088        109,057  

Defined benefit assets

     21        3,557        1,125  

Other non-current assets

     7,35,36        35,701        32,122  
     

 

 

    

 

 

 
        39,131,871        37,113,861  
     

 

 

    

 

 

 

Total Assets

       47,906,957        45,202,368  
     

 

 

    

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position — (Continued)

As of December 31, 2020 and 2019

 

(In millions of won)    Note      December 31,
2020
     December 31,
2019
 

Liabilities and Shareholders’ Equity

        

Current Liabilities:

        

Accounts payable — trade

     35,36,37       372,909        438,297  

Accounts payable — other

     35,36,37        2,484,466        2,521,474  

Withholdings

     35,36,37        1,410,239        1,350,244  

Contract liabilities

     9        229,892        191,225  

Accrued expenses

     3,35,36        1,554,889        1,424,833  

Income tax payable

     32        219,766        5,450  

Derivative financial liabilities

     22,35,36,39        77         

Provisions

     3,20,38        69,363        86,320  

Short-term borrowings

     18,35,36,39        109,998        20,603  

Current portion of long-term debt, net

     18,35,36,39        939,237        1,017,327  

Current portion of long-term payables — other

     19,35,36,39        424,600        423,839  

Lease liabilities

     3,35,36,37,39        359,936        371,742  

Other current liabilities

        2,595        319  
     

 

 

    

 

 

 
        8,177,967        7,851,673  
     

 

 

    

 

 

 

Non-Current Liabilities:

        

Debentures, excluding current portion, net

     18,35,36,39        7,690,169        7,253,894  

Long-term borrowings, excluding current portion, net

     18,35,36,38,39        1,979,261        1,972,149  

Long-term payables — other

     19,35,36,39        1,142,354        1,550,167  

Long-term lease liabilities

     3,35,36,37,39        1,076,841        919,265  

Long-term contract liabilities

     9        30,704        32,231  

Defined benefit liabilities

     21        154,944        172,258  

Long-term derivative financial liabilities

     22,35,36,39        375,083        1,043  

Long-term provisions

     3,20,38        81,514        78,841  

Deferred tax liabilities

     3,32        2,709,075        2,463,861  

Other non-current liabilities

     3,35,36,37        92,802        90,052  
     

 

 

    

 

 

 
        15,332,747        14,533,761  
     

 

 

    

 

 

 

Total Liabilities

        23,510,714        22,385,434  
     

 

 

    

 

 

 

Shareholders’ Equity:

        

Share capital

     1,23        44,639        44,639  

Capital surplus and others

     12,23,24,26        278,444        607,722  

Hybrid bonds

     25        398,759        398,759  

Retained earnings

     3,27        22,981,913        22,228,683  

Reserves

     28        40,139        (329,576

Equity attributable to owners of the Parent Company

        23,743,894        22,950,227  

Non-controlling interests

        652,349        (133,293
     

 

 

    

 

 

 

Total Shareholders’ Equity

        24,396,243        22,816,934  
     

 

 

    

 

 

 

Total Liabilities and Shareholders’ Equity

      47,906,957        45,202,368  
     

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-7


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Income

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won except for per share data)    Note      2020     2019     2018  

Operating revenue and other income:

         

Revenue

     3,5,37       18,624,651       17,740,716       16,873,960  

Other income

     3,5,30,37        99,648       102,821       71,950  
     

 

 

   

 

 

   

 

 

 
        18,724,299       17,843,537       16,945,910  
     

 

 

   

 

 

   

 

 

 

Operating expenses:

     3,37         

Labor

        3,006,172       2,822,673       2,288,655  

Commissions

     8        5,347,086       5,002,066       5,002,598  

Depreciation and amortization

     3,5        3,991,083       3,856,662       3,126,118  

Network interconnection

        770,712       752,334       808,403  

Leased lines

     3        294,722       263,367       309,773  

Advertising

        431,679       434,561       468,509  

Rent

     3        173,294       154,843       529,453  

Cost of goods sold

        1,608,470       1,833,362       1,796,146  

Others

     3,5,30        1,996,447       1,716,411       1,782,404  
     

 

 

   

 

 

   

 

 

 
        17,619,665       16,836,279       16,112,059  
     

 

 

   

 

 

   

 

 

 

Operating profit

     5        1,104,634       1,007,258       833,851  

Finance income

     3,5,31        241,196       142,155       256,435  

Finance costs

     3,5,31        (497,193     (437,955     (385,232

Gain relating to investments in subsidiaries, associates and joint ventures, net

     5,13        1,028,403       449,543       3,270,912  
     

 

 

   

 

 

   

 

 

 

Profit before income tax

     5        1,877,040       1,161,001       3,975,966  
     

 

 

   

 

 

   

 

 

 

Income tax expense

     3,32        376,502       300,268       843,978  
     

 

 

   

 

 

   

 

 

 

Profit for the year

        1,500,538       860,733       3,131,988  
     

 

 

   

 

 

   

 

 

 

Attributable to-:

         

Owners of the Parent Company

       1,504,352       888,698       3,127,887  

Non-controlling interests

        (3,814     (27,965     4,101  

Earnings per share

     3,33         

Basic earnings per share (in won)

       20,463       12,127       44,066  

Diluted earnings per share (in won)

        20,459       12,127       44,066  

See accompanying notes to the consolidated financial statements.

 

F-8


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)   Note     2020     2019     2018  

Profit for the year

    1,500,538       860,733       3,131,988  

Other comprehensive income (loss)

 

   

Items that will never be reclassified to profit or loss, net of taxes:

       

Remeasurement of defined benefit liabilities

    21       (2,637     (72,605     (41,490

Net change in other comprehensive income (loss) of investments in associates and joint ventures

    13,28       271       (19,269     (16,330

Valuation loss on financial assets at fair value through other comprehensive income

    28,31       579,678       (17,943     (130,035

Items that are or may be reclassified subsequently to profit or loss, net of taxes:

       

Net change in other comprehensive income (loss) of investments in associates and joint ventures

    13,28       (114,478     75,763       1,753  

Net change in unrealized fair value of derivatives

    22,28,31       19,138       40,681       32,227  

Foreign currency translation differences for foreign operations

    28       (20,150     (5,618     12,291  
   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) for the year, net of taxes

      461,822       1,009       (141,584
   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    1,962,360       861,742       2,990,404  
   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to:

 

     

Owners of the Parent Company

    1,869,075       891,051       3,000,503  

Non-controlling interests

      93,285       (29,309     (10,099

See accompanying notes to the consolidated financial statements.

 

F-9


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)   Attributable to owners     Non-controlling
interests
    Total equity  
    Share
capital
    Capital surplus
(deficit) and
others
    Hybrid bonds     Retained
earnings
    Reserves     Total  

Balance, December 31, 2017

  44,639       (202,237     398,518       17,835,946       (234,727     17,842,139       187,056       18,029,195  

Impact of adopting IFRS 15

                      1,900,049             1,900,049             1,900,049  

Impact of adopting IFRS 9

                      60,026       (68,804     (8,778           (8,778
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2018

    44,639       (202,237     398,518       19,796,021       (303,531     19,733,410       187,056       19,920,466  

Total comprehensive income:

               

Profit for the year

                      3,127,887             3,127,887       4,101       3,131,988  

Other comprehensive loss (note 13,21,22,28,31)

                      (57,473     (69,911     (127,384     (14,200     (141,584
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      3,070,414       (69,911     3,000,503       (10,099     2,990,404  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners:

               

Annual dividends (note 34)

                      (635,482           (635,482           (635,482

Interim dividends (note 34)

                      (70,609           (70,609           (70,609

Share option (note 26)

          593                         593       196       789  

Interest on hybrid bonds (note 25)

                      (15,803           (15,803           (15,803

Repayments of hybrid bonds (note 25)

          (1,482     (398,518                 (400,000           (400,000

Proceeds from issuance of hybrid bonds (note 25)

                398,759                   398,759             398,759  

Comprehensive stock exchange (note 12)

          129,595                         129,595             129,595  

Changes in ownership in subsidiaries

          329,856                         329,856       (298,725     31,131  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          458,562       241       (721,894           (263,091     (298,529     (561,620
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2018

  44,639       256,325       398,759       22,144,541       (373,442     22,470,822       (121,572     22,349,250  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-10


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)   Attributable to owners     Non-controlling
interests
    Total equity  
    Share
capital
    Capital surplus
(deficit) and
others
    Hybrid bonds     Retained
earnings
    Reserves     Total  

Balance, December 31, 2018

  44,639       256,325       398,759       22,144,541       (373,442     22,470,822       (121,572     22,349,250  

Impact of adopting IFRS 16 in 2019

                      (24,186           (24,186     (503     (24,689
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2019(As reported)

    44,639       256,325       398,759       22,120,355       (373,442     22,446,636       (122,075     22,324,561  

Changes in accounting policies (note 3)

                      (5,393           (5,393           (5,393
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2019(Restated)

    44,639       256,325       398,759       22,114,962       (373,442     22,441,243       (122,075     22,319,168  

Total comprehensive income:

               

Profit for the year

                      888,698             888,698       (27,965     860,733  

Other comprehensive income (loss) (note 13,21,22,28,31)

                      (41,513     43,866       2,353       (1,344     1,009  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      847,185       43,866       891,051       (29,309     861,742  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners:

               

Annual dividends (note 34)

                      (646,828           (646,828     (21,150     (667,978

Interim dividends (note 34)

                      (71,870           (71,870     (8,650     (80,520

Share option (note 26)

          295                         295       764       1,059  

Interest on hybrid bonds (note 25)

                      (14,766           (14,766           (14,766

Disposal of treasury shares (note 24)

          300,000                         300,000             300,000  

Changes in ownership in subsidiaries (note 12)

          51,102                         51,102       47,127       98,229  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          351,397             (733,464           (382,067     18,091       (363,976
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2019

  44,639       607,722       398,759       22,228,683       (329,576     22,950,227       (133,293     22,816,934  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-11


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)   Attributable to owners     Non-controlling
interests
    Total equity  
    Share
capital
    Capital surplus
(deficit) and
others
    Hybrid bonds     Retained
earnings
    Reserves     Total  

Balance, January 1, 2020

  44,639       607,722       398,759       22,228,683       (329,576     22,950,227       (133,293     22,816,934  

Total comprehensive income:

               

Profit for the year

                      1,504,352             1,504,352       (3,814     1,500,538  

Other comprehensive income (loss) (note 13,21,22,28,31)

                      (4,992     369,715       364,723       97,099       461,822  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      1,499,360       369,715       1,869,075       93,285       1,962,360  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners:

               

Annual dividends (note 34)

                      (658,228           (658,228     (5,771     (663,999

Interim dividends (note 34)

                      (73,136           (73,136           (73,136

Share option (note 26)

          179                         179       1,256       1,435  

Interest on hybrid bonds (note 25)

                      (14,766           (14,766           (14,766

Acquisition of treasury shares (note 24)

          (426,664                       (426,664           (426,664

Changes in ownership in subsidiaries (note 12)

          97,207                         97,207       696,872       794,079  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          (329,278           (746,130           (1,075,408     692,357       (383,051
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2020

  44,639       278,444       398,759       22,981,913       40,139       23,743,894       652,349       24,396,243  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-12


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)   Note    2020     2019     2018  

Cash flows from operating activities:

        

Cash generated from operating activities

        

Profit for the year

     1,500,538       860,733       3,131,988  

Adjustments for income and expenses

  39      4,256,654       4,435,039       1,568,919  

Changes in assets and liabilities related to operating activities

  39      302,458       (856,130     25,949  
    

 

 

   

 

 

   

 

 

 
       6,059,650       4,439,642       4,726,856  

Interest received

       41,832       56,392       59,065  

Dividends received

       166,019       241,117       195,671  

Interest paid

       (397,351     (360,439     (255,189

Income tax paid

       (48,274     (341,728     (393,823
    

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

       5,821,876       4,034,984       4,332,580  
    

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Cash inflows from investing activities:

        

Decrease in short-term financial instruments, net

             253,971        

Decrease in short-term investment securities, net

       17,684       29,503        

Collection of short-term loans

       77,114       113,345       117,610  

Decrease in long-term financial instruments

       99       231       5  

Proceeds from disposals of long-term investment securities

       46,065       234,683       371,816  

Proceeds from disposals of investments in associates and joint ventures

       2,715       220       74,880  

Proceeds from disposals of property and equipment

       102,526       18,478       58,256  

Proceeds from disposals of intangible assets

       39,654       7,327       5,851  

Collection of long-term loans

       4,608       4,435       10,075  

Decrease in deposits

       16,244       9,180       7,490  

Proceeds from settlement of derivatives

       845       601        

Collection of lease receivables

             27,712        

Proceeds from disposals of other non-current assets

                   1,186  

Proceeds from disposals of subsidiaries

       165       4,802        

Cash inflow from business combination

       115,834       5,016       38,925  

Cash inflow from transfers of business

       5,395       45,658        
    

 

 

   

 

 

   

 

 

 
       428,948       755,162       686,094  

Cash outflows for investing activities:

        

Increase in short-term financial instruments, net

       (596,025           (373,450

Increase in short-term investment securities, net

                   (49,791

Increase in short-term loans

       (103,604     (116,320     (112,319

Increase in long-term loans

       (11,044     (11,541     (6,057

Increase in long-term financial instruments

       (2           (2

Acquisitions of long-term investment securities

       (95,474     (383,976     (19,114

Acquisitions of investments in associates and joint ventures

       (170,292     (264,015     (206,340

Acquisitions of property and equipment

       (3,557,800     (3,375,883     (2,792,390

Acquisitions of intangible assets

       (129,976     (141,010     (503,229

Increase in deposits

       (12,175     (6,164     (8,591

Increase in other non-current assets

                   (5,927

Cash outflow for business combinations

       (2,958     (36,910     (654,685

Cash outflow for disposal and liquidation of subsidiaries

             (927     (1,924
    

 

 

   

 

 

   

 

 

 
       (4,679,350     (4,336,746     (4,733,819
    

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

      (4,250,402     (3,581,584     (4,047,725
    

 

 

   

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-13


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Cash Flows — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)   Note    2020     2019     2018  

Cash flows from financing activities:

        

Cash inflows from financing activities:

        

Proceeds from short-term borrowings, net

     76,375              

Proceeds from issuance of debentures

       1,420,962       1,633,444       1,809,641  

Proceeds from long-term borrowings

       1,947,848             1,920,114  

Proceeds from issuance of hybrid bonds

                   398,759  

Cash inflows from settlement of derivatives

       36,691       12,426       23,247  

Proceeds from disposals of treasury shares

             300,000        

Transactions with non-controlling shareholders

       17,766       101,398       499,926  
    

 

 

   

 

 

   

 

 

 
       3,499,642       2,047,268       4,651,687  

Cash outflows for financing activities:

             

Repayments of short-term borrowings, net

             (59,860     (87,701

Repayments of long-term payables – other

       (428,100     (428,153     (305,644

Repayments of debentures

       (975,500     (940,000     (1,487,970

Repayments of long-term borrowings

       (1,950,874     (89,882     (1,780,708

Repayments of hybrid bonds

                   (400,000

Cash outflows from settlement of derivatives

                   (29,278

Payments of dividends

       (742,136     (718,698     (706,091

Payments of interest on hybrid bonds

       (14,766     (14,766     (15,803

Repayments of lease liabilities

       (412,666     (443,238      

Acquisition of treasury shares

       (426,664            

Transactions with non-controlling shareholders

       (6,515     (39,345     (76,805
    

 

 

   

 

 

   

 

 

 
       (4,957,221     (2,733,942     (4,890,000
    

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

       (1,457,579     (686,674     (238,313
    

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

       113,895       (233,274     46,542  

Cash and cash equivalents at beginning of the year

       1,270,824       1,506,699       1,457,735  

Effects of exchange rate changes on cash and cash equivalents

       (15,066     (2,601     2,422  
    

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the year

     1,369,653       1,270,824       1,506,699  
    

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-14


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

For the years ended December 31, 2020, 2019 and 2018

 

1.

Reporting Entity

(1)    General

SK Telecom Co., Ltd. (“the Parent Company”) was incorporated in March 1984 under the laws of the Republic of Korea (“Korea”) to provide cellular telephone communication services in Korea. The Parent Company mainly provides wireless telecommunications services in Korea. The head office of the Parent Company is located at 65, Eulji-ro, Jung-gu, Seoul, Korea.

The Parent Company’s common shares and depositary receipts (DRs) are listed on the Stock Market of Korea Exchange, the New York Stock Exchange and the London Stock Exchange. As of December 31, 2020, the Parent Company’s total issued shares are held by the following shareholders:

 

     Number of shares      Percentage of
total shares issued (%)
 

SK Holdings Co., Ltd.(*)

     21,624,120        26.78  

National Pension Service

     8,853,906        10.97  

Institutional investors and other shareholders

     39,582,507        49.02  

Kakao Co., Ltd.

     1,266,620        1.57  

Treasury shares

     9,418,558        11.66  
  

 

 

    

 

 

 
     80,745,711        100.00  
  

 

 

    

 

 

 

These consolidated financial statements comprise the Parent Company and its subsidiaries (together referred to as the “Group” and individually as “Group entity”). SK Holdings Co., Ltd. is the ultimate controlling entity of the Parent Company.

(*) SK Holdings Co., Ltd. has changed its legal name from SK Holdings Co., Ltd. to SK Inc. effective March 29, 2021

(2)    List of subsidiaries

The list of subsidiaries as of December 31, 2020 and 2019 is as follows:

 

            Ownership (%)(*1)  

Subsidiary

 

Location

 

Primary business

  Dec. 31,
2020
    Dec. 31,
2019
 
Subsidiaries owned by the Parent Company   

SK Telink Co., Ltd.

  Korea   Telecommunication and Mobile Virtual Network Operator service     100.0       100.0  
  

SK Communications Co., Ltd.

  Korea   Internet website services     100.0       100.0  
  

SK Broadband Co., Ltd.(*2)

  Korea   Telecommunication services     74.3       100.0  
  

PS&Marketing Corporation

  Korea   Communications device retail business     100.0       100.0  
  

SERVICE ACE Co., Ltd.

  Korea   Call center management service     100.0       100.0  
  

SERVICE TOP Co., Ltd.

  Korea   Call center management service     100.0       100.0  
  

SK O&S Co., Ltd.

  Korea   Base station maintenance service     100.0       100.0  
  

SK Telecom China Holdings Co., Ltd.

  China   Investment (Holdings company)     100.0       100.0  
  

SK Global Healthcare Business Group, Ltd.

  Hong Kong   Investment     100.0       100.0  
  

YTK Investment Ltd.

  Cayman Islands   Investment association     100.0       100.0  
  

Atlas Investment

  Cayman Islands   Investment association     100.0       100.0  
  

SKT Americas, Inc.

  USA   Information gathering and consulting     100.0       100.0  
  

One Store Co., Ltd.(*3)

  Korea   Telecommunication services     52.1       52.7  
  

SK Planet Co., Ltd.

  Korea   Telecommunication services, system software development and supply services     98.7       98.7  

 

F-15


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

            Ownership (%)(*1)  

Subsidiary

 

Location

 

Primary business

  Dec. 31,
2020
    Dec. 31,
2019
 
  

Eleven Street Co., Ltd.(*4)

  Korea   E-commerce     80.3       80.3  
  

DREAMUS COMPANY

  Korea   Manufacturing digital audio players and other portable media devices     51.4       51.4  
  

SK Infosec Co., Ltd.(*5)

  Korea   Information security service     62.6       100.0  
  

Life & Security Holdings Co., Ltd.(*5,6)

  Korea   Investment (Holdings company)           55.0  
  

Quantum Innovation Fund I

  Korea   Investment     59.9       59.9  
  

SK Telecom Japan Inc.

  Japan   Information gathering and consulting     100.0       100.0  
  

id Quantique SA(*7)

  Switzerland  

Quantum information and

communications service

    68.1       66.8  
  

SK Telecom TMT Investment Corp.

  USA   Investment     100.0       100.0  
  

FSK L&S Co., Ltd.

  Korea   Freight and logistics consulting business     60.0       60.0  
  

Incross Co., Ltd.

  Korea   Media representative business     34.6       34.6  
  

Happy Hanool Co., Ltd.

  Korea   Service     100.0       100.0  
  

SK stoa Co., Ltd.(*8)

  Korea   Other telecommunication retail business     100.0        
  

Broadband Nowon Co., Ltd.(*6)

  Korea   Cable broadcasting services     55.0        
  

T map Mobility Co., Ltd.(*6)

  Korea   Mobility business     100.0        
Subsidiaries owned by SK Planet Co., Ltd.   

SK m&service Co., Ltd.

  Korea   Database and Internet website service     100.0       100.0  
  

SK Planet Global Holdings Pte. Ltd.

  Singapore   Investment (Holdings company)     100.0       100.0  
  

SKP America LLC.

  USA   Digital contents sourcing service     100.0       100.0  
  

K-net Culture and Contents Venture Fund

  Korea   Capital investing in startups     59.0       59.0  
Subsidiaries owned by DREAMUS COMPANY   

iriver Enterprise Ltd.

  Hong Kong   Management of Chinese subsidiaries     100.0       100.0  
  

iriver China Co., Ltd.

  China   Sales and manufacturing of MP3 and 4     100.0       100.0  
  

Dongguan iriver Electronics Co., Ltd.

  China   Sales and manufacturing of e-book devices     100.0       100.0  
  

LIFE DESIGN COMPANY Inc.

  Japan   Sales of goods in Japan     100.0       100.0  
Subsidiary owned by SK Infosec Co., Ltd.   

SKinfosec Information Technology(Wuxi) Co., Ltd.

  China   System software development and supply services     100.0       100.0  
  

ADT CAPS Co., Ltd.

  Korea   Unmanned security     100.0       100.0  
  

CAPSTEC Co., Ltd.

  Korea   Manned security     100.0       100.0  
  

ADT SECURITY Co., Ltd.(*6)

  Korea  

Sales and trade of anti-theft devices

and surveillance devices

          100.0  
Subsidiary owned by SK Telink Co., Ltd.   

SK TELINK VIETNAM Co., Ltd.(*6)

  Vietnam  

Communications device

retail business

          100.0  
Subsidiaries owned by SK Broadband Co., Ltd.   

Home & Service Co., Ltd.

  Korea  

Operation of information and

communication facility

    100.0       100.0  
  

SK stoa Co., Ltd.(*8)

  Korea  

Other telecommunication

retail business

          100.0  
Subsidiary owned by Quantum Innovation Fund I   

Pan Asia Semiconductor Materials LLC (*6, 9)

  Korea   Investment     66.4        
Subsidiary owned by SK Telecom Japan Inc.   

SK Planet Japan, K. K.

  Japan   Digital contents sourcing service     79.8       79.8  
Subsidiary owned by id Quantique SA   

Id Quantique LLC

  Korea  

Quantum information

and communications service

    100.0       100.0  
Subsidiaries owned by FSK L&S Co., Ltd.   

FSK L&S(Shanghai) Co., Ltd.

  China   Logistics business     66.0       66.0  
  

FSK L&S(Hungary) Co., Ltd.

  Hungary   Logistics business     100.0       100.0  
  

FSK L&S VIETNAM COMPANY LIMITED(*6)

  Vietnam   Logistics business     100.0        

 

F-16


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

            Ownership (%)(*1)  

Subsidiary

 

Location

 

Primary business

  Dec. 31,
2020
    Dec. 31,
2019
 
Subsidiaries owned by Incross Co., Ltd.   

Infra Communications Co., Ltd.

  Korea   Service operation     100.0       100.0  
  

Mindknock Co., Ltd.

  Korea   Software development     100.0       100.0  
Others(*10)   

SK Telecom Innovation Fund, L.P.

  USA   Investment     100.0       100.0  
  

SK Telecom China Fund I L.P.

  Cayman Islands   Investment     100.0       100.0  

 

 

(*1)

The ownership interest represents direct ownership interest in subsidiaries either by the Parent Company or subsidiaries of the Parent Company.

 

(*2)

On April 30, 2020, SK Broadband Co., Ltd. merged with Tbroad Co., Ltd., Tbroad Dongdaemun Broadcasting Co., Ltd. and Korea Digital Cable Media Center Co., Ltd. to strengthen competitiveness and enhance synergy as a comprehensive media company. The Parent Company’s ownership interest of SK Broadband Co., Ltd. has changed as SK Broadband Co., Ltd. issued new shares to the shareholders of the merged companies as the consideration for the merger. The Parent Company has entered into a shareholders’ agreement with the acquiree’s shareholders and ₩320,984 million of derivative financial liabilities are recognized for drag-along right of the acquiree’s shareholders and for call option of the Parent Company as of December 31, 2020. (See note 22)

 

(*3)

The ownership interest has changed as third-party share option of One Store Co., Ltd. was exercised during the year ended December 31, 2020.

 

(*4)

80.3% of the shares issued by Eleven Street Co., Ltd. are owned by the Parent Company and 18.2% of redeemable convertible preferred shares with voting rights by non-controlling shareholders. For the year ended December 31, 2019, Eleven Street Co., Ltd. acquired 1.5% of its outstanding shares from SK Planet Co., Ltd., which is currently held as treasury shares as of December 31, 2020. The Parent Company is obliged to guarantee dividend of at least 1% per annum of the preferred share’s issue price to the investor by the date on which Eleven Street Co., Ltd. is publicly listed or at the end of qualifying listing period, whichever occurs first. The present value of obligatory dividends amounting to ₩14,297 million are recognized as financial liabilities as of December 31, 2020.

 

(*5)

SK Infosec Co., Ltd. merged with Life & Security Holdings Co., Ltd., a subsidiary of the Parent Company, to improve management efficiency on December 30, 2020. The Group acquired 34,200,560 shares of SK Infosec Co., Ltd. based on the exchange ratio on December 30, 2020. As a result of merger, the Group’s ownership interest of SK Infosec Co,, Ltd. has changed from 100% to 62.6%.

 

(*6)

Details of changes in the consolidation scope for year ended December 31, 2020 are presented in note 1-(4).

 

(*7)

The Parent Company participated in a third-party allotment offering and acquired 4,166,667 shares on July 23, 2020.

 

(*8)

The Parent Company acquired 3,631,355 shares (100%) of SK stoa Co., Ltd. from SK Broadband Co., Ltd., a subsidiary of the Parent Company, at ₩40,029 million in cash during the year ended December 31, 2020.

 

(*9)

PanAsia Semiconductor Materials LLC increased its capital by a third-party allotment, which has changed the Group’s ownership interest for the year ended December 31, 2020.

 

(*10)

Others are owned by Atlas Investment and another subsidiary of the Parent Company.

(3)    Condensed financial information of subsidiaries

Condensed financial information of significant subsidiaries as of and for the year ended December 31, 2020 is as follows:

 

(In millions of won)    As of December 31, 2020      2020  

Subsidiary

   Total assets      Total liabilities      Total
equity
     Revenue      Profit (loss)  

SK Telink Co., Ltd.

   176,872        60,702        116,170        351,334        18,010  

Eleven Street Co., Ltd.

     999,225        542,534        456,691        545,556        (29,623

SK m&service Co., Ltd.

     129,738        74,962        54,776        214,949        2,759  

SK Broadband Co., Ltd.

     5,765,808        3,119,489        2,646,319        3,713,021        150,694  

K-net Culture and Contents Venture Fund

     377,683        65,896        311,787               (44,737

PS&Marketing Corporation

     470,521        257,809        212,712        1,427,218        (847

SERVICE ACE Co., Ltd.

     96,258        71,890        24,368        206,612        2,905  

SERVICE TOP Co., Ltd.

     69,496        51,584        17,912        195,479        2,592  

SK O&S Co., Ltd.

     88,663        54,012        34,651        278,948        778  

SK Planet Co., Ltd.

     536,981        214,846        322,135        276,462        1,305  

DREAMUS COMPANY(*1)

     172,443        76,642        95,801        226,329        (23,068

SK Infosec Co., Ltd.(*2)

     2,927,396        2,550,936        376,460        1,327,150        14,227  

 

F-17


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)    As of December 31, 2020      2020  

Subsidiary

   Total assets      Total liabilities      Total
equity
     Revenue      Profit (loss)  

One Store Co., Ltd.

     243,442        99,943        143,499        155,218        1,952  

Home & Service Co., Ltd.

     124,197        88,740        35,457        397,754        (20

SK stoa Co., Ltd.

     107,982        79,339        28,643        268,693        17,154  

FSK L&S Co., Ltd.(*3)

     66,117        35,192        30,925        205,623        3,022  

Incross Co., Ltd.(*4)

     179,308        104,778        74,530        39,440        12,307  

 

 

(*1)

The condensed financial information of DREAMUS COMPANY is consolidated financial information including iriver Enterprise Ltd. and three other subsidiaries of DREAMUS COMPANY.

 

(*2)

The condensed financial information of SK Infosec Co., Ltd. is consolidated financial information including SKinfosec Information Technology (Wuxi) Co., Ltd. and two other subsidiaries of SK Infosec Co., Ltd. and including profit and loss which Life Security & Holdings Co., Ltd. recognized prior to the merger.

 

(*3)

The condensed financial information of FSK L&S Co., Ltd. is consolidated financial information including FSK L&S (Shanghai) Co., Ltd. and two other subsidiaries of FSK L&S Co., Ltd.

 

(*4)

The condensed financial information of Incross Co., Ltd. is consolidated financial information including Infra Communications Co., Ltd. and another subsidiary of Incross Co., Ltd.

Condensed financial information of significant subsidiaries as of and for the year ended December 31, 2019 is as follows:

 

(In millions of won)    As of December 31, 2019      2019  

Subsidiary

   Total
assets
     Total
liabilities
     Total
equity
     Revenue      Profit
(loss)
 

SK Telink Co., Ltd.(*1)

   265,725        77,378        188,347        363,627        3,010  

Eleven Street Co., Ltd.

     923,424        446,432        476,992        530,489        (5,077

SK m&service Co., Ltd.

     109,699        58,605        51,094        218,848        2,448  

SK Broadband Co., Ltd.

     4,565,732        2,930,482        1,635,250        3,170,691        47,701  

K-net Culture and Contents Venture Fund

     151,493        21,163        130,330               (294

PS&Marketing Corporation

     439,947        225,942        214,005        1,684,576        96  

SERVICE ACE Co., Ltd.

     80,844        55,133        25,711        206,080        3,906  

SERVICE TOP Co., Ltd.

     66,932        50,060        16,872        193,377        2,230  

SK O&S Co., Ltd.

     96,446        62,086        34,360        281,634        1,724  

SK Planet Co., Ltd.

     595,838        278,438        317,400        275,544        1,214  

DREAMUS COMPANY(*2)

     171,586        53,669        117,917        196,961        (48,006

Life & Security Holdings Co., Ltd.(*3)

     2,639,781        2,330,920        308,861        913,301        12,703  

SK Infosec Co., Ltd.(*4)

     158,424        61,644        96,780        270,423        18,520  

One Store Co., Ltd.

     236,329        93,625        142,704        135,116        (5,415

Home & Service Co., Ltd.

     121,202        84,378        36,824        351,154        (427

SK stoa Co., Ltd.

     70,754        59,207        11,547        196,063        875  

FSK L&S Co., Ltd.(*5)

     47,550        19,651        27,899        130,872        306  

Incross Co., Ltd.(*6)

     144,263        78,519        65,744        19,787        5,756  

 

 

(*1)

The condensed financial information of SK Telink Co., Ltd. is consolidated financial information including SK TELINK VIETNAM Co., Ltd.

 

(*2)

The condensed financial information of DREAMUS COMPANY is consolidated financial information including iriver Enterprise Ltd. and three other subsidiaries of DREAMUS COMPANY.

 

F-18


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(*3)

The condensed financial information of Life & Security Holdings Co., Ltd. is consolidated financial information including ADT CAPS Co., Ltd. and two other subsidiaries of Life & Security Holdings Co., Ltd.

 

(*4)

The condensed financial information of SK Infosec Co., Ltd. is consolidated financial information including SK infosec Information Technology (Wuxi) Co., Ltd.

 

(*5)

The condensed financial information of FSK L&S Co., Ltd. is consolidated financial information including FSK L&S (Shanghai) Co., Ltd. and another subsidiary of FSK L&S Co., Ltd.

 

(*6)

The condensed financial information of Incross Co., Ltd. is consolidated financial information including Infra Communications Co., Ltd. and another subsidiary from the date of acquisition to December 31, 2019.

Condensed financial information of the significant subsidiaries as of and for the year ended December 31, 2018 is as follows:

 

(In millions of won)    As of December 31, 2018      2018  

Subsidiary

   Total
assets
     Total
liabilities
     Total
equity
     Revenue      Profit
(loss)
 

SK Telink Co., Ltd.(*1)

   493,972        107,565        386,407        373,019        39,962  

Eleven Street Co., Ltd.(*2)

     1,045,946        495,907        550,039        228,000        (9,507

SK m&service Co., Ltd.

     97,924        48,182        49,742        208,936        (119

SK Communications Co., Ltd.

     79,646        28,458        51,188        41,604        (10,323

SK Broadband Co., Ltd.

     4,266,458        2,682,236        1,584,222        3,158,877        154,999  

K-net Culture and Contents Venture Fund

     147,691        20,873        126,818               58,584  

PS&Marketing Corporation

     432,699        216,624        216,075        1,587,203        76  

SERVICE ACE Co., Ltd.

     76,770        45,229        31,541        198,164        4,217  

SERVICE TOP Co., Ltd.

     74,452        49,400        25,052        205,574        5,276  

SK O&S Co., Ltd.

     81,773        42,257        39,516        265,183        1,089  

SK Planet Co., Ltd.

     753,630        436,501        317,129        672,648        (436,106

DREAMUS COMPANY(*3)

     204,479        44,620        159,859        137,849        (21,314

SKP America LLC.

     383,697               383,697               (370

Life & Security Holdings Co., Ltd.(*4)

     2,611,838        2,261,456        350,382        197,487        6,038  

SK Infosec Co., Ltd.(*5)

     183,896        54,301        129,595                

One Store Co., Ltd.

     116,716        65,890        50,826        110,284        (13,903

Home & Service Co., Ltd.

     87,159        45,341        41,818        325,177        (1,264

SK stoa Co., Ltd.

     41,305        37,560        3,745        116,459        (16,987

 

 

(*1)

The condensed financial information of SK Telink Co., Ltd. is consolidated financial information including SK TELINK VIETNAM Co., Ltd.

 

(*2)

The condensed financial information of Eleven Street Co., Ltd. includes four months of revenue and profit and loss since the spin-off on August 31, 2018.

 

(*3)

The condensed financial information of DREAMUS COMPANY is consolidated financial information including iriver Enterprise Ltd. and six other subsidiaries of DREAMUS COMPANY.

 

(*4)

The condensed financial information of Life & Security Holdings Co., Ltd. is consolidated financial information including ADT CAPS Co., Ltd. and two other subsidiaries, including 3 months of revenue and profit and loss since Life & Security Holdings Co., Ltd. was acquired by the Parent Company on October 1, 2018.

 

(*5)

SK Infosec Co., Ltd. was acquired by the Parent Company and newly included in consolidation as of December 27, 2018.

 

F-19


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(4)    Changes in subsidiaries

1)    The list of subsidiaries that were newly included in consolidation during the year ended December 31, 2020 is as follows:

 

Subsidiary

  

Reason

Broadband Nowon Co., Ltd.

   Acquired by the Parent Company

FSK L&S VIETNAM COMPANY LIMITED

   Established by FSK L&S Co., Ltd.

Pan Asia Semiconductor Materials LLC

   Established by Quantum Innovation Fund I

T map Mobility Co., Ltd.

   Spin-off from the Parent Company

2)    The list of subsidiaries that were excluded from consolidation during the year ended December 31, 2020 is as follows:

 

Subsidiary

  

Reason

ADT SECURITY Co., Ltd.

   Merged into ADT CAPS Co., Ltd.

SK TELINK VIETNAM Co., Ltd.

   Disposed

Life & Security Holdings Co., Ltd.

   Merged into SK Infosec Co, Ltd.

 

F-20


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(5)    The financial information of significant non-controlling interests of the Group as of and for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)   DREAMUS
COMPANY
    One Store
Co., Ltd.
    Eleven Street
Co., Ltd.
    SK Infosec
Co., Ltd.(*)
    Incross Co., Ltd.     SK Broadband
Co., Ltd.
 

Ownership of non-controlling interests (%)

    48.6       47.4       18.2       37.4       55.2       24.9  
    As of December 31, 2020  

Current assets

  146,278       215,672       896,828       306,520       165,668       1,179,743  

Non-current assets

    26,165       27,770       102,397       2,620,876       13,640       4,586,065  

Current liabilities

    (72,762     (96,139     (508,427     (417,194     (101,065     (1,279,132

Non-current liabilities

    (3,880     (3,804     (34,107     (2,133,742     (3,713     (1,840,357

Net assets

    95,801       143,499       456,691       376,460       74,530       2,646,319  

Fair value adjustment and others

                (14,297     (1,227,442            

Net assets on the consolidated financial statements

    95,801       143,499       442,394       (850,982     74,530       2,646,319  

Carrying amount of non-controlling interests

    47,452       68,573       81,754       (318,267     46,010       665,020  
    2020  

Revenue

  226,329       155,218       545,556       1,327,150       39,440       3,713,021  

Profit (loss) for the year

    (23,068     1,952       (29,623     14,227       12,307       150,694  

Depreciation of the fair value adjustment and others

                (492     (19,229            

Profit (loss) for the year on the consolidated financial statements

    (23,068     1,952       (30,115     (5,002     12,307       150,694  

Total comprehensive income (loss)

    (22,740     2,278       (15,793     (3,758     12,145       151,417  

Profit (loss) attributable to non-controlling interests

    (10,770     930       (5,565     (12,432     7,568       27,240  

Net cash provided by operating activities

  15,223       38,006       65,499       248,524       24,629       1,035,474  

Net cash provided by (used in) investing activities

    (2,471     (62,816     (71,644     (229,130     (2,284     (844,454

Net cash provided by (used in) financing activities

    (2,329     (2,499     (18,059     11,134       (4,278     (93,259

Effects of exchange rate changes on cash and cash equivalents

    (2,053           (385     (554            

Net increase (decrease) in cash and cash equivalents

    8,370       (27,309     (24,589     29,974       18,067       97,761  

Dividend paid to non-controlling interests during the year ended December 31, 2020

              5,000       17,273              

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(*)

The condensed financial information of SK Infosec Co., Ltd. includes profit and loss, cash flows which Life Security & Holdings Co., Ltd. recognized prior to the merger.

 

(In millions of won)   DREAMUS
COMPANY
    One Store
Co., Ltd.
    Eleven Street
Co., Ltd.
    Life & Security
Holdings Co., Ltd.
    Incross Co., Ltd.  

Ownership of non-controlling interests (%)

    48.6       47.3       18.2       45.0       65.4  
    As of December 31, 2019  

Current assets

  136,269       208,527       779,568       126,437       133,741  

Non-current assets

    35,317       27,802       143,856       2,513,344       10,522  

Current liabilities

    (49,776     (88,842     (420,022     (279,403     (77,530

Non-current liabilities

    (3,893     (4,783     (26,410     (2,051,517     (989

Net assets

    117,917       142,704       476,992       308,861       65,744  

Fair value adjustment and others

                (18,805     (1,219,701      

Net assets on the consolidated financial statements

    117,917       142,704       458,187       (910,840     65,744  

Carrying amount of non-controlling interests

    57,175       67,742       84,673       (409,878     41,074  
    2019  

Revenue

  196,961       135,116       530,489       913,301       19,787  

Profit (loss) for the year

    (48,006     (5,415     (5,077     12,703       5,756  

Depreciation of the fair value adjustment and others

                (614     (14,913      

Profit (loss) for the year on the consolidated financial statements

    (48,006     (5,415     (5,691     (2,210     5,756  

Total comprehensive income (loss)

    (47,971     (5,856     (13,590     (5,413     5,396  

Profit (loss) attributable to non-controlling interests

    (23,281     (2,256     (1,064     (978     3,630  

Net cash provided by (used in) operating activities

  (1,387     14,426       7,980       238,378       (9,331

Net cash provided by (used in) investing activities

    (2,596     (87,275     102,366       (194,472     5,053  

Net cash provided by (used in) financing activities

    (2,965     96,189       (72,686     (51,129     (4,644

Effects on exchange rate changes on cash and cash equivalents

    197       2       35              

Net increase (decrease) in cash and cash equivalents

    (6,751     23,342       37,695       (7,223     (8,922

Dividend paid to non-controlling interests during the year ended December 31, 2019

              17,500       28,786        

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)   K-net Culture
and Contents
Venture Fund
    DREAMUS
COMPANY
    One Store
Co., Ltd.
    Eleven Street
Co., Ltd.
    Life & Security
Holdings Co., Ltd.(*)
 

Ownership of non-controlling interests (%)

    41.0       47.4       34.5       18.2       45.0  
    As of December 31, 2018  

Current assets

  118       150,014       92,844       923,153       124,091  

Non-current assets

    147,573       54,465       23,872       122,793       2,487,747  

Current liabilities

    (20,873     (41,957     (63,440     (486,391     (243,064

Non-current liabilities

          (2,663     (2,450     (9,516     (2,018,392

Net assets

    126,818       159,859       50,826       550,039       350,382  

Fair value adjustment and others

                      (23,191     (1,216,347

Net assets on the consolidated financial statements

    126,818       159,859       50,826       526,848       (865,965

Carrying amount of non-controlling interests

    51,995       76,204       17,711       95,811       (389,684
    2018  

Revenue

        137,849       110,284       228,000       197,487  

Profit (loss) for the year

    58,584       (21,314     (13,903     (9,507     6,038  

Depreciation of the fair value adjustment and others

                      (161     (2,954

Profit (loss) for the year on the consolidated financial statements

    58,584       (21,314     (13,903     (9,668     3,084  

Total comprehensive income (loss)

    27,773       (21,125     (14,386     (8,897     (991

Profit (loss) attributable to non-controlling interests

    24,019       (10,094     (4,791     (1,758     1,387  

Net cash provided by (used in) operating activities

  115,566       13,635       7,181       (69,347     (23,451

Net cash provided by (used in) investing activities

    600       (10,169     (11,482     (470,211     (139,430

Net cash provided by (used in) financing activities

    (116,150     69,267       5       494,923       124,076  

Net increase (decrease) in cash and cash equivalents

    16       72,733       (4,296     (44,635     (38,805

Dividend paid to non-controlling interests during the year ended December 31, 2018

  36,178                          

 

 

(*)

The financial information of Life & Security Holdings Co., Ltd. is related to the period subsequent to the acquisition by the Parent Company on October 1, 2018 and includes fair value adjustments from the business combination.

 

2.

Basis of Preparation

(1)    Statement of compliance

These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

These consolidated financial statements were authorized for issue by the Board of Directors on February 2, 2021 for statutory shareholders’ approval purpose, and re-authorized for issue by management in connection with the filing with the U.S. Securities Exchange Commission on April 29, 2021.

(2)    Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the consolidated statement of financial position:

 

   

derivative financial instruments measured at fair value;

 

   

financial instruments measured at fair value through profit or loss (“FVTPL”);

 

   

financial instruments measured at fair value through other comprehensive income (“FVOCI”);

 

   

liabilities (assets) for defined benefit plans recognized at the total present value of defined benefit obligations less the net of the fair value of plan assets

(3)    Functional and presentation currency

Financial statements of Group entities within the Group are prepared in functional currency of each group entity, which is the currency of the primary economic environment in which each entity operates. Consolidated financial statements of the Group are presented in Korean won, which is the Parent Company’s functional and presentation currency.

(4)    Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period prospectively

1)    Critical judgments

Information about critical judgments in applying accounting policies that have the most significant effects on the amounts recognized in the consolidated financial statements is included in notes for the following areas: consolidation (whether the Group has de facto control over an investee), determination of stand-alone selling prices.

2)    Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: loss allowance (notes 7 and 36), estimated useful lives of costs to obtain a contract (notes 8), property and equipment and intangible assets (notes 4 (7), (9), 14 and 17), impairment of goodwill (notes 4 (11) and 16), recognition of provision (notes 4 (17) and 20), measurement of defined benefit liabilities (notes 4 (16) and 21), and recognition of deferred tax assets (liabilities) (notes 4 (24) and 32).

3)    Fair value measurement

A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Group has an established policies and processes with respect to the measurement of fair values including Level 3 fair values, and the measurement of fair values is reviewed and is directly reported to the finance executives.

 

F-24


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

The Group regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the Group assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.

When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

 

   

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

   

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

 

   

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

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Information about assumptions used for fair value measurements are included in note 22 and note 36.

 

3.

Changes in accounting policies

The Group has initially adopted the amendments to the ’Definition of a Business’(Amendments to IFRS 3, Business Combination) and ‘Interest Rate Benchmark Reform’(Amendments to IFRS 9, Financial Instruments, IAS 39, Financial Instrument — Recognition and Measurement, IFRS 7, Financial Instruments — Disclosures) from January 1, 2020. A number of other amended standards are effective from January 1, 2020, but they do not have a material effect on the Group’s consolidated financial statements.

The Group applied Definition of a Business (Amendments to IFRS 3) to business combinations whose acquisition dates are on or after January 1, 2020 in assessing whether it had acquired a business or a group of assets. Details of the accounting policies are summarized in Note 4 (2).

The Group applied the interest rate benchmark reform amendments retrospectively to hedging relationships that existed at January 1, 2020 or were designated thereafter and that are directly affected by interest rate benchmark reform. The amendment also applied to the gain or loss accumulated in the cash flow hedging reserve that existed at January 1, 2020. The details of the accounting policies are disclosed in Note 4 (6). See also Note 36 for related disclosures about risks and hedge accounting.

The Group has applied IFRS 16, Leases from January 1, 2019 using the modified retrospective method with the cumulative effect of initially applying this standard recognized as an adjustment to the retained earnings as at January 1, 2019. Accordingly, the comparative information presented for 2018 has been presented, as previously reported, under IAS 17, Leases and has not been restated.

During the annual period ended December 31, 2020, the Group changed its accounting policy by applying agenda decision, Lease Term and Useful Life of Leasehold Improvements (IFRS 16 Leases and IAS 16 Property, Plant and Equipment) — November 2019, published by International Financial Reporting Interpretations Committee (“IFRIC”) on December 16, 2019.

Prior to the change in accounting policy, the Group determined the lease term based on the assumption that the right to extent or terminate the lease is no longer enforceable if a lease contract requires the counterparty’s consent to be extended. The Group now determines the lease term as the non-cancellable period of a lease, plus both:

 

F-25


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. In the assessing the periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option, the Company considered if it would incur a penalty on termination that is more than insignificant.

The Group has retrospectively applied the changes in its accounting policies in connection with the IFRIC agenda decision in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors and restated its comparative consolidated financial statements.

The following table summarizes the impacts of the change in accounting policies on the Group’s consolidated financial statements on the current and prior period.

(1)    Consolidated statements of financial position

 

(In millions of won)       
(Unaudited)    As of September 30, 2020(*)  
     As reported      Adjustments     Restated  

Assets

       

Accounts receivable — other, net

   1,225,398        12,919       1,238,317  

Prepaid expenses and others

     3,511,068        (13,086     3,497,982  

Property and equipment, net

     12,190,268        827,569       13,017,837  
  

 

 

    

 

 

   

 

 

 
   16,926,734        827,402       17,754,136  
  

 

 

    

 

 

   

 

 

 

Liabilities

       

Accrued expenses and others

   1,557,433        (273     1,557,160  

Provisions

     130,181        24,279       154,460  

Lease liabilities

     641,334        818,652       1,459,986  

Deferred tax liabilities

     2,733,327        (4,061     2,729,266  
  

 

 

    

 

 

   

 

 

 
   5,062,275        838,597       5,900,872  
  

 

 

    

 

 

   

 

 

 

Shareholder’s Equity

       

Retained earnings

   22,595,716        (11,195     22,584,521  

 

 

(*)

Subsequent to the adoption of the change in accounting policy, the Group does not maintain the information necessary to prepare financial statements using the previous accounting policy. Therefore, the Group presented the impact on unaudited interim financial information using available information.

 

F-26


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)       
     As of December 31, 2019  
     As reported      Adjustments     Restated  

Assets

       

Accounts receivable — other, net

   1,250,098        5,074       1,255,172  

Prepaid expenses and others

     3,619,033        (13,506     3,605,527  

Property and equipment, net

     12,334,280        599,180       12,933,460  
  

 

 

    

 

 

   

 

 

 
   17,203,411        590,748       17,794,159  
  

 

 

    

 

 

   

 

 

 

Liabilities

       

Accrued expenses and others

   1,515,300        (415     1,514,885  

Provisions

     143,229        21,932       165,161  

Lease liabilities

     712,740        578,267       1,291,007  

Deferred tax liabilities

     2,466,295        (2,434     2,463,861  
  

 

 

    

 

 

   

 

 

 
   4,837,564        597,350       5,434,914  
  

 

 

    

 

 

   

 

 

 

Shareholder’s Equity

       

Retained earnings

   22,235,285        (6,602     22,228,683  

 

(In millions of won)       
     As of January 1, 2019  
     As reported(*)      Adjustments     Restated  

Assets

       

Accounts receivable — other, net

   1,243,245        12,803       1,256,048  

Prepaid expenses and others

     2,944,245        (39,010     2,905,235  

Property and equipment, net

     11,371,690        218,320       11,590,010  
  

 

 

    

 

 

   

 

 

 
   15,559,180        192,113       15,751,293  
  

 

 

    

 

 

   

 

 

 

Liabilities

       

Accrued expenses and others

   1,357,339        (1,388     1,355,951  

Provisions

     187,208        20,319       207,527  

Lease liabilities

     663,827        180,456       844,283  

Deferred tax liabilities

     2,260,433        (1,881     2,258,552  
  

 

 

    

 

 

   

 

 

 
   4,468,807        197,506       4,666,313  
  

 

 

    

 

 

   

 

 

 

Shareholder’s Equity

       

Retained earnings

   22,120,355        (5,393     22,114,962  

 

 

(*)

Includes impact of initial adoption of IFRS 16 in 2019.

 

F-27


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2)    Consolidated statement of income

 

(In millions of won)                    
(Unaudited)    For the nine-month period ended
September 30, 2020(*)
 
     As reported      Adjustments     Restated  

Operating revenue and other income

       

Revenue

   13,784,051        1,322       13,785,373  

Other income

     55,506        (641     54,865  
  

 

 

    

 

 

   

 

 

 
     13,839,557        681       13,840,238  

Operating expenses:

       

Depreciation and amortization

     2,948,492        40,383       2,988,875  

Rent

     148,437        (31,272     117,165  

Leased lines

     206,577        (1,857     204,720  

Others

     9,535,803        (8,087     9,527,716  
  

 

 

    

 

 

   

 

 

 
     12,839,309        (833     12,838,476  
  

 

 

    

 

 

   

 

 

 

Operating profit

     1,000,248        1,514       1,001,762  

Finance income

     90,985        46       91,031  

Finance costs

     324,952        7,780       332,732  

Gain relating to investments in subsidiaries, associates and joint ventures, net

     673,800              673,800  
  

 

 

    

 

 

   

 

 

 

Profit before income tax

   1,440,081        (6,220     1,433,861  

Income tax expense

     305,405        (1,907     303,498  
  

 

 

    

 

 

   

 

 

 

Profit for the year

   1,134,676        (4,313     1,130,363  
  

 

 

    

 

 

   

 

 

 

Earnings per share:

       

Basic earnings per share (in won)

   15,218        (59     15,159  

Diluted earnings per share (in won)

     15,215        (59     15,156  

 

 

(*)

Subsequent to the adoption of the change in accounting policy, the Group does not maintain the information necessary to continue to prepare financial statements using the previous accounting policy. Therefore, the Group presented the impact on unaudited interim financial information using available information.

 

 

F-28


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)    2019  
     As reported      Adjustments     Restated  

Operating revenue and other income

       

Revenue

   17,743,702        (2,986     17,740,716  

Other income

     103,230        (409     102,821  
  

 

 

    

 

 

   

 

 

 
     17,846,932        (3,395     17,843,537  

Operating expenses:

       

Depreciation and amortization

     3,771,486        85,176       3,856,662  

Rent

     231,934        (77,091     154,843  

Leased lines

     272,616        (9,249     263,367  

Others

     12,570,003        (8,596     12,561,407  
  

 

 

    

 

 

   

 

 

 
     16,846,039        (9,760     16,836,279  
  

 

 

    

 

 

   

 

 

 

Operating profit

     1,000,893        6,365       1,007,258  

Finance income

     141,977        178       142,155  

Finance costs

     429,758        8,197       437,955  

Gain relating to investments in subsidiaries, associates and joint ventures, net

     449,543              449,543  
  

 

 

    

 

 

   

 

 

 

Profit before income tax

   1,162,655        (1,654     1,161,001  

Income tax expense

     300,713        (445     300,268  
  

 

 

    

 

 

   

 

 

 

Profit for the year

   861,942        (1,209     860,733  
  

 

 

    

 

 

   

 

 

 

Earnings per share:

       

Basic earnings per share (in won)

   12,144        (17     12,127  

Diluted earnings per share (in won)

     12,144        (17     12,127  

(3)    Consolidated statement changes in equity

The consolidated statement of changes in equity for the year ended December 31, 2019 has been restated to reflect the change in accounting policy.

(4)    Consolidated statements of cash flows

 

(In millions of won)

 

(Unaudited)

   For the nine-month period ended
September 30, 2020(*1)
 
     As reported     Adjustments     Restated  

Cash flows from operating activities(*2)

   4,525,676       21,102       4,546,778  

Cash flows from investing activities

     (3,047,428           (3,047,428

Cash flows from financing activities(*3)

     (870,621     (21,102     (891,723

 

 

(*1)

Subsequent to the adoption of the change in accounting policy, the Group does not maintain the information necessary to continue prepare financial statements using the previous accounting policy. Therefore, the Group presented the impact on unaudited interim financial information using available information.

 

(*2)

Prepaid expenses related to lease contracts which were additionally recognized as leases as a result of the change in lease terms have been reclassified as financing activities.

 

(*3)

Repayment of lease liabilities increased as additional contracts were recognized as lease contracts as a result of the change in lease terms.

 

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)    2019  
     As reported     Adjustments     Restated  

Cash flows from operating activities(*1)

   3,986,082       48,902       4,034,984  

Cash flows from investing activities(*2)

     (3,582,523     939       (3,581,584

Cash flows from financing activities(*3)

     (636,834     (49,840     (686,674

 

 

(*1)

Prepaid expenses related to lease contracts which were additionally recognized as leases as a result of the change in lease terms have been reclassified as financing activities.

 

(*2)

The effect of changes in accounting policies resulted in an increase in lease receivables from ₩26,773 million to ₩27,712 million.

 

(*3)

Repayment of lease liabilities increased as additional contracts were recognized as lease contracts as a result of the change in lease terms.

 

4.

Significant Accounting Policies

The significant accounting policies applied by the Group in the preparation of its consolidated financial statements in accordance with IFRS are included below. The significant accounting policies applied by the Group in these consolidated financial statements have been consistently applied for all periods presented, except for the changes described in note 3 and below.

(1)    Operating segments

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. The Group’s operating segments have been determined to be each business unit, for which the Group generates separately identifiable financial information that is regularly reported to the chief operating decision maker for the purpose of resource allocation and assessment of segment performance. The Group has five reportable segments as described in note 5. Segment results that are reported to the chief operating decision maker include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

(2)    Basis of consolidation

(a)    Business combination

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

Consideration transferred is generally measured at fair value, identical to the measurement of identifiable net assets acquired at fair value. The difference between the acquired company’s fair value and the consideration transferred is accounted for goodwill. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Acquisition-related costs are expensed in the periods in which the costs are incurred and the services are received excluding costs to issue debt or equity securities recognized based on IAS 32 and IFRS 9.

Consideration transferred does not include the amount settled in relation to the pre-existing relationship. Such amounts are generally recognized through profit or loss.

Contingent consideration is measured at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. If contingent consideration is not classified as equity, the Group subsequently recognizes changes in fair value of contingent consideration through profit or loss.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(b)    Non-controlling interests

Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition.

Changes in a Controlling Company’s ownership interest in a subsidiary that do not result in the Controlling Company losing control of the subsidiary are accounted for as equity transactions.

(c)    Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an 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 an investee begins from the date the Group obtains control of the investee and cease when the Group loses control of the investee.

(d)    Loss of control

If the Group loses control of a subsidiary, the Group derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of financial position and recognizes gain or loss associated with the loss of control attributable to the former controlling interest. Any investment retained in the former subsidiary is recognized at its fair value when control is lost.

(e)    Interest in investees accounted for using the equity method

Interest in investees accounted for using the equity method composed of interest in associates and joint ventures. An associate is an entity in which the Group has significant influence, but not control, over the entity’s financial and operating policies. A joint venture is a joint arrangement whereby the Group that has joint control of the arrangement has rights to the net assets of the arrangement.

The investment in an associate and a joint venture is initially recognized at cost including transaction costs and the carrying amount is increased or decreased to recognize the Group’s share of the profit or loss and changes in equity of the associate or the joint venture after the date of acquisition.

The investment in an associate and a joint venture is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

 

   

significant financial difficulty of the associate or joint venture;

 

   

a breach of contract, such as a default or delinquency in payments by the associate or joint venture;

 

   

the entity, for economic or legal reasons relating to its associate’s or joint venture’s financial difficulty, granting to the associate or joint venture a concession that the entity would not otherwise consider;

 

   

it becoming probable that the associate or joint venture will enter bankruptcy or other financial reorganization; or

 

   

the disappearance of an active market for the net investment because of financial difficulties of the associate or joint venture.

(f)    Intra-group transactions

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. The Group’s share of unrealized gain incurred from transactions with investees accounted for using the equity method are eliminated and unrealized loss are eliminated using the same basis if there are no evidence of asset impairments.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(g)    Business combinations under common control

SK Holdings Co., Ltd. is the ultimate controlling entity of the Group. The assets and liabilities acquired under business combination under common control are recognized at the carrying amounts in the ultimate controlling shareholder’s consolidated financial statements. The difference between consideration and carrying amount of net assets acquired is added to or subtracted from capital surplus and others.

(3)    Cash and cash equivalents

Cash and cash equivalents comprise cash balances, call deposits and investment securities with maturities of three months or less from the acquisition date that are easily convertible to cash and subject to an insignificant risk of changes in their fair value.

(4)    Inventories

Inventories are initially recognized at the acquisition cost and subsequently measured using the weighted average method. During the period, a perpetual inventory system is used to track inventory quantities, which is adjusted based on the physical inventory counts performed at the period end. When the net realizable value of inventories is less than cost, the carrying amount is reduced to the net realizable value, and any difference is charged to current period as operating expenses.

(5)    Non-derivative financial assets

(a)    Recognition and initial measurement

Accounts receivable — trade and debt investments issued are initially recognized when they are originated. All other financial assets and financial liabilities are initially recognized when the Group becomes a party to the contractual provisions of the instrument.

A financial asset (unless an accounts receivable — trade without a significant financing component) or financial liability is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. An accounts receivable — trade without a significant financing component is initially measured at the transaction price.

(b)    Classification and subsequent measurement

On initial recognition, a financial asset is classified as measured at:

 

   

FVTPL

 

   

FVOCI — equity investment

 

   

FVOCI — debt investment

 

   

Financial assets at amortized cost

A financial asset is classified based on the business model in which a financial asset is managed and its contractual cash flow characteristics.

Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model.

A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:

 

   

it is held within a business model whose objective is to hold assets to collect contractual cash flows; and

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

   

its contractual terms give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding on specified dates.

A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:

 

   

it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

 

   

its contractual terms give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding on specified dates.

On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income (“OCI”). This election is made on an investment-by-investment basis.

All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets. On initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

The following accounting polices apply to the subsequent measurement of financial assets.

 

Financial assets at FVTPL

   These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in profit or loss.

Financial assets at amortized cost

   These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.

Debt investments at FVOCI

   These assets are subsequently measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognized in profit or loss. Other net gains and losses are recognized in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss.

Equity investments at FVOCI

   These assets are subsequently measured at fair value. Dividends are recognized as income in profit or loss unless the dividend clearly represents a recovery of the cost of the investment. Other net gains and losses are recognized in OCI and are never reclassified to profit or loss.

(c)    Impairment

The Group estimates the expected credit losses (ECL) for the debt instruments measured at amortized cost and FVOCI based on the Group’s historical experience and informed credit assessment that includes forward-looking information. The impairment approach is decided based on the assessment of whether the credit risk of a financial asset has increased significantly since initial recognition. However, the Group applies a practical expedient and recognizes impairment losses equal to lifetime ECLs for accounts receivable — trade and lease receivables from the initial recognition.

ECL is a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive).

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

At each reporting date, the Group assesses whether financial assets measured at amortized cost and debt investments at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Loss allowance on financial assets measured at amortized cost is deducted from the carrying amount of the respective assets, while loss allowance on debt instruments at FVOCI is recognized in OCI, instead of reducing the carrying amount of the assets.

(d)    Derecognition

Financial assets are derecognized if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or transfers substantially all of the risks and rewards of asset.

The transferred assets are not derecognized when the Group enters into transactions whereby it transfers assets recognized in its statement of financial position but retains substantially all of the risks and rewards of the transferred assets.

(e)    Offsetting

Financial assets and financial liabilities are offset, and the net amount is presented in the statement of financial position when the Group currently has a legally enforceable right to offset the recognized amounts and it intends either to settle on a net basis or to settle the liability and realize the asset simultaneously.

A financial asset and a financial liability is offset only when the right to set off the amount is not contingent on future event and legally enforceable even on the event of default, insolvency or bankruptcy.

(6)    Derivative financial instruments, including hedge accounting

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value at the end of each reporting period, and changes therein are accounted for as described below.

(a)    Hedge accounting

The Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Group designates derivatives as hedging instruments to hedge the cash flow risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship.

Hedges directly affected by interest rate benchmark reform

For the purpose of evaluating whether there is an economic relationship between the hedged items and the hedging instruments, the Group assumes that the interest rate benchmark on which the hedged items and the hedging instruments are based is not altered as a result of interest rate benchmark reform.

For a cash flow hedge of a forecast transaction, the Group assumes that the benchmark interest rate will not be altered as a result of interest rate benchmark reform for the purpose of assessing whether the forecast transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect profit and loss. In determining whether a previously designated forecast transaction in a discontinued cash flow hedge is still expected to occur, the Group assumes that the interest rate benchmark cash flows designated as a hedge will not be altered as a result of interest rate benchmark reform.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

The Group will cease applying the specific policy for assessing the economic relationship between the hedged item and the hedging instrument (i) to a hedged item or hedging instrument when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based cash flows of the respective item or instrument or (ii) when the hedging relationship is discontinued.

For its highly probable assessment of the hedged item, the Group will no longer apply the specific policy when the uncertainty arising from interest rate benchmark reform about the timing and the amount of the interest rate benchmark-based future cash flows of the hedged item is no longer present, or when the hedging relationship is discontinued.

Cash flow hedge

When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss.

(b)    Other derivative financial instruments

Other derivative financial instrument not designated as a hedging instrument are measured at fair value, and the changes in fair value of the derivative financial instrument is recognized immediately in profit or loss.

(7)    Property and equipment

Property and equipment are initially measured at cost. The cost of property and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Property and equipment, subsequently, are carried at cost less accumulated depreciation and accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of property and equipment at cost or, if appropriate, as a separate item if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be reliably measured. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred.

Property and equipment, except for land, are depreciated on a straight-line basis over estimated useful lives that appropriately reflect the pattern in which the asset’s future economic benefits are expected to be consumed. A component that is significant compared to the total cost of property and equipment is depreciated over its separate useful life.

Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized as other non-operating income (loss).

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

The estimated useful lives of the Group’s property and equipment are as follows:

 

     Useful lives (years)

Buildings and structures

   15 ~ 40

Machinery

   3 ~ 15, 30

Other property and equipment

   2 ~10

Right-of-use assets

   1 ~ 50

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

(8)    Borrowing costs

The Group capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets are not qualifying assets, and assets that are ready for their intended use or sale when acquired are not qualifying assets either.

To the extent that the Group borrows funds specifically for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Group capitalizes during a period do not exceed the amount of borrowing costs incurred during the period.

(9)    Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Intangible assets, except for goodwill, are amortized on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, club memberships and brand are expected to be available for use as there are no foreseeable limits to the periods. These intangible assets are determined as having indefinite useful lives and, therefore, not amortized.

The estimated useful lives of the Group’s intangible assets are as follows:

 

     Useful lives (years)

Frequency usage rights

   5 ~ 10

Land usage rights

   5

Industrial rights

   5, 10

Development costs

   3 ~ 5

Facility usage rights

   10, 20

Customer relations

   3 ~ 20

Other

   3 ~ 20

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes, if appropriate, are accounted for as changes in accounting estimates.

Expenditures on research activities are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be reliably measured, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

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

(10)    Government grants

Government grants are not recognized unless there is reasonable assurance that the Group will comply with the grant’s conditions and that the grant will be received.

1)    Grants related to assets

Government grants whose primary condition is that the Group purchases, constructs, or otherwise acquires a long-term asset are deducted in calculating the carrying amount of the asset. The grant is recognized in profit or loss over the life of a depreciable asset as a reduction to depreciation expense.

2)    Grants related to income

Government grants which are intended to compensate the Group for expenses incurred are deducted from the related expenses.

(11)    Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets other than contract assets recognized for revenue arising from contracts with a customer, assets recognized for the costs to obtain or fulfill a contract with a customer, employee benefits, inventories, deferred tax assets, and non-current assets held for sale are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amounts to their carrying amounts.

The Group estimates the recoverable amount of an individual asset, and if it is impossible to measure the individual recoverable amount of an asset, the Group estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. The value in use is estimated by applying a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized in profit or loss to the extent the carrying amount of the asset exceeds its recoverable amount.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergy arising from the business acquired. Any impairment identified at the CGU level will first reduce the

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

carrying amount of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

(12)    Leases - Policies applicable from January 1, 2019

The Group has applied IFRS 16, Leases from January 1, 2019 using the modified retrospective method with the cumulative effect of initially applying this standard recognized as an adjustment to the retained earnings as at January 1, 2019. Accordingly, the comparative information presented for 2018 has been presented, as previously reported, under IAS 17, Leases and has not been restated.

A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract transfers the right to control the identified asset, the Group uses the definition of a lease in IFRS 16, Leases.

(a)    As a lessee

At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices. However, the Group has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component.

The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at of before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.

The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased.

Lease payments included in the measurement of the lease liability comprise the following:

 

   

Fixed payments, including in-substance fixed payments

 

   

Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date

 

   

Amounts expected to be payable under a residual value guarantee

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

   

The exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Group presents right-of-use assets that do not meet the definition of investment property in ‘property and equipment’ in the statement of financial position.

The Group has elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Group recognizes the lease payments associated with lease as an expense on a straight-line basis over the lease term.

(b)    As a lessor

At inception or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.

When the Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operation lease.

To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset.

When the Group is an intermediate lessor, is accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the Group applies the exemption described above, then it classifies the sub-lease as an operating lease.

If an arrangement contains lease and non-lease components, then the Group applies IFRS 15 to allocate the consideration in the contract.

The Group applies derecognition and impairment requirements in IFRS 9 to the net investment in the lease. The Group further regularly reviews estimated unguaranteed residual values used in calculating the gross investment in the lease.

The Group recognizes lease payments received under operating leases as income on a straight-line basis over the lease term as part of ‘other revenue’.

(13)     Leases — Policies applied before January 1, 2019

The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases under which the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(a)    Finance leases — lessee

At the commencement of the lease term, the Group recognizes as finance assets and finance liabilities in its consolidated statement of financial position, the lower amount of the fair value of the leased property and the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance cost and the reduction of the outstanding liability. The finance cost is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the Group adopts for depreciable assets that are owned. If there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life. The Group reviews to determine whether the leased assets are impaired at the reporting date.

(b)    Operating leases

Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in profit or loss on a straight-line basis over the lease term.

(c)    Determining whether an arrangement contains a lease

Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset and the arrangement conveys a right to use the asset.

At inception or reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a financial lease that it is impracticable to separate the payments reliably, the Group recognizes an asset and a liability at an amount equal to the fair value of the underlying asset that was identified as the subject of the lease. Subsequently, the liability is reduced as payments are made and an imputed finance charge on the liability is recognized using the Group’s incremental borrowing rate of interest.

(14)    Non-current assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sales rather than through continuing use, are classified as held for sale. In order to be classified as held for sale, the assets (or disposal groups) must be available for immediate sale in their present condition and their sale must be highly probable. The assets or disposal groups that are classified as non-current assets held for sale are measured at the lower of their carrying amounts and fair value less cost to sell. The Group recognizes an impairment loss for any initial or subsequent write-down of assets (or disposal groups) to fair value less costs to sell and a gain for any subsequent increase in fair value less costs to sell up to the cumulative impairment loss previously recognized in accordance with IAS 36, Impairment of Assets.

A non-current asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

(15)    Non-derivative financial liabilities

The Group classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement. The Group

 

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recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

(a)    Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, these liabilities are measured at fair value. The amount of change in fair value of financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income, and the remaining amount of change in the fair value of the liability shall be presented in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the issue of the financial liability are recognized in profit or loss as incurred.

(b)    Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the issue of the financial liability. Subsequent to initial recognition, other financial liabilities are measured at amortized cost and the interest expenses are recognized using the effective interest method.

(c)    Derecognition of financial liability

The Group extinguishes a financial liability only when the contractual obligation is fulfilled, canceled or expires. The Group recognizes new financial liabilities at fair value based on new contracts and eliminates existing liabilities when the contractual terms of the financial liabilities change and the cash flows change substantially.

When a financial liability is derecognized, the difference between the carrying amount and the consideration paid (including any transferred non-cash assets or liabilities assumed) is recognized in profit or loss.

(16)    Employee benefits

(a)    Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render related services. When an employee has rendered a service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

(b)    Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render related services. The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognized in profit or loss in the period in which they arise.

(c)    Retirement benefits: defined contribution plans

When an employee has rendered a service to the Group during a period, the Group recognizes the contribution payable to a defined contribution plan in exchange for that service as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, the Group recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

 

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(d)    Retirement benefits: defined benefit plans

At the end of reporting period, defined benefit liabilities relating to defined benefit plans are recognized at present value of defined benefit obligations net of fair value of plan assets.

The calculation is performed annually by an independent actuary using the projected unit credit method. When the fair value of plan assets exceeds the present value of the defined benefit obligation, the Group recognizes an asset, to the extent of the present value of any economic benefits available in the form of refunds from the plan or reduction in the future contributions to the plan.

Remeasurements of the net defined benefit liability (asset), which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Group determines net interests on net defined benefit liability (asset) by multiplying discount rate determined at the beginning of the annual reporting period and considers changes in net defined benefit liability (asset) from contributions and benefit payments. Net interest costs and other costs relating to the defined benefit plan are recognized through profit or loss.

When the plan amendment or curtailment occurs, gains or losses on amendment or curtailment in benefits for the past service provided are recognized through profit or loss. The Group recognizes a gain or loss on a settlement when the settlement of defined benefit plan occurs.

(e)    Termination benefits

The Group recognizes a liability and expense for termination benefits at the earlier of the period when the Group can no longer withdraw the offer of those benefits and the period when the Group recognizes costs for a restructuring that involves the payment of termination benefits. If benefits are payable more than 12 months after the reporting period, they are discounted to their present value.

(17)    Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. If the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

If some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement is recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement is treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

A provision is used only for expenditures for which the provision was originally recognized.

(18)    Transactions in foreign currencies

(a)    Foreign currency transactions

Transactions in foreign currencies are translated to the functional currency of Group at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the

 

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functional currency using the exchange rate at the reporting date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.

Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments.

(b)    Foreign operations

If the presentation currency of the Group is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation is treated as assets and liabilities of the foreign operation. Thus, they are expressed in the functional currency of the foreign operation and translated at the closing rate at the reporting date.

When a foreign operation is disposed, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such cumulative amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

(19)    Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

When the Parent Company repurchases its own shares, the amount of the consideration paid is recognized as a deduction from equity and classified as treasury shares. The gains or losses from the purchase, disposal, reissue, or retirement of treasury shares are directly recognized in equity being as transaction with owners.

(20)    Hybrid bond

The Group recognizes a financial instrument issued by the Group as an equity instrument if it does not include contractual obligation to deliver financial assets including cash to the counter party.

(21)    Share-based Payment

 

For equity-settled share-based payment transaction, if the fair value of the goods or services received cannot be reliably estimated, the Group measures the value indirectly by reference to the fair value of the equity instruments granted. The related expense with a corresponding increase in capital surplus and others is recognized over the vesting period of the awards.

The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service and non-market performance conditions at the vesting date.

The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognized as an expense with a corresponding increase in liabilities, over the period during which the employees become unconditionally entitled to payment. The liability is remeasured at each reporting date and at settlement date based on the fair value of the share appreciation rights. Any changes in the liability are recognized in profit or loss.

 

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(22)    Revenue

(a)    Identification of performance obligations in contracts with customers

The Group identifies the distinct services or goods as performance obligations in contracts with customers such as (1) providing wireless telecommunications services, (2) sale of handsets and (3) providing other goods and services. In the case of providing both wireless telecommunications service and selling a handset together to one customer, the Group allocates considerations from the customer between the separate performance obligations for handset sale and wireless telecommunications service. The handset sale revenue is recognized when handset is delivered, and the wireless telecommunications service revenue is recognized over the period of the contract term as stated in the subscription contract.

(b)    Allocation of the transaction price to each performance obligation

The Group allocates the transaction price of a contract to each performance obligation identified on a relative stand-alone selling price basis. The Group uses “adjusted market assessment approach” for estimating the stand-alone selling price of a good or service. As an exception, the Group uses “expected cost plus a margin approach” for insignificant transactions.

(c)    Incremental costs of obtaining a contract

The Group pays commissions to its retail stores and authorized dealers in connection with acquiring service contracts. The commissions paid to these parties constituted a significant portion of the Group’s operating expenses. These commissions would not have been paid if there have been no binding contracts with subscribers and, therefore, the Group capitalizes certain costs associated with commissions paid to obtain new customer contracts and amortize them over the expected contract periods.

(d)    Customer loyalty programs

The Group provides customer loyalty points to customers based on the usage of the service to which the Group allocates a portion of consideration received as a performance obligation distinct from wireless telecommunications services. The amount to be allocated to the loyalty program is measured according to the relative stand-alone selling price of the customer loyalty points. The amount allocated to the loyalty program is deferred as a contract liability and is recognized as revenue when loyalty points are redeemed.

(e)    Consideration payable to a customer

Based on the subscription contract, a customer who uses the Group’s wireless telecommunications services may receive discount for purchasing goods or services from a designated third party. The Group pays a portion of the price discounts that the customer receives to the third party which is viewed as consideration payable to a customer. The Group accounts for the amounts payable to the third party as a reduction of the wireless telecommunications service revenue.

(23)    Finance income and Finance costs

Finance income comprises interest income on funds invested (including financial assets measured at fair value), dividend income, gains on disposal of financial assets at FVTPL, changes in fair value of financial instruments at FVTPL, and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest rate method. Dividend income is recognized in profit or loss when the right to receive the dividend is established.

Finance costs comprise interest expense on borrowings, changes in fair value of financial instruments at FVTPL, and losses on hedging instruments that are recognized in profit or loss. Interest expense on borrowings and debentures is recognized as it accrues in profit or loss using the effective interest rate method.

 

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(24)    Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in OCI.

The Group pays income tax in accordance with the tax-consolidation system when the Parent Company and its subsidiaries are economically unified.

(a)    Current tax

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and includes interests and fines related to income taxes paid or payable. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, and non-taxable or non-deductible items from the accounting profit.

(b)    Deferred tax

Deferred tax is recognized by using the asset-liability method in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The Group recognizes a deferred tax liability for all taxable temporary differences, except for the difference associated with investments in subsidiaries and associates 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. The Group recognizes a deferred tax asset for all deductible temporary differences to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

A deferred tax asset is recognized for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. Future taxable profit is dependent on the reversal of taxable temporary differences. If there are insufficient taxable temporary differences to recognize the deferred tax asset, the business plan of the Group and the reversal of existing temporary differences are considered in determining the future taxable profit.

The Group reviews the carrying amount of a deferred tax asset at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized, or the liability is settled based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if the Group has a legally enforceable right to offset the amount recognized and intends to settle the current tax liabilities and assets on a net basis. Income tax expense in relation to dividend payments is recognized when liabilities relating to the dividend payments are recognized.

(c)    Uncertainty over income tax treatments

The Group assesses the uncertainty over income tax treatments pursuant to IAS 12. If the Group concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the Group reflects the effect of

 

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uncertainty for each uncertain tax treatment by using either of the following methods, depending on which method the entity expects to better predict the resolution of the uncertainty:

 

   

The most likely amount: the single most likely amount in a range of possible outcomes.

 

   

The expected value: the sum of the probability-weighted amounts in a range of possible outcomes.

(25)    Earnings per share

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

(26)    Standards issued but not yet effective

The following new standards are effective for annual periods beginning after January 1, 2020 and earlier application is permitted; however, the Group has not adopted the following new standards early in preparing the accompanying consolidated financial statements.

Interest Rate Benchmark Reform — Phase 2 (Amendments to IFRS 9, Financial Instruments, IAS 39, Financial Instrument—Recognition and Measurement, IFRS 7, Financial Instruments- Disclosures, IFRS 4, Insurance Contracts and IFRS 16, Leases)

The amendments address issued that might affect financial reporting as a result of the reform of an interest rate benchmark, including the effects of changes to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate. The amendments provide practical relief from certain requirements in IFRS 9, Financial Instruments, IAS 39, Financial Instrument- Recognition and Measurement, IFRS 7, Financial Instruments- Disclosures, IFRS 4, Insurance Contracts and IFRS 16, Leases relating to changes in the basis for determining contractual cash flows of financial assets, financial liabilities and lease liabilities and hedge accounting.

The amendment will require the Group to account for a change in the basis for determining the contractual cash flows of a financial asset or financial liability that is required by interest rate benchmark reform by updating the effective interest rate of the financial asset or financial liability.

As of December 31, 2020, the Group has LIBOR floating rate notes amounting to ₩326,400 million that will be subject to IBOR reform. The Group has not determined an alternative interest rate benchmark to LIBOR for these notes as of December 31, 2020 and these amendments are not expected to have a significant impact on the Group’s statement of income.

The amendments provide exceptions to the hedge accounting requirement in the following areas.

 

   

Allow amendment of the designation of a hedging relationship to reflect changes that are required by the reform.

 

   

When a hedged item in a cash flow hedge is amended to reflect the changes that are required by the reform, the amount accumulated in the cash flow hedge reserve will be deemed to be based on the alternative benchmark rate on which the hedged future cash flows are determined.

 

   

When a group of items is designated as a hedged item and an item in the Group is amended to reflect the changes that are required by the reform, the hedged items are allocated to sub- groups based on the benchmark rates being hedged.

 

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If an entity reasonably expects that an alternative benchmark rate will be separately identifiable within a period of 24 months, it is not prohibited from designating the rate as a non-contractually specified risk component if it is not separately identifiable at the designation date.

As of December 31, 2020, the Group has cash flow hedges of LIBOR risk. The Group has not identified the alternative interest rate benchmark to LIBOR for indexation of the hedged items and hedging instruments. When LIBOR is replaced by the alternative interest rate, the Group expects to apply the amendments related to hedge accounting. However, there is uncertainty about when and how replacement may occur. When the change occurs to the hedged item or the hedging instrument, the Group will remeasure the cumulative change in fair value of the hedged item or the fair value of the interest rate swap, respectively, based on the alternative interest rate to LIBOR. Hedging relationships may experience hedge ineffectiveness if there is a timing or other mismatch between the transition. The Group does not expect that the amounts accumulated in the cash flow hedge reserve will be immediately reclassified to profit or loss because of IBOR transition.

The amendments will require the Group to disclose additional information about the Group’s exposure to risks arising from interest rate benchmark reform and related risk management activities.

The Group plans to apply the amendments from January 1, 2021. Application will not impact amounts reported for 2020 or prior periods.

The following new and amended standards are not expected to have a significant impact on the Group’s consolidated financial statements.

 

   

COVID-19-Related Rent Concessions (Amendment to IFRS 16).

 

   

Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16).

 

   

Reference to Conceptual Framework (Amendments to IFRS 3).

 

   

Classification of Liabilities as Current or Non-current (Amendments to IAS 1).

 

   

IFRS 17 Insurance Contracts and amendments to IFRS 17 Insurance Contracts.

 

5.

Operating Segments

The Group’s operating segments have been identified to be each business unit, by which the Group provides independent services and merchandise. The Group’s reportable segments are cellular services, which include cellular voice service, wireless data service and wireless internet services; fixed-line telecommunication services, which include telephone services, internet services, and leased line services; security services, which include unmanned security services, manned security services and system software development; Commerce services, the open marketplace platform; and all other businesses, which include the Group’s internet portal services and other immaterial operations, each of which does not meet the quantitative threshold to be considered as a reportable segment and are presented collectively as others.

 

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For the years ended December 31, 2020, 2019 and 2018

 

(1)

Segment information for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                                                
    2020  
    Cellular
services
    Fixed-line
telecommu-
nication

services
    Security
services
    Commerce
services
    Others     Sub-total     Adjustments
(*2)
    Total  

Total revenue

  13,853,274       4,467,863       1,332,363       814,250       1,186,015       21,653,765       (3,029,114     18,624,651  

Inter-segment revenue

    1,557,590       1,062,187       85,846       21,399       302,092       3,029,114       (3,029,114      

External revenue

    12,295,684       3,405,676       1,246,517       792,851       883,923       18,624,651             18,624,651  

Depreciation and amortization

    2,892,460       874,562       210,092       35,742       62,403       4,075,259       (84,176     3,991,083  

Operating profit (loss)

    1,031,887       258,973       137,830       11,000       (21,299     1,418,391       (313,757     1,104,634  

Gain relating to investments in subsidiaries, associates and joint ventures, net

                  1,028,403  

Finance income

                  241,196  

Finance costs

                  (497,193

Profit before income tax

                  1,877,040  

 

(In millions of won)                                                
    2019  
    Cellular
services
    Fixed-line
telecommu-
nication

services(*1)
    Security
services(*1)
    Commerce
services(*1)
    Others(*1)     Sub-total     Adjustments
(*2)
    Total  

Total revenue

  13,787,009       3,944,260       1,183,724       726,552       1,069,685       20,711,230       (2,970,514     17,740,716  

Inter-segment revenue

    1,609,467       1,004,193       74,247       15,899       266,708       2,970,514       (2,970,514      

External revenue

    12,177,542       2,940,067       1,109,477       710,653       802,977       17,740,716             17,740,716  

Depreciation and amortization

    2,828,285       792,334       193,247       35,939       63,765       3,913,570       (56,908     3,856,662  

Operating profit (loss)

    963,207       144,739       153,843       1,840       (77,892     1,185,737       (178,479     1,007,258  

Gain relating to investments in subsidiaries, associates and joint ventures, net

                  449,543  

Finance income

                  142,155  

Finance costs

                  (437,955

Profit before income tax

                  1,161,001  

 

(In millions of won)                                                
    2018  
    Cellular
Services
    Fixed-line
telecommu-
nications

Services(*1)
    Security
Services(*1)
    Commerce
Services(*1)
    Others(*1)     Sub-total     Adjustments
(*2)
    Total  

Total revenue

  13,961,762       3,857,074       286,089       790,818       912,776       19,808,519       (2,934,559     16,873,960  

Inter-segment revenue

    1,582,865       1,034,769       1,801       62,446       252,678       2,934,559       (2,934,559      

External revenue

    12,378,897       2,822,305       284,288       728,372       660,098       16,873,960             16,873,960  

Depreciation and amortization

    2,341,862       643,813       52,887       19,051       62,659       3,120,272       5,846       3,126,118  

Operating profit (loss)

    1,320,726       240,572       (7,571     (85,041     (240,782     1,227,904       (394,053     833,851  

Gain relating to investments in subsidiaries, associates and joint ventures, net

                  3,270,912  

Finance income

                  256,435  

Finance costs

                  (385,232

Profit before income tax

                  3,975,966  

 

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For the years ended December 31, 2020, 2019 and 2018

 

 

 

(*1)

During the year ended December 31, 2019, due to the change in the categorization of information reviewed by the chief operating decision maker in 2019, the Group reclassified SK stoa Co., Ltd. from Fixed-line telecommunication Service segment to Commerce Services segment. In addition, operating segment for Life & Security Holdings Co., Ltd. and SK Infosec Co., Ltd. was separately presented as a reportable segment (Security Services) and no longer included in Others segment. Segment information for the years ended December 31, 2018 was restated to conform to the 2019 reclassifications.

 

(*2)

Adjustments for operating profit (loss) are the amount differences from operating profit (loss) included in CODM report which is based on Korean IFRS to operating profit (loss) under IFRS. The reconciliation of these amounts is included in note 5-(2). Adjustments for depreciation and amortization and operating profit (loss) also included the amount due to the consolidation adjustments, such as internal transactions.

 

(2)

Reconciliation of total segment operating profit to consolidated operating profit from continuing operations for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                   
     2020     2019     2018  

Total segment operating profit (Before adjustments)

   1,418,391       1,185,737       1,227,904  

Adjustments(*1)

     (69,067     (77,560     (26,144
  

 

 

   

 

 

   

 

 

 

Total segment operating profit

     1,349,324       1,108,177       1,201,760  

Other operating income:

      

Gain on disposal of property and equipment and intangible assets

     35,644       8,533       38,933  

Others(*2)

     64,004       94,288       33,017  
  

 

 

   

 

 

   

 

 

 
     99,648       102,821       71,950  

Other operating expenses:

      

Impairment loss on property and equipment and intangible assets

     (208,834     (65,935     (255,839

Loss on disposal of property and equipment and intangible assets

     (41,598     (47,760     (87,257

Donations

     (16,774     (17,557     (59,012

Bad debt for accounts receivable — other

     (10,559     (5,802     (7,718

Others(*3)

     (66,573     (66,686     (30,033
  

 

 

   

 

 

   

 

 

 
     (344,338     (203,740     (439,859
  

 

 

   

 

 

   

 

 

 

Consolidated operating profit from continuing operations

   1,104,634       1,007,258       833,851  
  

 

 

   

 

 

   

 

 

 

 

 

(*1)

Adjustments for operating profit included the amount due to the consolidation adjustments, such as internal transactions.

 

(*2)

Others for the years ended December 31, 2020 includes ₩12 billion of gain on business transfer and others for the years ended December 31, 2019 includes ₩70 billion of gain on business transfer, respectively, various other income with inconsequential amounts.

 

(*3)

Others for the years ended December 31, 2020, 2019 and 2018 include ₩10.1 billion, ₩42.4 billion and ₩0.4 billion of penalties, respectively, and various other expenses with inconsequential amounts.

Since there are no intersegment sales of inventory or depreciable assets, there is no unrealized intersegment profit to be eliminated on consolidation. Domestic revenue for the years ended December 31, 2020, 2019 and 2018 amounts to ₩18,608 billion, ₩17,680 billion and ₩16,656 billion, respectively. Domestic non-current assets (excluding financial assets, investments in associates and joint ventures and deferred tax assets) as of December 31, 2020, 2019 and 2018 amount to ₩22,242 billion, ₩20,678 billion and ₩20,040 billion, and non-current assets outside of Korea amount to ₩63 billion, ₩63 billion and ₩72 billion, respectively.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

No single customer contributed 10% or more to the Group’s total sales for the years ended December 31, 2020, 2019 and 2018.

The Group principally operates its businesses in Korea and the revenue amounts earned outside of Korea are immaterial. Therefore, no entity-wide geographical information is presented.

 

(3)

Disaggregation of operating revenues considering the economic factors that affect the amounts, timing and uncertainty of the Group’s revenue and future cash flows is as follows:

 

(In millions of won)                      
        2020     2019     2018  

Goods and services transferred at a point in time:

 

 

Cellular revenue

  Goods(*1)   975,247       1,142,868       1,124,143  

Fixed-line telecommunication revenue

  Goods     90,459       145,314       125,959  

Security services revenue

  Goods     136,504       79,732       12,332  

Commerce services revenue

  Goods     71,519       56,699       45,837  
  Commerce     218,468       151,690       77,539  

Other revenue

  Goods     60,002       86,793       81,311  
  Products     37,657       44,336       51,214  
  Others(*2)     505,076       497,768       275,431  
   

 

 

   

 

 

   

 

 

 
      2,094,932       2,205,200       1,793,766  
   

 

 

   

 

 

   

 

 

 

Goods and services transferred over time:

 

 

Cellular revenue

  Wireless service(*3)     9,801,194       9,532,377       9,770,423  
  Cellular interconnection     472,215       494,267       532,156  
  Other(*4)     1,047,028       1,008,030       952,175  

Fixed-line telecommunication revenue

  Fixed-line service     215,827       224,453       371,224  
  Cellular interconnection     85,130       92,396       95,865  
 

Internet Protocol

Television(*5)

    1,623,095       1,285,831       1,171,104  
  International calls     160,293       137,902       152,918  
 

Internet service and

miscellaneous(*6)

    1,230,872       1,054,171       905,235  

Security services revenue

  Service(*7)     1,110,013       1,029,745       271,956  

Commerce services revenue

  Commerce service     502,864       502,264       604,996  

Other revenue

  Miscellaneous(*2)     281,188       174,080       252,142  
   

 

 

   

 

 

   

 

 

 
      16,529,719       15,535,516       15,080,194  
   

 

 

   

 

 

   

 

 

 
    18,624,651       17,740,716       16,873,960  
   

 

 

   

 

 

   

 

 

 

 

 

(*1)

Cellular revenue includes revenue from sales of handsets and other electronic accessories.

 

(*2)

Miscellaneous other revenue includes revenue from considerations received for the development and maintenance of system software, and digital contents platform services.

 

(*3)

Wireless service includes revenue from wireless voice and data transmission services principally derived from usage charges to wireless subscribers.

 

(*4)

Other revenue includes revenue from billing and collection services as well as other miscellaneous services.

 

(*5)

IPTV service revenue includes revenue from IPTV services principally derived from usage charges to IPTV subscribers.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(*6)

Internet service includes revenue from the high speed broadband internet service principally derived from usage charges to subscribers as well as other miscellaneous services.

 

(*7)

Service includes revenue from rendering security services.

 

6.

Restricted Deposits

Deposits which are restricted in use as of December 31, 2020 and 2019 are summarized as follows:

 

(In millions of won)              
     December 31, 2020      December 31, 2019  

Short-term financial instruments(*)

   98,057        95,034  

Long-term financial instruments(*)

     890        988  
  

 

 

    

 

 

 
   98,947        96,022  
  

 

 

    

 

 

 

 

 

(*)

Financial instruments include charitable trust fund established by the Group where profits from the fund are donated to charitable institutions. As of December 31, 2020, the funds cannot be withdrawn before maturity.

 

7.

Trade and Other Receivables

 

(1)

Details of trade and other receivables as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)                    
     December 31, 2020  
     Gross
amount
     Loss
allowance
    Carrying
amount
 

Current assets:

       

Accounts receivable — trade

   2,453,149        (264,256     2,188,893  

Short-term loans

     98,366        (902     97,464  

Accounts receivable — other(*)

     1,034,119        (55,075     979,044  

Accrued income

     3,418        (166     3,252  

Guarantee deposits (Other current assets)

     112,733              112,733  
  

 

 

    

 

 

   

 

 

 
     3,701,785        (320,399     3,381,386  

Non-current assets:

       

Long-term loans

     84,355        (44,122     40,233  

Long-term accounts receivable — other(*)

     332,803              332,803  

Guarantee deposits

     172,774        (300     172,474  

Long-term accounts receivable — trade (Other non-current assets)

     25,702        (242     25,460  
  

 

 

    

 

 

   

 

 

 
     615,634        (44,664     570,970  
  

 

 

    

 

 

   

 

 

 
   4,317,419        (365,063     3,952,356  
  

 

 

    

 

 

   

 

 

 

 

 

(*)

Gross and carrying amounts of accounts receivable — other as of December 31, 2020 include ₩517,175 million of financial instruments classified as FVTPL.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)                    
     December 31, 2019  
     Gross
amount
     Loss
allowance
    Carrying
amount
 

Current assets:

       

Accounts receivable — trade

   2,480,419        (249,440     2,230,979  

Short-term loans

     66,706        (583     66,123  

Accounts receivable — other(*)

     951,888        (48,379     903,509  

Accrued income

     3,977        (166     3,811  

Guarantee deposits (Other current assets)

     145,039              145,039  
  

 

 

    

 

 

   

 

 

 
     3,648,029        (298,568     3,349,461  

Non-current assets:

       

Long-term loans

     81,231        (47,471     33,760  

Long-term accounts receivable — other(*)

     351,663              351,663  

Guarantee deposits

     164,951        (299     164,652  

Long-term accounts receivable — trade (Other non-current assets)

     16,977        (61     16,916  
  

 

 

    

 

 

   

 

 

 
     614,822        (47,831     566,991  
  

 

 

    

 

 

   

 

 

 
   4,262,851        (346,399     3,916,452  
  

 

 

    

 

 

   

 

 

 

 

 

(*)

Gross and carrying amounts of accounts receivable — other as of December 31, 2019 include ₩532,225 million of financial instruments classified as FVTPL.

 

(2)

Changes in the loss allowance on accounts receivable — trade measured at amortized costs during the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)                                         
     Beginning
balance
     Impairment      Write-offs(*)     Collection of
receivables
previously
written-off
     Business
combination
and others
     Ending
Balance
 

2020

   249,501        48,625        (48,278     12,771        1,879        264,498  

2019

   260,157        28,841        (55,756     14,772        1,487        249,501  

 

 

(*)

The Group writes off the trade and other receivables that are determined to be uncollectable due to reasons such as termination of operations or bankruptcy.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(3)

The Group applies the practical expedient that allows the Group to estimate the loss allowance for accounts receivable — trade at an amount equal to the lifetime expected credit losses. The expected credit losses include the forward-looking information. To make the assessment, the Group uses its historical credit loss experience over the past three years and classified the accounts receivable — trade by their credit risk characteristics and days overdue. Details of loss allowance on accounts receivable — trade as of December 31, 2020 are as follows:

 

(In millions of won)                              
     Less than
6 months
    6 months ~

1 year
    1 ~ 3 years     More than
3 years
 

Telecommunications service revenue

   Expected credit loss rate      2.04     70.29     86.21     99.18
   Gross amount    1,400,316       49,583       127,275       25,195  
   Loss allowance      28,574       34,854       109,727       24,988  
     

 

 

   

 

 

   

 

 

   

 

 

 

Other revenue

   Expected credit loss rate      2.82     77.52     61.76     56.19
   Gross amount    802,081       6,753       8,250       59,398  
   Loss allowance      22,652       5,235       5,095       33,373  
     

 

 

   

 

 

   

 

 

   

 

 

 

As the Group is a wireless and fixed-line telecommunications service provider, the Group’s financial assets measured at amortized cost primarily consist of receivables from numerous individual customers, and, therefore, no significant credit concentration risk arises.

Receivables related to other revenue mainly consist of receivables from corporate customers. The Group transacts only with corporate customers with credit ratings that are considered to be low at credit risk. In addition, the Group is not exposed to significant credit concentration risk as the Group regularly assesses their credit risk by monitoring their credit rating. While the contract assets are under the impairment requirements, no significant credit risk has been identified.

 

8.

Prepaid expenses

The Group pays commissions to its retail stores and authorized dealers for wireless and fixed-line telecommunications services. The Group capitalized certain costs associated with commissions paid to retail stores and authorized dealers to obtain new and retained customer contracts as prepaid expenses. These prepaid expenses are amortized on a straight-line basis over the periods that the Group expects to maintain its customers.

(1)     Details of prepaid expenses as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)              
     December 31, 2020      December 31, 2019  

Current assets:

     

Incremental costs of obtaining contracts

   2,016,570        1,897,233  

Others

     111,779        121,457  
  

 

 

    

 

 

 
     2,128,349        2,018,690  
  

 

 

    

 

 

 

Non-current assets:

     

Incremental costs of obtaining contracts

     982,952        1,152,748  

Others

     80,759        87,117  
  

 

 

    

 

 

 
   1,063,711        1,239,865  
  

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2)     Incremental costs of obtaining contracts

The amortization and impairment losses in connection with incremental costs of obtaining contracts recognized during the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                     
     2020      2019      2018  

Amortization and impairment losses recognized

   2,418,947        2,193,333        2,002,460  

 

9.

Contract assets and liabilities

In case of providing both wireless telecommunication services and sales of handsets, the Group allocated the consideration based on relative stand-alone selling prices and recognized unbilled receivables from handset sales as contract assets. The Group recognized receipts in advance for prepaid telecommunications services and unearned revenue for customer loyalty programs as contract liabilities.

 

(1)

Details of contract assets and liabilities as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)              
     December 31, 2020      December 31, 2019  

Contract assets:

     

Allocation of consideration between performance obligations

   148,281        191,858  

Contract liabilities:

     

Wireless service contracts

     22,026        20,393  

Customer loyalty programs

     16,709        21,945  

Fixed-line service contracts

     106,916        65,315  

Security services

     30,597        32,026  

Others

     84,348        83,777  
  

 

 

    

 

 

 
   260,596        223,456  
  

 

 

    

 

 

 

 

(2)

The amount of revenue recognized during the year ended December 31, 2020 related to the contract liabilities carried forward from the prior period is ₩142,144 million and during the year ended December 31, 2019 related to the contract liabilities carried forward from the prior period is ₩ 117,409 million. Details of revenue expected to be recognized from contract liabilities as of December 31, 2020 are as follows:

 

(In millions of won)                            
     Less than
1 year
     1 ~ 2 years      More than
2 years
     Total  

Wireless service contracts

   22,026                      22,026  

Customer loyalty programs

     13,704        2,123        882        16,709  

Fixed-line service contracts

     91,966        9,687        5,263        106,916  

Security services

     22,953        5,764        1,880        30,597  

Others

     79,243        1,798        3,307        84,348  
  

 

 

    

 

 

    

 

 

    

 

 

 
   229,892        19,372        11,332        260,596  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

10.

Inventories

 

(1)

Details of inventories as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)                                        
     December 31, 2020      December 31, 2019  
     Acquisition
cost
     Write-
down
    Carrying
amount
     Acquisition
cost
     Write-
down
    Carrying
amount
 

Merchandise

   172,762        (10,566     162,196        162,485        (14,557     147,928  

Finished goods

     3,730        (1,879     1,851        4,264        (2,265     1,999  

Work in process

     2,579        (818     1,761        2,674        (539     2,135  

Raw materials

     11,921        (6,905     5,016        12,369        (7,967     4,402  

Supplies

     619              619        7,112        (694     6,418  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   191,611        (20,168     171,443        188,904        (26,022     162,882  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(2)

The amount of the inventory write-downs and write-off of inventories charged to statement of income are as follows:

 

(In millions of won)                   
     2020     2019     2018  

Charged to cost of products that have been resold

   (1,560     15,019       2,509  

Write-off upon sale

     (3,312     (1,101     (2,396

There are no significant reversals of inventory write-downs for the periods presented.

 

(3)

Inventories recognized as operating expenses for the years ended December 31, 2020, 2019, and 2018 are ₩1,385,016 million, ₩1,498,249 million, and ₩1,411,986 million, respectively, which are included in the cost of goods sold.

 

11.

Investment Securities

 

(1)

Details of short-term investment securities as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)                   
     Category    December 31, 2020      December 31, 2019  

Beneficiary certificates

   FVTPL    150,392        166,666  

 

(2)

Details of long-term investment securities as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)                    
     Category     December 31, 2020      December 31, 2019  

Equity instruments

     FVOCI(*)     1,454,361        710,272  
     FVTPL       67,833        1,011  
    

 

 

    

 

 

 
       1,522,194        711,283  

Debt instruments

     FVOCI       1,080        4,627  
     FVTPL       125,563        141,305  
    

 

 

    

 

 

 
       126,643        145,932  
    

 

 

    

 

 

 
     1,648,837        857,215  
    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

 

 

(*)

The Group designated investment in equity instruments that are not held for trading as financial assets at FVOCI, the amounts to those FVOCI as of December 31, 2020 and 2019 are ₩1,454,361 million and ₩ 710,272 million, respectively. During the year ended December 31, 2019, the Group disposed of 6,109,000 common shares issued by Hana Financial Group Inc. in exchange for ₩ 221,146 million in cash. The valuation gain on financial assets at FVOCI of ₩30,073 million was reclassified from reserves to retained earnings. Also, the Group acquired 2,177,401 shares of Kakao Co., Ltd. in exchange for ₩302,321 million in cash and designated the investments as financial assets at FVOCI. In relation to this transaction, the Parent Company disposed 1,266,620 of its treasury shares to Kakao Co., Ltd. in exchange for ₩300,000 million in cash. (See note 24) As this transaction is considered as a forward transaction, the Group recognized ₩28,787 million of gain of settlement of derivatives, the difference of fair value between the contract date and the transaction date.

 

12.

Business Combinations

 

(1)

2020

 

1)

Merger of Tbroad Co., Ltd. and two other companies by SK Broadband Co., Ltd.:

On April 30, 2020, SK Broadband Co., Ltd., a subsidiary of the Parent Company, merged with Tbroad Co., Ltd., Tbroad Dongdaemun Broadcasting Co., Ltd. and Korea Digital Cable Media Center Co., Ltd. in order to strengthen the competitiveness and enhance the synergy as a comprehensive media company. The considerations transferred included shares of SK Broadband Co., Ltd. transferred based on the merger ratio and the obligations and rights pursuant to the shareholders’ agreement between the Parent Company and the acquiree’s shareholders, both measured at fair value as of April 30, 2020. The Group recognized the difference between the fair value of net assets acquired and the consideration transferred amounting to ₩405,639 million as goodwill.

The Group’s consolidated revenue and profit for the year would have been ₩18,831,147 million and ₩1,516,857 million, respectively, if the acquisition has occurred on January 1, 2020. The Group cannot reasonably identify the acquiree’s revenue and profit for the year included in the consolidated statement of income, as the business of Tbroad Co., Ltd. and the other two companies were merged with the Group’s subsidiary, SK Broadband Co., Ltd., and no separate financial information post acquisition is available.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(i)

Considerations transferred, identifiable assets acquired and liabilities assumed at the acquisition date are as follows:

 

(In millions of won)       
     Amounts  

I. Consideration transferred:

  

Fair value of shares of SK Broadband Co., Ltd.

   862,147  

Fair value of derivative liability(*1)

     320,984  

II. Fair value of identifiable assets acquired and liabilities assumed:

 

Cash and cash equivalents

     110,644  

Short-term financial instruments

     6  

Accounts receivable — trade and other

     66,241  

Prepaid expenses

     36,324  

Contract assets

     14,033  

Long-term investment securities

     6,239  

Investments in associates and joint ventures

     13,637  

Property and equipment, net

     245,654  

Intangible assets, net(*2)

     423,515  

Other assets

     3,261  

Deferred tax assets

     1,296  

Accounts payable — trade and other

     (105,179

Contract liabilities

     (1,674

Income tax payable

     (18,065

Provisions

     (2,755

Defined benefit liabilities

     (30

Other liabilities

     (15,655
  

 

 

 
   777,492  
  

 

 

 

III. Goodwill(I - II)

     405,639  
  

 

 

 

 

 

(*1)

The Parent Company has recognized fair value of obligations and rights in connection with the shareholders’ agreement with the acquiree’s shareholders as consideration for the business combination. (See note 22)

 

(*2)

Identifiable intangible asset recognized by the Group in the business combination included customer relationships related to Tbroad Co., Ltd. and Tbroad Dongdaemun Broadcasting Co., Ltd. measured at fair value on the date of merger amounting to ₩374,019 million. Fair value of the customer relationships was estimated based on the multi-period excess earnings method (“MPEEM”). MPEEM is a valuation technique under income approach which estimates fair value by discounting the expected future excess earnings attributable to an intangible asset using risk adjusted discount rate. The following table shows the details of valuation technique used in measuring fair values as well as the significant unobservable inputs used.

 

F-57


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

Type

  

Valuation
technique

  

Significant

unobservable inputs

  

Interrelationship between key unobservable
inputs and

fair value measurement

Customer relationships    MPEEM   

•  Estimated revenue per user

•  Future churn rates

•  Weighted average cost of capital (“WACC”)

(7.7% for Tbroad Co., Ltd. and 8.3% for Tbroad Dongdaemun Broadcasting Co., Ltd.)

  

•  The fair value of customer relationship will increase if expected revenue per subscriber increases and customer churn rate in the future and WACC decrease.

•  The fair value of customer relationship will decrease if expected revenue per subscriber decreases and customer churn rate in the future and WACC increase.

 

2)

Acquisition of Broadband Nowon Co., Ltd. by the Parent Company:

The Parent Company has obtained control by acquiring 627,000 shares(55%) of Tbroad Nowon Broadcasting Co., Ltd. and Tbroad Nowon Broadcasting Co., Ltd. changed its name to Broadband Nowon Co., Ltd. during the year ended December 31, 2020. The consideration transferred was ₩10,421 million in cash and the difference between the fair value of net assets acquired and the consideration transferred amounting to ₩733 million was recognized as other non-operating income. Subsequent to the acquisition, Broadband Nowon Co., Ltd. recognized revenue of ₩5,756 million and net profit of ₩426 million.

 

(i)

Summary of the acquiree

 

    

Information of Acquiree

Corporate name

   Broadband Nowon Co., Ltd.

Location

   21, 81gil, Dobong-ro, Gangbuk-gu, Seoul, Korea

CEO

   Yoo, Chang-Wan

Industry

   Cable broadcasting services

 

(ii)

Considerations transferred, identifiable assets acquired and liabilities assumed at the acquisition date are as follows:

 

(In millions of won)    Amounts  

I. Consideration transferred:

  

Cash and cash equivalents

   10,421  

II. Fair value of identifiable assets acquired and liabilities assumed:

 

Cash and cash equivalents

     18,106  

Accounts receivable — trade and other

     1,122  

Property and equipment, net

     1,784  

Intangible assets, net

     360  

Other assets

     595  

Accounts payable — trade and other

     (1,351

Other liabilities

     (336
  

 

 

 
     20,280  

III. Non-controlling interests:

     9,126  
  

 

 

 

IV. Gain on bargain purchase (I - II+III)

   (733
  

 

 

 

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

3)

Acquisition of security equipment construction and security services business of SK hystec inc. by ADT CAPS Co., Ltd.

ADT CAPS Co., Ltd., a subsidiary of the Parent Company, acquired the security equipment construction and security services business from SK hystec inc., a related party of the Group, in order to strengthen the expertise and the competitiveness of security business during the year ended December 31, 2020. The consideration transferred was ₩8,047 million, among which ₩2,958 million was paid in cash during the year ended December 31, 2020 and the remaining balance will be paid at ₩3,000 million annually in July 2021 and July 2022. The Group recognized the difference between the fair value of net assets acquired and the consideration transferred amounting to ₩2,892 million as goodwill.

 

(i)

Considerations transferred, identifiable assets acquired and liabilities assumed at the acquisition date are as follows:

 

(In millions of won)       
     Amounts  

I. Consideration transferred:

  

Cash and cash equivalents

   8,047  

II. Fair value of identifiable assets acquired and liabilities assumed:

 

Accounts receivable — trade and other

     6,787  

Property and equipment, net

     363  

Intangible assets, net

     6,460  

Other assets

     4  

Accounts payable — trade and other

     (5,306

Defined benefit liabilities

     (1,227

Deferred tax liabilities

     (1,554

Other liabilities

     (372
  

 

 

 
     5,155  
  

 

 

 

III. Goodwill (I - II)

   2,892  
  

 

 

 

 

4)

Business combination under common control: Merger of Life & Security Holdings Co., Ltd. by SK Infosec Co., Ltd.

SK Infosec Co., Ltd. merged with Life & Security Holdings Co., Ltd., a subsidiary of the Parent Company, to improve business management efficiency on December 30, 2020. As this transaction is a business combination under common control, the acquired assets and liabilities were recognized at the carrying amounts in the ultimate controlling entity’s consolidated financial statements and there is no effect on the assets and liabilities of consolidated financial statements. As a result of the merger, the Parent Company’s ownership interest of SK Infosec Co., Ltd. has changed from 100% to 62.6%.

 

(2)

2019

 

1)

Acquisition of Incross Co., Ltd. by the Parent Company

The Parent Company acquired 2,786,455 shares of Incross Co., Ltd. at ₩53,722 million in cash during the year ended December 31, 2019 in order to expand digital advertising business through the integration of the Group’s technological capabilities. Although the Parent Company owns less than 50% of the investee, the management has determined that the Parent Company controls Incross Co., Ltd. considering the level of dispersion of remaining voting rights and voting patterns at previous shareholders’ meetings, and the fact that the Parent Company has a right to appoint the majority of the members of board of directors by the virtue of an agreement with the investee’s

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

other shareholders. Incross Co., Ltd. reported ₩19,787 million of revenue and ₩5,756 million of profit since the Group obtained control.

 

(i)

Summary of the acquiree

 

    

Information of Acquiree

Corporate name

   Incross Co., Ltd.

Location

   5th floor, 1926, Nambusunhwan-ro, Gwanak-gu, Seoul, Korea

CEO

   Lee, Jae-won

Industry

   Media representative business

 

(ii)

Considerations transferred, identifiable assets acquired and liabilities assumed at the acquisition date are as follows:

 

(In millions of won)       
     Amount  

I. Considerations transferred:

  

Cash and cash equivalents

   53,722  

II. Fair value of identifiable assets acquired and liabilities assumed:

  

Cash and cash equivalents

     17,400  

Short-term financial instruments

     24,941  

Accounts receivable — trade and other

     67,259  

Property and equipment, net

     2,411  

Intangible assets, net

     2,709  

Other assets

     9,254  

Accounts payable — trade and other

     (57,309

Other liabilities

     (1,984
  

 

 

 
     64,681  

III. Non-controlling interests:

     40,592  
  

 

 

 

IV. Goodwill(I - II+III)

   29,633  
  

 

 

 

 

(3)

2018

 

1)

Acquisition of id Quantique SA by the Parent Company:

As of April 30, 2018, the Parent Company acquired additional 41,157,506 shares in exchange of ₩55,249 million in cash, which resulted in the Parent Company’s obtaining control over id Quantique SA with 44,157,506 shares and 58.1% ownership of the outstanding shares, in aggregate. Taking control of id Quantique SA will enable the Parent Company to increase its corporate value as the leading mobile telecommunication operator in Korea and to generate profit in overseas markets by utilizing quantum cryptographic technologies.

In addition, the Parent Company acquired additional 16,666,666 shares in exchange for assets amounting to ₩5,672 million resulting in the increase of the ownership to 65.6%.

id Quantique SA has recognized ₩9,935 million in revenue and ₩5,220 million in net losses since the Group obtained control. Meanwhile, the existing shares were reclassified into the investment in a subsidiary from the FVOCI equity instrument with the valuation gain on FVOCI equity instrument of ₩1,636 million reclassified into the retained earnings.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(i)

Summary of the acquiree

 

    

Information of Acquiree

Corporate name

   id Quantique SA

Location

   3, CHEMIN DE LA MARBRERIE, 1227 CAROUGE, SWITZERLAND

CEO

   Gregoire Ribordy

Industry

   Quantum information and communications industry

 

(ii)

Considerations transferred, identifiable assets acquired and liabilities assumed at the acquisition date are as follows:

 

(In millions of won)       
     Amount  

I. Considerations transferred:

  

Cash and cash equivalents

   55,249  

Existing shares(financial assets at FVOCI) at fair value

     3,965  
  

 

 

 
     59,214  

II. Fair value of identifiable assets acquired and liabilities assumed:

  

Cash and cash equivalents

     1,538  

Accounts receivable — trade and other

     13,609  

Inventories

     2,003  

Property and equipment, net

     415  

Intangible assets, net

     7,566  

Other assets

     447  

Accounts payable — trade and other

     (1,569

Other liabilities

     (2,880
  

 

 

 
     21,129  

III. Non-controlling interests:

     9,290  
  

 

 

 

IV. Goodwill(I - II+III)

   47,375  
  

 

 

 

 

2)

Acquisition of Life & Security Holdings Co., Ltd. by the Parent Company

As of October 1, 2018, the Parent Company obtained control by acquiring 55% ownership of Life & Security Holdings Co., Ltd which owns 100% ownership of ADT CAPS Co., Ltd. in order to strengthen the security business and expand residential customer base. The consideration for the business combination was ₩696,665 million in cash, and the difference between the fair value of net assets acquired and the consideration paid amounting to ₩1,155,037 million was recognized as goodwill. Subsequent to the acquisition, Life & Security Holdings Co., Ltd. recognized revenue of ₩197,487 million, and net profit of ₩6,038 million. In addition, assuming that the business combination occurred at the beginning of the reporting period, the Group would have additionally recognized revenue of ₩763,375 million, and net loss of ₩19,548 million.

 

(i)

Summary of the acquiree

 

    

Information of Acquiree

Corporate name

   Life & Security Holdings Co., Ltd.

Location

   323, Incheon tower-daero, Yeonsu-gu, Incheon, Korea

CEO

   Choi, Jin-hwan

Industry

   Holding company of subsidiaries in security business

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(ii)

Considerations transferred, identifiable assets acquired and liabilities assumed at the acquisition date are as follows:

 

(In millions of won)       
     Amount  

I. Considerations transferred:

  

Cash and cash equivalents

   696,665  

II. Fair value of identifiable assets acquired and liabilities assumed:

  

Cash and cash equivalents

     101,896  

Accounts receivable — trade and other

     40,241  

Inventories

     2,440  

Property and equipment, net

     427,752  

Intangible assets, net

     1,019,503  

Other assets

     3,956  

Accounts payable — trade and other

     (296,660

Borrowings

     (1,744,839

Deferred tax liabilities

     (229,207

Other liabilities

     (158,042
  

 

 

 
     (832,960

III. Non-controlling interests:

     (374,588
  

 

 

 

IV. Goodwill(I - II+III)

   1,155,037  
  

 

 

 

3)    Business combination under common control: Acquisition of SK Infosec Co., Ltd.

The Group acquired 100% ownership of SK Infosec Co., Ltd. from SK Holdings Co., Ltd., the ultimate controlling entity of the Parent Company, in order to create synergy in the security business and increase corporate value. As this transaction is a business combination under common control, the acquired assets and liabilities were recognized at the carrying amounts in the ultimate controlling entity’s consolidated financial statements. Considerations transferred and assets and liabilities recognized at the acquisition date are as follows:

 

(In millions of won)    Amount  

I. Considerations transferred:

  

Treasury shares of the Parent Company(*)

   281,151  

II. Fair value of identifiable assets acquired and liabilities assumed:

  

Cash and cash equivalents

     30,762  

Accounts receivable — trade and other

     62,448  

Inventories

     1,293  

Property and equipment, net

     8,047  

Intangible assets, net

     5,528  

Other assets

     79,951  

Accounts payable — trade and other

     (38,431

Other liabilities

     (20,003
  

 

 

 
     129,595  
  

 

 

 

III. Deduction of capital surplus and others (I — II)

   151,556  
  

 

 

 

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

 

 

(*)

The Parent Company provided 1,260,668 shares of its treasury shares as considerations, and the fair value of the considerations was ₩335,338 million at the transfer date.

In addition, assuming that the business combination occurred at the beginning of the reporting period, the Group would have additionally recognized revenue of ₩172,905 million and net profit of ₩19,512 million.

4)    Business combination under common control: Acquisition of Device business unit by SK Telink Co., Ltd.

During the year ended December 31, 2018, SK Telink Co., Ltd., the subsidiary owned by the Parent Company, acquired a device business in exchange of ₩4,450 million in cash from SK Holdings Co., Ltd., the ultimate controlling entity of the Parent Company. As this transaction is a business combination under common control, the difference between the consideration and carrying amount of net assets amounting to ₩1,018 million was deducted from capital surplus and others.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

13.

Investments in Associates and Joint Ventures

(1)    Investments in associates and joint ventures accounted for using the equity method as of December 31, 2020 and 2019 are as follows:

 

            December 31, 2020      December 31, 2019  
(In millions of won)    Country      Ownership
(%)
     Carrying
amount
     Ownership
(%)
     Carrying
amount
 
              

Investments in associates:

              

SK China Company Ltd.

     China        27.3      555,133        27.3      568,459  

Korea IT Fund(*1)

     Korea        63.3        323,294        63.3        311,552  

KEB HanaCard Co., Ltd.(*2)

     Korea        15.0        314,930        15.0        294,756  

SK Telecom CS T1 Co., Ltd.(*1)

     Korea        54.9        53,010        54.9        60,305  

NanoEnTek, Inc.(*3)

     Korea        28.4        43,190        28.6        42,127  

UniSK

     China        49.0        15,700        49.0        14,342  

SK Technology Innovation Company

    
Cayman
Islands
 
 
     49.0        41,579        49.0        43,997  

SK MENA Investment B.V.

     Netherlands        32.1        14,043        32.1        14,904  

SK hynix Inc.

     Korea        20.1        12,251,861        20.1        11,425,325  

SK Latin America Investment S.A.

     Spain        32.1        13,930        32.1        13,698  

Grab Geo Holdings PTE. LTD.

     Singapore        30.0        30,063        30.0        31,269  

SK South East Asia Investment Pte. Ltd.(*4)

     Singapore        20.0        311,990        20.0        250,034  

Pacific Telecom Inc.(*2)

     USA        15.0        39,723        15.0        40,016  

S.M. Culture & Contents Co., Ltd.(*5)

     Korea        23.3        62,248        23.4        63,469  

Content Wavve Co., Ltd.

     Korea        30.0        75,803        30.0        83,640  

Hello Nature Co., Ltd.(*6)

     Korea        49.9        11,969        49.9        13,620  

Digital Games International Pte. Ltd.(*7)

     Singapore        33.3        6,449                

Invites Healthcare Co., Ltd.(*8)

     Korea        43.5        25,536                

Nam Incheon Broadcasting Co., Ltd.(*9)

     Korea        27.3        10,902                

NANO-X IMAGING LTD.(*2,10)

     Israel        5.6        28,484                

Home Choice Corp.(*2,9)

     Korea        17.8        3,585                

Carrot General Insurance Co., Ltd. (Formerly, Carrot Co., Ltd)(*11)

     Korea        21.4        13,469        9.9        6,459  

12CM JAPAN and others(*2,8,12)

                   65,750               58,884  
        

 

 

       

 

 

 
           14,312,641           13,336,856  
        

 

 

       

 

 

 

Investments in joint ventures:

              

Dogus Planet, Inc.(*13)

     Turkey        50.0        15,071        50.0        15,921  

Finnq Co., Ltd.(*13)

     Korea        49.0        13,342        49.0        22,880  

NEXTGEN BROADCAST SERVICES CO, LLC(*13)

     USA        50.0        5,850        50.0        7,961  

NEXTGEN ORCHESTRATION, LLC(*13)

     USA        50.0        1,600        50.0        1,646  

Techmaker GmbH(*13)

     Germany        50.0        5,609                
        

 

 

       

 

 

 
           41,472           48,408  
        

 

 

       

 

 

 
         14,354,113         13,385,264  
        

 

 

       

 

 

 

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

 

 

(*1)

Investments in Korea IT Fund and SK Telecom CS T1 Co., Ltd. were classified as investment in associates as the Group does not have control over the investee under the contractual agreement with other shareholders.

 

(*2)

These investments were classified as investments in associates as the Group can exercise significant influence through its right to appoint the members of the board of directors even though the Group has less than 20% of equity interests.

 

(*3)

The ownership interest has changed as third-party share option was exercised and convertible bonds were converted during the year ended December 31, 2020.

 

(*4)

The Group additionally contributed ₩119,770 million in cash during the year ended December 31, 2020, but there is no change in the ownership interest.

 

(*5)

The ownership interest has changed as S.M. Culture & Contents Co., Ltd. issued 549,094 shares of common stock as a result of the merger with Hoteltrees Co., Ltd. during the year ended December 31, 2020.

 

(*6)

The Group additionally contributed ₩9,980 million in cash during the year ended December 31, 2020, but there is no change in the ownership interest.

 

(*7)

The Group newly invested ₩8,810 million in cash during the year ended December 31, 2020.

 

(*8)

The Group transferred the entire shares of Health Connect Co., Ltd. and assets related to the digital disease management business during the year ended December 31, 2020. The Group acquired 279,999 shares of common stock and 140,000 shares of convertible preferred stock of Invites Healthcare Co., Ltd. in consideration of the transfer and recognized ₩9,372 million of gain on investments in associates and ₩12,451 million of gain on the business transfer. After the transaction, Invites Healthcare Co., Ltd. increased its capital by a third-party allotment which changed the Group’s ownership interest.

 

(*9)

The Group acquired the shares of Nam Incheon Broadcasting Co., Ltd. and Home Choice Corp. from the merger with Tbroad Co., Ltd., Tbroad Dongdaemun Broadcasting Co., Ltd. and Korea Digital Cable Media Center Co., Ltd.

 

(*10)

The Group obtained significant influence by contributing ₩24,015 million in cash for the year ended December 31, 2020 and reclassified ₩3,621 million from financial assets at FVOCI to investments in associates. Meanwhile, NANO-X IMAGING LTD. has been listed on NASDAQ since the Group obtained significant influence. The ownership interest of the Group has changed due to issuance of new shares through listing and the exercise of right to acquire new shares by a third party.

 

(*11)

Group acquired 1,360,000 shares of common stock and 2,640,000 shares of preferred stock of Carrot General Insurance Co., Ltd. (formerly, Carrot Co., Ltd.) at ₩6,800 million and ₩13,200 million, respectively, during the year ended December 31, 2019, and has converted the entire preferred stock into common stock during the year ended December 31, 2020.

 

(*12)

The Group disposed the entire shares of SK Telecom Smart City Management Co., Ltd. and recognized ₩4,485 million of gain relating to investments in associates during the year ended December 31, 2020.

 

(*13)

These investments were classified as investments in joint ventures as the Group has a joint control pursuant to the agreement with the other shareholders.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2)    The market value of investments in listed associates as of December 31, 2020 and 2019 are as follows:

 

    December 31, 2020     December 31, 2019  
(In millions of won, except for share data)   Market price
per share

(in won)
    Number of
shares
    Market value     Market price
per share

(in won)
    Number of
shares
    Market value  

NanoEnTek, Inc.

  8,620       7,600,649       65,518       5,620       7,600,649       42,716  

SK hynix Inc.

    118,500       146,100,000       17,312,850       94,100       146,100,000       13,748,010  

S.M.Culture & Contents Co.,Ltd.

    1,630       22,033,898       35,915       1,530       22,033,898       33,712  

NANO-X IMAGING LTD.

    49,678       2,607,466       129,534                    

(3)    The condensed financial information of significant associates as of and for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)    SK hynix
Inc.(*)
     KEB HanaCard
Co., Ltd.(*)
     Korea IT
Fund
     SK China
Company
Ltd.(*)
     SK South East Asia
Investment Pte.
Ltd.(*)
 
     As of December 31, 2020  

Current assets

   16,570,953        7,910,517        107,652        380,413        797,045  

Non-current assets

     54,602,900        298,438        402,812        1,706,634        1,672,412  

Current liabilities

     9,072,360        897,594               51,025        67  

Non-current liabilities

     10,192,396        5,531,968               308,606         
     2020  

Revenue

   31,900,418        1,231,815        52,330        107,791         

Profit (loss) for the year

     4,758,914        154,521        36,615        20,369        (158,680

Other comprehensive income (loss)

     (107,378      (4,283      9,647        42,921        (390,851

Total comprehensive income (loss)

     4,651,536        150,238        46,262        63,290        (549,531

 

(In millions of won)    SK hynix
Inc.(*)
     KEB HanaCard
Co., Ltd.(*)
    Korea IT
Fund
     SK China
Company
Ltd.(*)
    SK South East Asia
Investment Pte.
Ltd.(*)
 
     As of December 31, 2019  

Current assets

   14,457,602        7,974,407       113,233        615,028       81,065  

Non-current assets

     50,331,892        207,284       378,691        1,442,748       1,797,239  

Current liabilities

     7,874,033        1,015,657              59,395       94  

Non-current liabilities

     8,972,266        5,537,850              215,354        
     2019  

Revenue

   26,990,733        1,236,678       70,565        116,269        

Profit for the year

     2,016,391        56,281       53,867        23,474       1,190  

Other comprehensive income (loss)

     94,023        (4,458     6,132        (15,093     97,508  

Total comprehensive income

     2,110,414        51,823       59,999        8,381       98,698  

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)    SK hynix
Inc.(*)
    KEB HanaCard
Co., Ltd.(*)
    Korea IT
Fund
    SK China
Company
Ltd.(*)
    SK South East Asia
Investment Pte.
Ltd.(*)
 
     As of December 31, 2018  

Current assets

   19,894,146       7,781,888       118,024       677,686       559,050  

Non-current assets

     43,764,189       202,251       326,740       1,221,736        

Current liabilities

     13,031,852       1,122,538             71,396        

Non-current liabilities

     3,774,152       5,286,179             117,094        
     2018  

Revenue

   40,445,066       1,642,133       57,430       117,132        

Profit for the year

     15,539,984       106,675       45,110       30,274        

Other comprehensive income (loss)

     (67,219     (4,344     (13,422     (16,149      

Total comprehensive income

     15,472,765       102,331       31,688       14,125        

 

(*)

The financial information of SK hynix Inc., KEB HanaCard Co., Ltd., SK China Company Ltd. and SK South East Asia Investment Pte. Ltd. are consolidated financial information. In addition, the financial information of SK hynix Inc. as of and for the year ended 2019 is financial information before the change in accounting policy in connection with the application of interpretations published by International Financial Reporting Interpretations Committee on determining lease term, as the impact on the Group’s consolidated financial statements is immaterial.

(4)    The condensed financial information of significant joint ventures as of and for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)    Dogus Planet, Inc.     Finnq Co., Ltd.  
     As of December 31, 2020  

Current assets

   55,951       26,781  

Cash and cash equivalents

     9,083       23,936  

Non-current assets

     30,408       8,530  

Current liabilities

     46,186       7,367  

Accounts payable, other payables and provisions

     28,145       5,094  

Non-current liabilities

     10,031       879  
     2020  

Revenue

   177,084       3,937  

Depreciation and amortization

     (4,642     (4,417

Interest income

     1,878       29  

Interest expense

     (555     (51

Profit (loss) for the year

     7,030       (19,426

Total comprehensive loss

     (1,659     (19,426

 

(In millions of won)    Dogus Planet, Inc.      Finnq Co., Ltd.  
     As of December 31, 2019  

Current assets

   59,632        42,995  

Cash and cash equivalents

     13,422        40,619  

Non-current assets

     25,247        11,389  

Current liabilities

     52,238        6,756  

Accounts payable, other payables and provisions

     35,459        5,062  

Non-current liabilities

     800        1,099  

 

F-67


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

     2019  

Revenue

   136,777       1,968  

Depreciation and amortization

     (5,487     (4,769

Interest income

     1,455       12  

Interest expense

     (92     (198

Profit (loss) for the year

     9,294       (17,079

Total comprehensive income (loss)

     9,294       (17,361

 

(In millions of won)    Dogus Planet, Inc.     Finnq Co., Ltd.  
     As of December 31, 2018  

Current assets

   43,127       11,985  

Cash and cash equivalents

     42,416       10,434  

Non-current assets

     20,239       15,435  

Current liabilities

     37,105       5,070  

Accounts payable, other payables and provisions

     28,432       87  

Non-current liabilities

     1,287       7,579  
     2018  

Revenue

   99,770       232  

Depreciation and amortization

     (5,427     (3,490

Interest income

     1,635       5  

Interest expense

           (301

Profit (Loss) for the year

     642       (17,995

Total comprehensive income (loss)

     642       (18,166

(5)    Reconciliations of financial information of significant associates to carrying amounts of investments in associates in the consolidated financial statements as of December 31, 2020 and 2019 are as follows:

 

     December 31, 2020  
(In millions of won)    Net assets      Ownership
interests
(%)
     Net assets
attributable to
the ownership
interests
     Cost-book
value
differentials
     Carrying
amount
 

SK hynix Inc.(*1,2)

   51,883,236        20.1        11,082,048        1,169,813        12,251,861  

KEB HanaCard Co., Ltd.

     1,779,393        15.0        266,909        48,021        314,930  

Korea IT Fund

     510,464        63.3        323,294               323,294  

SK China Company Ltd.(*1)

     1,725,949        27.3        470,687        84,446        555,133  

SK South East Asia Investment Pte. Ltd.(*1)

     1,559,951        20.0        311,990               311,990  
                                    
(In millions of won)    December 31, 2019  
     Net assets      Ownership
interests
(%)
     Net assets
attributable to
the ownership
interests
     Cost-book
value
differentials
     Carrying
amount
 

SK hynix Inc.(*1,2)

   47,928,415        20.1        10,237,314        1,188,011        11,425,325  

KEB HanaCard Co., Ltd.

     1,628,184        15.0        244,228        50,528        294,756  

Korea IT Fund

     491,924        63.3        311,552               311,552  

SK China Company Ltd.(*1)

     1,772,419        27.3        483,360        85,099        568,459  

SK South East Asia Investment Pte. Ltd.(*1)

     1,250,168        20.0        250,034               250,034  

 

F-68


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

 

 

(*1)

Net assets of these entities represent net assets excluding those attributable to their non-controlling interests.

 

(*2)

The ownership interest is based on the number of shares owned by the Parent Company divided by the total shares issued by the investee company. The Group applied the equity method using the effective ownership interest which is based on the number of shares owned by the Parent Company and the investee’s total shares outstanding. The effective ownership interest applied for the equity method is 21.36% for 2020 and 2019.

(6)    Details of the changes in investments in associates and joint ventures accounted for using the equity method for the years ended December 31, 2020 and 2019 are as follows:

 

    2020  
(In millions of won)   Beginning
balance
    Acquisition
and
Disposal
    Share of
profits

(losses)
    Other
compre-
hensive

income
(loss)
    Other
increase
(decrease)
    Business
Combina
-tion
    Ending
balance
 

Investments in associates:

             

SK China Company Ltd.

  568,459             3,752       (17,078                 555,133  

Korea IT Fund(*1)

    311,552             23,189       6,110       (17,557           323,294  

KEB HanaCard Co., Ltd.

    294,756             20,671       (497                 314,930  

SK Telecom CS T1 Co., Ltd.

    60,305             (7,282     (13                 53,010  

NanoEnTek, Inc.

    42,127       143       830       90                   43,190  

UniSK(*1)

    14,342             1,403       168       (213           15,700  

SK Technology Innovation Company

    43,997             184       (2,602                 41,579  

SK MENA Investment B.V.

    14,904                   (861                 14,043  

SK hynix Inc.(*1)

    11,425,325             995,117       (22,481     (146,100           12,251,861  

SK Latin America Investment S.A.

    13,698             (40     272                   13,930  

Grab Geo Holdings PTE. LTD.

    31,269             (425     (781                 30,063  

SK South East Asia Investment Pte. Ltd.

    250,034       119,770       11,250       (69,064                 311,990  

Pacific Telecom Inc.(*1)

    40,016             2,307       (1,621     (979           39,723  

S.M. Culture & Contents Co., Ltd.

    63,469       (162     (813     (246                 62,248  

Content Wavve Co., Ltd.

    83,640             (7,837                       75,803  

Hello Nature Co., Ltd.(*2)

    13,620       9,980       (11,118     (79     (434           11,969  

Digital Games International Pte. Ltd.

          8,810       (2,038     (323                 6,449  

Invites Healthcare Co., Ltd.

          28,000       (2,645     181                   25,536  

Nam Incheon Broadcasting Co., Ltd.

                676                   10,226       10,902  

NANO-X IMAGING LTD.(*3)

          28,515       (747           716             28,484  

Home Choice Corp.

                174                   3,411       3,585  

Carrot General Insurance Co., Ltd. (Formerly, Carrot Co., Ltd.)(*4)

    6,459       31       (6,188     (33     13,200             13,469  

12CM JAPAN and others(*5)

    58,884       (1,508     (2,134     (2,302     12,810             65,750  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    13,336,856       193,579       1,018,286       (111,160     (138,557     13,637       14,312,641  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-69


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

    2020  
(In millions of won)   Beginning
balance
    Acquisition
and
Disposal
    Share of
profits

(losses)
    Other
compre-
hensive

income
(loss)
    Other
increase
(decrease)
    Business
Combina-
tion
    Ending
balance
 

Investments in joint ventures:

             

Dogus Planet, Inc.

    15,921             3,453       (4,303                 15,071  

Finnq Co., Ltd.

    22,880             (9,538                       13,342  

NEXTGEN BROADCAST SERVICES CO, LLC

    7,961             (1,769           (342           5,850  

NEXTGEN ORCHESTRATION, LLC

    1,646             57             (103           1,600  

Techmaker GmbH

          5,609                               5,609  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    48,408       5,609       (7,797     (4,303     (445           41,472  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  13,385,264       199,188       1,010,489       (115,463     (139,002     13,637       14,354,113  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1)

Dividends received from the associates are deducted from the carrying amount during the year ended December 31, 2020.

 

(*2)

The Group recognized ₩434 million of impairment loss for the investments in Hello Nature Co., Ltd. for the year ended December 31, 2020.

 

(*3)

As the Group obtained significant influence, ₩3,621 million of financial assets at FVOCI are reclassified to the investment in associates for the year ended December 31, 2020.

 

(*4)

The Group acquired 1,360,000 of common shares and 2,640,000 of preferred shares of Carrot General Insurance Co., Ltd.(Formerly, Carrot Co., Ltd.) at ₩6,800 million and ₩13,200 million, respectively, in cash during the year ended December 31, 2019 and the entire preferred shares were converted to common shares during the year ended December 31, 2020.

 

(*5)

The acquisitions for the year ended December 31, 2020 include ₩1,600 million of cash investment in Laguna Dynamic Game Contents Fund and ₩1,342 million of cash investment in KDX Korea Data Exchange and ₩708 million relating to contribution of WALDEN SKT VENTURE FUND. The disposals for the year ended December 31, 2020 include ₩1,142 million relating to transfer of the shares of Health Connect Co., Ltd. and ₩2,056 million relating to liquidation of 2010 KIF-Stonebridge IT Fund and ₩1,984 million relating to disposal of the entire shares of SK Telecom Smart City Management Co., Ltd.

 

F-70


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

    2019  
(In millions of won)   Beginning
balance
    Acquisition
and
Disposal
    Share of
profits
(losses)
    Other
compre-
hensive
income
(loss)
    Other
increase
(decrease)
    Ending
balance
 

Investments in associates:

           

SK China Company Ltd.

  551,548             4,916       11,995             568,459  

Korea IT Fund(*1)

    281,684             34,116       3,884       (8,132     311,552  

KEB HanaCard Co., Ltd.

    288,457             6,827       (528           294,756  

SK Telecom CS T1 Co., Ltd.

          60,305                         60,305  

NanoEnTek, Inc.

    40,974       (43     1,220       (24           42,127  

UniSK(*1)

    13,486             728       347       (219     14,342  

SK Technology Innovation Company

    42,469             89       1,439             43,997  

SK MENA Investment B.V.

    14,420             4       480             14,904  

SK hynix Inc.(*1)

    11,208,315             416,168       20,008       (219,166     11,425,325  

SK Latin America Investment S.A.

    13,313             74       311             13,698  

Grab Geo Holdings PTE. LTD.

          30,518       (17     768             31,269  

SK South East Asia Investment Pte. Ltd.

    111,000       113,470       6,062       19,502             250,034  

Pacific Telecom Inc.

    37,075             2,689       252             40,016  

S.M.Culture & Contents Co., Ltd.

    63,801             464       (796           63,469  

Content Wavve Co., Ltd.

          90,858       (7,218                 83,640  

Hello Nature Co., Ltd.(*2)

    28,549             (6,580     (16     (8,333     13,620  

Health Connect Co., Ltd. and others(*1,3)

    96,522       7,444       (17,142     3,101       (24,582     65,343  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    12,791,613       302,552       442,400       60,723       (260,432     13,336,856  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments in joint ventures:

           

Dogus Planet, Inc.

    12,487       (81     4,628       (1,113           15,921  

Finnq Co., Ltd.

    7,671       24,500       (8,441     (850           22,880  

NEXTGEN BROADCAST SERVICES CO, LLC

          8,160       (144           (55     7,961  

NEXTGEN ORCHESTRATION, LLC

          1,748       (91           (11     1,646  

Celcom Planet(*4)

          6,141       (6,141                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    20,158       40,468       (10,189     (1,963     (66     48,408  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  12,811,771       343,020       432,211       58,760       (260,498     13,385,264  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1)

Dividends received from the associates are deducted from the carrying amount during the year ended December 31, 2019.

 

(*2)

The Group recognized ₩8,333 million of impairment loss for the investments in Hello Nature Co., Ltd. during the year ended December 31, 2019.

 

(*3)

The acquisition for the year ended December 31, 2019 includes ₩6,800 million of cash investments in Carrot General Insurance Co., Ltd.(Formerly, Carrot Co., Ltd.), and others. Other increase (decrease) includes the changes in book value due to the reclassification of FSK L&S Co., Ltd. as investments in subsidiary from investments in associates.

 

(*4)

Investment in Celcom Planet was disposed during year ended December 31, 2019.

 

F-71


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(7)    The Group discontinued the application of equity method to the following investees due to their carrying amounts being reduced to zero. The details of cumulative unrecognized equity method losses as of December 31, 2020 are as follows:

 

(In millions of won)    Unrecognized loss      Unrecognized change in equity  
     2020      Cumulative loss      2020      Cumulative loss  

Wave City Development Co., Ltd.

   (1,970      2,400                

Daehan Kanggun BcN Co., Ltd. and others

     295        10,947        14        (124
  

 

 

    

 

 

    

 

 

    

 

 

 
   (1,675      13,347        14        (124
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14.

Property and Equipment

(1)    Property and equipment as of December 31, 2020 and 2019 are as follows:

 

     December 31, 2020  
(In millions of won)    Acquisition cost      Accumulated
depreciation
     Accumulated
impairment loss
     Carrying amount  

Land

   1,039,323                      1,039,323  

Buildings

     1,747,445        (888,389      (450      858,606  

Structures

     913,102        (594,098      (1,601      317,403  

Machinery

     36,152,031        (27,761,449      (14,370      8,376,212  

Other

     2,047,405        (1,391,201      (2,588      653,616  

Right-of-use assets

     1,961,346        (489,311             1,472,035  

Construction in progress

     659,882                      659,882  
  

 

 

    

 

 

    

 

 

    

 

 

 
   44,520,534        (31,124,448      (19,009      13,377,077  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(In millions of won)    December 31, 2019  
     Acquisition cost      Accumulated
depreciation
     Accumulated
impairment loss
     Carrying amount  

Land

   981,389                      981,389  

Buildings

     1,715,619        (847,761      (450      867,408  

Structures

     910,049        (561,379      (1,601      347,069  

Machinery

     34,120,057        (26,161,923      (33,742      7,924,392  

Other

     2,079,265        (1,345,074      (3,125      731,066  

Right-of-use assets

     1,665,923        (339,295             1,326,628  

Construction in progress

     755,508                      755,508  
  

 

 

    

 

 

    

 

 

    

 

 

 
   42,227,810        (29,255,432      (38,918      12,933,460  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-72


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2)

Changes in property and equipment for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)                                            
    2020  
    Beginning
balance
    Acquisition     Disposal     Transfer     Depreciation     Impairment(*1)     Business
combination(*2)
    Ending
balance
 

Land

  981,389       525       (20,415     37,532                   40,292       1,039,323  

Buildings

    867,408       3,034       (21,811     48,160       (55,215           17,030       858,606  

Structures

    347,069       2,542       (4,417     9,167       (36,995           37       317,403  

Machinery

    7,924,392       553,052       (32,369     2,180,445       (2,419,522     (1,745     171,959       8,376,212  

Other

    731,066       945,499       (6,486     (817,819     (203,376           4,732       653,616  

Right-of-use assets

    1,326,628       736,157       (163,217           (436,231           8,698       1,472,035  

Construction in progress

    755,508       1,625,218       (16,162     (1,709,735                 5,053       659,882  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  12,933,460       3,866,027       (264,877     (252,250     (3,151,339     (1,745     247,801       13,377,077  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1)

The Group recognized impairment losses for obsolete assets during the year ended December 31, 2020.

 

(*2)

Includes assets from the acquisition of Broadband Nowon Co., Ltd. and from the merger of Tbroad Co., Ltd. and two other companies by SK Broadband Co., Ltd., a subsidiary of the Parent Company.

 

(In millions of
won)
     
    2019  
    Beginning
balance
    Acquisition     Disposal     Transfer     Depreciation     Impairment(*1)     Business
Combina
-tion(*2)
    Disposal of
subsidiaries
    Ending
balance
 

Land

  938,344       3,297       (275     39,454                   569             981,389  

Buildings

    863,294       8,117       (2,886     52,775       (54,100     (450     658             867,408  

Structures

    356,039       18,246       (48     10,582       (36,149     (1,601                 347,069  

Machinery

    7,129,154       821,576       (25,595     2,349,133       (2,316,598     (33,278                 7,924,392  

Other

    847,483       1,443,327       (5,816     (1,355,232     (199,106     (147     557             731,066  

Right-of-use assets

    890,339       1,141,349       (257,226           (448,817           1,080       (97     1,326,628  

Construction in
progress

    565,357       1,515,617       (22,338     (1,303,128                             755,508  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  11,590,010       4,951,529       (314,184     (206,416     (3,054,770     (35,476     2,864       (97     12,933,460  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1)

The Group recognized impairment losses for obsolete assets during the year ended December 31, 2019.

 

(*2)

Includes assets from the acquisitions of FSK L&S Co., Ltd. and Incross Co., Ltd.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

15.

Lease

 

(1)

As a lessee

1)    Details of the right-of-use assets as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)              
     December 31,
2020
     December 31,
2019
 

Land, buildings and structures

   1,269,753        1,131,035  

Others

     202,282        195,593  
  

 

 

    

 

 

 
   1,472,035        1,326,628  
  

 

 

    

 

 

 

2)    Details of amounts recognized in the consolidated statements of income for the years ended December 31, 2020 and 2019 as a lessee are as follows:

 

(In millions of won)    2020      2019  

Depreciation of right-of-use assets:

     

Land, buildings and structures

   347,166        359,755  

Others

     89,065        89,062  
  

 

 

    

 

 

 
   436,231        448,817  
  

 

 

    

 

 

 

Interest expense on lease liabilities

   22,976        25,981  

Expenses related to short-term leases

     20,193        19,098  

Expenses related to leases of low-value assets except for short-term leases

     3,297        2,550  

 

3)

The total cash outflows due to lease payments for the years ended December 31, 2020 and 2019 amounted to ₩459,132 million and ₩489,440 million, respectively.

 

(2)

As a lessor

1)    Finance lease

The Group recognized interest income of ₩2,223 million and ₩1,712 million on lease receivables for the years ended December 31, 2020 and 2019, respectively.

The following table sets out a maturity analysis for lease receivables, presenting the undiscounted lease payments to be received subsequent to December 31, 2020.

 

(In millions of won)

 

     Amount  

Less than 1 year

   26,004  

1 ~ 2 years

     15,732  

2 ~ 3 years

     6,794  

3 ~ 4 years

     3,044  

4 ~ 5 years

     678  

More than 5 years

     13  
  

 

 

 

Undiscounted lease payments

     52,265  
  

 

 

 

Unrealized finance income

     1,941  
  

 

 

 

Net investment in the lease

   50,324  
  

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

2)    Operating lease

The Group recognized lease income of ₩238,545 million and ₩168,482 million for the years ended December 31, 2020 and 2019, respectively, of which variable lease payment received are ₩21,715 million and ₩25,228 million, respectively.

The following table sets out a maturity analysis of lease payments, presenting the undiscounted lease payments to be received subsequent to December 31, 2020.

 

(In millions of won)

 

     Amount  

Less than 1 year

   201,828  

1 ~ 2 years

     125,681  

2 ~ 3 years

     40,474  

3 ~ 4 years

     1,211  

4 ~ 5 years

     12  

More than 5 years

     5  
  

 

 

 
   369,211  
  

 

 

 

 

16.

Goodwill

(1)    Goodwill as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)              
     December 31, 2020      December 31, 2019  

Goodwill related to merger of Shinsegi Telecom, Inc.

   1,306,236        1,306,236  

Goodwill related to acquisition of SK Broadband Co., Ltd.

     764,082        358,443  

Goodwill related to acquisition of Life & Security Holdings Co., Ltd.

     1,176,274        1,173,382  

Other goodwill

     110,932        111,469  
  

 

 

    

 

 

 
   3,357,524        2,949,530  
  

 

 

    

 

 

 

(2)    Details of the impairment testing of Goodwill as of December 31, 2020 is as follows:

Goodwill is allocated to the following CGUs for the purpose of impairment testing.

 

   

goodwill related to Shinsegi Telecom, Inc.(*1): Cellular services;

 

   

goodwill related to SK Broadband Co., Ltd.(*2): Fixed-line telecommunications services;

 

   

goodwill related to Life & Security Holdings Co., Ltd.(*3): Security services; and

 

   

other goodwill: Others.

 

(*1)

Goodwill related to merger of Shinsegi Telecom, Inc.

The recoverable amount of the CGU is based on its value in use calculated by applying the annual discount rate of 6.3%(4.9% in prior year) to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of (-)0.2%((-)0.6% in prior year) was applied for the cash flows expected to be incurred after five years and is not expected to exceed the long-term wireless telecommunication industry growth rate. Management of the Group does not expect the total carrying amount of the CGU will exceed the total recoverable amount due to reasonably possible changes from the major assumptions used to estimate the recoverable amount.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(*2)

Goodwill related to acquisition of SK Broadband Co., Ltd.

The recoverable amount of the CGU is based on its value in use calculated by applying the annual discount rate of 6.9%(5.0% in 2019) to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 1.0%(1.0% in 2019) was applied for the cash flows expected to be incurred after five years and is not expected to exceed the long-term fixed-line telecommunication industry growth rate. Management of the Group does not expect the total carrying amount of the CGU will exceed the total recoverable amount due to reasonably possible changes from the major assumptions used to estimate the recoverable amount.

 

(*3)

Goodwill related to acquisition of Life & Security Holdings Co., Ltd.

The recoverable amount of the CGU is based on its value in use, which is estimated based on using key assumptions including estimated revenue growth rates, labor costs, annual growth rate applied for the cash flows expected to be incurred after five years (“perpetual growth rate”), and discount rate. The discount rate applied for future cash flows based on financial budgets for the next five years is 7.1% (7.29% in 2019). The estimated revenue growth rates and labor costs are based on past performance, business plans and its expectation of future market changes. In addition, an annual growth rate of 1.0% (1.0% in 2019) was applied for the cash flows expected to be incurred after five years and does not exceed the long-term growth rate in the security service industry. Management of the Group does not expect the total carrying amount of the CGU will exceed the total recoverable amount as a result of reasonably possible changes to these assumptions.

 

(3)

Details of the changes in goodwill for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)       
     2020     2019  

Beginning balance

   2,949,530       2,938,563  

Acquisition(*1)

     408,531       30,962  

Impairment loss(*2)

     (519     (21,065

Other

     (18     1,070  
  

 

 

   

 

 

 

Ending balance

   3,357,524       2,949,530  
  

 

 

   

 

 

 

 

 

(*1)   It consists of goodwill recognized as SK Broadband Co., Ltd., a subsidiary of the Parent Company, merged with Tbroad Co., Ltd. and two other companies and goodwill recognized from ADT CAPS Co., Ltd.’s acquisition of security equipment construction and security services business from SK hystec inc. during the year ended December 31, 2020. (See Note 12)

 

(*2)   As a result of the impairment test on DREAMUS COMPANY and Incross Co., Ltd., the carrying value of the CGU exceeds the recoverable amount, thus the Group recognized ₩519 million of impairment loss.

As of December 31, 2020 and 2019, accumulated impairment losses are ₩85,764 million and ₩85,245 million, respectively.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

17.

Intangible Assets

 

(1)

Intangible assets as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)

 

     December 31, 2020  
     Acquisition cost      Accumulated
amortization
    Accumulated
impairment
    Carrying
amount
 

Frequency usage rights(*1)

   6,210,882        (4,079,729     (198,388     1,932,765  

Land usage rights

     50,503        (45,783           4,720  

Industrial rights

     116,889        (45,300     (147     71,442  

Development costs

     67,989        (54,771     (3,854     9,364  

Facility usage rights

     159,865        (137,985           21,880  

Customer relations

     1,091,146        (171,283           919,863  

Club memberships(*2)

     139,349              (32,484     106,865  

Brands(*2)

     374,096                    374,096  

Other(*3)

     4,604,077        (3,586,596     (22,282     995,199  
  

 

 

    

 

 

   

 

 

   

 

 

 
     ₩12,814,796      (8,121,447)     (257,155)     4,436,194  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(In millions of won)   
     December 31, 2019  
     Acquisition cost      Accumulated
amortization
    Accumulated
impairment
    Carrying
amount
 

Frequency usage rights

   6,210,882        (3,563,381           2,647,501  

Land usage rights

     53,265        (45,916           7,349  

Industrial rights

     110,380        (43,522     (34     66,824  

Development costs

     63,840        (50,127     (2,567     11,146  

Facility usage rights

     157,664        (131,832           25,832  

Customer relations

     607,435        (16,064           591,371  

Club memberships(*2)

     112,571              (32,161     80,410  

Brands(*2)

     374,096                    374,096  

Other(*3)

     4,397,319        (3,313,263     (22,493     1,061,563  
  

 

 

    

 

 

   

 

 

   

 

 

 
     ₩12,087,452      (7,164,105)     (57,255)     4,866,092  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

(*1)

During the year ended December 31, 2020, the Ministry of Science and Information and Communication Technology approved the discontinuance of 2G service. The Group recognized an impairment loss of ₩12,388 million related to 800MHz frequency usage rights used for 2G service. In addition, as of December 31, 2020, due to the change in its business environment, the Group expects that it is no longer probable that its 28GHz frequency usage rights will be in the condition necessary for it to be capable of operating in the manner intended by management. As a result, the Group performed impairment test over the frequency usage rights. As a result, the recoverable amount (determining based on value in use) exceeded the carrying value, and an impairment loss of ₩186,000 million was recognized.

 

(*2)

Club memberships and Brands are classified as intangible assets with indefinite useful lives and are not amortized.

 

(*3)

Other intangible assets primarily consist of computer software and others.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2)

Details of the changes in intangible assets for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)  
    2020  
    Beginning
balance
    Acquisition     Disposal     Transfer     Amortization     Impairment(*1)     Business
combination(*2)
    Ending
balance
 

Frequency usage rights

  2,647,501                         (516,348     (198,388           1,932,765  

Land usage rights

    7,349       550       (100           (3,079                 4,720  

Industrial rights

    66,824       1,836       (513     8,281       (4,825     (161           71,442  

Development costs

    11,146       1,141       (294     3,302       (4,644     (1,287           9,364  

Facility usage rights

    25,832       1,810       (3     434       (6,193                 21,880  

Customer relations

    591,371       2,014       (1,604     491       (52,849           380,440       919,863  

Club memberships

    80,410       11,821       (35,432     544             (323     49,845       106,865  

Brands(*3)

    374,096                                           374,096  

Other

    1,061,563       112,011       (13,729     272,433       (430,719     (6,410     50       995,199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    ₩4,866,092     131,183     (51,675)     285,485     (1,018,657)     (206,569)     430,335     4,436,194  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1)

The Group recognized the difference between recoverable amount and the carrying amount of intangible assets amounting to ₩206,569 million as impairment loss for the year ended December 31, 2020.

 

(*2)

Includes assets from the acquisition of Broadband Nowon Co., Ltd. and from the merger of Tbroad Co., Ltd. and two other companies by SK Broadband Co., Ltd., a subsidiary of the Parent Company.

 

(*3)

Brands are recognized in connection with the acquisition of Life & Security Holdings Co., Ltd. and are tested for impairment by comparing the recoverable amounts of CGU to the carrying amounts. (See note 16)

 

(In millions of won)  
    2019  
    Beginning
balance
    Acquisition     Disposal     Transfer     Amortization     Impairment(*1)     Business
combination(*2)
    Disposal of
subsidiaries
    Ending
balance
 

Frequency usage rights

  3,139,978                         (492,477                       2,647,501  

Land usage rights

    10,511       2,017       (442           (4,737                       7,349  

Industrial rights

    83,627       1,409       (1,540     2,491       (4,696           158       (14,625     66,824  

Development costs

    8,990       2,218             1,468       (5,359     (961     4,790             11,146  

Facility usage rights

    31,027       2,093       (25     236       (7,499                       25,832  

Customer relations

    625,091       250       (367     304       (33,907                       591,371  

Club memberships

    80,475       2,437       (1,574     (1,200           (916     1,188             80,410  

Brands

    374,096                                                 374,096  

Other

    1,157,441       134,911       (5,154     209,322       (417,571     (7,517     1,100       (10,969     1,061,563  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    ₩5,511,236     145,335     (9,102)     212,621     (966,246)     (9,394)     7,236     (25,594)     4,866,092  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1)

The Group recognized the difference between recoverable amount and the carrying amount of intangible assets amounting to ₩9,394 million as impairment loss for the year ended December 31, 2019.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(*2)

Includes assets from the Parent Company’s acquisitions of FSK L&S Co., Ltd. and Incross Co., Ltd.

 

(3)

Research and development expenditures recognized as expense for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                     
     2020      2019      2018  

Research and development costs expensed as incurred

   416,445        391,327        387,675  

 

(4)

Details of frequency usage rights as of December 31, 2020 are as follows:

 

(In millions of won)  
     Amount      Description      Commencement
of amortization
     Completion of
amortization
 

800MHz license

   13,515        CDMA and LTE service        Jul. 2011        Jun. 2021  

1.8GHz license

     125,620        LTE service        Sept. 2013        Dec. 2021  

2.6GHz license

     728,510        LTE service        Sept. 2016        Dec. 2026  

2.1GHz license

     94,963        W-CDMA and LTE service        Dec. 2016        Dec. 2021  

3.5GHz license(*)

     953,474        5G service        Apr. 2019        Nov. 2028  

28GHz license(*)

     16,683        5G service               Nov. 2023  
  

 

 

          
    1,932,765           
  

 

 

          

 

 

(*)

The Group participated in the frequency license allocation auction hosted by Ministry of Science and Information and Communication Technology(ICT) and was assigned the 3.5GHz and 28GHz bands of frequency licenses during the year ended December 31, 2018. The considerations payable for the bands of frequency are ₩1,218,500 million and ₩207,300 million, respectively. These bands of frequency were assigned in December 2018 and the annual payments in installment of the remaining balances will be made for the next ten and five years, respectively. The Group recognized these frequency licenses as intangible assets at the date of initial lump sum payment and began amortization for 3.5GHz frequency license in April 2019. The amortization for 28GHz license which is measured as recoverable value after recognition of impairment loss will begin when it is in the condition necessary for it to be capable of operating in the manner intended by management.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

18.

Borrowings and Debentures

 

(1)

Short-term borrowings as of December 31, 2020 and 2019 are as follows:

 

(In millions of won, and thousands of other currency)  
    

Lender

  

Annual

interest rate (%)

   December 31,
2020
     December 31,
2019
 

Short-term borrowings

   Citibank    2.45    50,000         
   KEB Hana Bank(*1)    FTP 1M + 1.51      27,000         
   KEB Hana Bank(*2)   

6M financial I

(bank) + 1.59

     5,000         
   Shinhan Bank(*2)   

6M financial I

(bank) + 1.35

     15,000         
   Shinhan Bank(*2)   

6M financial I

(bank) + 1.60

            15,000  
   KEB Hana Bank(*3)    3M CD + 1.75             5,000  
   Hana Financial Investment Co., Ltd.    4.50      4,642         
   DB Financial Investment Co., Ltd.    4.50      2,785         
   Shinhan Financial Investment Co., Ltd.    4.50      5,571         
   Woori Bank    7.50            

603

(VND 12,068,234

 

  

 

 

    

 

 

 
          109,998        20,603  
        

 

 

    

 

 

 

 

 

(*1)

1M FTP rate is 1.14% as of December 31, 2020.

 

(*2)

6M financial I(bank) rate are 0.92% and 1.52% as of December 31, 2020 and 2019, respectively.

 

(*3)

3M CD rate is 1.53% as of December 31, 2019.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2)

Long-term borrowings as of December 31, 2020 and 2019 are as follows:

 

(In millions of won and thousands of other currencies)  

Lender

   Annual interest
rate (%)
     Maturity      December 31,
2020
    December 31,
2019
 

Korea Development Bank(*1,2)

     3M CD + 0.61        Dec. 20, 2021      12,250       24,500  

Korea Development Bank(*1,3)

     3M CD + 0.71        Dec. 21, 2022        25,000       37,500  

Credit Agricole CIB(*1,4)

     3M CD + 0.82        Dec. 14, 2023        37,500       50,000  

Shinhan Bank and others(*5)

     4.21        Sept. 30, 2023              1,750,000  

KDB Capital and others(*5)

     7.20        Sept. 30, 2023              150,000  

Export Kreditnamnden(*6)

     1.70        Apr. 29, 2022       
18,726
(USD 17,211
 
   

33,266

(USD 28,732

 

Shinhan Bank and others

     3.20        Oct. 5, 2025        1,950,000        

UBS

     0.00        Mar. 28, 2025       

617

(CHF 500

 

     

FAE

     0.00        May. 7, 2025       

617

(CHF 500

 

     
        

 

 

   

 

 

 
           2,044,710       2,045,266  

Less present value discount

           (15,786     (22,729
        

 

 

   

 

 

 
           2,028,924       2,022,537  

Less current installments

           (49,663     (50,388
        

 

 

   

 

 

 
         1,979,261       1,972,149  
  

 

 

   

 

 

 

 

 

(*1)

3M CD rate are 0.66% and 1.53% as of December 31, 2020 and 2019, respectively.

 

(*2)

The long-term borrowings are to be repaid by installments on an annual basis from 2017 to 2021.

 

(*3)

The long-term borrowings are to be repaid by installments on an annual basis from 2018 to 2022.

 

(*4)

The long-term borrowings are to be repaid by installments on an annual basis from 2020 to 2023.

 

(*5)

The long-term borrowings were repaid before maturity during the year ended December 31, 2020.

 

(*6)

The long-term borrowings are to be repaid by installments on an annual basis from 2014 to 2022.

 

(3)

Debentures as of December 31, 2020 and 2019 are as follows:

 

(In millions of won and thousands of U.S. dollars)  
    

Purpose

   Maturity      Annual interest
rate (%)
    December 31,
2020
    December 31,
2019
 

Unsecured corporate bonds

   Operating fund      2021        4.22     190,000       190,000  

Unsecured corporate bonds

   Operating and refinancing fund      2022        3.30       140,000       140,000  

Unsecured corporate bonds

        2032        3.45       90,000       90,000  

Unsecured corporate bonds

   Operating fund      2023        3.03       230,000       230,000  

Unsecured corporate bonds

        2033        3.22       130,000       130,000  

Unsecured corporate bonds

        2024        3.64       150,000       150,000  

Unsecured corporate bonds

   Refinancing fund      2021        2.66       150,000       150,000  

Unsecured corporate bonds

        2024        2.82       190,000       190,000  

Unsecured corporate bonds

  

Operating and

refinancing fund

     2022        2.40       100,000       100,000  

Unsecured corporate bonds

        2025        2.49       150,000       150,000  

Unsecured corporate bonds

        2030        2.61       50,000       50,000  

Unsecured corporate bonds

   Operating fund      2025        2.66       70,000       70,000  

Unsecured corporate bonds

        2030        2.82       90,000       90,000  

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won and thousands of U.S. dollars)  
    

Purpose

   Maturity      Annual interest
rate (%)
    December 31,
2020
    December 31,
2019
 

Unsecured corporate bonds

   Operating and refinancing fund      2025        2.55       100,000       100,000  

Unsecured corporate bonds

        2035        2.75       70,000       70,000  

Unsecured corporate bonds

   Operating fund      2021        1.80       100,000       100,000  

Unsecured corporate bonds

        2026        2.08       90,000       90,000  

Unsecured corporate bonds

        2036        2.24       80,000       80,000  

Unsecured corporate bonds

        2021        1.71       50,000       50,000  

Unsecured corporate bonds

        2026        1.97       120,000       120,000  

Unsecured corporate bonds

        2031        2.17       50,000       50,000  

Unsecured corporate bonds

   Refinancing fund      2020        1.93             60,000  

Unsecured corporate bonds

        2022        2.17       120,000       120,000  

Unsecured corporate bonds

        2027        2.55       100,000       100,000  

Unsecured corporate bonds

   Operating and refinancing fund      2032        2.65       90,000       90,000  

Unsecured corporate bonds

   Refinancing fund      2020        2.39             100,000  

Unsecured corporate bonds

   Operating and refinancing fund      2022        2.63       80,000       80,000  

Unsecured corporate bonds

   Refinancing fund      2027        2.84       100,000       100,000  

Unsecured corporate bonds

        2021        2.57       110,000       110,000  

Unsecured corporate bonds

        2023        2.81       100,000       100,000  

Unsecured corporate bonds

        2028        3.00       200,000       200,000  

Unsecured corporate bonds

        2038        3.02       90,000       90,000  

Unsecured corporate bonds

   Operating and refinancing fund      2021        2.10       100,000       100,000  

Unsecured corporate bonds

        2023        2.33       150,000       150,000  

Unsecured corporate bonds

        2038        2.44       50,000       50,000  

Unsecured corporate bonds

   Operating fund      2022        2.03       180,000       180,000  

Unsecured corporate bonds

        2024        2.09       120,000       120,000  

Unsecured corporate bonds

        2029        2.19       50,000       50,000  

Unsecured corporate bonds

        2039        2.23       50,000       50,000  

Unsecured corporate bonds

   Operating and refinancing fund      2022        1.40       120,000       120,000  

Unsecured corporate bonds

        2024        1.49       60,000       60,000  

Unsecured corporate bonds

        2029        1.50       120,000       120,000  

Unsecured corporate bonds

        2039        1.52       50,000       50,000  

Unsecured corporate bonds

        2049        1.56       50,000       50,000  

Unsecured corporate bonds

   Operating fund      2022        1.69       230,000       230,000  

Unsecured corporate bonds

        2024        1.76       70,000       70,000  

Unsecured corporate bonds

        2029        1.79       40,000       40,000  

Unsecured corporate bonds

        2039        1.81       60,000       60,000  

Unsecured corporate bonds

  

Operating and

refinancing fund

     2023        1.64       170,000        

Unsecured corporate bonds

   Operating fund      2025        1.75       130,000        

Unsecured corporate bonds

        2030        1.83       50,000        

Unsecured corporate bonds

        2040        1.87       70,000        

Unsecured corporate bonds

   Refinancing fund      2025        1.40       140,000        

Unsecured corporate bonds

        2030        1.59       40,000        

Unsecured corporate bonds

        2040        1.76       110,000        

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won and thousands of U.S. dollars)  
    

Purpose

   Maturity      Annual interest
rate (%)
    December 31,
2020
    December 31,
2019
 

Unsecured corporate bonds(*1)

   Operating fund      2020        2.49             160,000  

Unsecured corporate bonds(*1)

        2020        2.43             140,000  

Unsecured corporate bonds(*1)

        2020        2.18             130,000  

Unsecured corporate bonds(*1)

  

Operating and

refinancing fund

     2021        1.77       120,000       120,000  

Unsecured corporate bonds(*1)

   Operating fund      2022        2.26       150,000       150,000  

Unsecured corporate bonds(*1)

   Refinancing fund      2020        2.34             30,000  

Unsecured corporate bonds(*1)

  

Operating and

refinancing fund

     2022        2.70       140,000       140,000  

Unsecured corporate bonds(*1)

        2021        2.59       70,000       70,000  

Unsecured corporate bonds(*1)

        2023        2.93       80,000       80,000  

Unsecured corporate bonds(*1)

   Refinancing fund      2022        2.00       50,000       50,000  

Unsecured corporate bonds(*1)

        2024        2.09       160,000       160,000  

Unsecured corporate bonds(*1)

  

Operating and

refinancing fund

     2022        1.71       80,000       80,000  

Unsecured corporate bonds(*1)

        2024        1.71       100,000       100,000  

Unsecured corporate bonds(*1)

        2026        1.86       50,000       50,000  

Unsecured corporate bonds(*1)

   Refinancing fund      2023        1.48       100,000        

Unsecured corporate bonds(*1)

  

Operating and

refinancing fund

     2025        1.64       100,000        

Unsecured corporate bonds(*1)

   Refinancing fund      2025        1.41       160,000        

Private placement corporate bonds(*2)

   Operating fund      2023              6,292       6,292  

Private placement corporate bonds(*2)

   Operating fund      2023              6,222       6,222  

Private placement corporate bonds(*2)

   Operating fund      2023              6,168        

Private placement corporate bonds(*2)

   Operating fund      2023              6,100        

Unsecured global bonds

   Operating fund      2027        6.63      


435,200

(USD
400,000



   


463,120

(USD
400,000

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won and thousands of U.S. dollars)  
    

Purpose

   Maturity      Annual interest
rate (%)
    December 31,
2020
    December 31,
2019
 

Unsecured global bonds

        2023        3.75      


544,000

(USD
500,000

 

 

   


578,900

(USD
500,000

 

 

Unsecured global bonds(*1)

   Refinancing fund      2023        3.88      


326,400

(USD
300,000

 

 

   


347,340

(USD
300,000

 

 

Floating rate notes(*3)

   Operating fund      2020       

3M LIBOR

+ 0.88

 

 

         


347,340

(USD
300,000

 

 

Floating rate notes(*3)

   Operating fund      2025       
3M LIBOR
+ 0.91
 
 
   


326,400

(USD
300,000)

 

 
 

     
          

 

 

   

 

 

 
             8,606,782       8,249,214  

Less discounts on bonds

             (27,039     (28,381
          

 

 

   

 

 

 
             8,579,743       8,220,833  

Less current installments of bonds

             (889,574     (966,939
          

 

 

   

 

 

 
             7,690,169       7,253,894  
          

 

 

   

 

 

 

 

 

(*1)

Unsecured corporate bonds were issued by SK Broadband Co., Ltd., a subsidiary of the Parent Company.

 

(*2)

Private placement corporate bonds were issued by SK Infosec Co., Ltd., a subsidiary of the Parent Company.

 

(*3)

3M LIBOR rates are 0.24% and 1.91% as of December 31, 2020 and 2019, respectively.

 

19.

Long-term Payables — other

 

(1)

Long-term payables — other as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)  
     December 31, 2020      December 31, 2019  

Payables related to acquisition of frequency usage rights

   1,141,723        1,544,699  

Other

     631        5,468  
  

 

 

    

 

 

 
   1,142,354        1,550,167  
  

 

 

    

 

 

 

 

(2)

As of December 31, 2020 and 2019, details of long-term payables — other which consist of payables related to the acquisition of frequency usage rights are as follows (See Note 17):

 

(In millions of won)  
     December 31, 2020     December 31, 2019  

Long-term payables — other

   1,626,040       2,051,389  

Present value discount on long-term payables — other

     (59,717     (82,851

Current installments of long-term payables — other

     (424,600     (423,839
  

 

 

   

 

 

 

Carrying amount at December 31

   1,141,723       1,544,699  
  

 

 

   

 

 

 

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(3)

The principal amounts of the long-term payables — other repaid during the years ended December 31, 2020 and 2019 are ₩425,349 million, respectively. The repayment schedule of the principal amount of long-term payables — other as of December 31, 2020 is as follows:

 

(In millions of won)       
     Amount  

Less than 1 year

     ₩425,349  

1~3 years

     444,480  

3~5 years

     382,290  

More than 5 years

     373,921  
  

 

 

 
   1,626,040  
  

 

 

 

 

20.

Provisions

Changes in provisions for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)        
    2020     As of December 31,
2020
 
    Beginning
balance
    Increase     Utilization     Reversal     Other     Business
Combination
    Ending
balance
    Current     Non-current  

Provision for restoration

  102,519       15,616       (3,610     (1,492     (6     626       113,653       42,348       71,305  

Emission allowance

    5,257       7,400             (5,233                 7,424       7,424        

Other provisions(*)

    57,385       3,250       (30,861     (1,904     (199     2,129       29,800       19,591       10,209  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  165,161       26,266       (34,471     (8,629     (205     2,755       150,877       69,363       81,514  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*)

₩18,717 million of current provisions are included in the other provisions relating to SK Planet Co., Ltd.’s onerous contracts. (See note 38)

 

(In millions of won)        
    2019     As of December 31,
2019
 
    Beginning
balance
    Increase     Utilization     Reversal     Other     Business
Combination
    Ending
balance
    Current     Non-current  

Provision for restoration

  98,060       9,424       (3,409     (1,711     115       40       102,519       48,391       54,128  

Emission allowance

    2,238       5,037       (1,086     (932                 5,257       5,257        

Other provisions(*)

    107,229       7,609       (45,260     (163     (12,030           57,385       32,672       24,713  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  207,527       22,070       (49,755     (2,806     (11,915     40       165,161       86,320       78,841  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*)

₩32,104 million of current provisions and ₩18,018 million of non-current provisions are included in the other provisions relating to SK Planet Co., Ltd.’s onerous contracts.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

21. Defined Benefit Liabilities (Assets)

 

(1)

Details of defined benefit liabilities (assets) as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)             
     December 31, 2020     December 31, 2019  

Present value of defined benefit obligations

   1,278,550       1,136,787  

Fair value of plan assets

     (1,127,163     (965,654
  

 

 

   

 

 

 

Defined benefit assets(*)

     (3,557     (1,125
  

 

 

   

 

 

 

Defined benefit liabilities

   154,944       172,258  
  

 

 

   

 

 

 

 

 

(*)

Since the Group entities neither have legally enforceable right nor intention to settle the defined benefit obligations of Group entities with defined benefit assets of other Group entities, defined benefit assets of Group entities have been separately presented from defined benefit liabilities.

 

(2)

Principal actuarial assumptions as of December 31, 2020 and 2019 are as follows:

 

     December 31, 2020     December 31, 2019  

Discount rate for defined benefit obligations

     1.83 ~ 3.14     1.77 ~ 3.04

Expected rate of salary increase

     2.04 ~ 6.00     1.53 ~ 6.00

Discount rate for defined benefit obligation is determined based on market yields of high-quality corporate bonds with similar maturities for estimated payment term of defined benefit obligation. Expected rate of salary increase is determined based on the Group’s historical promotion index, inflation rate and salary increase ratio.

 

(3)

Changes in defined benefit obligations for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)    For the year ended December 31  
     2020     2019  

Beginning balance

   1,136,787       926,302  

Current service cost

     193,078       171,197  

Past service cost

     815        

Interest cost

     25,958       23,685  

Remeasurement

    

- Demographic assumption

     2,071       19,344  

- Financial assumption

     (18,266     56,265  

- Adjustment based on experience

     17,364       14,363  

Business combinations

     1,742       3,653  

Benefit paid

     (76,987     (84,098

Others(*)

     (4,012     6,076  
  

 

 

   

 

 

 

Ending balance

   1,278,550       1,136,787  
  

 

 

   

 

 

 

 

 

(*)

Others include changes of liabilities due to employee’s transfers among affiliates for the years ended December 31, 2020 and 2019.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(4)

Changes in plan assets for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)    For the year ended December 31  
     2020     2019  

Beginning balance

   965,654       816,699  

Interest income

     21,057       19,717  

Remeasurement

     (1,385     (5,366

Contributions

     213,298       204,186  

Benefit paid

     (68,084     (73,396

Business combinations

     485       3,207  

Others

     (3,862     607  
  

 

 

   

 

 

 

Ending balance

   1,127,163       965,654  
  

 

 

   

 

 

 

The Group expects to contribute ₩214,088 million to the defined benefit plans in 2021.

 

(5)

Total cost of benefit plan, which is recognized in profit and loss (included in labor in the statement of income) and capitalized into construction-in-progress, for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)    For the year ended December 31  
     2020      2019  

Current service cost

   193,078        171,197  

Past service cost

     815         

Net interest cost

     4,901        3,968  
  

 

 

    

 

 

 
   198,794        175,165  
  

 

 

    

 

 

 

Costs related to the defined benefit except for the amounts transferred to construction in progress are included labor expenses and Research and development expenses.

 

(6)

Details of plan assets as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)              
     December 31, 2020      December 31, 2019  

Equity instruments

   15,770        29,489  

Debt instruments

     228,839        207,504  

Short-term financial instruments, etc.

     882,554        728,661  
  

 

 

    

 

 

 
   1,127,163        965,654  
  

 

 

    

 

 

 

 

(7)

As of December 31, 2020, effects on defined benefit obligations if each of significant actuarial assumptions changes within expectable and reasonable range are as follows:

 

(In millions of won)             
     0.5% Increase     0.5% Decrease  

Discount rate

   (58,830     65,732  

Expected salary increase rate

     65,338       (59,315

The sensitivity analysis does not consider dispersion of all cash flows that are expected from the plan and provides approximate values of sensitivity for the assumptions used.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

A weighted average duration of defined benefit obligations as of December 31, 2020 and 2019 are 9.49 years and 9.52 years, respectively.

 

22.

Derivative Instruments

 

(1)

Currency and interest rate swap contracts under cash flow hedge accounting as of December 31, 2020 are as follows:

 

(In millions of won and thousands of U.S. dollars)

Borrowing
date

  

Hedging Instrument (Hedged item)

 

Hedged risk

  

Financial
institution

 

Duration of
contract

Jul. 20, 2007   

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds

face value of USD 400,000)

  Foreign currency risk    Morgan Stanley and four other banks   Jul. 20, 2007 ~
Jul. 20, 2027
Dec. 16, 2013   

Fixed-to-fixed cross currency

(U.S. dollar borrowing amounting to USD 17,211)

  Foreign currency risk    Deutsche bank   Dec.16, 2013 ~ Apr. 29, 2022

Apr. 16,

2018

  

Fixed-to-fixed cross currency swap

(U.S. dollar denominated bonds face

value of USD 500,000)

  Foreign currency risk    The Export-Import Bank of Korea and three other banks   Apr. 16, 2018~ Apr. 16, 2023
Mar. 4, 2020   

Floating-to-fixed cross-currency interest rate swap

(U.S. dollar-denominated bonds face value of USD 300,000)

  Foreign currency risk and Interest rate risk    Citibank  

Mar. 4, 2020~

Jun. 4, 2025

Aug. 13,

2018

  

Fixed-to-fixed cross currency swap

(U.S. dollar denominated bonds face

value of USD 300,000)

  Foreign currency risk    Citibank   Aug. 13, 2018~ Aug. 13, 2023
Dec. 20, 2016   

Floating-to-fixed interest rate swap

(Korean won borrowing amounting to KRW 12,250)

  Interest rate risk    Korea Development Bank  

Dec. 20, 2016~

Dec. 20, 2021

Dec. 21, 2017   

Floating-to-fixed interest rate swap

(Korean won borrowing amounting to KRW 25,000)

  Interest rate risk    Korea Development Bank  

Dec. 21, 2017~

Dec. 21, 2022

Dec. 19, 2018   

Floating-to-fixed interest rate swap

(Korean won borrowing amounting to KRW 37,500)

  Interest rate risk    Credit Agricole CIB  

Mar.19, 2019~

Dec.14, 2023

 

(2)

SK Broadband Co., Ltd., a subsidiary of the Parent Company, entered into Total Return Swap(TRS) contract amounting to ₩270,000 million and ₩64,000 million with beneficiary certificates as underlying asset with IGIS Professional Investment Type Private Real Estate Investment Trust No. 156 and Hana Professional Alternative Investment Type Private Real Estate Investment Trust No. 62, respectively. The contract consists of the settlement of the difference resulting from the change in the value of the real estate on the maturity date of the contract and the settlement of the difference between the dividend and the standard dividend during the

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

  contract period. Each contract expires in November 2022 and September 2024, respectively. SK Broadband Co., Ltd. has an obligation to guarantee fixed rate of returns to the other party to each contract.

 

(3)

The Group has entered into an agreement regarding a share in order to establish a partnership for the growth of e-commerce business operated by Eleven Street Co., Ltd., a subsidiary of the Parent Company, whereby the Group is allowed to grant right to the counterparty to acquire new preferred shares when conditions of business performance or a stock listing are met. Exercise period of the right is 5 years from July 1, 2020, which is the date of the agreement. The Group determined the agreement is a derivative financial liability in accordance with IFRS 9 and recognized the liability amounting to ₩12,115 million as of December 31, 2020.

 

(4)

In relation to the business acquisition by SK Broadband Co., Ltd. (see note 12 (1)) in 2020, the Parent Company has entered into a shareholders’ agreement with the shareholders of the acquirees. Pursuant to the agreement, when certain conditions are met within a period of time subsequent to the business combination, the shareholders of the acquirees can exercise their drag-along rights and require the Parent Company to sell its shares in SK Broadband Co., Ltd. Should the shareholders exercise their drag-along rights, the Parent Company also can exercise its call options over the shares held by those shareholders. The Group recognized a derivative financial liability of ₩320,984 million for the rights included in the shareholders’ agreement as of December 31, 2020.

The fair value of SK Broadband Co., Ltd.’s common stock(Post-merger) was estimated using 5-year projected cash flows discounted at 6.9% per annum. The fair value of the derivative financial liability was determined by using the Binomial Model based on various assumptions including the price of common stock and its price fluctuations. The difference in fair values between the acquisition date and December 31, 2020 is insignificant. The significant unobservable inputs used in the fair value measurement and inter-relationship between significant unobservable inputs and fair value measurement are as below:

 

Significant unobservable inputs

  

Correlations between inputs

and fair value measurements

Fair value of SK Broadband Co., Ltd.’s common stock    The estimated fair value of derivative liabilities would decrease (increase) if the fair value of common stock would increase (decrease)
Volatility    The estimated fair value of derivative liabilities would decrease (increase) if the volatility of stock price increase (decrease)

 

(5)

The Group has entered into the agreement with Newberry Global Limited, whereby the Group has been granted subscription right and contingent subscription right to acquire Newberry series-C redeemable convertible preferred stock. The Group recognized long-term derivative financial assets of ₩14,155 million and derivative financial assets of ₩8,704 million, respectively, for subscription right and contingent subscription right.

 

(6)

The Group has been granted subscription right to acquire 2,262,443 shares of NANO-X IMAGING LTD., an associate, and recognized derivative financial assets of ₩71,212 million for subscription right as of December 31, 2020.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(7)

The fair value of derivative financial instruments to which the Group applies cash flow hedge is recorded in the financial statements as long-term derivative financial assets, derivative financial liabilities and long-term derivative financial liabilities. As of December 31, 2020, details of fair values of the derivatives assets and liabilities are as follows:

 

(In millions of won and thousands of U.S. dollars)  

Hedging instrument (Hedged item)

   Cash flow hedge     Fair value  

Non-current assets:

    

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 400,000)

   32,059       32,059  

Fixed-to-fixed cross currency swap (U.S. dollar denominated bonds face value of USD 500,000)

     30,247       30,247  

Fixed-to-fixed cross currency swap (U.S dollar denominated bonds face value of USD 300,000)

     2,830       2,830  
  

 

 

   

 

 

 
   65,136     65,136  
  

 

 

   

 

 

 

Current liabilities:

    

Floating-to-fixed interest rate swap (Korean won borrowing amounting to KRW 12,250)

   (77)       (77

Non-current liabilities:

    

Fixed-to-fixed cross currency swap (U.S dollar borrowing amounting to USD 17,211)

   (453)       (453

Floating-to-fixed cross currency interest rate swap (U.S dollar denominated bonds face value of USD 300,000)

     (40,565     (40,565

Floating-to-fixed interest rate swap (Korean won borrowing amounting to KRW 25,000)

     (360     (360

Floating-to-fixed interest rate swap (Korean won borrowing amounting to KRW 37,500)

     (606     (606
  

 

 

   

 

 

 
   (42,061   (42,061
  

 

 

   

 

 

 

 

(8)

The fair value of derivatives held for trading is recorded in the financial statements as derivative financial assets, long-term derivative financial assets and long-term derivative financial liabilities. As of December 31, 2020, details of fair values of the derivative assets and liabilities are as follows:

 

(In millions of won)  

Hedging instrument (Hedged item)

   Held for trading     Fair value  

Current assets:

    

Contingent subscription right

   8,704       8,704  

Non-current assets:

    

Total return swap

   5,488       5,488  

Subscription right

     85,367       85,367  
  

 

 

   

 

 

 
   99,559     99,559  
  

 

 

   

 

 

 

Non-current liabilities:

    

Drag-along and call option right

     (320,984     (320,984

Contingent subscription right

     (12,115     (12,115
  

 

 

   

 

 

 
   (333,099   (333,099
  

 

 

   

 

 

 

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

23.

Share Capital and Capital Surplus and Others

The Parent Company’s outstanding share capital consists entirely of common shares with a par value of ₩500. The number of authorized, issued and outstanding common shares and the details of capital surplus and others as of December 31, 2020 and 2019 are as follows:

 

(In millions of won, except for share data)  
     December 31, 2020     December 31, 2019  

Number of authorized shares

     220,000,000       220,000,000  

Number of issued shares(*1)

     80,745,711       80,745,711  

Share capital:

    

Common share

   44,639       44,639  

Capital surplus and others:

    

Paid-in surplus

     2,915,887       2,915,887  

Treasury shares(Note 24)

     (2,123,661     (1,696,997

Hybrid bonds(Note 25)

     398,759       398,759  

Share option(Note 26)

     1,481       1,302  

Others(*2)

     (515,263     (612,470
  

 

 

   

 

 

 
   677,203       1,006,481  
  

 

 

   

 

 

 

 

 

(*1)

In 2002 and 2003, the Parent Company retired treasury shares with reduction of retained earnings before appropriation. As a result, the Parent Company’s outstanding shares have decreased without change in share capital.

 

(*2)

Others primarily consist of the excess of the consideration paid by the Group over the carrying amount of net assets acquired from entities under common control.

There were no changes in share capital during the years ended December 31, 2020 and 2019 and details of shares outstanding as of December 31, 2020 and 2019 are as follows:

 

(In shares)    2020      2019  
     Issued
shares
     Treasury
shares
     Outstanding
shares
     Issued
shares
     Treasury
shares
     Outstanding
shares
 

Shares outstanding

     80,745,711        9,418,558        71,327,153        80,745,711        7,609,263        73,136,448  

 

24.

Treasury Shares

Treasury shares as of December 31, 2020 and 2019 are as follows:

 

(In millions of won, except for share data)              
     December 31, 2020      December 31, 2019  

Number of shares(*)

     9,418,558        7,609,263  

Acquisition cost

   2,123,661        1,696,997  

 

 

(*)

The Parent Company acquired 1,809,295 of its treasury shares for ₩426,664 million in an effort to increase shareholder value by stabilizing its stock price during the year ended December 31, 2020 and disposed 1,266,620 of its treasury shares to Kakao Co., Ltd. in exchange for ₩300,000 million in cash and acquired 2,177,401 shares of Kakao Co., Ltd. for ₩302,321 million during the year ended December 31, 2019 in order to solidify the future ICT business cooperation.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

25.

Hybrid Bonds

Hybrid bonds classified as equity as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)  
    

Type

  

Issuance date

  

Maturity(*1)

   Annual interest
rate(%)(*2)
     December 31,
2020
    December 31,
2019
 

Series 2-1 hybrid bonds

   Unsecured subordinated bearer bond    June 7, 2018    June 7, 2078      3.70      300,000       300,000  

Series 2-2 hybrid bonds

   Unsecured subordinated bearer bond    June 7, 2018    June 7, 2078      3.65        100,000       100,000  

Issuance costs

                 (1,241     (1,241
              

 

 

   

 

 

 
               398,759       398,759  
              

 

 

   

 

 

 

As there is no contractual obligation to deliver financial assets to the holders of hybrid bonds, the Group classified the hybrid bonds as equity. These are subordinated bonds which rank before common shares in the event of a liquidation or reorganization of the Parent Company.

 

(*1)

The Parent Company has a right to extend the maturity without any notice or announcement.

 

(*2)

Annual interest rate is determined as yield rate of 5 year national bond plus premium. According to the step-up clause, additional premium of 0.25% and 0.75%, respectively, after 10 years and 25 years from the issuance date are applied.

 

26.

Share option

 

(1)

The terms and conditions related to the grants of the share options under the share option program are as follows:

 

    Parent Company
    1-1   1-2   1-3   2   3(*)   4   5

Grant date

  March 24, 2017   February 20,
2018
  February 22,
2019
  March 26,

2019

  March 26, 2020

Types of shares to be issued

  Registered common shares

Grant method

  Reissue of treasury shares, cash settlement

Number of shares (in shares)

  22,168   22,168   22,168   1,358   4,177   1,734   127,643

Exercise price
(in won)

  246,750   266,490   287,810   254,120   265,260   254,310   192,260

Exercise period

  Mar. 25, 2019 ~

Mar. 24, 2022

  Mar. 25, 2020 ~

Mar. 24, 2023

  Mar. 25, 2021 ~

Mar. 24, 2024

  Feb. 21, 2020 ~

Feb. 20, 2023

  Feb. 23, 2021 ~

Feb. 22, 2024

  Mar. 27, 2021 ~

Mar. 26, 2024

  Mar. 27, 2023 ~

Mar. 26, 2027

Vesting conditions

  2 years’

service from

the grant date

  3 years’

service from the
grant date

  4 years’ service
from the grant
date
  2 years’

service from
the grant date

  2 years’

service from
the grant date

  2 years’

service from

the grant date

  3 years’

service from

the grant date

 

 

(*)

Parts of the grant that have not met the vesting conditions have been forfeited during the year ended December 31, 2019.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

    

One Store Co., Ltd.

  

DREAMUS COMPANY

    

1-1

  

1-2

  

1-3

Grant date

   April 27, 2018    March 28, 2019    March 28, 2019    March 28, 2019

Types of shares to be issued

   Common shares of One Store Co., Ltd.    Common shares of DREAMUS COMPANY

Grant method

   Issuance of new shares    Issuance of new shares, reissue of treasury shares, cash settlement

Number of shares
(in shares)(*1)

   712,150    366,679    366,672    366,649

Exercise price (in won)

   5,390    9,160    9,160    9,160

Exercise period

  

Apr. 28, 2020 ~

Apr. 27, 2024

  

Mar. 29, 2021 ~

Mar. 28, 2024

  

Mar. 29, 2022 ~

Mar. 28, 2025

  

Mar. 29, 2023 ~

Mar. 28, 2026

Vesting conditions

   2 years’ service from the grant date    (a) 2 years’ service from the grant date
(b) Average stock price for the exercise period is more than 150% of the exercise price
   (a) 3 years’ service from the grant date
(b) Average stock price for the exercise period is more than 150% of the exercise price
   (a) 4 years’ service from the grant date
(b) Average stock price for the exercise period is more than 150% of the exercise price

 

    Incross Co., Ltd.  
    3     4     5     6     7     8     9  

Grant date

    March 30, 2016       March 7, 2017       March 7, 2018       March 7, 2019      
October 15,
2019
 
 
    March 10, 2020      
October 20,
2020
 
 

Types of shares to be issued

    Common shares of Incross Co., Ltd.  

Grant method

    Issuance of new shares, reissue of treasury shares, cash settlement  

Number of shares
(in shares)(*1)

    5,000       29,625       9,900       6,600       59,225       19,800       3,300  

Exercise price
(in won)

    10,571       17,485       25,861       16,895       22,073       26,291       45,280  

Exercise period

   
Mar. 30, 2019 ~
Mar. 30, 2022
 
 
   
Mar. 7, 2020 ~
Mar. 6, 2023
 
 
   
Mar. 7, 2021 ~
Mar. 6, 2024
 
 
   
Mar. 7, 2022 ~
Mar. 6, 2025
 
 
   
Oct. 15, 2022 ~
Oct. 14, 2025
 
 
   
Mar. 10, 2023 ~
Mar. 9, 2026
 
 
   
Oct. 20, 2023 ~
Oct. 19, 2026
 
 

Vesting conditions

   

3 years’

service from

the grant date

 

 

 

   

3 years’

service from

the grant date

 

 

 

   

3 years’

service from

the grant date

 

 

 

   

3 years’

service from

the grant date

 

 

 

   

3 years’

service from

the grant date

 

 

 

   

3 years’

service from

the grant date

 

 

 

   

3 years’

service from

the grant date

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

     SK Infosec Co., Ltd.(*2)
     1-1    1-2    1-3    1-4

Grant date

   August 22, 2019

Types of shares to be issued

   Registered common shares of SK Infosec. Co., Ltd.

Grant method

   Cash settlement

Number of shares
(in shares)(*1)

   161,541    87,562    230,581    203,223

Exercise price (in won)

   20,579    20,579    22,225    24,003

Exercise period

   1st exercise: Applied to 50% of the granted shares and exercisable

6 months after the listing (June 30, 2022) of SK Infosec Co., Ltd.

   2nd exercise: Applied to 25% of the granted shares and exercisable

12 months after the listing (June 30, 2022) of SK Infosec Co., Ltd.

   3rd exercise: Applied to 25% of the granted shares and exercisable

18 months after the listing (June 30, 2022) of SK Infosec Co., Ltd.

Vesting conditions

   Service provided until
December 31, 2019
   Service provided until
December 31, 2020
   Service provided until
December 31, 2020
   Service provided until
December 31, 2021

 

     SK Infosec Co., Ltd.(*2)         
     2-1      2-2      2-3      2-4      FSK L&S Co., Ltd.  

Grant date

     December 30, 2020        May 31, 2019  

Types of shares to be issued

     Registered common shares of SK Infosec. Co., Ltd.       

Common shares of

FSK L&S Co., Ltd.

 

 

Grant method

     Cash settlement       
Issuance of new
shares
 
 

Number of shares (in shares)(*1)

     23,097        9,648        32,744        23,094        43,955  

Exercise price (in won)

     20,807        20,807        22,472        24,270        10,000  

Exercise period

    

1st exercise: Applied to 50% of the granted shares and exercisable

6 months after the listing (June 30, 2022) of SK Infosec Co., Ltd.

 

 

    

June 1, 2022 ~

May 31, 2025

 

 

    

2nd exercise: Applied to 25% of the granted shares and exercisable

12 months after the listing (June 30, 2022) of SK Infosec Co., Ltd.

 

 

    

3rd exercise: Applied to 25% of the granted shares and exercisable

18 months after the listing (June 30, 2022) of SK Infosec Co., Ltd.

 

 

Vesting conditions

    


Service provided
until
December 31,
2020
 
 
 
 
    


Service provided
until
December 31,
2021
 
 
 
 
    


Service provided
until
December 31,
2021
 
 
 
 
    


Service provided
until
December 31,
2022
 
 
 
 
    
3 years’ service
from the grant date
 
 

 

 

(*1)

Some of stock options granted by One Store Co., Ltd., DREAMUS COMPANY and SK Infosec Co., Ltd. that have not met the vesting conditions have been forfeited, and some of the stock options granted by One Store Co., Ltd. and Incross Co., Ltd. have been exercised during the year ended December 31, 2020. Some of stock options granted by One Store Co., Ltd. and DREAMUS COMPANY that have not met the vesting conditions have been forfeited during the year ended December 31, 2019.

 

(*2)

The share option has transferred from Life & Security Holdings Co., Ltd. due to the business combination. As a result of the business combination, number of shares and exercise price of the share option and the expected listing date have changed.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2)

Share compensation expense recognized during the year ended December 31, 2020 and the remaining share compensation expense to be recognized in subsequent periods are as follows:

 

(In millions of won)    Share
compensation expense
 

As of December 31, 2019

   3,276  

During the year ended December 31, 2020

     4,313  

In subsequent periods

     2,259  
  

 

 

 
   9,848  
  

 

 

 

 

(3)

The Group used binomial option pricing model or Monte-Carlo simulation in the measurement of the fair value of the share options at grant date and the inputs used in the model are as follows:

 

(In won)    Parent Company  
     Series  
     1-1     1-2     1-3     2     3     4     5  

Risk-free interest rate

     1.86     1.95     2.07     2.63     1.91     1.78     1.52

Estimated option’s life

     5 years       6 years       7 years       5 years       5 years       5 years       7 years  

Share price (Closing price on the preceding day)

     262,500       262,500       262,500       243,500       259,000       253,000       174,500  

Expected volatility

     13.38     13.38     13.38     16.45     8.30     7.70     8.10

Expected dividends

     3.80     3.80     3.80     3.70     3.80     3.90     5.70

Exercise price

     246,750       266,490       287,810       254,120       265,260       254,310       192,260  

Per-share fair value of the option

     27,015       20,240       15,480       23,988       8,600       8,111       962  

 

(In won)          DREAMUS COMPANY  
     One Store Co., Ltd.     1-1     1-2     1-3  

Risk-free interest rate

     2.58     1.73     1.77     1.82

Estimated option’s life

     6 years                    

Share price (Closing price on the preceding day)

     4,925       8,950       8,950       8,950  

Expected volatility

     9.25     32.34     32.34     32.34

Expected dividends

     0.00     0.00     0.00     0.00

Exercise price

     5,390       9,160       9,160       9,160  

Per-share fair value of the option

     566       1,976       2,189       2,356  

 

(In won)    Incross Co., Ltd.     .  
     3     4     5     6     7     8     9     FSK L&S
Co., Ltd
 

Risk-free interest rate

     2.09     1.35     1.50     1.76     1.41     1.16     1.23     1.64

Estimated option’s life

     6 years       6 years       6 years       6 years       6 years       6 years       6 years        

Share price (Closing price on the preceding day)

     17,993       43,843       27,300       17,000       22,050       21,800       40,300       10,455  

Expected volatility

     20.67     18.67     21.28     25.58     42.37     41.69     51.16     16.20

Expected dividends

     0.00     0.00     0.00     0.00     0.00     0.00     0.00     0.00

Exercise price

     10,571       17,485       25,861       16,895       22,073       26,291       45,280       10,000  

Per-share fair value of the option

     1,965       9,423       7,277       4,887       9,209       7,813       18,491       1,420  

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In won)  
     SK Infosec. Co., Ltd.(*)  
     1-1, 1-2  
     1st exercise     2nd exercise     3rd exercise  

Risk-free interest rate

     0.89     0.97     0.97

Estimated option’s life

     2 years       2.5 years       3 years  

Share price

     26,787       26,787       26,787  

Expected volatility

     27.87     27.87     27.87

Expected dividends

     0.00     0.00     0.00

Exercise price

     20,579       20,579       20,579  

Per-share fair value of the option

     6,051       7,448       7,571  

 

(In won)  
     SK Infosec. Co., Ltd.(*)  
     1-3  
     1st exercise     2nd exercise     3rd exercise  

Risk-free interest rate

     0.89     0.97     0.97

Estimated option’s life

     2 years       2.5 years       3 years  

Share price

     26,787       26,787       26,787  

Expected volatility

     27.87     27.87     27.87

Expected dividends

     0.00     0.00     0.00

Exercise price

     22,225       22,225       22,225  

Per-share fair value of the option

     5,521       6,531       6,720  

 

(In won)  
     SK Infosec. Co., Ltd.(*)  
     1-4  
     1st exercise     2nd exercise     3rd exercise  

Risk-free interest rate

     0.89     0.97     0.97

Estimated option’s life

     2 years       2.5 years       3 years  

Share price

     26,787       26,787       26,787  

Expected volatility

     27.87     27.87     27.87

Expected dividends

     0.00     0.00     0.00

Exercise price

     24,003       24,003       24,003  

Per-share fair value of the option

     4,948       5,663       5,909  

 

(In won)  
     SK Infosec. Co., Ltd.(*)  
     2-1, 2-2  
     1st exercise     2nd exercise     3rd exercise  

Risk-free interest rate

     0.89     0.97     0.97

Estimated option’s life

     2 years       2.5 years       3 years  

Share price

     26,787       26,787       26,787  

Expected volatility

     27.87     27.87     27.87

Expected dividends

     0.00     0.00     0.00

Exercise price

     20,807       20,807       20,807  

Per-share fair value of the option

     5,977       7,321       7,454  

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In won)  
     SK Infosec. Co., Ltd.(*)  
     2-3  
     1st exercise     2nd exercise     3rd exercise  

Risk-free interest rate

     0.89     0.97     0.97

Estimated option’s life

     2 years       2.5 years       3 years  

Share price

     26,787       26,787       26,787  

Expected volatility

     27.87     27.87     27.87

Expected dividends

     0.00     0.00     0.00

Exercise price

     22,472       22,472       22,472  

Per-share fair value of the option

     5,441       6,393       6,592  

 

(In won)  
     SK Infosec. Co., Ltd.(*)  
     2-4  
     1st exercise     2nd exercise     3rd exercise  

Risk-free interest rate

     0.89     0.97     0.97

Estimated option’s life

     2 years       2.5 years       3 years  

Share price

     26,787       26,787       26,787  

Expected volatility

     27.87     27.87     27.87

Expected dividends

     0.00     0.00     0.00

Exercise price

     24,270       24,270       24,270  

Per-share fair value of the option

     4,862       5,547       5,800  

 

 

(*)

The share option has transferred from Life & Security Holdings Co., Ltd. due to the business combination.

As One Store Co., Ltd., FSK L&S Co., Ltd., and SK Infosec Co., Ltd., the subsidiaries of the Parent Company, are unlisted, the share price is calculated using the discounted cash flow model.

 

27.

Retained Earnings

 

(1)

Retained earnings as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)    December 31, 2020      December 31, 2019  

Appropriated:

     

Legal reserve

   22,320        22,320  

Reserve for business expansion

     11,631,138        11,531,138  

Reserve for technology development

     4,365,300        4,265,300  
  

 

 

    

 

 

 
     16,018,758        15,818,758  

Unappropriated

     6,963,155        6,409,925  
  

 

 

    

 

 

 
   22,981,913        22,228,683  
  

 

 

    

 

 

 

 

(2)

Legal reserve

The Korean Commercial Act requires the Parent Company to appropriate as a legal reserve at least 10% of cash dividends paid for each accounting period until the reserve equals 50% of outstanding share capital. The legal reserve may not be utilized for cash dividends, but may only be used to offset a future deficit, if any, or may be transferred to share capital.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

28.

Reserves

 

(1)

Details of reserves, net of taxes, as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)    December 31, 2020     December 31, 2019  

Valuation gain (loss) on FVOCI

   438,979       (47,086

Other comprehensive loss of investments in associates and joint ventures

     (392,333     (278,142

Valuation gain (loss) on derivatives

     17,615       (920

Foreign currency translation differences for foreign operations

     (24,122     (3,428
  

 

 

   

 

 

 
   40,139       (329,576
  

 

 

   

 

 

 

 

(2)

Changes in reserves for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)      
    Valuation gain
(loss) on
financial assets
at FVOCI
    Other
comprehensive
income(loss) of
investments in
associates and
joint ventures
    Valuation gain
(loss) on
derivatives
    Foreign currency
translation
differences for
foreign
operations
    Total  

Balance at January 1, 2019

  (124     (334,637     (41,601     2,920       (373,442

Changes, net of taxes

    (46,962     56,495       40,681       (6,348     43,866  

Balance at December 31, 2019

  (47,086     (278,142     (920     (3,428     (329,576

Changes, net of taxes

    486,065       (114,191     18,535       (20,694     369,715  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

  438,979       (392,333     17,615       (24,122     40,139  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(3)

Changes in valuation gain (loss) on financial assets at FVOCI for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)             
     2020     2019  

Balance at January 1

   (47,086     (124

Amount recognized as other comprehensive income (loss) during the year, net of taxes

     486,440       (18,472

Amount reclassified to retained earnings, net of taxes

     (375     (28,490
  

 

 

   

 

 

 

Balance at December 31

   438,979       (47,086
  

 

 

   

 

 

 

 

(4)

Changes in valuation gain (loss) on derivatives for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)             
     2020     2019  

Balance at January 1

   (920     (41,601

Amount recognized as other comprehensive income during the year, net of taxes

     15,414       34,209  

Amount reclassified to profit, net of taxes

     3,121       6,472  
  

 

 

   

 

 

 

Balance at December 31

   17,615       (920
  

 

 

   

 

 

 

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

29.

Redeemable Convertible Preferred Stocks

Eleven street Co., Ltd., a subsidiary of the Parent Company, issued redeemable convertible preferred stocks on September 7, 2018 according to the board of directors’ resolution. The details of the issuance are as follows:

 

    

Information of redeemable convertible preferred stocks

Issuer

   Eleven Street Co., Ltd.

Number of shares issued

   1,863,093

Issue price

   ₩268,371 per share

Voting rights

   1 voting right per 1 share

Dividend rate(*)

  

6% of the issue price per annum (cumulative, non-participating)

The obligatory dividend rate of the Parent Company is 1% of the issue price per annum

Conversion period

   From 6 months after the date of issue to 1 business day before the expiration date of the redemption period

Conversion ratio

   [Issue price ÷ Conversion price at the date of conversion] per share

Conversion price

   ₩268,371 per share

Refixing clauses

  

•  In the case when spin-off, merger, split merger of the company, comprehensive stock exchange or transfer and decrease in capital, (“merger and others”), conversion price is subject to refixing to guarantee the value that the holder could earn the day right before the circumstances arise.

 

•  In the case when this preferred share is split or merged, the conversion prices is subject to refixing to correspond with the split or merge ratio.

Redemption period

   Two months from September 30, 2023 to December 31, 2047 at the choice of the issuer.

Redemption party

   Eleven Street Co., Ltd.

Redemption price

   Amounts realizing the internal rate of return to be 3.5% at the date of actual redemption

Liquidation preference

   Preferential to the common shares

 

(*)

The present value of obligatory dividends amounting to ₩14,297 million and ₩18,805 million payable to non-controlling interests based on the shareholders agreement are recognized as financial liabilities as of December 31, 2020 and 2019, respectively.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

30.

Other Operating Income and Expenses

Details of other operating income and expenses for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                     
     2020      2019      2018  

Other Operating Income:

        

Gain on disposal of property and equipment and intangible assets

   35,644        8,533        38,933  

Others(*)

     64,004        94,288        33,017  
  

 

 

    

 

 

    

 

 

 
   99,648        102,821        71,950  
  

 

 

    

 

 

    

 

 

 

Other Operating Expenses:

        

Communication

   41,138        43,606        35,507  

Utilities

     341,045        320,474        297,049  

Taxes and dues

     40,831        44,761        37,290  

Repair

     384,328        358,758        353,321  

Research and development

     416,445        391,327        387,675  

Training

     35,802        35,004        35,574  

Bad debt for accounts receivable — trade

     48,625        28,841        38,211  

Travel

     15,652        30,746        27,910  

Supplies and other

     328,243        259,155        130,008  

Loss on disposal of property and equipment and intangible assets

     41,598        47,760        87,257  

Impairment loss on other investment securities

            1,670        3,157  

Impairment loss on property and equipment and intangible assets

     208,834        65,935        255,839  

Donations

     16,774        17,557        59,012  

Bad debt for accounts receivable — other

     10,559        5,802        7,718  

Others(*)

     66,573        65,015        26,876  
  

 

 

    

 

 

    

 

 

 
   1,996,447        1,716,411        1,782,404  
  

 

 

    

 

 

    

 

 

 

 

 

(*)

See note 5 (2).

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

31.

Finance Income and Costs

 

(1)

Details of finance income and costs for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                     
     2020      2019      2018  

Finance Income:

        

Interest income

   50,357        63,579        69,936  

Gain on sale of accounts receivable — other

     22,605        15,855        20,023  

Dividends

     1,170        10,011        35,143  

Gain on foreign currency transactions

     13,120        11,798        17,990  

Gain on foreign currency translations

     8,928        4,576        2,776  

Gain on valuation of derivatives

     101,343        2,499        6,532  

Gain on settlement of derivatives

     7,829        29,277        20,399  

Gain relating to financial assets at FVTPL (*)

     35,844        4,504        83,636  

Gain relating to financial liabilities at FVTPL

            56         
  

 

 

    

 

 

    

 

 

 
   241,196        142,155        256,435  
  

 

 

    

 

 

    

 

 

 

Finance Costs:

        

Interest expense

   399,176        406,087        307,319  

Loss on sale of accounts receivable — other

            5,823         

Loss on foreign currency transactions

     13,373        12,660        38,920  

Loss on foreign currency translations

     12,730        4,948        2,397  

Loss on disposal of long-term investment securities

     98                

Loss on valuation of derivatives

     13,551                

Loss on settlement of derivatives

     2,637        641        12,554  

Loss relating to financial assets at FVTPL

     10,894        7,753        22,507  

Loss relating to financial liabilities at FVTPL

            43        1,535  

Other financial fees

     44,734                
  

 

 

    

 

 

    

 

 

 
   497,193        437,955        385,232  
  

 

 

    

 

 

    

 

 

 

 

 

(*)

Gain relating to financial assets at FVTPL for the year ended December 31, 2018 includes gains on disposal of 200,000 shares of convertible redeemable bonds issued by KRAFTON Co., Ltd. (formerly, Bluehole Inc.) amounting to ₩58,000 million.

 

(2)

Details of interest income included in finance income for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)    2020      2019      2018  

Interest income on cash equivalents and short-term financial instruments

   24,378        29,854        33,808  

Interest income on loans and others

     25,979        33,725        36,128  
  

 

 

    

 

 

    

 

 

 
   50,357        63,579        69,936  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(3)

Details of interest expenses included in finance costs for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)    2020      2019      2018  

Interest expense on borrowings

   116,397        104,991        10,796  

Interest expense on debentures

     225,309        224,765        222,195  

Others

     57,470        76,331        74,328  
  

 

 

    

 

 

    

 

 

 
   399,176        406,087        307,319  
  

 

 

    

 

 

    

 

 

 

 

(4)

Finance income and costs by category of financial instruments for the years ended December 31, 2020, 2019 and 2018 are as follows. Bad debt expense (reversal of loss allowance) for accounts receivable – trade, loans and receivables are presented and explained separately in notes 7 and 36.

1)    Finance income and costs

 

(In millions of won)              
     2020  
     Finance income      Finance costs  

Financial Assets:

     

Financial assets at FVTPL

   161,835        10,894  

Financial assets at FVOCI

     993        44,832  

Financial assets at amortized cost

     64,554        24,601  

Derivatives designated as hedging instrument

            1,867  
  

 

 

    

 

 

 
     227,382        82,194  
  

 

 

    

 

 

 

Financial Liabilities:

     

Financial liabilities at FVTPL

            12,115  

Financial liabilities at amortized cost

     6,434        400,678  

Derivatives designated as hedging instrument

     7,380        2,206  
  

 

 

    

 

 

 
     13,814        414,999  
  

 

 

    

 

 

 
   241,196        497,193  
  

 

 

    

 

 

 

 

(In millions of won)              
     2019  
     Finance income      Finance costs  

Financial Assets:

     

Financial assets at FVTPL

   56,953        13,577  

Financial assets at FVOCI

     9,924         

Financial assets at amortized cost

     75,119        17,488  
  

 

 

    

 

 

 
     141,996        31,065  
  

 

 

    

 

 

 

Financial Liabilities:

     

Financial liabilities at FVTPL

     56        43  

Financial liabilities at amortized cost

     103        406,206  

Derivatives designated as hedging instrument

            641  
  

 

 

    

 

 

 
     159        406,890  
  

 

 

    

 

 

 
   142,155        437,955  
  

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)              
     2018  
     Finance income      Finance costs  

Financial Assets:

     

Financial assets at FVTPL

   134,841        22,507  

Financial assets at FVOCI

     35,143         

Financial assets at amortized cost

     86,032        20,018  
  

 

 

    

 

 

 
     256,016        42,525  
  

 

 

    

 

 

 

Financial Liabilities:

     

Financial liabilities at FVTPL

            1,535  

Financial liabilities at amortized cost

     419        328,618  

Derivatives designated as hedging instrument

            12,554  
  

 

 

    

 

 

 
     419        342,707  
  

 

 

    

 

 

 
   256,435        385,232  
  

 

 

    

 

 

 

2)    Other comprehensive income (loss)

 

(In millions of won)                   
     2020     2019     2018  

Financial Assets:

      

Financial assets at FVOCI

   579,678       (17,943     (130,035

Derivatives designated as hedging instrument

     24,320       41,305       17,180  
  

 

 

   

 

 

   

 

 

 
     603,998       23,362       (112,855
  

 

 

   

 

 

   

 

 

 

Financial Liabilities:

      

Derivatives designated as hedging instrument

     (5,182     (624     15,047  
  

 

 

   

 

 

   

 

 

 
   598,816       22,738       (97,808
  

 

 

   

 

 

   

 

 

 

 

(5)

Details of impairment losses for financial assets for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                     
     2020      2019      2018  

Accounts receivable — trade

   48,625        28,841        38,211  

Other receivables

     10,559        5,802        7,718  
  

 

 

    

 

 

    

 

 

 
   59,184        34,643        45,929  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

32.

Income Tax Expense

 

(1)

Income tax expenses for the years ended December 31, 2020, 2019 and 2018 consist of the following:

 

(In millions of won)                    
     2020      2019     2018  

Current tax expense:

       

Current year

   286,717        105,859       362,265  

Current tax of prior years(*)

     14,536        (6,855     (22,575
  

 

 

    

 

 

   

 

 

 
     301,253        99,004       339,690  
  

 

 

    

 

 

   

 

 

 

Deferred tax expense:

       

Changes in net deferred tax assets

     75,249        201,264       504,288  
  

 

 

    

 

 

   

 

 

 

Income tax expense

   376,502        300,268       843,978  
  

 

 

    

 

 

   

 

 

 

 

 

(*)

Current tax of prior years are mainly composed of the income tax refund due to a change in the interpretation of the tax authority in relation to the income tax previously recognized by the Group.

 

(2)

The difference between income taxes computed using the statutory corporate income tax rates and the recorded income taxes for the years ended December 31, 2020, 2019 and 2018 is attributable to the following:

 

(In millions of won)                   
     2020     2019     2018  

Income taxes at statutory income tax rate

   505,824       308,913       1,083,029  

Non-taxable income

     (41,084     (92,666     (19,450

Non-deductible expenses

     31,882       14,630       26,724  

Tax credit and tax reduction

     (48,774     (32,877     (17,580

Changes in unrecognized deferred taxes

     (69,776     83,940       (177,902

Changes in tax rate

     24,537       4,050       (3,983

Income tax refund and others

     (26,107     14,278       (46,860
  

 

 

   

 

 

   

 

 

 

Income tax expense

   376,502       300,268       843,978  
  

 

 

   

 

 

   

 

 

 

 

(3)

Deferred taxes directly charged to (credited from) equity for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                   
     2020     2019     2018  

Valuation gain (loss) on financial assets measured at fair value

   (166,612     2,983       41,461  

Share of other comprehensive income (loss) of associates and joint ventures

     (14     2,279       278  

Valuation loss on derivatives

     (6,886     (16,083     (9,223

Remeasurement of defined benefit liabilities

     (164     22,733       10,843  
  

 

 

   

 

 

   

 

 

 
   (173,676     11,912       43,359  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(4)

Details of the changes in deferred tax assets (liabilities) for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)                              
    2020  
    Beginning     Deferred tax
expense
(income)
    Directly charged
to (credited
from) equity
    Business
combinations
    Ending  

Deferred tax assets (liabilities) related to temporary differences:

         

Loss allowance

  88,913       1,326             1,046       91,285  

Accrued interest income

    (2,039     435             (27     (1,631

Financial assets measured at fair value

    98,101       (17,586     (166,612     5,042       (81,055

Investments in subsidiaries, associates and joint ventures

    (1,613,048     (60,844     (14           (1,673,906

Property and equipment and intangible assets

    (371,489     (47,468           (92,905     (511,862

Provisions

    2,543       3,751                   6,294  

Retirement benefit obligation

    100,194       1,873       (164     382       102,285  

Valuation gain on derivatives

    17,507       4,146       (6,886           14,767  

Gain or loss on foreign currency translation

    22,005       (231                 21,774  

Incremental costs to acquire a contract

    (829,055     21,224                   (807,831

Contract assets and liabilities

    (28,030     25,424                   (2,606

Right-of-use assets

    (390,936     18,639                   (372,297

Lease liabilities

    385,394       (22,918                 362,476  

Others

    64,620       (30,310           86,204       120,514  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (2,455,320     (102,539     (173,676     (258     (2,731,793
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax assets related to unused tax loss carryforwards and tax credit carryforwards:

         

Tax loss carryforwards

    91,136       (2,913                 88,223  

Tax credit

    9,380       30,203                   39,583  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    100,516       27,290                   127,806  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (2,354,804     (75,249     (173,676     (258     (2,603,987
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)                              
    2019  
    Beginning     Deferred tax
expense
(income)
    Directly charged
to (credited
from) equity
    Business
combinations
    Ending  

Deferred tax assets (liabilities) related to temporary differences:

         

Loss allowance

  102,276       (13,698           335       88,913  

Accrued interest income

    (2,713     691             (17     (2,039

Financial assets measured at fair value

    79,757       15,099       2,983       262       98,101  

Investments in subsidiaries, associates and joint ventures

    (1,580,087     (35,222     2,279       (18     (1,613,048

Property and equipment and intangible assets

    (415,327     43,841             (3     (371,489

Provisions

    2,494       49                   2,543  

Retirement benefit obligation

    84,034       (6,643     22,733       70       100,194  

Valuation gain on derivatives

    31,415       2,175       (16,083           17,507  

Gain or loss on foreign currency translation

    21,948       57                   22,005  

Incremental costs to acquire a contract

    (640,840     (188,215                 (829,055

Contract assets and liabilities

    (26,458     (1,572                 (28,030

Right-of-use assets

    (263,528     (127,408                 (390,936

Lease liabilities

    248,244       137,150                   385,394  

Others

    54,341       10,273             6       64,620  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (2,304,444     (163,423     11,912       635       (2,455,320
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax assets related to unused tax loss carryforwards and tax credit carryforwards:

         

Tax loss carryforwards

    122,899       (31,763                 91,136  

Tax credit

    15,458       (6,078                 9,380  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    138,357       (37,841                 100,516  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (2,166,087     (201,264     11,912       635       (2,354,804
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(5)

Details of temporary differences, unused tax loss carryforwards and unused tax credits carryforwards which are not recognized as deferred tax assets(liabilities), in the consolidated statements of financial position as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)              
     December 31, 2020      December 31, 2019  

Loss allowance

   102,085        96,006  

Investments in subsidiaries, associates and joint ventures

     8,365        (128,339

Other temporary differences

     68,415        145,692  

Unused tax loss carryforwards

     1,042,063        1,023,907  

Unused tax credit carryforwards

     1,037        1,192  

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(6)

The amount of unused tax loss carryforwards and unused tax credit carryforwards which are not recognized as deferred tax assets as of December 31, 2020 are expiring within the following periods:

 

(In millions of won)              
     Unused tax loss carryforwards      Unused tax credit carryforwards  

Less than 1 year

   79,725        20  

1 ~ 2 years

     88,794        172  

2 ~ 3 years

     70,834        116  

More than 3 years

     802,710        729  
  

 

 

    

 

 

 
   1,042,063        1,037  
  

 

 

    

 

 

 

 

33.

Earnings per Share

(1)    Basic earnings per share

 

1)

Basic earnings per share for the years ended December 31, 2020, 2019 and 2018 are calculated as follows:

 

(In millions of won, except for share data)       
     2020      2019      2018  

Basic earnings per share attributable to owners of the Parent Company:

        

Profit attributable to owners of the Parent Company

   1,504,352        888,698        3,127,887  

Interest on hybrid bonds

     (14,766      (14,766      (15,803
  

 

 

    

 

 

    

 

 

 

Profit attributable to owners of the Parent Company on common shares

     1,489,586        873,932        3,112,084  

Weighted average number of common shares outstanding

     72,795,431        72,064,159        70,622,976  
  

 

 

    

 

 

    

 

 

 

Basic earnings per share (in won)

   20,463        12,127        44,066  
  

 

 

    

 

 

    

 

 

 

 

2)

The weighted average number of common shares outstanding for the years ended December 31, 2020, 2019 and 2018 are calculated as follows:

 

(In shares)             
     2020  
     Number of common shares     Weighted average number
of common shares
 

Issued shares at January 1, 2020

     80,745,711       80,745,711  

Treasury shares at January 1, 2020

     (7,609,263     (7,609,263

Acquisition of treasury shares

     (1,809,295     (341,017
  

 

 

   

 

 

 
     71,327,153       72,795,431  
  

 

 

   

 

 

 

 

(In shares)             
     2019  
     Number of common shares     Weighted average number
of common shares
 

Issued shares at January 1, 2019

     80,745,711       80,745,711  

Treasury shares at January 1, 2019

     (8,875,883     (8,875,883

Disposal of treasury shares

     1,266,620       194,331  
  

 

 

   

 

 

 
     73,136,448       72,064,159  
  

 

 

   

 

 

 

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In shares)             
     2018  
     Number of common shares     Weighted average number
of common shares
 

Issued shares at January 1, 2018

     80,745,711       80,745,711  

Treasury shares at January 1, 2018

     (10,136,551     (10,136,551

Disposal of treasury shares

     1,260,668       13,816  
  

 

 

   

 

 

 
     71,869,828       70,622,976  
  

 

 

   

 

 

 

(2) Diluted earnings per share

 

1)

Diluted earnings per share for the years ended December 31, 2020 are calculated as follows:

 

(In millions of won, except for share data)       
     2020  

Profit for the year on common shares

   1,489,586  

Adjusted weighted average number of common shares outstanding

     72,808,379  
  

 

 

 

Diluted earnings per share (in won)

   20,459  
  

 

 

 

 

2)

The adjusted weighted average number of common shares outstanding for the years ended December 31, 2020 are calculated as follows:

 

(In shares)       
     2020  

Outstanding shares at January 1, 2020

     73,136,448  

Effect of treasury shares

     (341,017

Effect of share option

     12,948  
  

 

 

 

Adjusted weighted average number of common shares outstanding

     72,808,379  
  

 

 

 

For the years ended December 31, 2019 and 2018 diluted earnings per share are the same as basic earnings per share as there are no dilutive potential common shares.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

34. Dividends

(1)     Details of dividends declared

Details of dividend declared for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won, except for face value and share data)  
Year   

Dividend type

   Number of
shares
outstanding
     Face value
(in won)
     Dividend
ratio
    Dividends  
2020    Cash dividends (Interim)      73,136,448        500        200   73,136  
   Cash dividends (Year-end)      71,327,153        500        1,800     641,944  
             

 

 

 
              715,080  
             

 

 

 
2019    Cash dividends (Interim)      71,869,828        500        200   71,870  
   Cash dividends (Year-end)      73,136,448        500        1,800     658,228  
             

 

 

 
              730,098  
             

 

 

 
2018    Cash dividends (Interim)      70,609,160        500        200   70,609  
   Cash dividends (Year-end)      71,869,828        500        1,800     646,828  
             

 

 

 
              717,437  
             

 

 

 

(2)     Dividends yield ratio

Dividends yield ratios for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In won)                    

Year

   Dividend type    Dividend per share    Closing price at
year-end
   Dividend yield ratio

2020

   Cash dividends    10,000    238,000    4.20%

2019

   Cash dividends    10,000    238,000    4.20%

2018

   Cash dividends    10,000    269,500    3.71%

35. Categories of Financial Instruments

 

(1)

Financial assets by category as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)                                    
    December 31, 2020        
    Financial
assets at
FVTPL
    Equity
instruments
at FVOCI
    Debt
instruments
at FVOCI
    Financial
assets at
amortized
cost
    Derivatives
hedging
instrument
    Total  

Cash and cash equivalents

                    1,369,653             1,369,653  

Financial instruments

                      1,427,845             1,427,845  

Short-term investment securities

    150,392                               150,392  

Long-term investment securities(*)

    193,396       1,454,361       1,080                   1,648,837  

Accounts receivable — trade

                      2,214,353             2,214,353  

Loans and other receivables

    517,175                   1,220,828             1,738,003  

Derivative financial assets

    99,559                         65,136       164,695  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  960,522       1,454,361       1,080       6,232,679       65,136       8,713,778  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

The Group designated ₩1,454,361 million of equity instruments that are not held for trading as financial assets at FVOCI.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)                                    
    December 31, 2019        
    Financial
assets at
FVTPL
    Equity
instruments
at FVOCI
    Debt
instruments
at FVOCI
    Financial
assets at
amortized
cost
    Derivatives
hedging
instrument
    Total  

Cash and cash equivalents

                    1,270,824             1,270,824  

Financial instruments

                      831,637             831,637  

Short-term investment securities

    166,666                               166,666  

Long-term investment securities(*)

    142,316       710,272       4,627                   857,215  

Accounts receivable — trade

                      2,247,895             2,247,895  

Loans and other receivables

    532,225                   1,136,332             1,668,557  

Derivative financial assets

    6,074                         144,886       150,960  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  847,281       710,272       4,627       5,486,688       144,886       7,193,754  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

The Group designated ₩710,272 million of equity instruments that are not held for trading as financial assets at FVOCI.

 

(2)

Financial liabilities by category as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)                            
     December 31, 2020  
     Financial
liabilities at
FVTPL
     Financial
liabilities at
amortized
cost
     Derivatives
hedging
instrument
     Total  

Accounts payable — trade

          372,909               372,909  

Derivative financial liabilities

     333,099               42,061        375,160  

Borrowings

            2,138,922               2,138,922  

Debentures

            8,579,743               8,579,743  

Lease liabilities(*)

            1,436,777               1,436,777  

Accounts payable — other and others

            6,051,550               6,051,550  
  

 

 

    

 

 

    

 

 

    

 

 

 
   333,099        18,579,901        42,061        18,955,061  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(In millions of won)                     
     December 31, 2019  
     Financial
liabilities at
amortized cost
     Derivatives
hedging
instrument
     Total  

Accounts payable — trade

   438,297               438,297  

Derivative financial liabilities

            1,043        1,043  

Borrowings

     2,043,140               2,043,140  

Debentures

     8,220,833               8,220,833  

Lease liabilities(*)

     1,291,007               1,291,007  

Accounts payable — other and others

     6,562,612               6,562,612  
  

 

 

    

 

 

    

 

 

 
   18,555,889        1,043        18,556,932  
  

 

 

    

 

 

    

 

 

 

 

(*)

Lease liabilities are not applicable on category of financial liabilities, but are classified as financial liabilities measured at amortized cost on consideration of nature for measurement of liabilities.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

36.

Financial Risk Management

(1) Financial risk management

The Group is exposed to credit risk, liquidity risk and market risk. Market risk is the risk related to the changes in market prices, such as foreign exchange rates and interest rates. The Group implements a risk management system to monitor and manage these specific risks.

The Group’s financial assets consist of cash and cash equivalents, financial instruments, investment securities, accounts receivable — trade and others, etc. Financial liabilities consist of accounts payable — other, borrowings, debentures, lease liabilities and others.

 

1)

Market risk

(i)    Currency risk

The Group incurs exchange position due to revenue and expenses from its global operations. Major foreign currencies where the currency risk occur are USD, EUR and JPY. The Group determines the currency risk management policy after considering the nature of business and the presence of methods that mitigate the currency risk for each Group entities. Currency risk occurs on forecasted transactions and recognized assets and liabilities which are denominated in a currency other than the functional currency of each Group entity. The Group manages currency risk arising from business transactions by using currency forwards, etc.

Monetary assets and liabilities denominated in foreign currencies as of December 31, 2020 are as follows:

 

(In millions of won, thousands of foreign currencies)  
     Assets      Liabilities  
     Foreign
currencies
     Won
equivalent
     Foreign
currencies
     Won
equivalent
 

USD

     84,581      92,025        1,541,544      1,677,200  

EUR

     10,903        14,591        2,519        3,370  

JPY

     672,311        7,088        22,778        240  

Others

            2,702               606  
     

 

 

       

 

 

 
      116,406         1,681,416  
     

 

 

       

 

 

 

In addition, the Group has entered into cross currency swaps to hedge against currency risk related to foreign currency borrowings and debentures. (See note 22)

As of December 31, 2020, a hypothetical change in exchange rates by 10% would have increased (reduced) the Group’s income before income tax as follows:

 

(In millions of won)              
     If increased by 10%      If decreased by 10%  

USD

   5,507        (5,507

EUR

     1,122        (1,122

JPY

     685        (685

Others

     210        (210
  

 

 

    

 

 

 
   7,524        (7,524
  

 

 

    

 

 

 

(ii)    Interest rate risk

The interest rate risk of the Group arises from borrowings, debenture and long-term payables — other. Since the Group’s interest bearing assets are mostly fixed-interest bearing assets, the Group’s revenue and operating cash flows from the interest-bearing assets are not influenced by the changes in market interest rates.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

The Group performs various analysis to reduce interest rate risk and to optimize its financing. To minimize risks arising from changes in interest rates, the Group takes various measures such as refinancing, renewal, alternative financing and hedging.

As of December 31, 2020, the floating-rate borrowings and bonds of the Group are ₩121,750 million and ₩326,400 million, respectively, and the Group has entered into interest rate swap agreements, as described in note 22, for the most of all floating-rate borrowings and debentures to hedge interest rate risk. If the interest rate increases (decreases) 1% with all other variables held constant, income before income taxes would change by ₩470 million in relation to interest expenses on floating-rate borrowings that are exposed to interest rate risk, which would also change the year-end balance of shareholder’s equity by the same amount.

As of December 31, 2020, the floating-rate long-term payables – other are ₩1,626,040 million. If the interest rate increases (decreases) 1% with all other variables held constant, income before income taxes for the year ended December 31, 2020 would change by ₩16,260 million in relation to floating-rate long-term payables – other that are exposed to interest rate risk.

A fundamental reform of major interest rate benchmarks is being undertaken globally, including the replacement of some interbank offered rates (“IBOR”s) with alternative nearly risk-free rates (referred to as “IBOR reform”). The Group has exposures to IBORs on its financial instruments that will be replaced or reformed as part of these market-wide initiatives. There is uncertainty over the timing and the methods of transition in some jurisdictions that the Group operates in. The Group anticipates that IBOR reform will impact its risk management and hedge accounting.

Derivatives

The Group holds interest rate swaps for risk management purposes which are designated in cash flow hedging relationships. The interest rate swaps have floating legs that are indexed to LIBOR. The Group’s derivative instruments are governed by contracts based on the International Swaps and Derivatives Association (“ISDA”)’s master agreements.

ISDA is currently reviewing its standardized contracts in the light of IBOR reform and plans to amend certain floating-rate options in the 2006 ISDA definitions to include fallback clauses that would apply on the permanent discontinuation of certain key IBORs. ISDA is expected to publish an IBOR fallback supplement to amend the 2006 ISDA definitions and an IBOR fallback protocol to facilitate multilateral amendments to include the amended floating-rate options in derivative transactions that were entered into before the date of the supplement. The Group currently plans to adhere to the protocol if and when it is finalized and to monitor whether its counterparties will also adhere. If this plan changes or there are counterparties who will not adhere to the protocol, the Group will negotiate with them bilaterally about including new fallback clauses.

Hedge accounting

The Group has evaluated the extent to which its cash flow hedging relationships are subject to uncertainty driven by IBOR reform as of December 31, 2020. The Group’s hedged items and hedging instruments continue to be indexed to LIBOR. These benchmark rates are quoted each day and the IBOR cash flows are exchanged with counterparties as usual.

However, the Group’s LIBOR cash flow hedging relationships extend beyond the anticipated cessation date for LIBOR. The Group expects that LIBOR will be discontinued after the end of 2021. As of December 31, 2020, the Group has not determined the alternative interest rate benchmark to LIBOR and there is uncertainty about when and how replacement may occur with respect to the relevant hedged items and hedging instruments. Such uncertainty may impact the hedging relationship. The Group applies the amendments to IFRS 9, Financial Instruments issued in 2020 to those hedging relationships directly affected by IBOR reform.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

Hedging relationships impacted by IBOR reform may experience ineffectiveness attributable to market participants’ expectations of when the shift from the existing IBOR benchmark rate to an alternative benchmark interest rate will occur. This transition may occur at different times for the hedged item and hedging instrument, which may lead to hedge ineffectiveness. The Group has measured its hedging instruments indexed to LIBOR using available quoted market rates for LIBOR-based instruments of the same tenor and similar maturity and has measured the cumulative change in the present value of hedged cash flows attributable to changes in LIBOR on a similar basis.

 

2)

Credit risk

The maximum credit exposure as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)              
     December 31, 2020      December 31, 2019  

Cash and cash equivalents

   1,369,423        1,270,572  

Financial instruments

     1,427,845        831,637  

Investment securities

     4,154        13,548  

Accounts receivable — trade

     2,214,353        2,247,895  

Contract assets

     148,281        191,858  

Loans and other receivables

     1,738,003        1,668,557  

Derivative financial assets

     164,695        150,960  
  

 

 

    

 

 

 
   7,066,754        6,375,027  
  

 

 

    

 

 

 

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. To manage credit risk, the Group evaluates the credit worthiness of each customer or counterparty considering the party’s financial information, its own trading records and other factors. Based on such information, the Group establishes credit limits for each customer or counterparty.

(i) Accounts receivable — trade and contract assets

The Group establishes a loss allowance in respect of accounts receivable – trade and contract assets. The main components of this allowance are a specific loss component that relates to individually significant exposures and a collective loss component established for groups of similar assets in respect of losses that are expected to occur. The collective loss allowance is determined based on historical data of collection statistics for similar financial assets. Details of changes in loss allowance during the year ended December 31, 2020 are included in note 7.

(ii) Debt investments

The credit risk arises from debt investments included in ₩1,427,845 million of financial instruments, ₩4,154 million of investment securities and ₩1,738,003 million of loans and other receivables. To limit the exposure to this risk, the Group transacts only with financial institutions with credit ratings that are considered to be low credit risk.

Most of the Group’s debt investments are considered to have a low risk of default and the borrower has a strong capacity to meet its contractual cash flow obligations in the near term. Thus the Group measured the loss allowance for the debt investments at an amount equal to 12-month expected credit losses.

Meanwhile, the Group monitors changes in credit risk at each reporting date. The Group recognized the loss allowance at an amount equal to lifetime expected credit losses when the credit risk on the debt investments is assumed to have increased significantly if it is more than 30 days past due.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

The Group’s maximum exposure to credit risk is equal to each financial asset’s carrying amount. The gross carrying amounts of each financial asset except for the accounts receivable – trade and derivative financial assets as of December 31, 2020 are as follows.

 

(In millions of won)  
     Financial assets at
FVTPL
     Financial
assets at
FVOCI
     At amortized cost  
     12-month ECL     Lifetime ECL — not
credit impaired
    Lifetime ECL —
credit impaired
 

Gross amount

   520,249        1,080        2,517,685       105,878       125,674  

Loss allowance

                   (3,751     (7,995     (88,819
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Carrying amount

   520,249        1,080        2,513,934       97,883       36,855  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Changes in the loss allowance for the debt investments during the year ended December 31, 2020 are as follows:

 

(In millions of won)                         
     12-month ECL     Lifetime ECL — not
credit impaired
    Lifetime ECL — credit
impaired
    Total  

December 31, 2019

   4,241       8,704       83,953       96,898  

Remeasurement of loss allowance, net

     834       2,321       7,404       10,559  

Transfer to lifetime ECL — not credit impaired

     (334     334              

Transfer to lifetime

ECL — credit impaired

     (990     (2,357     3,347        

Amounts written off

                 (12,208     (12,208

Recovery of amounts written off

                 6,323       6,323  

Others

           (1,007           (1,007
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2020

   3,751       7,995       88,819       100,565  
  

 

 

   

 

 

   

 

 

   

 

 

 

(iii) Cash and cash equivalents

The Group has ₩1,369,423 million as of December 31, 2020 (₩1,270,572 million as of December 31, 2019) cash and cash equivalents with banks and financial institutions above specific credit ratings.

Impairment on cash and cash equivalents has been measured on a 12-month expected loss basis and reflects the short maturities of the exposures. The Group considered that its cash and cash equivalents have low credit risk based on the credit ratings of the counterparties assigned by external credit rating agencies.

 

3)

Liquidity risk

The Group’s approach to managing liquidity is to ensure that it will always maintain sufficient cash and cash equivalents balances and have enough liquidity through various committed credit lines. The Group maintains enough liquidity within credit lines through active operating activities.

 

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

Contractual maturities of financial liabilities as of December 31, 2020 are as follows:

 

(In millions of won)  
     Carrying
amount
     Contractual
cash flows
     Less than
1 year
     1 - 5 years      More than
5 years
 

Accounts payable — trade

   372,909        372,909        372,909                

Borrowings(*)

     2,138,923        2,467,988        225,657        2,242,331         

Debentures(*)

     8,579,743        9,749,762        1,106,505        5,680,403        2,962,854  

Lease liabilities

     1,436,777        1,537,279        365,925        826,331        345,023  

Accounts payable — other and others(*)

     6,051,550        6,145,185        4,920,324        849,013        375,848  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   18,579,902        20,273,123        6,991,320        9,598,078        3,683,725  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*)

Includes interest payables.

The Group does not expect that the cash flows included in the maturity analysis could occur significantly earlier or at different amounts.

As of December 31, 2020, periods in which cash flows from cash flow hedge derivatives are expected to occur are as follows:

 

(In millions of won)  
     Carrying
amount
    Contractual
cash flows
    Less than
1 year
    1 - 5
years
    More than
5 years
 

Assets

   65,136       65,637       20,211       52,651       (7,225

Liabilities

     (42,061     (43,076     (1,740     (41,336      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   23,075       22,561       18,471       11,315       (7,225
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2)

Capital management

The Group manages its capital to ensure that it will be able to continue as a business while maximizing the return to shareholders through the optimization of its debt and equity structure. The overall strategy of the Group is the same as that of the Group as of and for the year ended December 31, 2019.

The Group monitors its debt-equity ratio as a capital management indicator. This ratio is calculated as total liabilities divided by total equity; both are from the financial statements.

Debt-equity ratio as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)             
     December 31,
2020
    December 31,
2019
 

Total liabilities

   23,510,714       22,385,434  

Total equity

     24,396,243       22,816,934  
  

 

 

   

 

 

 

Debt-equity ratios

     96.37     98.11
  

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(3)

Fair value

 

1)

Fair value and carrying amount of financial assets and liabilities including fair value hierarchy as of December 31, 2020 are as follows:

 

(In millions of won)                              
    December 31, 2020  
    Carrying
amount
    Level 1     Level 2     Level 3     Total  

Financial assets that are measured at fair value:

         

FVTPL

  960,522       60,473       629,732       270,317       960,522  

Derivatives hedging instruments

    65,136             65,136             65,136  

FVOCI

    1,455,441       885,452             569,989       1,455,441  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,481,099       945,925       694,868       840,306       2,481,099  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities that are measured at fair value:

         

FVTPL

  333,099                   333,099       333,099  

Derivatives hedging instruments

    42,061             42,061             42,061  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  375,160             42,061       333,099       375,160  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities that are not measured at fair value:

         

Borrowings

  2,138,923             2,282,316             2,282,316  

Debentures

    8,579,743             9,085,324             9,085,324  

Long-term payables — other

    1,566,954             1,582,805             1,582,805  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  12,285,620             12,950,445             12,950,445  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

2)

Fair value and carrying amount of financial assets and liabilities including fair value hierarchy as of December 31, 2019 are as follows:

 

(In millions of won)      
    December 31, 2019  
    Carrying
amount
    Level 1     Level 2     Level 3     Total  

Financial assets that are measured at fair value:

         

FVTPL

  847,281             668,891       178,390       847,281  

Derivatives hedging instruments

    144,886             144,886             144,886  

FVOCI

    714,899       407,651             307,248       714,899  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  1,707,066       407,651       813,777       485,638       1,707,066  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities that are measured at fair value:

         

Derivatives hedging instruments

  1,043             1,043             1,043  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities that are not measured at fair value:

         

Borrowings

  2,043,140             2,191,037             2,191,037  

Debentures

    8,220,833             8,714,408             8,714,408  

Long-term payables — other

    1,974,006             2,008,493             2,008,493  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  12,237,979             12,913,938             12,913,938  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

The above information does not include fair values of financial assets and liabilities of which fair values have not been measured as carrying amounts are reasonable approximation of fair values.

Fair value of the financial instruments that are traded in an active market (financial assets at FVOCI) is measured based on the bid price at the end of the reporting date.

The Group uses various valuation methods for determination of fair value of financial instruments that are not traded in an active market. Derivative financial contracts and long-term liabilities are measured using the discounted present value methods. Other financial assets are determined using the methods such as discounted cash flow and market approach. Inputs used to such valuation methods include swap rate, interest rate, and risk premium, and the Group performs valuation using the inputs which are consistent with natures of assets and liabilities measured.

Interest rates used by the Group for the fair value measurement as of December 31, 2020 are as follows:

 

     Interest rate  

Derivative instruments

     0.14% ~ 3.90%  

Borrowings and debentures

     0.99% ~ 2.21%  

Long-term payables — other

     0.90% ~ 1.72%  

 

3)

There have been no transfers between Level 2 and Level 1 for year ended December 31, 2020. The changes of financial assets classified as Level 3 for the year ended December 31, 2020 are as follows:

 

(In millions of won)  
     Balance at
January 1,
2020
     Gain(loss)
for the year
    OCI     Acquisition      Disposal     Transfer     Business
combination
    Balance at
December 31,
2020
 

Financial assets

 

FVTPL

   178,390        103,327       (8,266     60,576        (39,570     (24,156     16       270,317  

FVOCI

     307,248        (98     230,526       37,381        (5,154     (6,137     6,223       569,989  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   485,638        103,229       222,260       97,957        (44,724     (30,293     6,239       840,306  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities

 

          (12,115                              (320,984     (333,099
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(4)

Enforceable master netting agreement or similar agreement

Carrying amount of financial instruments recognized of which offset agreements are applicable as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)                              
    December 31, 2020  
    Gross
financial
instruments
recognized
    Amount
offset
    Net financial
instruments
presented on the
statements of
financial position
    Relevant financial
instruments not offset
    Net
amount
 

Financial assets:

         

Derivative instruments(*)

  8,015             8,015       (453     7,562  

Accounts receivable — trade and others

    317,332       (203,403     113,929             113,929  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  325,347       (203,403     121,944       (453     121,491  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

         

Derivative instruments(*)

  453             453       (453      

Accounts payable — other and others

    301,996       (203,403     98,593             98,593  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  302,449       (203,403     99,046       (453     98,593  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

The balance represents the net amount under the standard terms and conditions of International Swaps and Derivatives Association.

 

(In millions of won)                  
    December 31, 2019  
    Gross
financial
instruments
recognized
    Amount
offset
    Net financial
instruments
presented on the
statements of
financial position
 

Financial assets:

     

Accounts receivable — trade and others

  102,241       (100,895     1,346  

Financial liabilities:

     

Accounts payable — other and others

  100,895       (100,895      

 

37.

Transactions with Related Parties

(1) List of related parties

 

Relationship

  

Company

Ultimate Controlling Entity

   SK Holdings Co., Ltd.

Joint ventures

   Dogus Planet, Inc. and 4 others

Associates

   SK hynix Inc. and 55 others

Others

   The Ultimate Controlling Entity’s subsidiaries and associates, etc.

For the periods presented, the Group belongs to SK Group, a conglomerate as defined in the Monopoly Regulation and Fair Trade Act of the Republic of Korea. All of the other entities included in SK Group are considered related parties of the Group.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2) Compensation for the key management

The Parent Company considers registered directors (3 executive and 5 non-executive directors) who have substantial role and responsibility in planning, operations, and relevant controls of the business as key management. The compensation given to such key management for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)              
     2020      2019      2018  

Salaries

   10,029        5,969        4,488  

Defined benefits plan expenses

     3,459        1,237        920  

Share option

     158        325        548  
  

 

 

    

 

 

    

 

 

 
    13,646        7,531        5,956  
  

 

 

    

 

 

    

 

 

 

Compensation for the key management includes salaries, non-monetary salaries and retirement benefits made in relation to the pension plan and compensation expenses related to share options granted.

 

  (3)

Transactions with related parties for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                          
          2020  

Scope

  

Company

   Operating
revenue and
others
     Operating
expense
and
others(*1)
     Acquisition
of property
and
equipment
 

Ultimate Controlling Entity

   SK Holdings Co., Ltd.(*2)    40,717        596,509        76,534  
     

 

 

    

 

 

    

 

 

 

Associates

  

F&U Credit information Co., Ltd.

     3,484        51,228         
   SK hynix Inc.(*3)      316,001        267         
   KEB HanaCard Co., Ltd.      683        3,065         
   SK Wyverns Co., Ltd.      1,279        19,354         
   Content Wavve Co., Ltd.      446        56,631         
   Others(*4)      65,431        12,511        78  
     

 

 

    

 

 

    

 

 

 
        387,324        143,056        78  
     

 

 

    

 

 

    

 

 

 

Others

   SK Engineering & Construction Co., Ltd.      12,349        238         
   SK Innovation Co., Ltd.      38,999        18,464         
  

SK Networks Co., Ltd.(*5)

     13,893        1,022,976        32  
  

SK Networks Services Co., Ltd.

     6,936        76,653        2,023  
  

SK Telesys Co., Ltd.

     388        10,751        30,453  
  

SK TNS Co., Ltd.

     1,118        43,767        496,460  
  

SK Energy Co., Ltd.

     16,009        296         
   SK hynix Semiconductor (China) Ltd.      73,683                
   SK Battery Hungary Krt      19,394                
   SK Global Chemical Co., Ltd.      20,667        9         
   SK Global Chemical International
Trading (Shanghai) Co., Ltd.
     15,898        8         
   HappyNarae Co., Ltd.      9,871        17,361        129,621  
   Others      102,141        128,268        83,693  
     

 

 

    

 

 

    

 

 

 
        331,346        1,318,791        742,282  
     

 

 

    

 

 

    

 

 

 
       759,387        2,058,356        818,894  
     

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

 

 

(*1)

Operating expense and others include lease payments by the Group.

 

(*2)

Operating expense and others include ₩216,241 million of dividends paid by the Parent Company.

 

(*3)

Operating revenue and others include ₩146,100 million of dividends received from SK hynix Inc. which was deducted from the investment in associates and ₩70,495 million of disposal amounts of Yongin SK Academy training facility.

 

(*4)

Operating revenue and others include ₩18,749 million of dividends declared by Korea IT Fund and Pacific Telecom Inc. and UniSK which was deducted from the investments in associates.

 

(*5)

Operating expenses and others include costs for handset purchases amounting to ₩961,167 million.

 

(In millions of won)                          
          2019  

Scope

  

Company

   Operating
revenue and
others
     Operating
expense and
others(*1)
     Acquisition of
property and
equipment
 

Ultimate Controlling Entity

   SK Holdings Co., Ltd.(*2)    53,507        612,248        95,426  
     

 

 

    

 

 

    

 

 

 

Associates

  

F&U Credit information Co., Ltd.

     2,293        55,179         
   SK hynix Inc.(*3)      273,047        481         
   KEB HanaCard Co., Ltd.      832        1,901         
   SK Wyverns Co., Ltd.      1,399        21,528         
   Others(*4)      17,286        13,864        457  
     

 

 

    

 

 

    

 

 

 
        294,857        92,953        457  
     

 

 

    

 

 

    

 

 

 

Others

  

SK Engineering & Construction Co., Ltd.

     13,339        1,601        7,400  
   SK Innovation Co., Ltd.      26,697        2,777         
   SK Networks Co., Ltd.(*5)      29,321        1,088,443        449  
  

SK Networks Services Co., Ltd.

     1,056        76,671        4,979  
   SK Telesys Co., Ltd.      474        9,686        59,392  
   SK TNS Co., Ltd.      240        35,824        607,546  
   SK Energy Co., Ltd.      16,294        516         
  

SK hynix Semiconductor (China) Ltd.

     73,542                
  

SK Global Chemical International Trading (Shanghai) Co., Ltd.

     14,535        131         
   HappyNarae Co., Ltd.      6,943        18,121        168,286  
   Others      90,307        105,569        109,189  
     

 

 

    

 

 

    

 

 

 
        272,748        1,339,339        957,241  
     

 

 

    

 

 

    

 

 

 
      621,112        2,044,540        1,053,124  
     

 

 

    

 

 

    

 

 

 

 

 

(*1)

Operating expense and others include lease payments by the Group.

 

(*2)

Operating expense and others include ₩216,241 million of dividends paid by the Parent Company.

 

(*3)

Operating revenue and others include ₩219,150 million of dividends received from SK hynix Inc. which was deducted from the investment in associates.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(*4)

Operating revenue and others include ₩11,955 million of dividends declared by Korea IT Fund, UniSK and KIF-Stonebridge IT Investment Fund which was deducted from the investments in associates.

 

(*5)

Operating expenses and others include costs for handset purchases amounting to ₩1,043,902 million.

 

(In millions of won)                                 
          2018  

Scope

  

Company

   Operating
revenue and
others
     Operating
expense
and others
     Acquisition of
property and
equipment
     Collection
of loans
 

Ultimate Controlling Entity

   SK Holdings Co., Ltd.(*1)    20,050        601,176        151,502         
     

 

 

    

 

 

    

 

 

    

 

 

 

Associates

  

F&U Credit information Co., Ltd.

     2,777        54,857                
  

HappyNarae Co., Ltd.(*2)

     1,002        20,286        88,327         
  

SK hynix Inc.(*3)

     179,708        313                
  

KEB HanaCard Co., Ltd.

     15,046        15,387                
  

Others(*4)

     5,924        35,296        1,202        204  
     

 

 

    

 

 

    

 

 

    

 

 

 
        204,457        126,139        89,529        204  
     

 

 

    

 

 

    

 

 

    

 

 

 

Others

  

SK Engineering & Construction Co., Ltd.

     4,662        1,122        8,700         
  

SK Innovation Co., Ltd.(*5)

     44,010        996                
  

SK Networks Co., Ltd.(*6)

     23,078        1,189,404        460         
  

SK Networks Services Co., Ltd.

     774        90,723        5,478         
  

SK Telesys Co., Ltd.

     362        10,945        127,840         
  

SK TNS Co., Ltd.

     140        31,220        493,793         
  

SK Energy Co., Ltd.(*5)

     15,134        897                
  

SK Gas Co., Ltd.

     7,653        2                
  

SKC Infra Service Co., Ltd.

     57        50,829        24,761         
  

Others(*5)

     55,224        19,323                
     

 

 

    

 

 

    

 

 

    

 

 

 
        151,094        1,395,461        661,032         
     

 

 

    

 

 

    

 

 

    

 

 

 
      375,601        2,122,776        902,063        204  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(*1)

Operating expense and others include ₩203,635 million of dividends paid by the Parent Company.

 

(*2)

Transactions with HappyNarae Co., Ltd. occurred before disposal.

 

(*3)

Operating revenue and others include ₩146,100 million of dividends received from SK hynix Inc. which was deducted from the investments in associates.

 

(*4)

Operating revenue and others include ₩4,587 million of dividends received from Korea IT Fund, KIF-Stonebridge IT Investment Fund and UniSK which were deducted from the investments in associates.

 

(*5)

Operating revenue and others include ₩68,500 million received from disposal of the real estate investment fund to SK Innovation Co., Ltd., SK Energy Co., Ltd., SK Lubricants Co., Ltd., SK Trading International Co., Ltd. and SK Global Chemical Co., Ltd.

 

(*6)

Operating expenses and others include costs for handset purchases amounting to ₩1,100,370 million.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(4)

Account balances with related parties as of December 31, 2020 and 2019 are as follows:

 

(In millions of won)            
          December 31, 2020  
          Receivables      Payables  

Scope

  

Company

   Loans      Accounts
receivable — trade,
etc
     Accounts
payable — other,
etc
 

Ultimate Controlling Entity

  

SK Holdings Co., Ltd.

          6,449        64,373  

Associates

  

F&U Credit information Co., Ltd.

            10        4,699  
  

SK hynix Inc.

            33,773        128  
  

Wave City Development Co., Ltd.(*1)

            25,782         
  

Daehan Kanggun BcN Co., Ltd.(*2)

     22,147        2,779         
  

KEB HanaCard Co., Ltd.

            352        145,328  
  

Content Wavve Co., Ltd.

            283        2,491  
  

Others

            9,098        1,686  
     

 

 

    

 

 

    

 

 

 
        22,147        72,077        154,332  
     

 

 

    

 

 

    

 

 

 

Others

  

SK Engineering & Construction Co., Ltd.

            1,521        152  
  

SK Innovation Co., Ltd.

            11,737        44,105  
  

SK Networks. Co., Ltd.

            2,245        108,233  
  

SK Networks Services Co., Ltd.

            579        7,103  
  

SK Telesys Co., Ltd.

            37        9,253  
  

SK TNS Co., Ltd.

            263        89,915  
  

SK Energy Co., Ltd.

            3,502        1,837  
  

SK hystec Co., Ltd.

            494        6,085  
  

SK hynix Semiconductor (China) Ltd.

            5,896         
  

SK Battery Hungary Krt

            2,075         
  

SK Global Chemical Co., Ltd.

            1,142        5  
  

SK Global Chemical InternationalTrading (Shanghai) Co., Ltd.

            795        21  
  

HappyNarae Co., Ltd.

            720        16,534  
  

Others

            15,564        120,575  
     

 

 

    

 

 

    

 

 

 
               46,570        403,818  
     

 

 

    

 

 

    

 

 

 
      22,147        125,096        622,523  
     

 

 

    

 

 

    

 

 

 

 

 

(*1)

As of December 31, 2020, the Parent Company recognized loss allowance amounting to ₩10,880 million on the accounts receivable — trade.

 

(*2)

As of December 31, 2020, the Parent Company recognized full loss allowance for the balance of loans to Daehan Kanggun BcN Co., Ltd.

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)            
          December 31, 2019  
          Receivables      Payables  

Scope

  

Company

   Loans      Accounts
receivable — trade,
etc
     Accounts
payable — other,
etc
 

Ultimate Controlling Entity

  

SK Holdings Co., Ltd.

          7,941        87,458  

Associates

  

F&U Credit information Co., Ltd.

            2        4,869  
  

SK hynix Inc.

            21,510        100  
  

Wave City Development Co., Ltd.(*1)

            31,523         
  

Daehan Kanggun BcN Co., Ltd.(*2)

     22,147        5,359         
  

KEB HanaCard Co., Ltd.

            1,025        9,474  
  

Others

     204        2,490        2,262  
     

 

 

    

 

 

    

 

 

 
        22,351        61,909        16,705  
     

 

 

    

 

 

    

 

 

 

Others

  

SK Engineering & Construction Co., Ltd.

            4,422        97  
  

SK Innovation Co., Ltd.

            7,496        43,791  
  

SK Networks. Co., Ltd.

            3,469        76,993  
  

SK Networks Services Co., Ltd.

                   10,900  
  

SK Telesys Co., Ltd.

            30        16,337  
  

SK TNS Co., Ltd.

        14        200,703  
  

SK Energy Co., Ltd.

            2,757        1,954  
  

SK hystec Co., Ltd.

            848        687  
  

SK hynix Semiconductor (China) Ltd.

            8,556         
  

Others

            23,264        88,813  
     

 

 

    

 

 

    

 

 

 
               50,856        440,275  
     

 

 

    

 

 

    

 

 

 
      22,351        120,706        544,438  
     

 

 

    

 

 

    

 

 

 

 

 

(*1)

As of December 31, 2019, the Parent Company recognized loss allowance amounting to ₩13,283 million on the accounts receivable — trade.

 

(*2)

As of December 31, 2019, the Parent Company recognized full loss allowance for the balance of loans to Daehan Kanggun BcN Co., Ltd.

 

(5)

SK Telink Co., Ltd., a subsidiary of the Parent Company, is holding a blank note provided by SK Holdings Co., Ltd. with regards to a performance guarantee.

 

(6)

The details of additional investments and disposal of associates and joint ventures for the year ended December 31, 2020 as presented in note 13.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

38.

Commitments and Contingencies

(1)    Collateral assets and commitments

SK Broadband Co., Ltd., a subsidiary of the Parent Company, has pledged its properties as collateral for leases on buildings in the amount of ₩1,568 million as of December 31, 2020.

In addition, SK Infosec Co., Ltd., a subsidiary of the Parent Company, has pledged its shares of ADT CAPS Co., Ltd., CAPSTEC Co., Ltd., and ADT SECURITY Co., Ltd. for the long-term borrowings with a face value of ₩1,950,000 million and Incross Co., Ltd., a subsidiary of the Parent Company, has pledged ₩20,057 million of short-term financial instrument for performance guarantee as of December 31, 2020.

(2)    Legal claims and litigations

As of December 31, 2020 the Group is involved in various legal claims and litigation. Provision recognized in relation to these claims and litigation is immaterial. In connection with those legal claims and litigation for which no provision was recognized, management does not believe the Group has a present obligation, nor is it expected any of these claims or litigation will have a significant impact on the Group’s financial position or operating results in the event an outflow of resources is ultimately necessary.

Meanwhile, the pending litigation over the validity of partnership contract that SK Planet Co., Ltd., a subsidiary of the Parent Company, was involved as the defendant (Plaintiff: Nonghyup Bank) was settled by the agreement between the parties during the year ended December 31, 2018. As a result of the settlement, the credit card business partnership between SK Planet Co., Ltd. and Nonghyup Bank will be maintained until April 2021, and the Group is obligated to pay the commission fees based on the customers’ credit card usage until September 2021, the expiration date of the credit cards. The Group determined that the contract and the subsidiary agreements meet the definition of an onerous contract according to IAS 37, for which the Group recognized provisions with the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. In this regard, ₩18,717 million are recognized as current provisions as of December 31, 2020.

(3)    Accounts receivable from sale of handsets

The sales agents of the Parent Company sell handsets to the Parent Company’s subscribers on an installment basis. The Parent Company entered into comprehensive agreements to purchase accounts receivables from handset sales with retail stores and authorized dealers and to transfer the accounts receivables from handset sales to special purpose companies which were established with the purpose of liquidating receivables, respectively.

The accounts receivables from sale of handsets amounting to ₩571,004 million and ₩646,837 million as of December 31, 2020 and 2019, respectively, which the Parent Company purchased according to the relevant comprehensive agreement are recognized as accounts receivable – other and long-term accounts receivable — other.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

39.

Statements of Cash Flows

 

(1)

Adjustments for income and expenses from operating activities for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                   
     2020     2019     2018  

Interest income

   (50,357     (63,579     (69,936

Dividends

     (1,170     (10,011     (35,143

Gain on foreign currency translations

     (8,928     (4,576     (2,776

Gain on valuation of derivatives

     (101,343     (2,499     (6,532

Gain on settlement of derivatives

     (7,829     (29,277     (20,399

Gain relating to investments in subsidiaries, associates and joint ventures, net

     (1,028,403     (449,543     (3,270,912

Gain on sale of accounts receivable — other

     (22,605     (15,855     (20,023

Gain on disposal of property and equipment and intangible assets

     (35,644     (8,533     (38,933

Gain on business transfer

     (12,455     (69,522      

Gain relating to financial assets at FVTPL

     (35,844     (4,504     (83,636

Gain relating to financial liabilities at FVTPL

           (56      

Other income

     (4,220     (1,875     (952

Interest expense

     399,176       406,087       307,319  

Loss on foreign currency translations

     12,730       4,948       2,397  

Loss on disposal of long-term investment securities

     98              

Loss on sale of accounts receivable — other

           5,823        

Income tax expense

     376,502       300,268       843,978  

Expense related to defined benefit plan

     198,794       175,165       147,722  

Share option

     4,313       2,073       789  

Depreciation and amortization

     4,169,996       4,021,016       3,284,339  

Bad debt expense

     48,625       28,841       38,211  

Loss on disposal of property and equipment and intangible assets

     41,598       47,760       87,257  

Impairment loss on property and equipment and intangible assets

     208,833       65,935       255,839  

Bad debt for accounts receivable — other

     10,559       5,802       7,718  

Loss on valuation of derivatives

     13,551              

Loss on settlement of derivatives

     2,637       641       12,554  

Loss relating to financial assets at FVTPL

     10,894       7,753       22,507  

Loss relating to financial liabilities at FVTPL

           43       1,535  

Loss on impairment of investment assets

           1,670       3,157  

Other expenses

     67,146       21,044       102,839  
  

 

 

   

 

 

   

 

 

 
   4,256,654       4,435,039       1,568,919  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(2)

Changes in assets and liabilities from operating activities for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                   
     2020     2019     2018  

Accounts receivable — trade

   (33,410     (211,712     175,841  

Accounts receivable — other

     (50,003     48,399       319,913  

Accrued income

           151        

Advanced payments

     (945     (12,204     13,393  

Prepaid expenses

     112,270       (680,925     (3,597

Inventories

     (7,219     115,893       (13,429

Long-term accounts receivable — other

     26,027       (56,216     11,064  

Contract assets

     1,528       (68,805     9,161  

Guarantee deposits

     26,122       6,392       (258

Accounts payable — trade

     3,023       (23,607     (58,487

Accounts payable — other

     311,737       167,595       (271,128

Withholdings

     33,348       (31,545     129,492  

Contract liabilities

     35,426       33,574       11,328  

Deposits received

     (1,028     (3,112     (333

Accrued expenses

     61,848       116,949       (102,246

Provisions

     (30,773     (36,478     (4,298

Long-term provisions

     (548     (1,699     1,193  

Plan assets

     (145,214     (130,790     (123,075

Retirement benefit payment

     (76,987     (84,098     (63,957

Others

     37,256       (3,892     (4,628
  

 

 

   

 

 

   

 

 

 
   302,458       (856,130     25,949  
  

 

 

   

 

 

   

 

 

 

 

(3)

Significant non-cash transactions for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                    
     2020     2019      2018  

Increase(decrease) in accounts payable — other relating to acquisition of property and equipment and intangible assets

   (426,723     438,622        1,162,301  

Increase of right-of-use assets

     736,157       1,141,349         

Contribution in kind for investments

     4,702       78,900         

Investment in subsidiary from comprehensive stock exchange

                  129,595  

Merger of Tbroad Co., Ltd. and two other companies by SK Broadband Co., Ltd.

     1,072,487               

 

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SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(4)

Reconciliation of liabilities arising from financing activities for the years ended December 31, 2020 and 2019 are as follows:

 

(In millions of won)  
    2020  
    January 1,
2020
    Cash flows     Non-cash transactions        
  Exchange
rate
changes(*)
    Fair value
changes
    Business
combinations
    Other
changes
    December 31,
2020
 

Total liabilities from financing activities:

             

Short-term borrowings

  20,603       76,375       13,020                         109,998  

Long-term borrowings

    2,022,537       (3,026     (14,208                 23,621       2,028,924  

Debentures

    8,220,833       445,462       (94,391                 7,839       8,579,743  

Lease liabilities

    1,291,007       (412,666                 7,696       550,740       1,436,777  

Long-term payables — other

    1,971,609       (428,100                       23,445       1,566,954  

Derivative financial liabilities

    1,043       8,191             44,942                   54,176  

Derivative financial assets

    (144,886     28,500             51,250                   (65,136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  13,382,746       (285,264     (95,579     96,192       7,696       605,645       13,711,436  

Other cash flows from financing activities:

             

Payments of cash dividends

    (742,136          

Payments of interest on hybrid bonds

      (14,766          

Acquisition of treasury shares

      (426,664          

Cash inflow from transactions with the non-controlling shareholders

      17,766            

Cash outflow from transactions with the non-controlling shareholders

      (6,515          
      (1,172,315          
   

 

 

           
    (1,457,579          
   

 

 

           

 

 

(*)

The effect of changes in foreign exchange rates for financial liabilities at amortized cost.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won)  
    2019  
    January 1,
2019
    Cash flows     Non-cash transactions        
  Exchange
rate
changes(*)
    Fair value
changes
    Business
combinations
    Other
changes
    December 31,
2019
 

Total liabilities from financing activities:

             

Short-term borrowings

  80,000       (59,860     (2           465             20,603  

Long-term borrowings

    2,104,996       (89,882     1,129                   6,294       2,022,537  

Debentures

    7,466,852       693,444       59,157       223             1,157       8,220,833  

Lease liabilities

    844,283       (443,238                 955       889,007       1,291,007  

Long-term payables – other

    2,393,027       (428,153     (84                 6,819       1,971,609  

Derivative financial liabilities

    4,184       626             (3,767                 1,043  

Derivative financial assets

    (55,457     11,800             (98,958           (2,271     (144,886
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  12,837,885       (315,263     60,200       (102,502     1,420       901,006       13,382,746  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other cash flows from financing activities:

             

Payments of cash dividends

    (718,698          

Payments of interest on hybrid bonds

      (14,766          

Disposal of treasury shares

      300,000            

Cash inflow from transactions with the non-controlling shareholders

      101,398            

Cash outflow from transactions with the non-controlling shareholders

      (39,345          
   

 

 

           
      (371,411          
   

 

 

           
    (686,674          
   

 

 

           

 

 

(*)

The effect of changes in foreign exchange rates for financial liabilities at amortized cost.

 

40.

Cash Dividends paid to the Parent Company

Cash dividends paid to the Parent Company for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

(In millions of won)                     
     2020      2019      2018  

Cash dividends received from consolidated subsidiaries

   119,036        287,549        61,985  

Cash dividends received from associates

     164,850        227,500        149,815  
  

 

 

    

 

 

    

 

 

 
   283,886        515,049        211,800  
  

 

 

    

 

 

    

 

 

 

 

41.

Subsequent Events

(1)    Merge of ADT Caps Co., Ltd. by SK Infosec Co., Ltd.

On January 13, 2021, the board of directors of SK Infosec Co., Ltd., a subsidiary of the Parent Company, resolved to approve SK Infosec Co., Ltd.’s merger with ADT CAPS Co., Ltd. SK Infosec Co., Ltd. On March 4, 2021, SK Infosec Co., Ltd. merged with ADT CAPS Co., Ltd. pursuant to a resolution from the board of directors meeting held in January 2021.

(2)    Sale of ownership interest for SK Wyverns

On January 26, 2021, the Parent Company entered into a memorandum of understanding (“MOU”) with E-MART Inc. to sell its entire 1,000,000 common stock of SK Wyverns Co., Ltd., in addition to land and buildings for ₩100,000 million and ₩35,280 million, respectively. In accordance with the MOU, the sale and purchase agreement of stock has been executed on February 23, 2021 and the agreement to sell land and building with SK Wyverns Co., Ltd. was executed on February 26, 2021.

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

SK hynix, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of SK hynix, Inc. and subsidiaries (the Group) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2020 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Changes in Accounting Principle

As discussed in Note 3-(26) to the consolidated financial statements, during 2019 and 2020, the Group changed its method of accounting for leases as of January 1, 2019 due to the adoption of IFRS 16, Leases, and the related interpretations published by Internal Financial Reporting Interpretations Committee, respectively.

Basis for Opinion

These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Measurement of fair value of long-term investment assets related to KIOXIA Holdings Corporation (“KIOXIA”)

As discussed in Note 6 and Note 12 to the consolidated financial statements, the Group holds ₩ 3,595,494 million of equity investment in BCPE Pangea Intermediate Holdings Cayman, L.P. (“SPC1”), and ₩ 2,351,225 million of convertible bonds investment in BCPE Pangea Cayman2 Limited (“SPC2”), as of December 31, 2020. Fair values of these long-term investment assets are measured based on the equity value of KIOXIA. Specifically, the fair value of equity investment in SPC1 is measured using an option pricing model allocating the estimated fair value of KIOXIA equity between investors, together with consideration of expected KIOXIA initial public offering and SPC1 liquidation. The fair value of convertible bonds investment in SPC2 is measured based on the estimated KIOXIA’s equity value and SPC2’s equity ownership in KIOXIA.

 

G-1


Table of Contents

We identified the measurement of fair values of long-term investment assets related to KIOXIA as a critical audit matter. Estimation of equity value of KIOXIA, an unlisted company, and fair values of the financial instruments in SPC1 and SPC2 involved the application of significant judgment and measurement uncertainty therefore requires a high degree of auditor judgment, and involvement of professionals with specialized skill and knowledge. Specifically, determination of valuation methods in measuring the fair value of the financial instruments, the assumptions of estimated future revenue, operating profit, discount rate, and volatility of KIOXIA’s equity value, and the expected timing of liquidation of SPC1 were challenging to test and involved subjective auditor judgment.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal control related to the process over measurement of fair values of long-term investment assets related to KIOXIA. We compared assumptions of estimated future revenue, and operating profit used in the forecasted cash flow in prior year to the actual results in current year to assess the Group’s ability to accurately forecast. We performed sensitivity analyses over discount rate, and volatility of KIOXIA’s equity value, and expected timing of liquidation of SPC1 to assess the impact of changes in those assumptions on the fair value measurement. We involved our valuation professionals with specialized skills and knowledge, who assisted us in the following:

 

   

assessing the valuation methods used in measuring the fair value for the financial instruments in SPC1 and SPC2 by considering the availability of relevant observable inputs;

 

   

assessing the estimated future revenue, and operating profit by comparing them with relevant industry data;

 

   

assessing the discount rate by comparing it against independently developed rates using publicly available market data for comparable entities;

 

   

assessing the volatility of KIOXIA’s equity value by comparing it against the volatilities for other public comparable companies.

/s/ KPMG Samjong Accounting Corp.

We have served as the Group’s auditor since 2012.

Seoul, Korea

April 29, 2021

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2020 and 2019

 

     Note      2020      2019  
            (In millions of won)  

Assets

        

Current assets

        

Cash and cash equivalents

     5,6      2,975,989        2,306,070  

Short-term financial instruments

     5,6,7        436,708        298,350  

Short-term investment assets

     5,6        1,535,518        1,390,293  

Trade receivables, net

     5,6,8,34        4,931,322        4,261,674  

Loans and other receivables, net

     5,6,8,34        69,194        23,508  

Inventories, net

     9        6,136,318        5,295,835  

Current tax assets

        202        199,805  

Other current assets

     10        485,672        682,037  

Other financial assets

     5,6,7        30        30  
     

 

 

    

 

 

 
        16,570,953        14,457,602  
     

 

 

    

 

 

 

Non-current assets

        

Investments in associates and joint ventures

     11        1,166,244        768,767  

Long-term trade receivables, net

     5,6,8               44,775  

Long-term investment assets

     5,6,12        6,139,627        4,381,812  

Loans and other receivables, net

     5,6,8,34        75,589        109,079  

Other financial assets

     5,6,7        353        901  

Property, plant and equipment, net

     13,16,35        41,230,562        39,949,940  

Right-of-use assets, net

     3,14        1,707,645        1,706,658  

Intangible assets, net

     15        3,400,278        2,571,049  

Investment property, net

     13,16        209,417        258  

Deferred tax assets

     22,32        556,194        673,640  

Employee benefit assets, net

     21        61,962        3,406  

Other non-current assets

     10,35        55,029        580,463  
     

 

 

    

 

 

 
        54,602,900        50,790,748  
     

 

 

    

 

 

 

Total assets

      71,173,853        65,248,350  
     

 

 

    

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-3


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Financial Position,  continued

As of December 31, 2020 and 2019

 

     Note      2020     2019  
     (In millions of won)  

Liabilities

       

Current liabilities

       

Trade payables

     5,6,34      1,046,159       1,042,542  

Other payables

     5,6,34        2,348,909       2,367,673  

Other non-trade payables

     5,6,17,34        1,367,193       1,257,895  

Borrowings

     5,6,18,35        3,114,250       2,737,770  

Provisions

     20        13,797       10,701  

Current tax liabilities

        636,649       89,217  

Lease liabilities

     3,5,6,14        347,464       293,171  

Other current liabilities

     19        197,395       162,997  

Other financial liabilities

     5,6        544        
     

 

 

   

 

 

 
        9,072,360       7,961,966  
     

 

 

   

 

 

 

Non-current liabilities

       

Long-term other payables

     5,6        272,396        

Other non-trade payables

     5,6,17        29,923       18,266  

Borrowings

     5,6,18,35        8,137,398       7,785,736  

Defined benefit liabilities, net

     21        2,739       53,624  

Deferred tax liabilities

     22,32        266,640       15,743  

Lease liabilities

     3,5,6,14        1,296,252       1,373,828  

Other financial liabilities

     5,6,23        88,121       15,532  

Other non-current liabilities

     19        98,927       87,773  
     

 

 

   

 

 

 
        10,192,396       9,350,502  
     

 

 

   

 

 

 

Total liabilities

        19,264,756       17,312,468  
     

 

 

   

 

 

 

Equity

       

Equity attributable to owners of the Parent Company

       

Capital stock

     24        3,657,652       3,657,652  

Capital surplus

     24        4,143,736       4,143,736  

Other equity

     24,37        (2,503,122     (2,504,713

Accumulated other comprehensive loss

     25        (405,453     (298,935

Retained earnings

     26        46,995,728       42,923,362  
     

 

 

   

 

 

 

Total equity attributable to owners of the Parent Company

        51,888,541       47,921,102  

Non-controlling interests

        20,556       14,780  
     

 

 

   

 

 

 

Total equity

        51,909,097       47,935,882  
     

 

 

   

 

 

 

Total liabilities and equity

      71,173,853       65,248,350  
     

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-4


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2020, 2019 and 2018

 

     Note      2020     2019     2018  
            (In millions of won, except per share
information)
 

Revenue

     4,27,34      31,900,418       26,990,733       40,445,066  

Cost of sales

     29,34        21,089,789       18,818,814       15,180,838  
     

 

 

   

 

 

   

 

 

 

Gross profit

        10,810,629       8,171,919       25,264,228  

Selling and administrative expenses

     28,29        (5,798,005     (5,452,740     (4,420,478

Finance income

     5,30        3,327,905       1,247,640       1,691,955  

Finance expenses

     5,30        (1,980,411     (1,531,417     (1,142,134

Share of profit of equity-accounted investees

     11        (36,279     22,633       13,007  

Other income

     31        84,773       88,179       112,810  

Other expenses

     31        (171,575     (113,575     (178,358
     

 

 

   

 

 

   

 

 

 

Profit before income tax

        6,237,037       2,432,639       21,341,030  

Income tax expense

     32        1,478,123       423,561       5,801,046  
     

 

 

   

 

 

   

 

 

 

Profit for the year

        4,758,914       2,009,078       15,539,984  

Other comprehensive income (loss)

         

Item that will never be reclassified to profit or loss:

         

Remeasurements of defined benefit liability, net of tax

     21        1,266       (90,211     (77,029

Items that are or may be reclassified to profit or loss:

         

Foreign operations – foreign currency translation differences, net of tax

     25        (47,407     150,037       7,534  

Gain (loss) on valuation of derivatives, net of tax

     23,25        (417     12,753        

Equity-accounted investees – share of other comprehensive income (loss), net of tax

     11,25        (60,820     21,444       2,276  
     

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) for the year, net of tax

        (107,378     94,023       (67,219
     

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

      4,651,536       2,103,101       15,472,765  
     

 

 

   

 

 

   

 

 

 

Profit or loss attributable to:

         

Owners of the Parent Company

      4,755,102       2,005,975       15,540,111  

Non-controlling interests

        3,812       3,103       (127

Total comprehensive income attributable to:

         

Owners of the Parent Company

        4,649,850       2,099,648       15,471,792  

Non-controlling interests

        1,686       3,453       973  

Earnings per share

         

Basic earnings per share (in won)

     33        6,952       2,933       22,255  

Diluted earnings per share (in won)

     33        6,950       2,932       22,252  

 

See accompanying notes to the consolidated financial statements

 

G-5


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2020, 2019 and 2018

 

           Attributable to owners of the Parent Company              
     Notes     Capital stock     Capital
surplus
    Other
equity
    Accumulated
other
comprehensive
income (loss)
    Retained
earnings
    Total     Non-controlling
interests
    Total equity  
     (In millions of won)  

Balance at January 1, 2018

     3,657,652       4,143,736       (771,100     (491,529     27,276,521       33,815,280       5,639       33,820,919  

Total comprehensive income

                  

Profit for the year

                               15,540,111       15,540,111       (127     15,539,984  

Other comprehensive income (loss)

                         8,710       (77,029     (68,319     1,100       (67,219
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                         8,710       15,463,082       15,471,792       973       15,472,765  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the Parent Company

                  

Acquisition of treasury shares

               (1,736,514                 (1,736,514           (1,736,514

Dividends paid

     26                               (706,002     (706,002           (706,002

Share-based payment transactions

     37                   1,163                   1,163             1,163  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the Parent Company

                   (1,735,351           (706,002     (2,441,353           (2,441,353
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018

       3,657,652       4,143,736       (2,506,451     (482,819     42,033,601       46,845,719       6,612       46,852,331  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2019

       3,657,652       4,143,736       (2,506,451     (482,819     42,033,601       46,845,719       6,612       46,852,331  

Total comprehensive income

                  

Profit for the year

                               2,005,975       2,005,975       3,103       2,009,078  

Other comprehensive income (loss)

     25                         183,884       (90,211     93,673       350       94,023  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                         183,884       1,915,764       2,099,648       3,453       2,103,101  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the Parent Company

                  

Increase of non-controlling interests

                                           4,715       4,715  

Dividends paid

     26                               (1,026,003     (1,026,003           (1,026,003

Share-based payment transactions

     37                   1,738                   1,738             1,738  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the Parent Company

                   1,738             (1,026,003     (1,024,265     4,715       (1,019,550
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2019

     3,657,652       4,143,736       (2,504,713     (298,935     42,923,362       47,921,102       14,780       47,935,882  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-6


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Changes in Equity,  continued

For the years ended December 31, 2020, 2019 and 2018

 

            Attributable to owners of the Parent Company              
     Notes      Capital stock      Capital
surplus
     Other
equity
    Accumulated
other
comprehensive
income (loss)
    Retained
earnings
    Total     Non-controlling
interests
    Total equity  
     (In millions of won)  

Balance at January 1, 2020

      3,657,652        4,143,736        (2,504,713     (298,935     42,923,362       47,921,102       14,780       47,935,882  

Total comprehensive income

                     

Profit for the year

                                  4,755,102       4,755,102       3,812       4,758,914  

Other comprehensive income (loss)

     25                            (106,518     1,266       (105,252     (2,126     (107,378
     

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                            (106,518     4,756,368       4,649,850       1,686       4,651,536  
     

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the Parent Company

                     

Increase of non-controlling interests

                                              4,090       4,090  

Dividends paid

     26                                  (684,002     (684,002           (684,002

Share-based payment transactions

     37                      1,591                   1,591             1,591  
     

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the Parent Company

                      1,591             (684,002     (682,411     4,090       (678,321
     

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

      3,657,652        4,143,736        (2,503,122     (405,453     46,995,728       51,888,541       20,556       51,909,097  
     

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-7


Table of Contents

SK HYNIX, INC. and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2020, 2019 and 2018

 

     Note      2020     2019     2018  
            (In millions of won)  

Cash flows from operating activities

         

Cash generated from operating activities

     36      12,916,771       11,895,834       25,825,017  

Interest received

        40,635       30,543       81,323  

Interest paid

        (288,565     (238,314     (126,029

Dividends received

        16,365       14,891       15,258  

Income tax paid

        (370,635     (5,153,218     (3,568,370
     

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

        12,314,571       6,549,736       22,227,199  
     

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

         

Net change in short-term financial instruments

        (140,810     225,447       4,174,667  

Net change in short-term investment assets

        (115,122     4,164,793       (4,519,395

Decrease in other financial assets

        773             116  

Increase in other financial assets

        (205     (627     (100

Collection of loans and other receivables

        36,722       13,057       21,824  

Increase in loans and other receivables

        (238,727     (57,482     (48,424

Proceeds from disposal of long-term investment assets

        708       4,316       7,118  

Acquisition of long-term investment assets

        (93,846     (81,447     (4,012,799

Proceeds from disposal of property, plant and equipment

        59,089       53,840       131,754  

Acquisition of property, plant and equipment

        (10,068,662     (13,920,244     (16,036,146

Proceeds from disposal of intangible assets

        695       183       2,532  

Acquisition of intangible assets

        (800,729     (673,356     (933,139

Proceeds from business transfer

        2,958              

Receipt of government grants

                    17,081  

Acquisition of investments in associates

        (483,237     (176,954     (200,508

Acquisition of subsidiary, net of cash acquired

                    (33,330

Net cash outflow from business combination

              (2,462      
     

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

        (11,840,393     (10,450,936     (21,428,749
     

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

         

Proceeds from borrowings

     36        5,173,016       9,833,882       3,125,721  

Repayments of borrowings

     36        (3,921,310     (4,585,425     (2,078,522

Payments of lease liabilities

     36        (319,740     (390,501      

Acquisition of treasury shares

                    (1,736,514

Dividends paid

        (684,002     (1,026,003     (706,002

Increase of non-controlling interests

        4,090       4,715        
     

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

        252,054       3,836,668       (1,395,317
     

 

 

   

 

 

   

 

 

 

Effect of movements in exchange rates on cash and cash equivalents

        (56,313     21,283       (3,805
     

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

        669,919       (43,249     (600,672

Cash and cash equivalents at beginning of the year

        2,306,070       2,349,319       2,949,991  
     

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the year

      2,975,989       2,306,070       2,349,319  
     

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

G-8


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

1.    Reporting Entity

(1) General information about SK hynix, Inc. (the “Parent Company” or the “Company”) and its subsidiaries (collectively the “Group”) is as follows:

The Parent Company, incorporated in October 15, 1949, is engaged in the manufactures, distribution and sales of semiconductor products and its shares have been listed on the Korea Exchange since 1996. The Parent Company’s headquarters is located at 2091 Gyeongchung-daero, Bubal-eup, Icheon-si, Gyeonggi-do, South Korea, and the Group has manufacturing facilities in Icheon-si and Cheongju-si, South Korea, and Wuxi and Chongqing, China.

As of December 31, 2020, the shareholders of the Parent Company are as follows:

 

Shareholder

   Number of
shares
     Percentage of
ownership (%)
 

SK Telecom Co., Ltd.

     146,100,000        20.07  

National Pension Service

     79,883,313        10.97  

Other investors

     458,018,482        62.92  

Treasury shares

     44,000,570        6.04  
  

 

 

    

 

 

 
     728,002,365        100.00  
  

 

 

    

 

 

 

The Parent Company’s common shares and depositary receipts (DRs) are listed on the Stock Market of Korea Exchange and the Luxembourg Stock Exchange, respectively.

 

G-9


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

1.    Reporting Entity,  continued

 

(2) Details of the Group’s consolidated subsidiaries as of December 31, 2020 and 2019 are as follows:

 

               Ownership (%)  

Company

   Location    Business    2020      2019  

SK hyeng Inc.

   Korea    Construction service      100.00        100.00  

SK hystec Inc.

   Korea    Business support service      100.00        100.00  

Happymore Inc.

   Korea    Manufacturing and cleaning

cleanroom suits

     100.00        100.00  

SK hynix system ic Inc.

   Korea    Semiconductor
manufacturing and sales
     100.00        100.00  

HAPPYNARAE Co., Ltd.

   Korea    Industrial material supply      100.00        100.00  

SK hynix America Inc.

   U.S.A.    Semiconductor sales      97.74        97.74  

SK hynix Deutschland GmbH

   Germany    Semiconductor sales      100.00        100.00  

SK hynix Asia Pte. Ltd.

   Singapore    Semiconductor sales      100.00        100.00  

SK hynix Semiconductor Hong Kong Ltd.

   Hong Kong    Semiconductor sales      100.00        100.00  

SK hynix U.K. Ltd.

   U.K.    Semiconductor sales      100.00        100.00  

SK hynix Semiconductor Taiwan Inc.

   Taiwan    Semiconductor sales      100.00        100.00  

SK hynix Japan Inc.

   Japan    Semiconductor sales      100.00        100.00  

SK hynix Semiconductor (Shanghai) Co., Ltd.

   China    Semiconductor sales      100.00        100.00  

SK hynix Semiconductor India Private Ltd.1

   India    Semiconductor sales      100.00        100.00  

SK hynix (Wuxi) Semiconductor Sales Ltd.

   China    Semiconductor sales      100.00        100.00  

SK hynix Semiconductor (China) Ltd.

   China    Semiconductor
manufacturing
     100.00        100.00  

SK hynix Semiconductor (Chongqing) Ltd.2

   China    Semiconductor
manufacturing
     100.00        100.00  

SK hynix Italy S.r.l

   Italy    Semiconductor research and
development
     100.00        100.00  

SK hynix memory solutions America Inc.

   U.S.A.    Semiconductor research and
development
     100.00        100.00  

SK hynix memory solutions Taiwan Ltd.

   Taiwan    Semiconductor research and
development
     100.00        100.00  

SK hynix memory solutions Eastern Europe LLC.

   Belarus    Semiconductor research and
development
     100.00        100.00  

SK APTECH Ltd.

   Hong Kong    Overseas investment      100.00        100.00  

SK hynix Ventures Hong Kong Limited

   Hong Kong    Overseas investment      100.00        100.00  

SK hynix (Wuxi) Investment Ltd.3

   China    Overseas investment      100.00        100.00  

SK hynix (Wuxi) Industry Development Ltd. 4

   China    Foreign hospital
construction
     100.00        100.00  

SK hynix Happiness (Wuxi) Hospital Management Ltd.4

   China    Foreign hospital operation      70.00        70.00  

SK hynix system ic (Wuxi) Co., Ltd.5

   China    Overseas Semiconductor
manufacturing and sales
     100.00        100.00  

SK hynix cleaning (Wuxi) Ltd.4

   China    Building maintenance      100.00        100.00  

SUZHOU HAPPYNARAE Co., Ltd.6

   China    Overseas industrial material
supply
     100.00        100.00  

CHONGQING HAPPYNARAE Co., Ltd.7

   China    Overseas industrial material
supply
     100.00        100.00  

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

1.    Reporting Entity,  continued

 

               Ownership (%)  

Company

   Location    Business    2020      2019  

SkyHigh Memory Limited5

   Hong Kong    Overseas manufacturing and
sales of semiconductor
     60.00        60.00  

SK hynix (Wuxi) Education Technology Co., Ltd.4

   China    Education      100.00        100.00  

Gauss Labs Inc.8

   U.S.A    Telecommunication of
information
     100.00         

MMT (Money Market Trust)

   Korea    Money Market Trust      100.00        100.00  

 

 

1

Subsidiary of SK hynix Asia Pte. Ltd.

 

2 

Subsidiary of SK APTECH Ltd.

 

3 

Subsidiary of SK hynix Semiconductor (China) Ltd.

 

4 

Subsidiary of SK hynix (Wuxi) Investment Ltd.

 

5 

Subsidiary of SK hynix system ic Inc.

 

6 

Subsidiary of HAPPYNARAE Co., Ltd.

 

7 

Subsidiary of SUZHOU HAPPYNARAE Co., Ltd.

 

8 

Gauss Labs Inc. has been established during the year ended December 31, 2020.

(3) Changes in the consolidated subsidiaries for the year ended December 31, 2020 are as follows:

 

    

Company

  

Description

Newly included

   Gauss Labs Inc.    Newly established

(4) Major subsidiaries’ summarized separate statements of financial position as of December 31, 2020 and 2019 are as follows:

 

    2020     2019  
    Assets     Liabilities     Equity     Assets     Liabilities     Equity  
    (In millions of won)  

SK hynix system ic Inc.

  998,154       368,517       629,636       684,261       150,527       533,734  

SK hynix America Inc.

    2,722,417       2,330,715       391,702       1,801,366       1,436,975       364,391  

SK hynix Asia Pte. Ltd.

    284,115       197,442       86,673       387,860       298,657       89,203  

SK hynix Semiconductor Hong Kong Ltd.

    282,273       134,019       148,254       195,262       44,405       150,857  

SK hynix U.K. Ltd.

    303,729       283,833       19,896       217,160       197,293       19,867  

SK hynix Semiconductor Taiwan Inc.

    273,651       247,895       25,756       247,671       219,056       28,615  

SK hynix Japan Inc.

    348,336       278,622       69,714       305,770       235,243       70,527  

SK hynix (Wuxi) Semiconductor Sales Ltd.

    1,250,087       1,024,006       226,081       1,646,998       1,510,156       136,842  

SK hynix Semiconductor (China) Ltd.

    11,862,866       6,685,079       5,177,787       9,605,890       4,937,517       4,668,373  

SK hynix Semiconductor (Chongqing) Ltd.

    920,531       317,216       603,315       837,339       309,283       528,056  

HAPPYNARAE Co., Ltd.

    171,026       116,728       54,298       182,747       132,925       49,822  

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

1.    Reporting Entity,  continued

 

(5) Major subsidiaries’ summarized separate statements of comprehensive income for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020  
     Revenue      Profit (Loss)     Total
comprehensive
income (loss)
 
     (In millions of won)  

SK hynix system ic Inc.

   702,979        97,317       95,903  

SK hynix America Inc.

     12,761,911        53,448       53,448  

SK hynix Asia Pte. Ltd.

     1,858,091        3,055       3,055  

SK hynix Semiconductor Hong Kong Ltd.

     1,746,160        6,320       6,320  

SK hynix U.K. Ltd.

     994,299        1,331       1,331  

SK hynix Semiconductor Taiwan Inc.

     1,917,103        4,657       4,657  

SK hynix Japan Inc.

     551,890        (181     (212

SK hynix (Wuxi) Semiconductor Sales Ltd.

     10,423,701        90,303       90,303  

SK hynix Semiconductor (China) Ltd.

     3,936,769        484,677       484,677  

SK hynix Semiconductor (Chongqing) Ltd.

     699,558        73,048       73,048  

HAPPYNARAE Co., Ltd.

     981,466        4,314       4,475  

 

     2019  
     Revenue      Profit      Total
comprehensive
income
 
     (In millions of won)  

SK hynix system ic Inc.

   661,511        76,195        76,400  

SK hynix America Inc.

     8,353,658        47,947        47,947  

SK hynix Asia Pte. Ltd.

     1,662,315        1,965        1,965  

SK hynix Semiconductor Hong Kong Ltd.

     1,579,680        2,493        2,493  

SK hynix U.K. Ltd.

     907,945        1,057        1,057  

SK hynix Semiconductor Taiwan Inc.

     1,455,320        8,127        8,127  

SK hynix Japan Inc.

     672,393        701        700  

SK hynix (Wuxi) Semiconductor Sales Ltd.

     10,882,152        94,768        94,768  

SK hynix Semiconductor (China) Ltd.

     3,177,415        18,551        18,551  

SK hynix Semiconductor (Chongqing) Ltd.

     477,849        39,102        39,102  

HAPPYNARAE Co., Ltd.

     1,107,524        8,473        8,162  

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

1.    Reporting Entity,  continued

 

     2018  
     Revenue      Profit (Loss)     Total
comprehensive
income (loss)
 
     (In millions of won)  

SK hynix system ic Inc.

   554,264        60,649       60,360  

SK hynix America Inc.

     14,296,762        30,800       30,800  

SK hynix Asia Pte. Ltd.

     3,531,313        3,999       3,999  

SK hynix Semiconductor Hong Kong Ltd.

     3,710,359        11,486       11,486  

SK hynix U.K. Ltd.

     1,517,706        1,005       1,005  

SK hynix Semiconductor Taiwan Inc.

     2,955,717        2,475       2,475  

SK hynix Japan Inc.

     1,084,079        (410     (467

SK hynix Semiconductor (Shanghai) Co., Ltd.

     7,291,257        49,634       49,634  

SK hynix (Wuxi) Semiconductor Sales Ltd.

     4,832,879        43,163       43,163  

SK hynix Semiconductor (China) Ltd.

     2,518,849        84,089       84,089  

SK hynix Semiconductor (Chongqing) Ltd.

     406,839        27,125       27,125  

HAPPYNARAE Co., Ltd.

     1,094,778        12,117       11,942  

(6) There are no significant non-controlling interests to the Group as of December 31, 2020, 2019 and 2018.

2.     Basis of Preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (IASB).

The consolidated financial statements were authorized by the board of directors on January 28, 2021 for statutory shareholder approval purpose, and re-authorized for issuance by Parent Company’s management on April 29, 2021.

(1)    Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the consolidated statements of financial position:

 

   

derivative financial instruments are measured at fair value

 

   

financial instruments at fair value through profit or loss are measured at fair value

 

   

assets or liabilities for defined benefit plans are recognized at the net of the total present value of defined benefit obligations less the fair value of plan assets

(2)    Functional and presentation currency

Financial statements of entities within the Group are presented in functional currency and the currency of the primary economic environment in which each entity operates. Consolidated financial statements of the Group are presented in Korean won, which is the Parent Company’s functional and presentation currency.

(3)    Use of estimates

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

G-13


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

2.     Basis of Preparation,  continued

 

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

(a)    Judgments

Information about critical judgments in applying accounting policies that have the significant effect on the amounts recognized in the consolidated financial statements is included in the note for investments in associates and joint ventures.

(b)    Assumptions and estimation uncertainties

Preparation of consolidated financial statements requires assumptions and estimates of the future, and the management requires judgement to apply the Group’s accounting policies. The estimates and assumptions are continuously assessed, considering historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 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 future financial year are addressed below.

During 2020, the spread of Coronavirus disease 2019 (“COVID-19”) has a material impact on the global economy. It may have a negative impact; such as, decrease in productivity, decrease or delay in sales, collection of existing receivables and others. Accordingly, it may have a negative impact on the financial position and financial performance of the Group.

Assumptions and estimates applied in the preparation of the consolidated financial statements can be adjusted depending on changes in the uncertainty from COVID-19. Also, the ultimate effect of COVID-19 to the Group’s business, financial position and financial performance cannot presently be determined.

The following are estimates and assumptions about management decisions and significant risks that may affect the adjustment of the carrying amount of assets and liabilities in the following financial years: Additional information on significant judgements and estimates for some items is included in the separate footnotes.

 

  (i)

Fair value of financial instruments

In principle, the fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group is making judgments on the selection and assumptions of various evaluation techniques based on important market conditions as of the end of the reporting period (see note 6).

 

  (ii)

Corporate income tax

There is uncertainty in determining the final tax effect as corporate tax on the Group’s taxable income is calculated by applying various national tax laws and tax authorities’ decisions. The Group recognized the corporate tax effect, which is expected to be borne in the future as a result of business activities until the end of the reporting period, as current tax and deferred tax after the best estimation process. However, the actual future final corporate tax burden may not be consistent with the assets and liabilities recognized, and this difference may affect current and deferred tax assets and liabilities when the final tax effect is confirmed.

The Group will pay additional corporate taxes calculated by the method prescribed by the tax law when a certain amount of taxable income is not used for investment, salary increase, etc. for a certain period of time. Therefore, when measuring current and deferred taxes during the period, the tax effects should be reflected, and the corporate tax to be borne by the Group depends on the level of investment and salary growth in each year, so there is uncertainty in calculating the final tax effect.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

2.     Basis of Preparation,  continued

 

In accordance with IAS 12, the Group reviews uncertainty in its tax treatment and reflects the impact of uncertainty in its financial statements if the tax authorities conclude that uncertainty is unlikely to be accepted, using a method that expects better prediction of uncertainty:

 

   

Most likely: the single most likely amount within the range of possible outcomes

 

   

Expected value: the sum of all amounts in the range of possible outcomes multiplied by each probability

 

  (iii)

Provisions

The Group calculates provisions related to litigation costs as of the end of the reporting period, which are determined by estimates based on past experience (see note 20).

 

  (iv)

Net defined benefit liabilities

The present value of the net defined benefit liability is affected by various factors determined by the actuarial method, especially changes in the discount rate (see note 21).

 

  (v)

Inventories

Estimating the net realizable value of inventories is based on the most reliable evidence available as of the estimated date for the amount feasible from inventories. In addition, if the Group confirms the circumstances in which an event exists at the end of the reporting period, it shall estimate the change in price or cost directly related to the event.

 

  (vi)

Revenue recognition

A refund liability and a right to the returned goods are recognized for the products expected to be returned once they are sold. Accumulated experience is used to estimate such returns at the time of sale at a portfolio level (expected value method), and the Group’s revenue is affected by changes in expected return rate.

Sales of goods are recognized based on considerations specified in the contract, net of sales incentives, when control of the products has transferred. The sales deduction, which affects the Company’s revenue, is reasonably estimated based on historical experience and past contracts.

 

  (vii)

Development cost

The recoverable amounts of development cost have been determined based on value-in-use calculations, and those calculations are based on estimates.

 

  (vii)

Depreciation of property, plant, and equipment and Intangible assets

The depreciation method, residual values and useful lives of property, plant and equipment and Intangible assets are reviewed, and adjusted if appropriate, at the end of each reporting period. If the resulting estimates differ from previous estimates, the difference is accounted for as a change in accounting estimates in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.

 

  (ix)

Goodwill

The recoverable amount of cash-generating units to review goodwill for impairment is determined on the basis of their net fair value.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

2.     Basis of Preparation,  continued

 

  (x)

Lease

In determining the lease term, the Group considers all relevant facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

For warehouses, retail stores, and equipment leases, the most relevant factors are generally as follows:

 

   

If a significant penalty is to be paid to terminate (not to extend), it is generally quite certain that the Group exercises the option to extend (not to extend).

 

   

It is generally fairly certain that the Group exercises the option to extend (not exercise the option to terminate) if the lease is expected to have significant residual value.

 

   

In other cases than the above, the Group will consider other factors, including the lease duration and costs, and the discontinuation required to replace the leased asset.

Most extension options in office and vehicle transport leases are not included in lease liabilities because the Group can replace the asset without significant cost or business interruption.

Reevaluate the lease term if the option is actually exercised (or not exercised) or the Group is liable to exercise (not exercised) the option. Only when significant events occur or there are significant changes in the circumstances that affect the lessee’s control of the lease term, the consolidator changes its judgment to ensure that the option to extend (or will not be exercised) is significant.

(c) Fair value measurement

The Group establishes fair value measurement policies and procedures as its accounting policies and disclosures require fair value measurements for various financial and non-financial assets and liabilities. Such policies and procedures are executed by the valuation department, which is responsible for the review of significant fair value measurements including fair values classified as level 3 in the fair value hierarchy.

The valuation department regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation department assesses the evidence obtained from the third parties to support the conclusion that these valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which the valuations should be classified.

The Group reports significant valuation issues to the audit committee.

When measuring the fair value of an asset or a liability, the Group uses observable market data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

 

   

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

 

   

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

 

   

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)

If various inputs used to measure fair value of assets or liabilities fall into different levels of the fair value hierarchy, the Group classifies the assets and liabilities at the lowest level of inputs among the fair value hierarchy, which is significant to the entire measured value. The Group recognizes transfers between levels at the end of the reporting period of which such transfers occurred.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

2.     Basis of Preparation,  continued

 

Information about assumptions used for fair value measurements is included in note 6 financial risk management.

3.    Significant Accounting Policies

The significant accounting policies applied by the Group in preparation of its consolidated financial statements are explained below. Except for the new accounting standards that are effective for annual periods beginning on or after January 1, 2020, the accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

(1)    Operating Segments

An operating segment is a component of the Group that: 1) engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with other components of the Group, 2) whose operating results are reviewed regularly by the Group’s Chief Operating Decision Maker (“CODM”) in order to allocate resources and assess its performance, and 3) for which discrete financial information is available. The Group’s CODM is the board of directors, who do not receive and therefore do not review discrete financial information for any component of the Group. Accordingly, no operating segment information is included in these consolidated financial statements. Entity wide disclosures of geographic, product and customer information are provided in note 4 and 27.

(2)    Consolidation

(a)    Business combination

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Transaction costs are expensed as incurred and during period of service, except if related to the issue of debt or equity securities according to IAS 32 and IFRS 9.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.

If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards), then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based measure of the replacement awards compared with the market-based measure of the acquiree’s awards and the extent to which the replacement awards relate to pre-combination service.

(b)    Non-controlling interests

Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition.

 

G-17


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

(c)    Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity 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 entity. Consolidation of an investee begins from the date the Group obtains control of the investee and cease when the Group loses control of the investee.

(d)    Loss of control

If the Group loses control of a subsidiary, the Group derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of financial position and recognizes gain or loss associated with the loss of control attributable to the former controlling interest. Any investment retained in the former subsidiary is recognized at its fair value when control is lost.

(e)    Interests in equity-accounted investees

The Group’s interest in equity-accounted investees comprise interests in an associate and a joint venture. An associate are these entities in which the Group has significant influence, but not control or joint control, over the entity’s financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

Interests in associates and the joint venture are initially recognized at cost including transaction costs. Subsequent to initial recognition, their carrying amounts are increased or decreased to recognize the Group’s share of the profit or loss and changes in equity of the associate or the joint venture. Distributions from equity-accounted investees are accounted for as deduction from the carrying amounts.

(f)    Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. The Group’s share of unrealized gain incurred from transactions with equity-accounted investees are eliminated and unrealized loss are eliminated using the same basis if there are no evidence of asset impairments.

(g)    Business combinations under common control

The assets and liabilities acquired in the combination of entities or business under common control are recognized at the carrying amounts recognized previously in the consolidated financial statements of the ultimate parent. The difference between consideration transferred and carrying amounts of net assets acquired is added to or deducted from other capital adjustments.

(3)    Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

(4)    Inventories

The cost of inventories is based on the weighted average method (except for goods in-transit that is based on the specific identification method), and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing inventories to their existing location and condition. In the case of manufactured inventories and work-in-process, cost includes an appropriate share of production overheads based on the actual capacity of production facilities. However, the normal capacity is used for the allocation of fixed production overheads if the actual level of production is lower than the normal capacity.

Inventories are measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and selling expenses. The amount of any write-down of inventories to net realizable value and all losses of inventories shall be recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, shall be recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.

(5)    Non-derivative financial assets

(a)    Initial recognition and measurement

Trade and other receivables, and debt investment are initially recognized when they are originated. Other financial assets and financial liabilities are recognized when the Group becomes a party to the contractual provisions of the instruments.

A financial asset and financial liability (unless it is an account receivable—trade without a significant financing component that is initially measured at the transaction price) are initially measured at fair value plus, for an item not at fair value through profit or loss (FVTPL), transaction costs that are directly attributable to its acquisition.

(b)    Classification and subsequent measurements

On initial recognition, a financial asset is classified as measured at: amortized cost; fair value through other comprehensive income (FVOCI)—debt investment; FVOCI—equity investment; or FVTPL. The classification of financial assets is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. In case of changing its business model, all affected financial asset are reclassified on the first day of the first reporting period after the change in the business model.

A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:

 

   

it is held within a business model whose objective is to hold assets to collect contractual cash flow; and

 

   

its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:

 

   

it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

 

   

its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income. This election is made on an investment-by-investment basis and irrevocable election can be made at initial recognition.

All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets. On initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

The Group makes an assessment of the objective of the business model in which, financial assets is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:

 

   

the stated policies and objectives for the portfolio and the operation of those policies in practice;

 

   

how the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity’s key management personnel;

 

   

the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way in which those risks are managed;

 

   

how managers of the business are compensated (e.g. whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected); and

 

   

the frequency, volume and timing of sales of financial assets in prior periods, the reason for those sales and expectation about future sales activity for financial asset.

Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Group’s continuing recognition of the assets.

For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial assets on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making this assessment, the Group considers:

 

   

contingent events that would change the amount or timing of cash flows;

 

   

terms that may adjust the contractual coupon rate, including variable-rate features;

 

   

prepayment and extension features; and

 

   

terms that limit the Group’s claim to cash flows from specified assets (e.g. non-recourse features).

A prepayment feature is consistent with the solely payments of principal and interest criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable additional compensation for early termination of the contract. Additionally, for a financial asset acquired at a discount or premium to its contractual par amount, a feature that permits or requires prepayment at an amount that substantially represents the contractual par amount plus accrued (but unpaid) contractual interest (which may also include reasonable additional compensation for early termination) is treated as consistent with this criterion if the fair value of the prepayment feature is insignificant at initial recognition.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

The following accounting policies apply to subsequent measurements of financial assets.

 

Financial assets at FVTPL

   These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in profit or loss.

Financial assets at amortized cost

   These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.

Debt investments at FVOCI

   These assets are subsequently measured at fair value. Interest income is calculated using the effective interest method. Foreign exchange gains and losses and impairment are recognized in profit or loss. Other net gains and losses are recognized in OCI. On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss.

Equity investments at FVOCI

   These assets are subsequently measured at fair value. Dividends are recognized as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognized in OCI and are never reclassified to profit or loss.

(c)    De-recognition

The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.

The Group enters into transactions whereby it transfers assets recognized in its statement of financial position, but retain either all or substantially all of the risks and rewards of the transferred assets. In these cases, the transferred assets are not derecognized.

(d)    Offsetting between financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Group currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

(6)    Derivative financial instruments

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value at the end of each reporting period, and changes in the fair value of derivatives therein are accounted for as described below.

(a)    Hedge accounting

The Group enters into a fixed-to-fixed cross currency swap contract and a floating-to-fixed cross currency interest rate swap contract to hedge interest rate risk and currency risk.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction. In addition, the document includes hedging instruments; hedged items; initial commencement date of those hedge relationship; fair value of hedged items based on hedged risk during the subsequent period; and the method of valuation on hedging instruments offsetting changes in cash flow.

 

   

Cash flow hedge

When a derivative is designated to hedge the variability in cash flows attributable to a particular risk associated with a recognized asset or liability, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income, net of tax, and presented in accumulated other comprehensive income. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods which the forecasted transaction occurs.

(b)    Other derivative financial instruments

Other derivative financial instrument not designated as a hedging instrument are measured at fair value, and the changes in fair value of the derivative financial instrument is recognized immediately in profit or loss.

(7)    Impairment of financial assets

(a)    Recognition of impairment on financial assets

The Group recognizes loss allowances for expected credit losses (ECLs) on:

 

   

financial assets measured at amortized costs; and

 

   

contract assets.

The Group measures impairment losses at an amount equal to lifetime ECLs except for the below assets, which are measured at 12-month ELCs.

 

   

credit risk of debt instruments is low at the end of reporting date

 

   

credit risk has not increased significantly since the initial recognition of debt investment (lifetime ECL: ECL that resulted from all possible default events over the expected life of a financial instrument)

The Group adopted an accounting policy to recognize loss allowances at an amount equal to lifetime expected credit losses for trade receivables and contract assets.

In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition and estimating expected credit loss, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort.

Lifetime expected credit losses are the expected credit losses that result from all possible default events over the expected life of a financial instrument.

12-month ECLs are the portion of ECLs that result from all default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is less than 12 months).

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk.

(b)    Measurement of expected credit loss

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the effective interest rate of the financial instrument.

(c)    Credit-impaired financial instrument

A debt instrument carried at amortized cost and fair value through other comprehensive income (FVOCI) is assessed at the end of each reporting period to determine whether there is objective evidence that it is impaired. A financial asset is credit- impaired when one or more events that have a detrimental impact on the estimated future cash flows of that asset have occurred.

Objective evidence that a financial asset is impaired includes:

 

   

significant financial difficulty of the issuer or borrower;

 

   

a breach of contract, such as default or delinquency in interest or principal payments;

 

   

the Group, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the Group would not otherwise consider;

 

   

it becoming probable that the borrower will enter bankruptcy or other financial reorganization; or

 

   

the disappearance of an active market for the financial asset because of financial difficulties

(d)    Presentation of credit loss allowance on financial position

Loss allowances for financial assets measured at amortized cost are deducted from the gross carrying amount of the assets.

(e)    Write-off

The Group writes off a financial asset when it has no reasonable expectations of recovering the contractual cash flows on a financial asset in its entirety or a portion thereof. For corporate customers, the Group individually makes an assessment with respect to the timing and amount of write-off based on whether there is a reasonable expectation of recovery. However financial assets that are written off could still be subject to collection activities according to the Group’s past due collection process.

(8)    Property, plant and equipment

Property, plant and equipment are initially measured at cost. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Subsequent to initial recognition, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

Subsequent costs are recognized in the carrying amount of property, plant and equipment at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the cost will flow to the Group and it can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day repair and maintenance are recognized in profit or loss as incurred.

Property, plant and equipment, except for land, are depreciated on a straight-line basis over estimated useful lives that appropriately reflect the pattern in which the asset’s future economic benefits are expected to be consumed.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized as other income or expenses.

The estimated useful lives of the Group’s property, plant and equipment are as follows:

 

     Useful lives (years)  

Buildings

     10 -50  

Structures

     10 -20  

Machinery

     5 - 15  

Vehicles

     5 - 10  

Others

     5 - 10  

Depreciation methods, useful lives, and residual values are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.

(9)    Borrowing costs

The Group capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

To the extent that the Group borrows funds specifically for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Group capitalizes during a period does not exceed the amount of borrowing costs incurred during that period.

(10)    Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Goodwill arising from business combinations is recognized as the excess of the consideration transferred in the acquisition over the net fair value of the identifiable assets acquired and liabilities assumed. Any deficit is a bargain purchase that is recognized in profit or loss. Goodwill is measured at cost less accumulated impairment losses.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

Amortization of intangible assets is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, certain intangible assets are determined as having indefinite useful lives and not amortized as there is no foreseeable limit to the period over which the assets are expected to be available for use.

The estimated useful lives of the Group’s intangible assets are as follows:

 

     Useful lives (years)

Industrial rights

   5 - 10

Development costs

   2

Other intangible assets1

   4 - 20

 

 

1 

Other intangible assets include royalty payments with useful lives of 4 to 20 years.

Useful lives and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

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

(11)    Government grants

Government grants are not recognized unless there is reasonable assurance that the Group will comply with the grant’s conditions and that the grant will be received.

(a)    Grants related to assets

Government grants whose primary condition is that the Group purchases, constructs or otherwise acquires non-current assets are deducted in calculating the carrying amount of the asset. The grant is recognized in profit or loss over the useful lives of depreciable assets.

(b)    Grants related to income

Government grants which are intended to compensate the Group for expenses incurred are recognized in profit or loss by as deduction of the related expenses.

(12)    Investment property

Property held for the purpose of earning rental income or benefiting from capital appreciation is classified as investment property. Investment property is initially measured at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at cost less accumulated depreciation and impairment losses.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the cost will flow to the Group and it can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day repair and maintenance are recognized in profit or loss as incurred.

Investment property is depreciated on a straight-line basis over 40 years.

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.

(13)    Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets, other than assets arising from employee benefits, inventories, and deferred tax assets, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

The Group estimates the recoverable amount of an individual asset; however if it is impossible to measure the individual recoverable amount of an asset, the Group estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell.

The value in use is estimated by applying a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from business combination. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis.

Except for impairment losses in respect of goodwill, which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

(14)    Leases

The Group assesses whether a contract is or contains a lease at inception of a contract. Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

(a)    As a lessee

The Group recognizes for a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, the initial amount of the lease liability, adjusted for any lease

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove of the underlying asset, or to restore the underlying asset or the site on which the underlying asset is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In case that ownership of the right-of-use asset is transferred at the end of the lease term, or the cost of the right-of-use asset includes the exercise price of a purchase option, the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset may be reduced by an impairment loss or adjusted for remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. The Group generally uses its incremental borrowing rate as the discount rate.

Lease payments included in the measurement of the lease liability consist of the following:

 

   

fixed payments (including in-substance fixed payments)

 

   

variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date

 

   

amounts expected to be payable under a residual value guarantee

 

   

the exercise price under a purchase option that the Group is reasonably certain to exercise

 

   

lease payments in an optional renewal period, if the Group is reasonably certain to exercise extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.

The lease liability is subsequently increased by the interest expense recognized for the lease liability and decreased by reflecting the payment of the lease. The lease liability is remeasured when there is a change in future lease payments arising from changes in an index or a rate (interest rate), if there’s a change in the Group’s estimate of the amount expected to be paid under a residual value guarantee, or if the Group changes in the assessment of whether the option to buy or extend is reasonably certain to be exercised or not to exercise the termination option.

When the lease liabilities are remeasured, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

A lessee shall remeasure the lease liability as an adjustment to the right-of-use asset, if either:

 

   

a change in the lease term or a change in circumstances or significant events that result in a change in the assessment of the exercise of the purchase option. In such cases, the lease liability is remeasured by discounting the modified lease payment at the revised discount rate;

 

   

the lease payment changes due to changes in the index or rate (interest rate) or the amount expected to be paid according to the residual value guarantee. In such cases, the lease liability measures the modified lease fee again by discounting it at an unchanged discount rate. However, if a change in the variable interest rate causes a change in the lease payments, the revised discount rate that reflects the change in interest rates is used; or

 

   

the lease agreement changes and is not accounted for as a separate lease. In such cases, the lease liability is remeasured by discounting the modified lease payment at the revised discount rate as of the effective date of the lease change, based on the lease term of the modified lease.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

The Group has elected not to recognize right-of-use assets and lease liabilities for some leases of low-value assets and short-term leases. The Group recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease and non-lease component on the basis of their relative stand-alone prices. However, for certain agreements, the Group has elected practical expedient not to separate non-lease components and account for the lease and non-lease components as a single lease component.

The Group separately presents right-of-use assets that do not meet the definition of investment property in the statement of financial position.

Subsequently, the right-of-use asset is accounted for consistently with the accounting policies applicable to the asset.

(b)    As a lessor

As a lessor, the Group determines whether the lease is a finance lease or an operating lease at the inception of the lease.

To classify each lease, the Group generally determines whether the lease transfers most of the risks and rewards of ownership of the underlying asset. If most of the risks and rewards of ownership of the underlying asset are transferred to the lessee, the lease is classified as a finance lease, otherwise the lease is classified as an operating lease. As part of this assessment, the Group considers whether the lease term represents a significant portion of the economic life of the underlying asset.

When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sublease separately. In addition, the classification of a lease is determined by the right-of-use asset arising from the head lease, not the underlying asset. If a head lease is a short-term lease to which the Group applies the recognition exemption, then the sub-lease is classified as an operating lease.

The Group has applied IFRS 15 ‘Revenue from Contracts with Customers’ to allocate consideration in the contract to each lease and non-lease components.

The Group recognizes the lease payments received from operating leases on a straight-line basis over the lease term as revenue in ‘other revenue’.

The accounting policies that the Group has applied to the comparative period as lessors are not different from those in IFRS 16.

(15)    Non-derivative financial liabilities

The Group classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Group recognizes financial liabilities in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the financial liability.

(a)    Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, any directly attributable transaction costs are recognized in profit or loss as incurred.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

(b)    Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities. At the date of initial recognition, other financial liabilities are measured at fair value less any directly attributable transaction costs. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest rate method.

(c)    Derecognition of financial liability

The Group derecognizes financial liability when its contractual obligations are discharged, cancelled or expire. The Group also derecognizes a financial liability, when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognized at fair value. On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-cash assets transferred of liabilities assumed) is recognized in profit or loss.

(16)    Employee benefits

(a)    Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the reporting period in which the employees render the related service. When an employee has rendered service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

(b)    Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the reporting period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods. Remeasurements are recognized in profit or loss in the period in which they arise.

(c)    Retirement benefits: defined benefit plans

As of the end of reporting period, defined benefits liabilities relating to defined benefit plans are recognized as present value of defined benefit obligations, net of fair value of plan assets.

The calculation is performed annually by an independent actuary using the projected unit credit method. When the fair value of plan assets exceeds the present value of the defined benefit obligation, the Group recognizes an asset, to the extent of the present value of any economic benefits available in the form of refunds from the plan or reduction in the future contributions to the plan.

Remeasurements of the net defined benefit liability (asset) comprise of actuarial gains and losses, the return on plan assets excluding amounts included in net interest on the net defined benefit liability (asset), and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset), and are recognized in other comprehensive income. The Group determines net interests on net defined benefit liability (asset) by multiplying discount rate determined at the beginning of the annual reporting period and considers changes in net defined benefit liability (asset) from contributions and benefit payments. Net interest costs and other costs relating to the defined benefit plan are recognized through profit or loss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. The Group recognizes gains or losses on a settlement of defined benefit plan when the settlement occurs.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

(d)    Retirement benefits: defined contribution plans

When an employee has provided service for a certain period of time in relation to the defined contribution plan, the contribution to the defined contribution plan is recognized in profit or loss except to be included in the cost of the asset. The contributions to be paid are recognized as liabilities (accrued expenses) less the contributions that have been already paid.

(e)    Termination benefits

The Group recognizes a liability and expense for termination benefits at the earlier of the period when the Group can no longer withdraw the offer of those benefits and the period when the Group recognizes costs for a restructuring. If benefits are not payable within 12 months after the end of the reporting period, then they are discounted to their present value.

(17)     Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Where some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement is recognized when, and only when, it is virtually certain that reimbursement will be received if the Group settles the obligation. The reimbursement is treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

A provision is used only for expenditures for which the provision was originally recognized.

(18)     Emissions Rights

The Group accounts for greenhouse gases emission right and the relevant liability as below pursuant to the Act on Allocation and Trading of Greenhouse Gas Emission in Korea.

(a)     Greenhouse Gases Emission Right

Greenhouse Gases Emission Right consists of emission allowances, which are allocated from the government free of charge or purchased from the market. The cost includes any directly attributable costs incurred during the normal course of business.

Emission rights held for the purpose of performing the obligation are classified as intangible asset and are initially measured at cost and after initial recognition are carried at cost less accumulated impairment losses. Emission rights held for short-swing profits are classified as current asset and are measured at fair value with any changes in fair value recognized as profit or loss in the respective reporting period.

The Group derecognizes an emission right asset when the emission allowance is unusable, disposed or submitted to government in which the future economic benefits are no longer expected to be probable.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

(b)     Emission liability

Emission liability is a present obligation of submitting emission rights to the government with regard to emission of greenhouse gas. Emission liability is recognized when it is probable that outflows of resources will be required to settle the obligation and the costs required to perform the obligation are reliably estimable. Emission liability is an amount of estimated obligations for emission rights to be submitted to the government for the performing period. The emission liability is measured based on the expected quantity of emission for the performing period in excess of emission allowance in possession and the unit price for such emission rights in the market at the end of the reporting period.

(19)     Foreign currencies

(a)     Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency at the exchange rate at the reporting data. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined.

Foreign currency differences arising on the settlement or retranslation of monetary items are recognized in profit or loss, except for differences arising on the retranslation of the net investment in a foreign operation, which are recognized in other comprehensive income. When a gain or loss on a non-monetary item is recognized in other comprehensive income, any exchange component of that gain or loss is recognized in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss is recognized in profit or loss.

(b)     Foreign operations

If the presentation currency of the Group is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the end of reporting period. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation is treated as assets and liabilities of the foreign operation. Thus, they are expressed in the functional currency of the foreign operation and translated at the exchange rates at the end of reporting date.

When a foreign operation is disposed of, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such cumulative amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

(20)     Equity capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of ordinary shares is recognized as a deduction from equity, net of any tax effects.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

When the Group repurchases its share capital, the amount of the consideration paid is recognized as a deduction from equity and classified as treasury shares. The profits or losses from the purchase, disposal, reissue, or retirement of treasury shares are not recognized as current profit or loss. If the Group acquires and disposes treasury shares, the consideration paid or received is directly recognized in equity.

(21)     Share-based payment

The Group has granted shares or share options to its employees. For equity-settled share-based payment transactions, the Group measures the goods or services received, and the corresponding increase in equity as a capital adjustment at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the Group cannot reliably estimate the fair value of the goods or services received, the Group measures their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. If the fair value of the equity instruments cannot be estimated reliably at the measurement date, the Group measures them at their intrinsic value and recognizes the goods or services received based on the number of equity instruments that ultimately vest.

For cash-settled share-based payment transactions, the Group measures the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the Group remeasures the fair value of the liability at each reporting date and at the date of settlement, with changes in fair value recognized in profit or loss for the period.

The Group accounts for share-based payment, with options to choose either cash-settled or equity-settled share-based payment, in accordance with the substance of transactions.

(22)     Revenue from contracts with customers

The Group’s accounting policies relating to revenue from contracts with customers are described in note 27.

(23)     Finance income and finance expenses

The Group’s finance income and finance expenses include:

 

   

Interest income;

 

   

Interest expense;

 

   

Dividend income;

 

   

The net gain or loss on financial assets at fair value through profit or loss;

 

   

Gain or loss on foreign exchange (currency) translation for financial asset and liabilities;

 

   

Impairment losses and reversals on investment in debt securities carried at amortized cost method; and

 

   

The gain on the remeasurement to fair value of any pre-existing interest in an acquire in a business combination

The Group uses effective interest rate method for recognizing interest income and expense. Dividend income is recognized in profit or loss on the date that the Group’s right to receive dividend is established.

The ‘effective interest rate’ is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to:

 

   

The gross carrying amount of the financial asset; or

 

   

The amortized cost of the financial liability

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit-impaired) or to the amortized cost of the liability. However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortized cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis.

(24)     Income taxes

Income tax expense comprises current and deferred tax. Current and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

(a)     Current tax

Current tax is the expected tax payable or refundable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The amount of current tax payable or receivable is the best estimate of tax amount expected to be paid or received that reflects uncertainty related to income taxes. The taxable income is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit (tax loss) of future periods, and non-taxable or non-deductible items from the accounting profit. The tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period.

(b)     Deferred tax

Deferred tax is recognized, using the asset-liability method, in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

The Group recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures except to the extent that the 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. The Group recognizes deferred tax assets for all deductible temporary differences including unused tax loss and tax credit to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset the related current tax liabilities and assets, and they relate to income taxes levied by the same tax authority and they intend to

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

settle current tax liabilities and assets on a net basis. If there are any additional income tax expense incurred in accordance with dividend payments, such income tax expense is recognized when liabilities relating to the dividend payments are recognized.

(25)     Earnings per share

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

(26)     Changes in accounting policies

The Group has initially adopted IFRS 16 ‘Leases’ from January 1, 2019. The Group recognized the cumulative effect of the initial application of IFRS 16 in right-of-use assets and lease liabilities as of January 1, 2019 (the date of initial application). Accordingly, the comparative information presented for 2018 has not been restated - i.e. it is presented, as previously reported, under IAS 17 and related interpretations.

From January 1, 2020, the Group has changed its accounting policy by adopting accounting treatments in accordance with agenda decisions for ‘Lease Term and Useful Life of Leasehold Improvements’ issued by IFRS Interpretations Committee on December 16, 2019. The Group determines the lease term as the non-cancellable period of a lease, together with both (a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and (b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. When the lessee and the lessor each has the right to terminate the lease without permission from the other party, the Group has considered a termination penalty in determining the period for which the contract is enforceable.

The Group has adopted the above decisions made by IFRS Interpretations Committee as a change in accounting policies, and the main effects of such changes for the relevant periods are as follows:

 

   

Back-end Process Service Contracts and Machinery Rental Contracts

For the determination of lease terms of certain back-end process service contracts and machinery rental contracts, the Group identified the contract period as the enforceable lease period during the initial adoption of IFRS 16 in 2019 since the leaseholder’s consent was required to extend such contracts. However, upon adoption of aforementioned accounting policy, considering the economic loss the Group would incur if the contract was not extended, more extended period was identified as lease period. Due to this change of accounting policies, the lease period has been extended and related lease liabilities and right-of-use assets have increased.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

The adoption of change in accounting policy based on the guidance issued by IFRS Interpretation Committee has been retrospectively applied as of January 1, 2019 for prior and current periods and the impacts are as follows:

 

     January 1, 2019  
     As reported      Adoption      Adjusted  
     (In millions of won)  

Current assets

   19,894,146           19,894,146  

Non-current assets

     44,878,908        435,423        45,314,331  

Right-of-use assets, net

     1,193,370        435,423        1,628,793  

Total Assets

     64,773,054        435,423        65,208,477  
  

 

 

    

 

 

    

 

 

 

Current liabilities

     13,257,271        100,315        13,357,586  

Lease liabilities

     244,644        100,315        344,959  

Non-current liabilities

     4,663,452        335,108        4,998,560  

Lease liabilities

     946,935        335,108        1,282,043  
  

 

 

    

 

 

    

 

 

 

Total Liabilities

     17,920,723        435,423        18,356,146  
  

 

 

    

 

 

    

 

 

 

Total Equity

   46,852,331           46,852,331  
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2019  
     As reported      Adoption     Adjusted  
     (In millions of won)  

Current assets

   14,457,602          14,457,602  

Non-current assets

     50,331,892        458,856       50,790,748  

Right-of-use assets, net

     1,250,576        456,082       1,706,658  

Deferred tax assets

     670,866        2,774       673,640  
  

 

 

    

 

 

   

 

 

 

Total Assets

     64,789,494        458,856       65,248,350  
  

 

 

    

 

 

   

 

 

 

Current liabilities

     7,874,033        87,933       7,961,966  

Lease liabilities

     205,238        87,933       293,171  

Non-current liabilities

     8,972,266        378,236       9,350,502  

Lease liabilities

     995,592        378,236       1,373,828  
  

 

 

    

 

 

   

 

 

 

Total Liabilities

     16,846,299        466,169       17,312,468  
  

 

 

    

 

 

   

 

 

 

Total Equity

   47,943,195      (7,313   47,935,882  
  

 

 

    

 

 

   

 

 

 

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

     December 31, 2020  
     Amount based
on previous
policy
     Adjustment      Reported
amount
 
     (In millions of won)  

Current assets

   16,570,953           16,570,953  

Non-current assets

     54,209,482        393,418        54,602,900  

Right-of-use assets, net

     1,314,227        393,418        1,707,645  

Total Assets

     70,780,435        393,418        71,173,853  
  

 

 

    

 

 

    

 

 

 

Current liabilities

     8,953,989        118,371        9,072,360  

Lease liabilities

     229,093        118,371        347,464  

Non-current liabilities

     9,925,184        267,212        10,192,396  

Deferred tax liabilities

     263,668        2,972        266,640  

Lease liabilities

     1,032,012        264,240        1,296,252  
  

 

 

    

 

 

    

 

 

 

Total Liabilities

     18,879,173        385,583        19,264,756  
  

 

 

    

 

 

    

 

 

 

Total Equity

   51,901,262      7,835      51,909,097  
  

 

 

    

 

 

    

 

 

 

 

     Year ended December 31, 2019  
     As reported      Adoption     Adjusted  
     (In millions of won)  

Revenue

   26,990,733          26,990,733  

Cost of sales

     18,825,275        (6,461     18,818,814  

Gross profit

     8,165,458        6,461       8,171,919  

Selling and administrative expenses

     5,452,740              5,452,740  

Operating profit

     2,712,718        6,461       2,719,179  

Finance income

     1,247,640              1,247,640  

Finance expenses

     1,514,869        16,548       1,531,417  

Share of profit of equity-accounted investees

     22,633              22,633  

Other income

     88,179              88,179  

Other expenses

     113,575              113,575  

Profit before income tax

     2,442,726        (10,087     2,432,639  

Income tax expense

     426,335        (2,774     423,561  

Profit for the year

     2,016,391        (7,313     2,009,078  

Other comprehensive income (loss)

     94,023              94,023  

Basic earnings per share (in won)

     2,943        (10     2,933  

Diluted earnings per share (in won)

     2,943        (11     2,932  

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

     Year ended December 31, 2020  
     Amount based
on previous
policy
    Adjustment     Reported
amount
 
     (In millions of won)  

Revenue

   31,900,418         31,900,418  

Cost of sales

     21,098,992       (9,203     21,089,789  

Gross profit

     10,801,426       9,203       10,810,629  

Selling and administrative expenses

     5,798,005             5,798,005  

Operating profit

     5,003,421       9,203       5,012,624  

Finance income

     3,327,905             3,327,905  

Finance expenses

     1,992,102       (11,691     1,980,411  

Share of profit of equity-accounted investees

     (36,279           (36,279

Other income

     84,773             84,773  

Other expenses

     171,575             171,575  

Profit before income tax

     6,216,143       20,894       6,237,037  

Income tax expense

     1,475,151       2,972       1,478,123  

Profit for the year

     4,740,992       17,922       4,758,914  

Other comprehensive income (loss)

     (107,378           (107,378

Basic earnings per share (in won)

     6,926       26       6,952  

Diluted earnings per share (in won)

     6,924       26       6,950  

 

     Year ended December 31, 2019  
     As reported     Adoption     Adjusted  
     (In millions of won)  

Cash flows from operating activities

   6,483,188     66,548     6,549,736  

Cash flows from investing activities

     (10,450,936           (10,450,936

Cash flows from financing activities

     3,903,216       (66,548     3,836,668  

(27)    New and amended standards adopted by the Group

The following new standards and amendments to standards are effective for accounting periods beginning on or after January 1, 2020 and earlier application is permitted. The impacts on the consolidated financial statements in adopting the following new standards are not expected to be significant.

(a)    Amendments to IAS 1 ‘Presentation of Financial Statements’ and IAS 8 ‘Accounting policies, changes in accounting estimates and errors’ — Definition of Material

The amendments clarify the definition of material. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general-purpose financial statements make on the basis of those financial statements. The amendments do not have a significant impact on the consolidated financial statements.

(b)    Amendments to IFRS 3 ‘Business Combination’ — Definition of a Business

The amended definition of a business requires an acquisition to include an input and a substantive process that together significantly contribute to the ability to create outputs and the definition of output excludes the returns in the form of lower costs and other economic benefits. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, an entity may elect to apply an

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business. The amendments do not have a significant impact on the consolidated financial statements.

(c)    Amendments to IFRS 1109 ‘Financial Instruments’, IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 7 ‘Financial Instruments: Disclosure’ — Interest Rate Benchmark Reform

The amendments allow to apply the exceptions when forward-looking analysis is performed in relation the application of hedge accounting while uncertainties arising from interest rate benchmark reform exist. The exceptions require the Group assumes that the interest rate benchmark on which the hedged items and the hedging instruments are based on is not altered as a result of interest rate benchmark reform, when determining whether the expected cash flows are highly probable, whether an economic relationship between the hedged item and the hedging instrument exists, and when assessing the hedging relationship is highly effective. The amendments do not have a significant impact on the consolidated financial statements.

(28)     New and amended standards not yet adopted by the Group

The following new accounting standards and interpretations that have been published that are not mandatory for December 31, 2020 reporting period and have not been early adopted by the Group.

(a) Amendments to IFRS 16 ‘Lease’ — Practical expedient for COVID-19-Related Rent Exemption, Concessions, Suspension

As a practical expedient, a lessee may elect not to assess whether a rent concession occurring as a direct consequence of the COVID-19 pandemic is a lease modification, and the amounts recognized in profit or loss as a result of applying this exemption should be disclosed. The amendments should be applied for annual periods beginning on or after June 1, 2020, and earlier application is permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.

(b)    Amendments to IFRS 9 ‘Financial Instruments’, IAS 39 ‘Financial Instruments: Recognition and Measurement’, IFRS 7 ‘Financial Instruments: Disclosure’, IFRS 4 ‘Insurance Contracts’ and IFRS 16 ‘Lease’ — Interest Rate Benchmark Reform

In relation to interest rate benchmark reform, the amendments provide exceptions including adjust effective interest rate instead of book amounts when interest rate benchmark of financial instruments at amortized costs is replaced, and apply hedge accounting without discontinuance although the interest rate benchmark is replaced in hedging relationship. The amendments should be applied for annual periods beginning on or after January 1, 2021, and earlier application is permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.

(c)    Amendments to IFRS 3 ‘Business Combination’ — Reference to the Conceptual Framework

The amendments update a reference of definition of assets and liabilities qualify for recognition in revised Conceptual Framework for Financial Reporting. However, the amendments add an exception for the recognition of liabilities and contingent liabilities within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and IFRSC 2121 ‘Levies’. The amendments also confirm that contingent assets should not be recognized at the acquisition date. The amendments should be applied for annual periods beginning on or after January 1, 2022, and earlier application is permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

3.    Significant Accounting Policies,  continued

 

(d)    Amendments to IAS 16 ‘Property, plant and equipment’ — Proceeds before intended use

The amendments prohibit an entity from deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while the entity is preparing the asset for its intended use. Instead, the entity will recognize the proceeds from selling such items, and the costs of producing those items, in profit or loss. The amendments should be applied for annual periods beginning on or after January 1, 2022, and earlier application is permitted. The Group is evaluating the impact of these amendments on the consolidated financial statements.

(e)    Amendments to IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ — Onerous Contracts : Cost of Fulfilling a Contract

The amendments clarify that the direct costs of fulfilling a contract include both the incremental costs of fulfilling the contract and an allocation of other costs directly related to fulfilling contracts when assessing whether the contract is onerous. The amendments should be applied for annual periods beginning on or after January 1, 2022, and earlier application is permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.

(f)    Annual Improvements to ‘Framework 2018-2020’

Annual improvements of ‘Framework 2018-2020’ cycle should be applied for annual periods beginning on or after January 1, 2022, and earlier application is permitted. The Group does not expect that these amendments have a significant impact on the consolidated financial statements.

 

   

IFRS 1 ‘First time Adoption of International Financial Reporting Standards’ — Subsidiaries that are first-time adopters

 

   

IFRS 9 ‘Financial Instruments’ — Fees related to the 10% test for derecognition of financial liabilities

 

   

IFRS 6 ‘Leases’ — Lease incentives

 

   

IAS 41’Agriculture’ — Measuring fair value

(g)    Amendments to IAS 1001 ‘Presentation of Financial Statements’—Classification of Liabilities as Current or Non-current

The amendments clarify that liabilities are classified as either current or non-current, depending on the substantive rights that exist at the end of the reporting period. Classification is unaffected by the likelihood that an entity will exercise right to defer settlement of the liability or the expectations of management. Also, the settlement of liability includes the transfer of the entity’s own equity instruments, however, it would be excluded if an option to settle them by the entity’s own equity instruments if compound financial instruments is met the definition of equity instruments and recognized separately from the liability. The amendments should be applied for annual periods beginning on or after January 1, 2023, and earlier application is permitted. The Group is reviewing the impact of these amendments on the consolidated financial statements.

4.    Geographic and Customer Information

The Group has a single reportable segment that is engaged in the manufacture and sale of semiconductor products. The Board of Directors of the Group reviews the operating results of the semiconductor business for reporting information used and reviewed when establishing the Group’s business strategy.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

4.    Geographic and Customer Information,  continued

 

(1) The Group’s non-current assets (excluding financial assets, loans and other receivables, equity-accounted investees and deferred tax assets) information by region based on the locations of subsidiaries as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Korea

   35,954,666        35,565,747  

China

     10,302,196        8,814,465  

Asia (other than China)

     20,397        21,497  

U.S.A.

     373,767        395,772  

Europe

     13,868        14,293  
  

 

 

    

 

 

 
   46,664,894        44,811,774  
  

 

 

    

 

 

 

(2) Revenue from customer A, B and C each constitutes more than 10% of the Group’s consolidated revenue for the year ended December 31, 2020 and amounts to ₩3,655,937 million (2019: ₩4,947,483 million and 2018: ₩5,265,807 million), and ₩3,510,469 million(2019: ₩3,051,211 million and 2018: ₩5,407,782 million) and ₩3,190,135 million, respectively.

5.    Categories of Financial Instruments

(1) Categories of financial assets as of December 31, 2020 and 2019 are as follows:

 

    2020  
    Financial assets at fair value
through profit or loss
    Financial assets at fair value
through other comprehensive
income or loss
    Financial assets at
amortized cost
    Total  
    (In millions of won)  

Cash and cash equivalents

              2,975,989       2,975,989  

Short-term financial instruments

    227,500             209,208       436,708  

Short-term investment assets

    1,535,518                   1,535,518  

Trade receivables1

          512,458       4,418,864       4,931,322  

Loans and other receivables

                144,783       144,783  

Other financial assets

                383       383  

Long-term investment assets

    6,139,627                   6,139,627  
 

 

 

   

 

 

   

 

 

   

 

 

 
  7,902,645       512,458       7,749,227       16,164,330  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

1

The Group transferred certain portion of trade receivables, which are from specific customers, and derecognized the trade receivables from the financial statements as all the risks and rewards are substantially transferred. Accordingly, the Group recognized gain or loss on disposal of trade receivables.

 

G-40


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

5.    Categories of Financial Instruments,  continued

 

    2019  
    Financial assets at fair value
through profit or loss
    Financial assets at
amortized cost
    Total  
    (In millions of won)  

Cash and cash equivalents

        2,306,070       2,306,070  

Short-term financial instruments

          298,350       298,350  

Short-term investment assets

    1,390,293             1,390,293  

Trade receivables

          4,306,449       4,306,449  

Loans and other receivables

          132,587       132,587  

Other financial assets

          931       931  

Long-term investment assets

    4,381,812             4,381,812  
 

 

 

   

 

 

   

 

 

 
  5,772,105       7,044,387       12,816,492  
 

 

 

   

 

 

   

 

 

 

(2) Categories of financial liabilities as of December 31, 2020 and 2019 are as follows:

 

    2020  
    Financial liabilities
measured at amortized cost
    Other financial liabilities     Total  
    (In millions of won)  

Trade payables

  1,046,159             1,046,159  

Other payables

    2,621,305             2,621,305  

Other non-trade payables

    1,397,116             1,397,116  

Borrowings

    11,251,648             11,251,648  

Lease liabilities

    1,643,716             1,643,716  

Other financial liabilities

    3,958       84,707       88,665  
 

 

 

   

 

 

   

 

 

 
  17,963,902       84,707       18,048,609  
 

 

 

   

 

 

   

 

 

 

 

    2019  
    Financial liabilities at fair
value through profit
or loss
    Financial liabilities
measured at amortized cost
    Total  
    (In millions of won)  

Trade payables

        1,042,542       1,042,542  

Other payables

    13,006       2,354,667       2,367,673  

Other non-trade payables

          1,276,161       1,276,161  

Borrowings

          10,523,506       10,523,506  

Lease liabilities

          1,666,999       1,666,999  

Other financial liabilities

    15,532             15,532  
 

 

 

   

 

 

   

 

 

 
  28,538       16,863,875       16,892,413  
 

 

 

   

 

 

   

 

 

 

 

G-41


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

5.    Categories of Financial Instruments,  continued

 

(3) Details of gain and loss on financial assets and liabilities by category for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020     2019  
     (In millions of won)  

Financial assets at amortized cost

    

Interest income

   27,872       30,062  

Foreign exchange differences

     (959,065     229,649  

Impairment

     (555      

Reversal of impairment

     5       85  
  

 

 

   

 

 

 
     (931,743     259,796  

Financial assets at fair value through profit or loss

    

Dividend income

     1,325       429  

Gain on disposal

     27,510       59,217  

Gain (loss) on valuation

     1,736,345       (227,423

Foreign exchange differences

     (40,222     209,563  
  

 

 

   

 

 

 
     1,724,958       41,786  

Financial liabilities measured at amortized cost

    

Interest expenses

     (253,468     (245,440

Foreign exchange differences

     809,001       (339,834
  

 

 

   

 

 

 
     555,533       (585,274
  

 

 

   

 

 

 
   1,348,748       (283,692
  

 

 

   

 

 

 

 

     2018  
     (In millions of won)  

Financial assets at amortized cost

  

Interest income

   62,478  

Foreign exchange differences

     573,349  

Reversal of impairment

     44  
  

 

 

 
     635,871  

Financial assets at fair value through profit or loss

  

Dividend income

     2,136  

Gain on disposal

     41,853  

Gain on valuation

     197,919  

Foreign exchange differences

     122,375  
  

 

 

 
     364,283  

Financial liabilities measured at amortized cost

  

Interest expenses

     (94,635

Foreign exchange differences

     (355,654
  

 

 

 
     (450,289
  

 

 

 
     549,865  
  

 

 

 

 

G-42


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

6.     Financial Risk Management

(1)     Financial risk management

The Group’s activities are exposed to a variety of financial risks: market risk (including foreign exchange risk, 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.

Risk management is carried out by the Parent Company’s corporate finance division in accordance with policies approved by the board of directors. The Parent Company’s corporate finance division identifies, evaluates and hedges financial risks in close cooperation with the Group’s operating units. The board of directors provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, and credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.

(a)     Market risk

(i)    Foreign currency risk

The Group operates internationally and is exposed to foreign currency risk arising from various currency exposures, primarily with respect to US dollar, Chinese Yuan, Euro and Japanese Yen. Foreign currency risk arises from future commercial transactions, recognized assets and liabilities in foreign currencies, and net investments in foreign operations.

Monetary foreign currency assets and liabilities as of December 31, 2020 are as follows:

 

     Assets      Liabilities  
     Foreign
currencies
     Korean won
equivalent
     Foreign
currencies
     Korean won
equivalent
 
     (In millions of won and millions of foreign currencies)  

USD

     10,370      11,283,027        10,913      11,873,394  

JPY

     385        4,062        140,716        1,483,515  

CNY

     1,779        297,021        27        4,525  

EUR

     10        12,791        34        45,167  

Also, as described in note 23, the Group entered into a fixed-to-fixed cross currency swap and a floating-to-fixed cross currency interest rate swap to hedge foreign currency rate risk relating to bonds and borrowings denominated in foreign currencies.

As of December 31, 2020, effects on profit before income tax as a result of strengthening or weakening of the foreign currencies by 10% are as follows:

 

     If strengthening by 10%     If weakening by 10%  
     (In millions of won)  

USD

   49,200       (49,200

JPY

     (147,945     147,945  

CNY

     29,250       (29,250

EUR

     (3,238     3,238  

(ii)    Interest rate risk

Interest rate risk of the Group is defined as the risk that the interest expenses arising from borrowings will fluctuate because of changes in future market interest rate. The interest rate risk mainly arises through floating rate borrowings.

 

G-43


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

6.    Financial Risk Management,  continued

 

The Group is managing cash flow interest rate risk using floating-to-fixed cross currency interest rate swaps. These interest rate swaps have an economic effect of converting floating interest borrowings into fixed interest borrowings. Generally, the Group borrows at a floating interest rate and then swaps at a fixed rate. Under the swap agreement, the Group will settle the difference between fixed interest costs and the floating interest costs calculated according to the principal agreed upon for each counterparty and specific period (mainly quarterly).

The Group is partially exposed to the risk of changing net interest costs due to changes in interest rates as of December 31, 2020. The Group has signed a currency interest rate swap contract on floating interest rate borrowings of ₩544,000 million and interest rate swap contract on floating interest rate borrowings of ₩108,800 million. Therefore, the changes in interest costs subject to fluctuation of interest rates do not have an impact on the profit before income tax for the year ended December 31, 2020.

As of December 31, 2020, if interest rates on borrowings had been 100 basis points higher/lower with all other variables held constant, profit before income tax would have been ₩50,270 million (2019 : ₩55,093 million) lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings and interest income on floating rate financial assets.

(iii)    Price risk

The Group invests in equity and debt securities resulted from its business needs and the purpose of liquidity management. The Group’s equity and debt securities are exposed to price risk as of December 31, 2020.

Equity investments that the Group owns are all unlisted equities and the effect of the equity investments on the Group’s profit for the year and other comprehensive income are explained in note 12.

(b)     Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises mainly from operating and investing activities. In order to manage credit risk, the Group periodically evaluates the credit worthiness of each customer or counterparty through the analysis of its financial information, historical transaction records and other factors, based on which the Group establishes credit limits for each customer or counterparty.

(i)    Trade and other receivables

For each new customer, the Group individually analyzes its credit worthiness before standard payment and delivery terms and conditions are offered. In addition, the Group is consistently managing trade and other receivables by reevaluating the overseas customer’s credit worthiness and securing collaterals in order to limit its credit risk exposure.

The Group reviews at the end of each reporting period whether trade and other receivables are impaired and maintains credit insurance policies to manage credit risk exposure from oversea customers. The maximum exposure to credit risk as of December 31, 2020 is the carrying amount of trade and other receivables.

(ii)     Other financial assets

Credit risk also arises from other financial assets such as cash and cash equivalents, short-term financial instruments, and deposits with banks and financial institutions as well as short-term and long-term loans mainly due to the bankruptcy of each counterparty to those financial assets. The maximum exposure to credit risk as of December 31, 2020 is the carrying amount of those financial assets. The Group transacts only with banks and financial institutions with high credit ratings, and accordingly management does not expect any significant losses from non-performance by these counterparties.

 

G-44


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

6.    Financial Risk Management,  continued

 

(c) Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in having sufficient funds needed to meet obligations associated with its financial contracts until maturity. The Group forecasts its cash flow and liquidity status and sets action plans on a regular basis to manage liquidity risk proactively.

The Group invests surplus cash in interest-bearing current accounts, time deposits, and demand deposits, choosing instruments with appropriate maturities or sufficient liquidity based on the above-mentioned forecasts.

Contractual maturities of financial liabilities as of December 31, 2020 and 2019 are as follows:

 

     2020  
     Less than
1 year
    1 – 2 years     2 – 5 years      More than
5 years
     Total  
     (In millions of won)  

Borrowings1

   3,309,009       2,317,331       5,136,314        1,121,480        11,884,134  

Lease liabilities

     352,201       250,840       391,356        848,315        1,842,712  

Trade payables

     1,046,159                           1,046,159  

Other payables

     2,348,909       56,902       160,488        78,336        2,644,635  

Other non-trade payables

     1,346,254       17,896       12,028               1,376,178  

Derivative Liabilities

     (3,538     (3,839     77,573        13,460        83,656  

Other financial liabilities

     117,106                           117,106  

Financial guarantee contract

     87,040                           87,040  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
   8,603,140       2,639,130       5,777,759        2,061,591        19,081,620  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

1

The cash flow includes payment of interest under terms and conditions of borrowing.

 

     2019  
     Less than
1 year
    1 – 2 years     2 – 5 years     More than
5 years
     Total  
     (In millions of won)  

Borrowings1

   2,988,176       2,974,910       4,535,800       794,687        11,293,573  

Lease liabilities

     296,419       294,633       443,049       849,095        1,883,196  

Trade payables

     1,042,542                          1,042,542  

Other payables

     2,367,673                          2,367,673  

Other non-trade payables

     1,257,895       15,611       2,655              1,276,161  

Other financial liabilities

     (15,826     (13,862     (16,732     5,522        (40,898

Financial guarantee contract

     69,468                          69,468  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
   8,006,347       3,271,292       4,964,772       1,649,304        17,891,715  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

1

The cash flow includes payment of interest under terms and conditions of borrowing contracts.

The table above analyzes the Group’s financial liabilities into relevant maturity groups based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and include estimated interest payments.

 

G-45


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

6.    Financial Risk Management,  continued

 

(2)     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 stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends to shareholders, proceeds and repayments of borrowings, issue new shares or sell assets to repay debt.

The debt-to-equity ratio and net borrowing ratio as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Total liabilities (A)

   19,264,756        17,312,468  

Total equity (B)

     51,909,097        47,935,882  

Cash and cash equivalents; short-term financial instruments; and short-term investment asset (C)

     4,948,215        3,994,713  

Total borrowings (D)

     11,251,648        10,523,506  

Debt-to-equity ratio (A/B)

     37.11%        36.12%  

Net borrowing ratio (D-C)/B

     12.14%        13.62%  

(3)     Fair value

Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in valuation techniques as follows:

 

   

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

 

   

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

 

   

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)

 

G-46


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

6.    Financial Risk Management,  continued

 

(a) The following table presents the carrying amounts and fair values of financial instruments by categories, including their levels in the fair value hierarchy, as of December 31, 2020 and 2019:

 

            2020  
     Carrying
amounts
     Level 1      Level 2      Level 3      Total  
     (In millions of won)  

Financial assets measured at fair value

              

Short-term financial instruments

   227,500                      227,500        227,500  

Short-term investment asset

     1,535,518               1,535,518               1,535,518  

Trade receivables1

     512,458               512,458               512,458  

Long-term investment asset

     6,139,627                      6,139,627        6,139,627  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     8,415,103               2,047,976        6,367,127        8,415,103  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets not measured at fair value

              

Cash and cash equivalents2

     2,975,989                              

Short-term financial instruments2

     209,208                              

Trade receivables2

     4,418,864                              

Loans and other receivables2

     144,783                              

Other financial assets2

     383                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     7,749,227                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial asset

     16,164,330               2,047,976        6,367,127        8,415,103  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities measured at fair value

              

Other financial liabilities

     84,707               84,707               84,707  

Financial liabilities not measured at fair value

              

Trade payables2

     1,046,159                              

Other payables2

     2,621,305                              

Other non-trade payables2

     1,397,116                              

Borrowings

     11,251,648               11,372,509               11,372,509  

Lease liabilities2

     1,643,716                              

Other financial liabilities2

     3,958                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     17,963,902               11,372,509               11,372,509  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   18,048,609               11,457,216               11,457,216  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

The Group transferred some of the trade receivables and majority of the risks and rewards to the customer. Accordingly, the Group derecognized trade receivables from the financial statement on the date of assets transfer and recognized gain or loss on disposal of trade receivables.

2 

The Group did not include fair values of financial assets and liabilities of which carrying amounts are considered to be a reasonable approximation of fair values.

 

G-47


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

6.    Financial Risk Management,  continued

 

(a) The following table presents the carrying amounts and fair values of financial instruments by categories, including their levels in the fair value hierarchy, as of December 31, 2020 and 2019, Continued:

 

            2019  
     Carrying
amounts
     Level 1      Level 2      Level 3      Total  
     (In millions of won)  

Financial assets measured at fair value

              

Short-term investment asset

    1,390,293               1,390,293               1,390,293  

Long-term investment asset

     4,381,812                      4,381,812        4,381,812  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5,772,105               1,390,293        4,381,812        5,772,105  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets not measured at fair value

              

Cash and cash equivalents1

     2,306,070                              

Short-term financial instruments1

     298,350                              

Trade receivables1

     4,306,449                              

Loans and other receivables1

     132,587                              

Other financial assets1

     931                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     7,044,387                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial asset

     12,816,492               1,390,293        4,381,812        5,772,105  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities measured at fair value

              

Other financial liabilities

     15,532               15,532               15,532  

Other payables

     13,006                      13,006        13,006  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     28,538               15,532        13,006        28,538  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities not measured at fair value

              

Trade payables1

     1,042,542                              

Other payables1

     2,354,667                              

Other non-trade payables1

     1,276,161                              

Borrowings

     10,523,506               10,585,029               10,585,029  

Lease liabilities1

     1,666,999                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     16,863,875               10,585,029               10,585,029  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

    16,892,413               10,600,561        13,006        10,613,567  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

The Group did not include fair values of financial assets and liabilities of which fair values have not been measured as carrying amounts are reasonable approximation of fair values.

 

G-48


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

6.    Financial Risk Management,  continued

 

(b)     Valuation Techniques

The valuation techniques of recurring and non-recurring fair value measurements and quoted prices classified as level 2 or level 3 are as follows:

 

     Fair value      Level      Valuation Techniques  
     (In millions of won)                

Financial assets at fair value through profit or loss:

        

Short-term investment assets

   1,535,518        2        Present value technique  

Long-term investment assets

     6,139,627        3        Present value technique and others  

Short-term financial instruments

     227,500        3        Present value technique  

Financial assets at fair value through other comprehensive income

        

Trade receivables

   512,458        2        Present value technique  

Financial liabilities at fair value through other comprehensive income

        

Other financial liabilities

   84,707        2        Present value technique  

Long-term investments measured at Level 3 in the fair value hierarchy include investments in special purpose companies of BCPE Pangea Intermediate Holdings Cayman, L.P. (“SPC1”) amounting to ₩3,595,494 million and BCPE Pangea Cayman2 Limited (“SPC2”) amounting to ₩2,351,225 million in connection with the Group’s investments in acquisition of KIOXIA Holdings Corporation (“KIOXIA”, formerly Toshiba Memory Corporation) (see note 12). The fair value of the long-term investments is measured based on the equity value of the underlying asset, KIOXIA estimated utilizing present value discount model.

The fair value of equity investment in SPC1 is measured using an option pricing model allocating the estimated fair value of KIOXIA equity between investors based on distribution priority pursuant to the underlying investment arrangement together with consideration of expected KIOXIA initial public offering and SPC1 liquidation.

The fair value of debt investment in SPC2 convertible bonds is measured based on the estimated KIOXIA’s equity value and SPC2’s equity ownership in KIOXIA (15.0%).

The valuation techniques used to measure equity investments in SPC1 and SPC2 convertible bonds have changed in the current year in response to a change in estimate of the likelihood of KIOXIA’s initial public offering.

The valuation techniques and key inputs used in valuation of the equity investment in SPC1 and investment in SPC2 convertible bonds are as follows:

 

     Fair value    

Valuation Techniques

 

Level 3 inputs

  Input
Range
 
     (In millions of won)                

Equity investment in SPC1

  

3,595,494

 

 

Present value technique

and option-pricing method

  Terminal growth rate     0
  Discount rate (Weighted-average capital cost)     7.8
  Expected timing of liquidation of the SPC (years)     2.92  
  Volatility     42.0

SPC2 convertible
bonds

       Risk free rate     -0.13
     Present value technique   Terminal growth rate     0
     2,351,225       Discount rate (Weighted-average capital cost)     7.8

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

6.    Financial Risk Management,  continued

 

Other significant unobservable inputs used in the present value discount model also include estimated future revenue and operating profit of KIOXIA. In these level 3 significant unobservable inputs, the higher in terminal growth rate, future revenue, and operating profit or the lower in weighted-average capital cost will result the higher fair value of the equity investment in SPC1, while any change in volatility and risk free rate may have either positive or negative impact on the fair value of the investment in SPC1. In addition, the higher in terminal growth rate and the lower in weighted-average capital cost will result in the higher fair value of the investment in SPC2 convertible bonds.

Any positive or negative changes in the above inputs will have a significant and direct impact on the fair value of investments in SPC1 and SPC2, respectively. They are significant, but unobservable. Accordingly, the investments are classified as fair value hierarchy Level 3 and the above inputs may have a significant impact on the value of investments in SPC1 and SPC2.

The sensitivity analysis results for the effect of changes in each long-term investment input classified as Level 3 under sensitivity analysis on fair value are as follows:

 

     Positive
fluctuation
     Negative
fluctuation
 
     (In millions of won)  

Equity investment in SPC11

   906,367      (738,474

SPC2 convertible bonds1

     590,076        (456,627

 

1

The changes in fair value are calculated by increasing or decreasing the terminal growth rate and weighted-average capital costs, which are major unobservable inputs by 0.5%.

(c) There was no transfer between fair value hierarchy levels during the year ended December 31, 2020 and the changes in financial assets and financial liabilities classified as Level 3 fair value measurements during the year ended December 31, 2020 are as follows:

 

     Beginning
Balance
     Acquisition      Disposals     Payments      Gain on
Valuation
     Foreign
Exchange
Difference
    Transfer1     Ending
Balance
 
     (In millions of won)  

Financial assets:

                    

Short-term Financial instruments

                                           227,500       227,500  

Long-term investment assets

     4,381,812        95,332        (706            1,733,783        (44,214     (26,380     6,139,627  

Other payables

     13,006                     14,605               (27,611            

 

1 

Certain long-term investment assets were transferred to associates and joint ventures.

 

G-50


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

7.    Restricted Financial Instruments

Details of restricted financial instruments as of December 31, 2020 and 2019 are as follows:

 

     2020      2019     

Description

     (In millions of won)       

Short-term financial instruments

   227,500        227,500      Restricted for supporting small businesses
     8,434        6,381      Pledged for consumption tax
     84,419             Guarantee deposits for repayments of borrowings
  

 

 

    

 

 

    
     320,353        233,881     
  

 

 

    

 

 

    

Other financial assets

     11        11      Bank overdraft guarantee deposit
     305        269      Others
  

 

 

    

 

 

    
     316        280     
  

 

 

    

 

 

    
   320,669        234,161     
  

 

 

    

 

 

    

8.    Trade Receivables and Loans and Other Receivables

(1) Details of trade receivables as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Current

  

Trade receivables

   4,873,602        4,175,470  

Trade receivables to be collected from related parties

     57,720        86,204  
  

 

 

    

 

 

 
     4,931,322        4,261,674  
  

 

 

    

 

 

 

Non-current

     

Trade receivables

            44,775  
  

 

 

    

 

 

 
   4,931,322        4,306,449  
  

 

 

    

 

 

 

 

G-51


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

8.    Trade Receivables and Loans and Other Receivables,  continued

 

(2) Details of loans and other receivables as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Current

     

Other receivables

   13,603        11,104  

Accrued income

     2,570        2,043  

Short-term loans

     5,045        6,816  

Short-term guarantee and other deposits

     47,976        3,545  
  

 

 

    

 

 

 
     69,194        23,508  
  

 

 

    

 

 

 

Non-current

     

Long-term other receivables

     2,977        2  

Long-term loans

     37,838        35,299  

Guarantee deposits

     34,558        73,550  

Others

     216        228  
  

 

 

    

 

 

 
     75,589        109,079  
  

 

 

    

 

 

 
   144,783        132,587  
  

 

 

    

 

 

 

(3) Trade receivables and loans and other receivables, net of provision for impairment, as of December 31, 2020 and 2019 are as follows:

 

     2020  
     Gross amount      Provision for
impairment
    Carrying
amount
 
     (In millions of won)  

Trade receivables

   4,931,366        (44     4,931,322  

Current loans and other receivables

     70,472        (1,278     69,194  

Non-current loans and other receivables

     76,743        (1,154     75,589  
  

 

 

    

 

 

   

 

 

 
   5,078,581        (2,476     5,076,105  
  

 

 

    

 

 

   

 

 

 

 

     2019  
     Gross amount      Provision for
impairment
    Carrying
amount
 
     (In millions of won)  

Trade receivables

   4,306,458        (9     4,306,449  

Current loans and other receivables

     24,788        (1,280     23,508  

Non-current loans and other receivables

     110,241        (1,162     109,079  
  

 

 

    

 

 

   

 

 

 
   4,441,487        (2,451     4,439,036  
  

 

 

    

 

 

   

 

 

 

 

G-52


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

8.    Trade Receivables and Loans and Other Receivables,  continued

 

(4) Details of provision for impairment

Changes in the provision for impairment of trade receivables for the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning balance

   9       48  

Bad debt expense

     555        

Reversal

           (40

Write-off

     (517      

Foreign exchange difference

     (3     1  
  

 

 

   

 

 

 

Ending balance

   44       9  
  

 

 

   

 

 

 

Changes in the provision for impairment of current loans and other receivables for the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning balance

   1,280       1,323  

Reversal

     (2     (45

Foreign exchange difference

           2  
  

 

 

   

 

 

 

Ending balance

   1,278       1,280  
  

 

 

   

 

 

 

Changes in the provision for impairment of non-current loans and other receivables for the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning balance

   1,162       1,117  

Reversal

     (3      

Write-off

     64        

Foreign exchange difference

     (69     45  
  

 

 

   

 

 

 

Ending balance

   1,154       1,162  
  

 

 

   

 

 

 

 

G-53


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

8.    Trade Receivables and Loans and Other Receivables,  continued

 

(5) The aging analysis of trade receivables and loans and other receivables as of December 31, 2020 and 2019 are as follows:

 

     2020  
     Not impaired                
            Overdue                
     Not past
due
     Less than
3 months
     Over
3 months
and less than
6 months
     Over
6 months
     Impaired      Total  
     (In millions of won)  

Trade receivables

   4,931,328                             38        4,931,366  

Current loans and other receivables

     69,194                             1,278        70,472  

Non-current loans and other receivables

     75,589                             1,154        76,743  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   5,076,111                             2,470        5,078,581  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     2019  
     Not impaired                
            Overdue                
     Not past
due
     Less than
3 months
     Over
3 months
and less than
6 months
     Over
6 months
     Impaired      Total  
     (In millions of won)  

Trade receivables

   4,306,453                             5        4,306,458  

Current loans and other receivables

     23,508                             1,280        24,788  

Non-current loans and other receivables

     109,079                             1,162        110,241  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   4,439,040                             2,447        4,441,487  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

9.    Inventories

(1) Details of inventories as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Merchandise

   2,173        2,822  

Finished goods

     1,078,967        1,058,434  

Work-in-process

     3,584,955        2,988,762  

Raw materials

     724,482        625,779  

Supplies

     588,009        521,068  

Goods in transit

     157,732        98,970  
  

 

 

    

 

 

 
     ₩6,136,318      5,295,835  
  

 

 

    

 

 

 

 

G-54


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

9.    Inventories,  continued

 

(2) The amount of the inventories recognized as cost of sales is as follows:

 

     2020      2019      2018  
     (In millions of won)  

Inventories recognized as cost of sales

   21,313,696        18,547,022        15,178,673  

(3) The changes in inventory valuation allowance during the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning balance

   647,498       377,992  

Charged to cost of sales

     79,560       273,820  

Utilization upon sales

     (306,072     (4,314
  

 

 

   

 

 

 

Ending balance

   420,986       647,498  
  

 

 

   

 

 

 

There were no significant reversals of inventory write-downs recognized during 2020 and 2019.

10.    Other Current and Non-current Assets

Details of other current and non-current assets as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Current

     

Advance payments

   51,047        64,429  

Prepaid expenses

     145,298        218,365  

Value added tax refundable

     235,602        343,434  

Contract assets

     53,605        55,715  

Others

     120        94  
  

 

 

    

 

 

 
     485,672        682,037  
  

 

 

    

 

 

 

Non-current

     

Long-term advance payments

     36,985        44,746  

Long-term prepaid expenses

     14,961        535,717  

Others

     3,083         
  

 

 

    

 

 

 
     55,029      580,463  
  

 

 

    

 

 

 
   540,701        1,262,500  
  

 

 

    

 

 

 

 

G-55


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

11.    Investments in Associates and Joint Ventures

(1) Details of investments in associates and joint ventures as of December 31, 2020 and 2019 are follows:

 

Type

  

Investee

  

Location

  

Business

Associate

   Stratio, Inc.    U.S.A    Development and manufacture of semiconductor parts
   SK China Company Limited    China    Consulting and investment
   Gemini Partners Pte. Ltd.    Singapore    Consulting
   TCL Fund    China    Investment
   SK South East Asia Investment Pte. Ltd.    Singapore    Consulting and investment
   Hushan Xinju (Chengdu) Venture Investment Center(Smartsource)    China    Venture Capital
   Prume Social Farm, Co., Ltd.    Korea    Growing crops
   Wuxi xinfa IC industry park., Ltd.    China    Developing Science-Technological Park
   Magnus Private Investment Co.,Ltd    Korea    Investment
   L&S (No.10) Early Stage III Investment Association    Korea    Investment
   SiFive Inc.    U.S.A    Design and manufacture of semiconductor
   YD-SK-KDB Social Value    Korea    Investment

Joint venture

   HITECH Semiconductor (Wuxi) Co., Ltd.    China    Manufacture of semiconductor parts
   Hystars Semiconductor (Wuxi) Co., Ltd.    China    Foundry factory construction
   Specialized Investment-type Private Equity Investment Trust For Growth Of Semiconductor    Korea    Investment
   Specialized Investment-type Private Equity Investment Trust For Win-win System Semiconductor    Korea    Investment

 

G-56


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

11.    Investments in Associates and Joint Ventures,  continued

 

 

    2020     2019  

Type

 

Investee

  Ownership
(%)
    Net asset
value
    Carrying
amount
    Ownership
(%)
    Carrying
amount
 
        (In millions of won)  

Associate

  Stratio, Inc.1     9.12     101       407       9.12     395  
  SK China Company Limited2     11.87       204,877       257,474       11.87       259,272  
  Gemini Partners Pte. Ltd.     20.00       1,771       1,771       20.00       2,735  
  TCL Fund1     11.05       11,191       11,538       11.06       4,995  
  SK South East Asia Investment Pte. Ltd.     20.00       325,006       325,006       20.00       237,599  
  Hushan Xinju (Chengdu) Venture Investment Center (Smartsource)2     16.67       7,970       7,970       16.67       5,659  
  Prume Social Farm, Co., Ltd.3     35.52       1,657       2,221       31.95       1,000  
  Wuxi xinfa IC industry park., Ltd.4     30.00       20,952       20,952              
  Magnus Private Investment Co.,Ltd.5     49.76       150,840       150,840              
  L&S (No.10) Early Stage III Investment Association     24.39       2,609       2,609              
  SiFive Inc.7     7.87       8,062       34,372              
  YD-SK-KDB Social Value6     23.26       2,566       2,566              

Joint venture

  HITECH Semiconductor(Wuxi) Co., Ltd.8     45.00       115,367       113,430       45.00       114,518  
  Hystars Semiconductor (Wuxi) Co., Ltd.8     50.10       193,833       195,423       50.10       142,594  
  Specialized Investment-type Private Equity Investment Trust For Growth Of Semiconductor9     33.33       24,818       24,818              
  Specialized Investment-type Private Equity Investment Trust For Win-win System Semiconductor10     37.50       14,847       14,847              
     

 

 

   

 

 

     

 

 

 
      1,086,467       1,166,244       768,767  
     

 

 

   

 

 

     

 

 

 

 

1

The Group is able to exercise significant influence through its right to appoint a director to the Board of Directors of each investee. Accordingly, the investments in these investees have been classified as associates.

 

2

Management of the Group is able to exercise significant influence over the entity by participating Board of Directors. Accordingly, the investments in these investees have been classified as associates.

 

3

WooYoung Farm Co., Ltd. has changed its name to “Prume Social Farm, Co., Ltd.” during the year ended December 31, 2020.

 

4

The Group has acquired 30.00% of ownership in Wuxi xinfa IC industry park., Ltd. during the year ended December 31, 2020, and the Group has significant influence over Wuxi xinfa IC industry park., Ltd., accordingly, the investment in this investee has been classified as an associate.

 

5

The Group has acquired 49.76% of the Magnus Private Investment Co., Ltd.’s interest for the year ended December 31, 2020, and the entity has been classified as an associate as the Group has significant influence.

 

6

It has been reclassified from long-term investment assets to associates for the year ended December 31, 2020.

 

7

The Group has acquired 7.87% of ownership in SiFive during the year ended December 31, 2020. It has been classified as an associate since the Group is able to exercise significant influence through its right to appoint a director to the Board of Directors of the investee.

 

8

Since the relevant contract stipulates that important matters have to be resolved unanimously, the Group has classified it as a joint venture.

 

9

It was reclassified from long-term investment assets to joint venture for the year ended December 31, 2020, as it is stated in the agreement that unanimous vote is required for relevant activities.

 

10

The Group has acquired 37.5% of ownership in Specialized Investment-type Private Equity Investment Trust For Win-win System Semiconductor’s interest during the year ended December 31, 2020. It has been classified as a joint venture since it is stated in the agreement that unanimous vote is required for relevant activities.

 

G-57


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

11.    Investments in Associates and Joint Ventures,  continued

 

(2) Changes in investments in associates and joint ventures for years ended December 31, 2020 and 2019 are as follows:

 

     2020  
     Beginning
balance
     Acquisition      Transfer      Share of
profit
(loss)
    Other
equity
movement
    Dividend     Ending
balance
 
     (In millions of won)  

Stratio, Inc.

   395                      19       (7           407  

SK China Company Limited

     259,272                      5,746       (7,544           257,474  

Gemini Partners Pte. Ltd.

     2,735                      (872     (92           1,771  

TCL Fund

     4,995        5,280               999       264             11,538  

SK South East Asia Investment Pte. Ltd.

     237,599        121,450               10,889       (44,932           325,006  

Hushan Xinju (Chengdu) Venture Investment Center(Smartsource)

     5,659        2,565               (233     (14     (7     7,970  

Prume Social Farm, Co., Ltd.

     1,000        1,000               221                   2,221  

Wuxi xinfa IC industry park., Ltd.

            21,860               (86     (822           20,952  

Magnus Private Investment Co.,Ltd.

            207,346               (56,506                 150,840  

L&S (No.10) Early Stage III Investment Association

            2,250        500        (141                 2,609  

SiFive Inc.

            35,709               (880     (457           34,372  

YD-SK-KDB Social Value

            1,400        1,400        (234                 2,566  

HITECH Semiconductor
(Wuxi) Co., Ltd.

     114,518                      21,241       (7,296     (15,033     113,430  

Hystars Semiconductor
(Wuxi) Co., Ltd.

     142,594        69,377               (16,627     79             195,423  

Specialized Investment-type Private Equity Investment Trust For Growth Of Semiconductor

                   24,480        338                   24,818  

Specialized Investment-type Private Equity Investment Trust For Win-win System Semiconductor

            15,000               (153                 14,847  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   768,767        483,237        26,380        (36,279     (60,821     (15,040     1,166,244  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

G-58


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

11.    Investments in Associates and Joint Ventures,  continued

 

    2019  
    Beginning
balance
    Acquisition     Share of
profit
(loss)
    Other
equity
movement
    Dividend     Impairment     Ending
balance
 
    (In millions of won)  

Stratio, Inc.

  2,079             8       3             (1,695     395  

SK China Company Limited

    246,052             3,358       9,862                   259,272  

Gemini Partners Pte. Ltd.

    2,601             (10     144                   2,735  

TCL Fund

    3,464       1,406       84       41                   4,995  

SK South East Asia Investment Pte. Ltd.

    111,810       113,470       5,752       6,567                   237,599  

Hushan Xinju (Chengdu) Venture Investment Center (Smartsource)

    3,241       2,531       (67     (46                 5,659  

WooYoung Farm Co., Ltd.

          1,000                               1,000  

HITECH Semiconductor
(Wuxi) Co., Ltd.

    109,708             15,725       3,543       (14,458           114,518  

Hystars Semiconductor
(Wuxi) Co., Ltd.

    83,239       58,547       (522     1,330                   142,594  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  562,194       176,954       24,328       21,444       (14,458     (1,695     768,767  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(3) Associates and joint ventures’ summarized statements of financial position as of December 31, 2020 and 2019 are as follows:

 

     2020  
     Current
assets
     Non-current
assets
     Current
liabilities
    Non-current
liabilities
 
     (In millions of won)  

Stratio, Inc.

   411        731        32        

SK China Company Limited

     380,413        1,706,634        51,485       308,147  

Gemini Partners Pte. Ltd.

     4,419        4,532        96        

TCL Fund

     42,747        63,649        5,117        

SK South East Asia Investment Pte. Ltd.

     797,045        1,672,412        67        

Hushan Xinju (Chengdu) Venture Investment Center (Smartsource)

     3,943        43,904        27        

Prume Social Farm, Co., Ltd.

     2,972        2,007        315        

Wuxi xinfa IC industry park., Ltd.

     69,823        2        (17      

Magnus Private Investment Co., Ltd.

     175,007        522,600        85,754       461,012  

L&S (No.10) Early Stage III Investment Association

     945        9,751               

SiFive Inc.

     134,171        42,432        45,152       29,050  

YD-SK-KDB Social Value

     49        10,986        2        

HITECH Semiconductor (Wuxi) Co., Ltd.

     208,103        380,648        129,135       203,246  

Hystars Semiconductor (Wuxi) Co., Ltd.

     89,629        555,551        31,557       226,732  

Specialized Investment-type Private Equity Investment Trust For Growth Of Semiconductor

     38,920        36,162        629        

Specialized Investment-type Private Equity Investment Trust For Win-win System Semiconductor

     27,236        12,800        443        

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

11.    Investments in Associates and Joint Ventures,  continued

 

     2019  
     Current
assets
     Non-current
assets
     Current
liabilities
     Non-current
liabilities
 
     (In millions of won)  

Stratio, Inc.

   431        715        169         

SK China Company Limited

     604,127        1,357,238        46,747        170,812  

Gemini Partners Pte. Ltd.

     6,851        6,912        54        33  

TCL Fund

     12,652        35,809        3,256         

SK South East Asia Investment Pte. Ltd.

     108,465        1,705,297        91         

Hushan Xinju (Chengdu) Venture Investment Center (Smartsource)

     20,623        13,657        329         

WooYoung Farm Co., Ltd.

     1,016        610        2        222  

HITECH Semiconductor (Wuxi) Co., Ltd.

     193,377        442,510        84,071        297,330  

Hystars Semiconductor (Wuxi) Co., Ltd.

     167,238        388,318        48,984        225,075  

(4) Associates and joint ventures’ summarized comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

    2020     2019     2018  
    Revenue     Profit (loss)
for the year
    Revenue     Profit (loss)
for the year
    Revenue     Profit (loss)
for the year
 
    (In millions of won)  

Stratio, Inc.

  341       208       242       81       88       (330

SK China Company Limited

    154,355       48,427       120,317       28,309       94,966       20,176  

Gemini Partners Pte. Ltd.

          (4,361           (49           1,279  

TCL Fund

          9,141             759             713  

SK South East Asia Investment Pte. Ltd.

    9,467       54,448       10,294       28,763              

Hushan Xinju (Chengdu) Venture Investment Center(Smartsource)

          (1,395           (837           (31

Prume Social Farm, Co., Ltd.

          763       19       (105            

Wuxi xinfa IC industry park., Ltd.

          (288                        

Magnus Private Investment Co., Ltd.

    164,662       (56,505                        

L&S (No.10) Early Stage III Investment Association

    9       (579                        

SiFive Inc.

    101,602       (11,182                        

YD-SK-KDB Social Value

    15       (1,006                        

HITECH Semiconductor (Wuxi) Co., Ltd.

    622,653       51,871       657,741       36,398       621,528       27,438  

Hystars Semiconductor (Wuxi) Co., Ltd.

          (33,188           (1,044           (658

Specialized Investment-type Private Equity Investment Trust For Growth Of Semiconductor

    391       (240                        

Specialized Investment-type Private Equity Investment Trust For Win-win System Semiconductor

    37       (407                        

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

12.    Long-term Investment Assets

(1) Details of long-term investment assets as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     Type      Acquisition
cost
     Book
value
     Book
value
 
     (In millions of won)  

ProMOS Technologies Inc.

     Equity securities      21,847                

Intellectual Discovery

     Equity securities        4,000        2,182        2,392  

China Walden Venture Investments II, L.P.

     Certificate        8,496        10,965        9,138  

China Walden Venture Investments III, L.P.

     Certificate        6,522        7,085        5,790  

Keyssa,Inc

     Equity securities        6,174        189        822  

BCPE Pangea Intermediate Holdings Cayman, L.P.1

     Certificate        2,738,393        3,595,494        2,780,758  

BCPE Pangea Cayman2, Ltd.1

     Convertible bond        1,281,780        2,351,225        1,435,460  

FemtoMetrix, Inc.

     Convertible bond        4,387        4,387        4,387  

GigaIO Networks, Inc.

     Equity securities        4,066        3,103        4,066  

Inpria Corporation

     Equity securities        4,753        4,729        1,214  

Shanghai IoT Phase II Venture Capital Fund Partnership, L.P

     Certificate        8,266        13,262        7,729  

Beijing Horizon Robotics Technology Co., Ltd.

     Equity securities        55,091        56,190        63,550  

Shanghi Sitrus Microelectronics Technology Co., Ltd.

     Equity securities        5,254        1,314        1,360  

Jiangsu Jiequan Junhai Rongxin Investment Partnership

     Certificate        20,506        20,035         

Impact Venture Capital I, L.P.

     Certificate        4,223        5,881        4,010  

Lion Semiconductor Inc.

     Equity securities        4,077        3,754        3,474  

Others

            58,663        59,832        57,662  
     

 

 

    

 

 

    

 

 

 
      4,236,498        6,139,627        4,381,812  
     

 

 

    

 

 

    

 

 

 

 

1 

In 2017, the Group participated in a consortium that includes Bain Capital in connection with acquisition of a stake in Toshiba Memory Corporation (“TMC”). On March 1, 2019, Toshiba Memory Holdings Corporation (“TMCHD”) was established as the holding company for TMC. Subsequently TMCHD and TMC were renamed KIOXIA Holdings Corporation (“KIOXIA”) and KIOXIA Corporation respectively. As of December 31, 2020, the Group holds equity interests in SPC1, which holds equity interests in KIOXIA, and convertible bonds issued by SPC2, which may be later convertible to 15% stake in KIOXIA. Management and decision-making rights of the Group for SPC1 and SPC2 are limited. Accordingly, the Group does not control or have any significant influence on SPC1 and SPC2. The investments in SPC1 and SPC2 are classified as financial assets which are debt instruments measured at fair value through profit or loss.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

12.    Long-term Investment Assets,  continued

 

(2) Changes in the carrying amount of long-term investment assets for the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning balance

   4,381,812       4,325,550  

Acquisition

     95,333       82,861  

Disposal

     (706     (3,884

Gain (loss) on valuation

     1,733,753       (233,234

Foreign exchange difference

     (44,185     210,519  

Transfer

     (26,380      
  

 

 

   

 

 

 

Ending balance

   6,139,627       4,381,812  
  

 

 

   

 

 

 

13.    Property, Plant and Equipment

(1) Changes in property, plant and equipment for the years ended December 31, 2020 and 2019 are as follows:

 

    2020  
    Land     Buildings     Structures     Machinery     Vehicles     Others     Construction-
in-progress
    Total  
    (In millions of won)  

Beginning balance

  1,041,771       5,547,744       1,619,064       26,974,270       43,096       764,043       3,959,952       39,949,940  

Changes during 2020

               

Acquisitions

    38,075       476,831       284,113       6,044,813       55       192,353       3,012,558       10,048,798  

Disposals

    (9,231     (327     (73     (17,095           (884     (37,850     (65,460

Depreciation

          (233,909     (114,307     (7,888,654     (3,351     (274,913           (8,515,134

Transfers1

    (96,096     1,222,639       21,076       1,367,213       753       45,476       (2,767,284     (206,223

Exchange differences and others

    (2,913     5,271       2,234       10,495       4       (1,250     4,800       18,641  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

    971,606       7,018,249       1,812,107       26,491,042       40,557       724,825       4,172,176       41,230,562  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

    971,606       8,459,016       2,494,982       74,141,182       48,860       2,045,915       4,172,176       92,333,737  

Accumulated depreciation

          (1,401,792     (663,771     (47,485,857     (8,292     (1,321,067           (50,880,779

Accumulated impairment

          (23,699     (19,104     (162,276           (23           (205,102

Government grants

          (15,276           (2,007     (11                 (17,294
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  971,606       7,018,249       1,812,107       26,491,042       40,557       724,825       4,172,176       41,230,562  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Certain investment property was transferred to property, plant and equipment during the year ended December 31, 2020.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

13.    Property, Plant and Equipment,  continued

 

    2019  
    Land     Buildings     Structures     Machinery     Vehicles     Others     Construction-
in-progress
    Total  
    (In millions of won)  

Beginning net book amount

  1,020,229       4,529,947       1,281,816       22,642,498       11,315       623,311       4,843,501       34,952,617  

Impacts on transition to IFRS 16

                      (73,069                       (73,069
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning net book amount after transition adjustments

    1,020,229       4,529,947       1,281,816       22,569,429       11,315       623,311       4,843,501       34,879,548  

Changes during 2019

               

Acquisitions

    16,882       375,243       325,189       8,428,185       1,715       328,079       3,100,165       12,575,458  

Disposals

    (48     (447     (432     (37,468     (3     (1,110     (337     (39,845

Depreciation

          (211,287     (95,114     (6,952,920     (2,124     (250,349           (7,511,794

Transfers1

    3,051       848,071       106,110       2,982,080       32,184       62,397       (4,032,788     1,105  

Exchange differences and others

    1,657       6,217       1,495       (15,036     9       1,715       49,411       45,468  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

    1,041,771       5,547,744       1,619,064       26,974,270       43,096       764,043       3,959,952       39,949,940  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

    1,041,771       6,794,238       2,193,817       67,650,975       48,061       1,882,254       3,959,952       83,571,068  

Accumulated depreciation

          (1,207,184     (555,649     (40,510,568     (4,949     (1,118,187           (43,396,537

Accumulated impairment

          (23,699     (19,104     (163,270           (24           (206,097

Government grants

          (15,611           (2,867     (16                 (18,494
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  1,041,771       5,547,744       1,619,064       26,974,270       43,096       764,043       3,959,952       39,949,940  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Certain investment property was transferred to property, plant and equipment during the year ended December 31, 2019.

(2) Details of depreciation expense allocation for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Cost of sales

   7,749,569        6,878,303        5,421,324  

Selling and administrative expenses

     725,791        574,961        365,508  

Other expenses

     7,418        14,923        10,152  

Development costs and others

     32,356        43,607        107,172  
  

 

 

    

 

 

    

 

 

 
   8,515,134        7,511,794        5,904,156  
  

 

 

    

 

 

    

 

 

 

(3) Certain machinery and others are pledged as collaterals for borrowings of the Group as of December 31, 2020 (see note 35).

(4) The Group capitalized borrowing costs amounting to ₩53,311 million (2019: ₩36,302 million and 2018: ₩33,086 million) on qualifying assets during the year ended December 31, 2020. Borrowing costs were calculated using a capitalization rate of 1.93% (2019: 2.84% and 2018: 3.08%) for the year ended December 31, 2020.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

13.    Property, Plant and Equipment,  continued

 

(5) Details of insured assets as of December 31, 2020 are as follows:

 

    

Insured assets

   Insured amount     

Insurance Company

          (In millions of won)       

Package insurance

   Property, plant and equipment; investment property; inventories; and business interruption    105,295,336     

Hyundai Marine & Fire

Insurance Co., Ltd. and others

Fire insurance

   Property, plant and equipment; investment property      73,349  

Erection all risks insurance

   Property, plant and equipment      5,448,476  
     

 

 

    
      110,817,161     
     

 

 

    

In addition to the assets stated above, vehicles are insured by vehicle comprehensive insurance and liability insurance.

(6) The Group provides certain property, plant, and equipment as operating leases. Rental income from the property, plant and equipment during the year ended December 31, 2020 are ₩27,737 million (2019: ₩29,746 million and 2018: ₩15,277 million).

14.    Leases

(1) Leases as lessee

(a) Changes in right-of-use assets for the year ended December 31, 2020 and 2019 are as follows:

 

     2020  
     Properties     Structures     Machinery     Vehicles     Others     Total  
     (In millions of won)  

Beginning net book amount

   97,855       975,996       609,529       11,491       11,787       1,706,658  

Increase

     26,358       159,166       52,849       25,881       20,212       284,466  

Others

     6,607       (7,706     15,823       (4,746           9,978  

Depreciation

     (18,686     (83,522     (172,750     (14,436     (6,824     (296,218

Foreign

exchange difference

     (274     4,274       (912     17       (344     2,761  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

     111,860       1,048,208       504,539       18,207       24,831       1,707,645  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

     169,300       1,210,800       811,315       29,684       40,787       2,261,886  

Accumulated amortization

     (26,193     (162,592     (306,776     (11,477     (15,956     (522,994

Government grants

     (31,247                             (31,247
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   111,860       1,048,208       504,539       18,207       24,831       1,707,645  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

14.    Leases,  continued

 

     2019  
     Properties     Structures     Machinery     Vehicles     Others     Total  
     (In millions of won)  

Beginning net book amount

                                  

Adjustment on initial application of IFRS 16

     31,652       867,864       279,952       10,688       3,214       1,193,370  

Impacts of changes in accounting policies

            

(Interpretation of lease period)

                 435,423                   435,423  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning net book amount after transition adjustments

     31,652       867,864       715,375       10,688       3,214       1,628,793  

Increase

     79,295       170,887       105,729       11,776             367,687  

Others

     4,163                   1,250       13,647       19,060  

Depreciation

     (16,949     (67,586     (211,551     (12,255     (5,074     (313,415

Foreign

exchange difference

     (306     4,831       (24     32             4,533  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

     97,855       975,996       609,529       11,491       11,787       1,706,658  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

     144,208       1,058,738       757,107       17,959       16,330       1,994,342  

Accumulated amortization

     (14,546     (82,742     (147,578     (6,468     (4,543     (255,877

Government grants

     (31,807                             (31,807
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   97,855       975,996       609,529       11,491       11,787       1,706,658  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(b) Changes in lease liabilities for the year ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning net book amount

   1,666,999        

Impacts on transition to IFRS 16

           1,191,579  

Impacts of changes in accounting policies

    

(Interpretation of lease period)

           435,423  
  

 

 

   

 

 

 

Beginning net book amount after transition adjustments

     1,666,999       1,627,002  

Increase

     284,466       367,687  

Others

     9,389       19,357  

Interest expense

     34,435       32,588  

Payments

     (326,665     (401,058

Foreign exchange difference

     (24,908     21,423  
  

 

 

   

 

 

 

Ending net book amount

   1,643,716       1,666,999  
  

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

14.    Leases,  continued

 

(c) The details of the minimum lease payment to be paid in the future for each period in connection with lease liabilities, present value and current/non-current classification of lease liabilities as of December 31, 2020 are as follows:

 

     2020  
     (In millions of won)  

Less than 1 year

   352,201  

1~5 years

     642,196  

More than 5 years

     848,315  
  

 

 

 

Total lease liabilities undiscounted as of December 31, 2020

     1,842,712  

Present value of lease liabilities recognized as of December 31, 2020

     1,643,716  
  

 

 

 

Current lease liabilities

     347,464  

Non-current lease liabilities

     1,296,252  

(d) The amounts recognized in profit or loss in relation to right-of-use assets and lease liabilities for the year ended December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Depreciation of right-to-use assets

   296,218        313,415  

Interest expenses of lease liabilities

     34,435        32,588  

Expenses relating to short-term leases

     17,911        14,489  

Expenses relating to leases of low-value assets

     1,733        1,234  

(2) Leases as lessor

The Group provides certain property, plant, and equipment and investment property as leases (See note 13 and 16). All leases are classified as operating leases.

Details of the undiscounted operating lease payments to be received in the future periods subsequent to December 31, 2020 are as follows:

 

     Property, plant and
equipment
     Investment Property      Total  
     (In millions of won)  

Less than 1 year

   11,503        9,857        21,360  

1~2 years

     9,476        9,763        19,239  

2~3 years

     3,948        9,763        13,711  

3~4 years

            9,763        9,763  
  

 

 

    

 

 

    

 

 

 
   24,927        39,146        64,073  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

15.    Intangible Assets

(1) Changes in intangible assets for the years ended December 31, 2020 and 2019 are as follows:

 

     2020  
     Goodwill     Industrial
property
rights
    Development
costs
    Others     Total  
           (In millions of won)        

Beginning net book amount

   720,197       85,724       931,788       833,340       2,571,049  

Changes during 2020

          

Internal development

                 259,020             259,020  

External acquisition

           13,693             412,524       426,217  

Disposals

           (3,782           (8,504     (12,286

Amortization

           (16,001     (576,334     (368,215     (960,550

Impairment

                 (16,544           (16,544

Transfers

           6,493             (9,720     (3,227

Others1

     (18,601                 1,155,200       1,136,599  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

     701,596       86,127       597,930       2,014,625       3,400,278  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

     701,596       195,637       3,185,403       3,110,632       7,193,268  

Accumulated amortization and impairment

           (109,510     (2,587,473     (1,096,007     (3,792,990
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   701,596       86,127       597,930       2,014,625       3,400,278  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1

Others include reclassification of license assets due to a change in accounting estimate and increasing or decreasing amount due to exchange rate fluctuations and others.

 

     2019  
     Goodwill      Industrial
property
rights
    Development
costs
    Others     Total  
     (In millions of won)  

Beginning net book amount

     ₩709,811        96,065       1,153,956       718,938       2,678,770  

Impacts on transition to IFRS 16

                        (5,582     (5,582
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Beginning net book amount after transition adjustments

     709,811        96,065       1,153,956       713,356       2,673,188  

Changes during 2019

           

Internal development

                  332,888             332,888  

External acquisition

            9,626             331,704       341,330  

Business combination

                        18,333       18,333  

Disposals

            (3,964           (6,589     (10,553

Amortization

            (16,003     (555,056     (224,110     (795,169

Impairment

                        (71     (71

Exchange differences

     10,386                    717       11,103  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending net book amount

     720,197        85,724       931,788       833,340       2,571,049  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition cost

     720,197        184,942       2,926,382       1,568,718       5,400,239  

Accumulated amortization
and impairment

            (99,218     (1,994,594     (735,378     (2,829,190
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     ₩720,197        85,724       931,788       833,340       2,571,049  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

G-67


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

15.    Intangible Assets,  continued

 

(2) Details of amortization expense allocation for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Cost of sales

   219,851        88,445        65,885  

Selling and administrative expenses

     739,247        705,383        456,269  

Development costs

     1,452        1,341        1,941  
  

 

 

    

 

 

    

 

 

 
   960,550        795,169        524,095  
  

 

 

    

 

 

    

 

 

 

(3) Goodwill impairment tests

The Group performs goodwill impairment tests annually. For the purpose of impairment tests, goodwill is allocated to CGU. The recoverable amount of the CGU as of December 31, 2020 was determined based on fair value less costs to sell, which was determined using the current stock price as of December 31, 2020. No impairment loss of goodwill was recognized since the recoverable amount is higher than the carrying value of the CGU as of December 31, 2020.

(4) Details of development costs

(a) Detailed criteria for capitalization of development costs

The Group’s development projects for a new product proceeds in the process of review and planning phases (Phase 0 ~ 4) and product design and mass production phases (Phase 5 ~ 8). The Group recognizes expenditures incurred after Phase 4 in relation with the development for new technology is recognized as an intangible asset. Expenditures incurred at phase 0 through 4 are recognized as expenses.

(b) Development cost capitalized and expenses on research and development

Among costs associated with development activities, ₩259,020 million (2019: ₩332,888 million 2018: ₩610,954 million) that met capitalization criteria, were capitalized as development cost for the year ended December 31, 2020. In addition, costs associated with research activities and other development expenditures that did not meet the criteria in the amount of ₩3,111,298 million (2019: ₩2,855,643 million and 2018: ₩2,284,000 million) were recognized as expenses for the year ended December 31, 2020.

(c) Details of development costs as of December 31, 2020 and 2019 are as follows:

 

     2020
     Book value     

Residual amortization period

     (In millions of won)

DRAM

   46,995      11 months
     60,549      1

NAND

     296,317      18 months
   124,328      1

CIS

     43,883      2~12 months
     25,858      1
  

 

 

    
     ₩597,930       
  

 

 

    

 

1

Amortization has not started as of December 31, 2020

 

G-68


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

15.    Intangible Assets,  continued

 

     2019
     Book value     

Residual amortization period

     (In millions of won)

DRAM

   263,262      11 ~23 months
     1,068      1

NAND

     203,307      12 months
   351,745      1

CIS

     19,613      1~14 months
     92,793      1
  

 

 

    
     ₩931,788       
  

 

 

    

 

1

Amortization has not started as of December 31, 2019

(d) The Group recognized ₩16,544 million impairment loss in development costs for the year ended December 31, 2020. There are no accumulated impairment losses in development costs as of December 31, 2020, as the development costs impaired during 2020 were written off subsequent to the recognition of impairment. The Group did not recognize impairment loss in development costs for the year ended December 31, 2019.

16.    Investment Property

(1) Changes in investment property for the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning net book amount

   258       1,400  

Depreciation

     (291     (37

Transfer1

     209,450       (1,105
  

 

 

   

 

 

 

Ending net book amount

     209,417       258  
  

 

 

   

 

 

 

Acquisition cost

     249,135       511  

Accumulated depreciation

     (39,718     (253
  

 

 

   

 

 

 

Ending net book amount

   209,417       258  
  

 

 

   

 

 

 

 

1 

Certain investment property was transferred to property, plant and equipment and certain property, plant and equipment was transferred to investment property during the year ended December 31, 2020. Certain investment property was transferred to property, plant and equipment during the year ended December 31, 2019.

(2) The depreciation expense of ₩291 million was charged to cost of sales for the year ended December 31, 2020 (2019: ₩37 million and 2018: ₩84 million).

(3) Rental income from investment property during the year ended December 31, 2020 was ₩1,235 million (2019: ₩123 million and 2018: ₩308 million).

 

G-69


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

17.    Other Payables

Details of other payables as of December 31, 2020 and 2019 are as follows:    

 

     2020      2019  
     (In millions of won)  

Current

     

Accrued expenses

   1,367,193        1,257,895  
  

 

 

    

 

 

 

Non-current

     

Rent deposits payable

     6,360        13,487  

Long-term accrued expenses

     23,563        4,779  
  

 

 

    

 

 

 
     29,923        18,266  
  

 

 

    

 

 

 
   1,397,116        1,276,161  
  

 

 

    

 

 

 

18.    Borrowings

(1) Details of borrowings as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Current

     

Short-term borrowings

   179,579        1,168,354  

Current portion of long-term borrowings

     2,604,724        1,259,593  

Current portion of debentures

     329,947        309,823  
  

 

 

    

 

 

 
     3,114,250        2,737,770  
  

 

 

    

 

 

 

Non-current

     

Long-term borrowings

     4,526,968        5,040,371  

Debentures

     3,610,430        2,745,365  
  

 

 

    

 

 

 
     8,137,398        7,785,736  
  

 

 

    

 

 

 
   11,251,648        10,523,506  
  

 

 

    

 

 

 

 

G-70


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

18.    Borrowings,  continued

 

(2) Details of short-term borrowings as of December 31, 2020 and 2019 are as follows:

 

   

Financial

Institutions

 

Maturity date

 

Interest rate per annum

in 2020 (%)1

  2020     2019  
    (In millions of won)  

General borrowings

  Shinhan Bank   2021.09.27   2.47~2.52   4,000       4,000  
  Hyundai Card   2020.01.17 ~ 2020.03.18             215,073  

Usance

  Hana Bank and others   2020.04.20 ~ 2020.05.15             569,164  

Foreign general borrowings

  Cypress   2021.12.31   4.60     6,924        
  Industrial & Commercial Bank of China   2021.01.20  

3M USD LIBOR

+ 0.60

    32,682        
  China Construction Bank and others   2021.02.26   3M USD LIBOR + 0.60     76,258        
  City Bank   2021.07.14 ~ 2021.11.25   3M USD LIBOR +1.00     59,715       22,536  
  The Export-Import Bank of China   2020.11.24 ~ 2020.12.04             107,731  
  Bank of China and others   2020.08.14 ~ 2020.11.11             249,850  
       

 

 

   

 

 

 
    179,579       1,168,354  
   

 

 

   

 

 

 

 

G-71


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

18.    Borrowings,  continued

 

(3) Details of long-term borrowings as of December 31, 2020 and 2019 are as follows:

 

   

Financial institutions

  Maturity date     Interest rate per annum
in 2020 (%)1
    2020     2019  
                    (In millions of won)  

Local currency borrowings:

         

Funds for equipment

  Korea Development Bank    
2021.09.29 ~
2025.04.14
 
 
    1.98 ~ 2.50     725,000       500,000  
  The Export-Import Bank of Korea    
2022.10.23 ~
2025.05.15
 
 
    1.31 ~ 2.00       600,000        
 

Shinhan Bank and others

   
2025.03.31 ~
2026.12.19
 
 
    1.00 ~ 2.96       3,573       2,008  

Commercial Paper

  Shinhan Bank General Finance Department     2023.11.19       CD(91 days) + 0.67       300,000        
       

 

 

   

 

 

 
          1,628,573       502,008  
       

 

 

   

 

 

 

Foreign currency borrowings:

         

General borrowings

  The Export-Import Bank of Korea     2021.05.31       3M JPY LIBOR + 0.57       843,408       850,776  
  The Export-Import Bank of Korea     2023.02.03       3M USD LIBOR + 1.30       108,800        

Funds for equipment

  The Export-Import Bank of Korea    
2021.02.25 ~
2022.03.10

 
   
3M USD LIBOR +
1.10 ~ 1.40

 
    244,800       607,845  
  The Export-Import Bank of Korea    
2021.12.25 ~
2021.12.27
 
 
    3M USD LIBOR + 1.30       272,349       289,059  
 

Korea Development Bank

    2026.10.02       3M USD LIBOR + 1.10       544,000       622,318  
 

Woori Bank

    2020.03.11                   43,417  
 

China Development Bank

   
2023.05.25 ~
2023.11.27

 
    6M USD LIBOR + 1.00       212,432        
 

China Bank

    2022.11.28      
3M USD LIBOR +
0.80 ~ 1.70

 
    187,376       124,873  

Syndicated loan

  Industrial & Commercial Bank of China and others     2024.04.24       3M USD LIBOR + 1.65       3,097,974       3,272,146  
       

 

 

   

 

 

 
          5,511,139       5,810,434  
       

 

 

   

 

 

 
          7,139,712       6,312,442  
       

 

 

   

 

 

 

Less: Current portion

          (2,604,724     (1,259,593

Less: Present value discount

          (8,020     (12,478
       

 

 

   

 

 

 
        4,526,968       5,040,371  
       

 

 

   

 

 

 

 

1 

As of December 31, 2020, the annual interest rates are as follows:

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

18.    Borrowings,  continued

 

Type

   Interest rate per annum as
of December 31, 2020
 

3M USD LIBOR

     0.24

3M JPY LIBOR

     -0.08

CD(91 Days)

     0.66

(4) Details of debentures as of December 31, 2020 and 2019 are as follows:

 

     Maturity date      Interest rate per
annum in 2020 (%)
     2020     2019  
                   (In millions of won)  

Unsecured notes in local currency:

          

Unsecured corporate bonds 214-1st

     2020.08.26                     210,000  

Unsecured corporate bonds 214-2nd

     2022.08.26        2.63        140,000       140,000  

Unsecured corporate bonds 215-2nd

     2020.11.25                     100,000  

Unsecured corporate bonds 215-3rd

     2022.11.25        2.75        10,000       10,000  

Unsecured corporate bonds 216-2nd

     2021.02.19        2.22        180,000       180,000  

Unsecured corporate bonds 216-3rd

     2023.02.19        2.53        80,000       80,000  

Unsecured corporate bonds 217-2nd

     2021.05.27        2.30        150,000       150,000  

Unsecured corporate bonds 218th

     2023.03.14        3.01        300,000       300,000  

Unsecured corporate bonds 219-1st

     2023.08.27        2.48        250,000       250,000  

Unsecured corporate bonds 219-2nd

     2025.08.27        2.67        90,000       90,000  

Unsecured corporate bonds 220-1st

     2022.05.09        1.96        410,000       410,000  

Unsecured corporate bonds 220-2nd

     2024.05.09        1.99        200,000       200,000  

Unsecured corporate bonds 220-3rd

     2026.05.09        2.17        120,000       120,000  

Unsecured corporate bonds 220-4rd

     2029.05.09        2.54        250,000       250,000  

Unsecured corporate bonds 221-1st

     2023.02.14        1.61        340,000        

Unsecured corporate bonds 221-2nd

     2025.02.14        1.72        360,000        

Unsecured corporate bonds 221-3rd

     2027.02.14        1.93        130,000        

Unsecured corporate bonds 221-4th

     2030.02.14        2.21        230,000        

Unsecured corporate bonds 222-1st

     2030.11.10        2.33        70,000        

Unsecured corporate bonds 222-2nd

     2035.11.10        2.73        100,000        
        

 

 

   

 

 

 
           3,410,000       2,490,000  
        

 

 

   

 

 

 

Unsecured notes in foreign currency:

          

Unsecured global bonds 9th

     2024.09.17        3.00        544,000       578,900  
        

 

 

   

 

 

 
           3,954,000       3,068,900  
        

 

 

   

 

 

 

Less: Discounts on debentures

           (13,623     (13,712

Less: Current portion

           (329,947     (309,823
        

 

 

   

 

 

 
         3,610,430       2,745,365  
        

 

 

   

 

 

 

 

G-73


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

19.    Other Current and Non-current Liabilities

Details of other current and non-current liabilities as of December 31, 2020 and 2019 are as follows:

 

     December 31,
2020
     December 31,
2019
 
     (In millions of won)  

Current

     

Advance receipts

   13,006        9,901  

Unearned income

     404        190  

Withholdings

     67,043        59,186  

Deposits received

     14,063        1,341  

Contract liabilities

     96,378        86,999  

Others

     6,501        5,380  
  

 

 

    

 

 

 
     197,395        162,997  
  

 

 

    

 

 

 

Non-current

     

Other long-term employee benefits

     94,026        82,873  

Long-term advance receipts

     4,901        4,900  
  

 

 

    

 

 

 
     98,927        87,773  
  

 

 

    

 

 

 
   296,322        250,770  
  

 

 

    

 

 

 

20.    Provisions

(1) Details of changes in provisions for the years ended December 31, 2020 and 2019 are as follows:

 

     2020  
     Beginning
balance
     Increase      Utilization     Reversal      Ending
Balance
 
     (In millions of won)  

Warranty

   4,081        1,087        (2,153            3,015  

Emission allowances

     6,620        13,070        (8,908            10,782  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   10,701        14,157        (11,061            13,797  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     2019  
     Beginning
balance
     Increase      Utilization     Reversal     Ending
Balance
 
     (In millions of won)  

Warranty

   3,992        15,811        (15,722           4,081  

Legal claims

     5,881               (5,881        

Emission allowances

     46,335               (2,702     (37,013     6,620  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   56,208        15,811        (24,305     (37,013     10,701  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

(2) Provisions for warranty

The Group estimates the expected warranty costs based on historical results and accrues provisions for warranty.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

20.    Provisions,  continued

 

(3) Provisions for legal claims

The Group recognizes provisions for legal claims when the Group has a present legal or constructive obligation as a result of past events and an outflow of resources required to settle the obligation is probable and the amount can be reliably estimated.

(4) Provision for emission allowances

The Group recognizes estimated future payment for the number of emission certificates required to settle the Group’s obligation exceeding the actual number of certificates on hand as emission allowances according to the Act on Allocation and Trading of Greenhouse Gas Emission Permits.

21.    Defined Benefit Liabilities

Under the defined benefit plan, the Group pays employee benefits to retired employees in the form of a lump sum based on their salaries and years of service at the time of their retirement. Accordingly, the Group is exposed to a variety of actuarial assumption risks such as risk associated with expected years of service, interest risk, and market (investment) risk.

(1) Details of defined benefit liabilities (assets) as of December 31, 2020 and 2019 are as follows:

 

     December 31,
2020
    December 31,
2019
 
     (In millions of won)  

Present value of defined benefit obligations

   2,169,154       1,936,868  

Fair value of plan assets

     (2,228,377     (1,886,650
  

 

 

   

 

 

 

Net defined benefit liabilities

   (59,223)       50,218  
  

 

 

   

 

 

 

Defined benefit liabilities

     2,739       53,624  

Defined benefit assets1

     (61,962     (3,406

 

1

The Parent Company and certain subsidiaries’ fair value of plan assets in excess of the present value of defined benefit obligations amounted to ₩61,962 million and ₩3,406 million as of December 31, 2020 and 2019 are presented as defined benefit assets.

(2) Principal actuarial assumptions as of December 31, 2020 and 2019 are as follows:

 

     2020 (%)      2019 (%)  

Discount rate for defined benefit obligations

     1.96 ~ 3.56        1.92 ~ 3.47  

Expected rate of salary increase

     3.00 ~ 5.51        2.70 ~ 5.94  

(3) Weighted average durations of defined benefit obligations as of December 31, 2020 and 2019 are 11.77 and 11.48 years, respectively.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

21.    Defined Benefit Liabilities,  continued

 

(4) Changes in defined benefit obligations for the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning balance

   1,936,868       1,609,055  

Current service cost

     250,098       220,870  

Past service cost

     (714      

Interest expense

     65,002       59,683  

Transfer from associates

     (2,205     2,408  

Remeasurements:

     (25,036     97,434  

Demographic assumption

     39,198       67  

Financial assumption

     (35,429     76,241  

Adjustment based on experience

     (28,805     21,126  

Benefits paid

     (54,824     (52,609

Effect of movements in exchange rates

     (35     27  
  

 

 

   

 

 

 

Ending balance

   2,169,154       1,936,868  
  

 

 

   

 

 

 

(5) Changes in plan assets for the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning balance

   1,886,650       1,608,832  

Contributions

     355,664       279,751  

Interest income

     62,834       59,554  

Transfer from associates

     231       3,430  

Benefits paid

     (53,588     (38,008

Remeasurements

     (23,373     (26,909

Foreign exchange differences

     (41      
  

 

 

   

 

 

 

Ending balance

   2,228,377       1,886,650  
  

 

 

   

 

 

 

(6) The amounts recognized in profit or loss for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020     2019      2018  
     (In millions of won)  

Current service cost

   250,098       220,870        179,689  

Past service cost

     (714             

Net interest expense

     2,168       129        (186
  

 

 

   

 

 

    

 

 

 
   251,552       220,999        179,503  
  

 

 

   

 

 

    

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

21.    Defined Benefit Liabilities,  continued

 

(7) The amounts in which defined benefit plan related expenses are included for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Cost of sales

   135,999        120,736        101,944  

Selling and administrative expenses

     115,553        100,263        77,559  
  

 

 

    

 

 

    

 

 

 
   251,552        220,999        179,503  
  

 

 

    

 

 

    

 

 

 

(8) Details of plan assets as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Deposits

   2,227,196        1,884,630  

Others

     1,181        2,020  
  

 

 

    

 

 

 
   2,228,377        1,886,650  
  

 

 

    

 

 

 

Actual return on plan assets for the year ended December 31, 2020 amounted to ₩39,461 million (2019 : ₩32,645 million and 2018: ₩24,167 million).

(9) As of December 31, 2020, the Group funded defined benefit obligations through insurance plans with Mirae Asset Life Insurance Co., Ltd. and other insurance companies. The Group’s reasonable estimation of contribution to the plan assets for the year ending December 31, 2021 is ₩326,470 million under the assumption that the Group maintains the defined benefit plan.

(10) The sensitivity analysis of the defined benefit obligations as of December 31, 2020 to changes in the principal assumptions is as follows:

 

     Effects on defined benefit obligation  
     Increase of rate     Decrease of rate  
     (In millions of won)  

Discount rate (if changed by 1%)

   (228,838     270,446  

Expected rate of salary increase (if changed by 1%)

     269,436       (232,219

The sensitivity analysis does not consider dispersion of all cash flows that are expected from the plan and provides approximate values of sensitivity for the assumptions used.

(11) Information about the maturity profile of the defined benefit obligation as of December 31, 2020 is as follows:

 

     Less than 1
year
     2 - 5
years
     6 - 10
years
     More than
11 years
     Total  
     (In millions of won)  

Benefits paid

   122,429        321,072        644,612        2,353,885        3,441,998  

Information about the maturity profile is based on the undiscounted and vested amount of defined benefit obligation as of December 31, 2020, and classified by employee’s expected years of remaining services.

(12) The Group adopted defined contribution plan for retirement benefit for employees subject to peak wage system. Contributions to defined contribution plans amounting to ₩931 million (2019: ₩455 million) was expensed for the year ended December 31, 2020.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

22.    Deferred Income Tax

(1) Changes in deferred income tax assets and liabilities for the years ended December 31, 2020 and 2019 without taking into consideration the offsetting of balances within the same tax authority, are as follows:

 

     2020  
     Beginning     Adjustment      Profit or
loss
    Equity      Foreign
exchange
differences
    Ending  
     (In millions of won)  

Inventories, net

   176,742              (52,937            (464     123,341  

Property, plant and equipment, net

     208,478       27,188        201,165              (159     436,672  

Defined benefits liabilities, net

     7,756              (9,798     169        (3     (1,876

Short-term and long-term investment assets and others

     (27,555            (514,745                  (542,300

Employee benefits

     46,537              12,936              (2     59,471  

Provisions

     3,589              (13,006            (24     (9,441

Other assets and other liabilities

     11,629              7,632              117       19,378  

Accrued expenses

     92,408              8,306                    100,714  

Others

     14,681              (2,410            (456     11,815  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax assets for temporary differences, net

     534,265       27,188        (362,857     169        (991     197,774  

Tax credit carryforwards recognized

     6,251              (2,192            (160     3,899  

Tax loss carryforwards recognized

     117,381              (24,561            (4,939     87,881  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax assets recognized, net

   657,897       27,188        (389,610     169        (6,090     289,554  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     2019  
     Beginning     Profit or loss     Equity      Foreign
exchange
differences
    Ending  
     (In millions of won)  

Inventories, net

   102,812       73,691              240       176,743  

Property, plant and equipment, net

     140,762       74,433              (6,718     208,477  

Defined benefits liabilities, net

     (609     (25,776     34,132        10       7,757  

Short-term and long-term investment assets and others

     (32,984     5,429                    (27,555

Employee benefits

     39,954       6,583                    46,537  

Provisions

     19,169       (15,599            19       3,589  

Other assets and other liabilities

     24,583       (12,872            (82     11,629  

Accrued expenses

     48,883       43,526                    92,409  

Others

     56,653       (35,239            (6,734     14,680  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax assets for temporary differences, net

     399,223       114,176       34,132        (13,265     534,266  

Tax credit carryforwards recognized

     15,189       (9,542            604       6,251  

Tax loss carryforwards recognized

     123,007       (10,023            4,396       117,380  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax assets recognized, net

   537,419       94,611       34,132        (8,265     657,897  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

22.    Deferred Income Tax,  continued

 

(2) As of December 31, 2020 and 2019, the temporary differences that are not recognized as deferred tax assets (liabilities) are as follows:

 

     2020     2019  
     (In millions of won)  

Deductible temporary differences

   2,637,294       2,443,911  

Taxable temporary differences

     (3,130,362     (2,788,357
  

 

 

   

 

 

 

Investments in subsidiaries, associates, and joint ventures

     (493,068     (344,446
  

 

 

   

 

 

 

Other deductible temporary differences

     12,790       18,863  
  

 

 

   

 

 

 

(3) Details of period when the deferred income tax assets (liabilities) are recovered (settled) as of December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Deferred income tax assets to be recovered after more than 12 months

   1,410,835       1,110,617  

Deferred income tax assets to be recovered within 12 months

     142,651       202,665  
  

 

 

   

 

 

 

Deferred income tax assets recognized

     1,553,486       1,313,282  
  

 

 

   

 

 

 

Deferred income tax liabilities to be recovered after more than 12 months

     (1,263,264     (655,003

Deferred income tax liabilities to be settled within 12 months

     (668     (382
  

 

 

   

 

 

 

Deferred income tax liabilities recognized

     (1,263,932     (655,385
  

 

 

   

 

 

 

Net income deferred tax assets (liabilities) recognized

   289,554       657,897  
  

 

 

   

 

 

 

23.    Derivative Financial Instruments

(1) Details of derivative financial instruments applying cash flow hedge accounting as of December 31, 2020 are as follows:

 

Hedged items

  Hedging instruments

Borrowing date

 

Financial
instrument

  Hedged risk   Type of contract   Financial
institution
  Contract period
    (In thousands of foreign currencies)

2019.09.17

 

Foreign currency denominated bond with fixed rate

(Par value: USD 500,000)

  Foreign
currency risk
  Fixed-to-fixed
cross currency
swap
  Kookmin
Bank and
other
  2019.09.17~
2024.09.17

2019.10.02

 

Foreign currency denominated borrowing for equipment with floating rate

(Par value: USD 500,000)

  Foreign
currency and
interest rate
risk
  Floating-to-fixed
cross currency
interest rate
swap
  Korea
Development
Bank
  2019.10.02~
2026.10.02

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

23.    Derivative Financial Instruments,  continued

 

Hedged items

  Hedging instruments

Borrowing date

 

Financial
instrument

  Hedged risk   Type of contract   Financial
institution
  Contract period
    (In thousands of foreign currencies)

2020.02.03

 

Foreign currency denominated borrowing with floating rate

(Par value: USD 50,000)

  Interest rate
risk
  Interest rate
swap
  Woori Bank   2020.02.03~
2023.02.03

2020.03.18

 

Foreign currency denominated borrowing with floating rate

(Par value: USD 50,000)

  Interest rate
risk
  Interest rate
swap
  Woori Bank   2020.03.18~
2023.02.03

(2) The derivative financial instruments held by the Group are presented in non-current other financial liabilities in the consolidated financial statements of financial position and the details are as follows:

 

Type of contract

  

Hedged items

   Cash flow hedge      Fair value  
     (In millions of won and thousands of foreign currencies)  

Fixed-to-fixed cross currency swap

  

Foreign currency denominated bond with fixed rate

(Par value: USD 500,000)

   23,018        23,018  

Floating-to-fixed cross currency interest rate swap

  

Foreign currency denominated borrowing for equipment with floating rate

(Par value: USD 500,000)

     59,478        59,478  

Interest rate swap

  

Foreign currency denominated borrowing with floating rate

(Par value: USD 50,000)

     1,539        1,539  

Interest rate swap

  

Foreign currency denominated borrowing with floating rate

(Par value: USD 50,000)

     672        672  
        

 

 

 
          84,707  
        

 

 

 

As of December 31, 2020, changes of fair value of the derivative is recognized in other comprehensive income or loss as all of designated hedging instruments are effective for foreign currency risk or foreign currency and interest rate risk.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

24.    Capital Stock, Capital Surplus and Other Equity

(1) The Parent Company has 9,000,000,000 authorized shares and the face value per share is ₩5,000 as of December 31, 2020. The number of shares issued, common stock, capital surplus and other capital as of December 31, 2020 and 2019, are as follows:

 

     2020     2019  
    

(In millions of won,

thousands of shares)

 

Issued shares1

     731,530       731,530  

Capital stock:

    

Common stock

   3,657,652       3,657,652  

Capital surplus:

    

Additional paid in capital

     3,625,797       3,625,797  

Others

     517,939       517,939  
  

 

 

   

 

 

 
     4,143,736       4,143,736  
  

 

 

   

 

 

 

Other equity:

    

Acquisition cost of treasury shares

     (2,508,427     (2,508,427

Stock option

     5,305       3,714  
  

 

 

   

 

 

 
   (2,503,122     (2,504,713
  

 

 

   

 

 

 

Number of treasury shares

     44,001       44,001  

 

1 

As of December 31, 2020, total number of shares is 728,002 thousand shares, which differs from total issued shares due to the effect of stock retirement.

(2) The number of outstanding shares, which deducted treasury shares held by the Parent Company from listed shares, is 684,002 thousands as of December 31, 2020 and 2019.

25.    Accumulated Other Comprehensive Loss

(1) Details of accumulated other comprehensive loss as of December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Equity-accounted investees — share of other comprehensive income (loss)

   (57,542)       3,278  

Foreign operations — foreign currency translation differences

     (360,247     (314,966

Gain on valuation of derivatives

     12,336       12,753  
  

 

 

   

 

 

 
   (405,453     (298,935
  

 

 

   

 

 

 

(2) Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2020 and 2019 are as follows:

 

     2020  
     Beginning     Change     Ending  
     (In millions of won)  

Equity-accounted investees — share of other comprehensive income (loss)

   3,278       (60,820     (57,542

Foreign operations — foreign currency translation differences

     (314,966     (45,281     (360,247

Gain (loss) on valuation of derivatives

     12,753       (417     12,336  
  

 

 

   

 

 

   

 

 

 
   (298,935     (106,518     (405,453
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

25.    Accumulated Other Comprehensive Loss,  continued

 

     2019  
     Beginning     Change      Ending  
     (In millions of won)  

Equity-accounted investees — share of other comprehensive income (loss)

   (18,166)       21,444        3,278  

Foreign operations — foreign currency translation differences

     (464,653     149,687        (314,966

Gain on valuation of derivatives

           12,753        12,753  
  

 

 

   

 

 

    

 

 

 
   (482,819     183,884        (298,935
  

 

 

   

 

 

    

 

 

 

26.    Retained Earnings and Dividends

(1) Details of retained earnings as of December 31, 2020 and 2019 are as follows:

 

     2020      2019  
     (In millions of won)  

Legal reserve1

   349,954        281,555  

Discretionary reserve2

     235,506        235,506  

Unappropriated retained earnings

     46,410,268        42,406,301  
  

 

 

    

 

 

 
   46,995,728        42,923,362  
  

 

 

    

 

 

 

 

1 

The Commercial Code of the Republic of Korea requires the Parent Company to appropriate for each financial period, 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 cash dividends payment, but may be transferred to capital stock or used to reduce accumulated deficit.

2 

Discretionary reserve is a reserve for technology development.

(2) Dividends of the Parent Company

(a) Details of dividends for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won and in thousands of shares)  

Type of dividends

     Cash Dividends        Cash Dividends        Cash Dividends  

Outstanding ordinary shares

     684,002        684,002        684,002  

Par value (in won)

   5,000        5,000        5,000  

Dividend rate

     23%        20%        30%  

Total dividends

   800,282        684,002        1,026,003  

(b) Dividend payout ratio for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Dividends

   800,282        684,002        1,026,003  

Profit attributable to owners of the Parent Company

     4,755,102        2,005,975        15,540,111  

Dividend payout ratio

     16.83%        34.10%        6.60%  

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

26.    Retained Earnings and Dividends,  continued

 

(c) Dividend yield ratio for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In won)  

Dividends per share

   1,170        1,000        1,500  

Closing stock price

     118,500        94,100        60,500  

Dividend yield ratio

     0.99%        1.06%        2.48%  

27.    Revenue

(1) Details of the Group’s revenue for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Sale of goods

   31,837,538        26,922,416        40,388,846  

Providing services

     62,880        68,317        56,220  
  

 

 

    

 

 

    

 

 

 
   31,900,418        26,990,733        40,445,066  
  

 

 

    

 

 

    

 

 

 

(2) Details of the Group’s revenue by product and service types for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

DRAM

   22,536,404        20,292,687        32,370,936  

NAND Flash

     7,471,242        5,139,563        7,420,857  

Other

     1,892,772        1,558,483        653,273  
  

 

 

    

 

 

    

 

 

 
   31,900,418        26,990,733        40,445,066  
  

 

 

    

 

 

    

 

 

 

(3) The Group’s revenue information by region based on the location of selling entities for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Korea

   1,452,006        1,446,997        840,491  

China

     12,217,634        12,570,278        15,785,993  

Taiwan

     1,905,650        1,444,188        2,950,067  

Asia (other than China and Taiwan)

     2,416,321        2,301,314        4,609,601  

U.S.A.

     12,686,108        8,141,151        14,278,161  

Europe

     1,222,699        1,086,805        1,980,753  
  

 

 

    

 

 

    

 

 

 
   31,900,418        26,990,733        40,445,066  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

27.    Revenue,  continued

 

(4) Details of the Group’s revenue by the timing of revenue recognition for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Performance obligations satisfied at a point in time

   31,837,538        26,922,416        40,388,846  

Performance obligations satisfied over time

     62,880        68,317        56,220  
  

 

 

    

 

 

    

 

 

 
   31,900,418        26,990,733        40,445,066  
  

 

 

    

 

 

    

 

 

 

(5) Revenue recognition policies and performance obligations

Revenue is measured based on the promised consideration specified in a contract with a customer. The Group recognizes revenue when the Group transfers a promised good or service to a customer.

Revenue recognition policies regarding the nature and timing of performance obligation satisfaction in the contract are as follows:

 

    

Nature and timing of performance
obligation satisfaction

  

Revenue recognition policies

Sale of goods

  

Revenue is recognized when the customer obtains control of that asset, which is typically upon delivery or shipment depending on the terms of the contract.

 

When the good is defective, the customer is granted the right to return the defective goods in exchange for a functioning product or cash.

  

Revenue is measured at the amount of consideration for the sale of goods, reflecting the expected amount of return estimated through historical information. The Group’s right to recover products from customers and refund liability are recognized.

 

Refund liability is initially measured at the former carrying amount of the product less any expected costs to recover those products. Refund liability is included in other current liabilities (See note 19) and right to recover products from customers is included in other current assets (See note 10).The Group reviews its estimate of expected returns at the end of each reporting period and updates the amounts of the asset and liabilities accordingly.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

28.    Selling and Administrative Expenses

Selling and administrative expenses for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020     2019     2018  
     (In millions of won)  

Selling and administrative expenses:

      

Salaries

   592,894       516,226       564,923  

Defined benefit plan

     40,927       34,692       27,200  

Employee benefits

     159,600       141,104       115,892  

Commission

     334,570       460,644       369,307  

Depreciation

     245,858       206,429       130,229  

Amortization

     719,652       687,365       442,389  

Freight and custody charge

     48,617       40,222       27,412  

Legal cost

     20,323       31,679       34,032  

Rental

     8,944       6,933       13,301  

Taxes and dues

     56,934       54,525       31,785  

Training

     67,626       43,217       32,636  

Advertising

     95,158       92,792       92,025  

Utilities

     13,688       12,193       11,603  

Supplies

     100,748       99,029       103,384  

Repair

     26,541       29,546       24,938  

Travel and transportation

     4,692       16,731       15,483  

Others

     149,935       123,770       99,939  
  

 

 

   

 

 

   

 

 

 
     2,686,707       2,597,097       2,136,478  
  

 

 

   

 

 

   

 

 

 

Research and development:

      

Expenditure on research and development

     3,370,318       3,188,531       2,894,954  

Development cost capitalized

     (259,020     (332,888     (610,954
  

 

 

   

 

 

   

 

 

 
     3,111,298       2,855,643       2,284,000  
  

 

 

   

 

 

   

 

 

 
   5,798,005       5,452,740       4,420,478  
  

 

 

   

 

 

   

 

 

 

29.    Expenses by Nature

Nature of expenses for the years ended December 31, 2020, 2019 and 2018 is as follows:

 

     2020     20192     20182  
     (In millions of won)  

Changes in finished goods and work-in-process

   (616,725     (523,777     (1,473,125

Raw materials, supplies and consumables

     7,649,164       6,787,445       5,709,613  

Employee benefit

     3,833,439       3,411,234       3,669,809  

Depreciation and others

     9,764,776       8,605,492       6,418,184  

Commission

     2,149,025       2,113,753       1,736,422  

Utilities

     1,459,346       1,366,041       1,167,291  

Repair

     1,129,642       1,080,705       1,050,340  

Outsourcing

     1,188,589       1,128,458       1,072,222  

Others

     639,284       650,002       897,246  

Transfer: capitalized development cost and others

     (308,746     (347,799     (646,686
  

 

 

   

 

 

   

 

 

 

Total1

   26,887,794       24,271,554       19,601,316  
  

 

 

   

 

 

   

 

 

 

 

1 

Total expenses consist of cost of sales and selling and administrative expenses.

 

G-85


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

29.    Expenses by Nature,  continued

 

2

Expenses for the years ended December 31, 2019 and 2018 were reclassified to conform with the classification for the year ended December 31, 2020.

30.    Finance Income and Expenses

Finance income and expenses for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019     2018  
     (In millions of won)  

Finance income:

       

Interest income

   27,872        30,062       62,478  

Dividend income

     1,325        429       2,136  

Foreign exchange differences1

     1,527,580        1,143,099       1,386,287  

Gain on valuation of short-term investment assets

     2,592        5,811       16,740  

Gain on valuation of long-term investment assets

     1,741,026        8,237       182,461  

Gain on disposal of short-term investment assets

     27,510        58,784       36,349  

Gain on disposal of short-term investment assets

            1,218       5,504  
  

 

 

    

 

 

   

 

 

 
     3,327,905        1,247,640       1,691,955  
  

 

 

    

 

 

   

 

 

 

Finance expenses:

       

Interest expenses

     253,468        245,440       94,635  

Foreign exchange differences2

     1,717,989        1,043,720       1,046,217  

Loss on disposal of long-term investment assets

            786        

Loss on valuation of long-term investment assets

     7,273        241,471       1,282  

Loss on valuation of financial liabilities

     1,681               
  

 

 

    

 

 

   

 

 

 
     1,980,411        1,531,417       1,142,134  
  

 

 

    

 

 

   

 

 

 

Net finance income (expense)

   1,347,494        (283,777     549,821  
  

 

 

    

 

 

   

 

 

 

 

1

Gain on foreign currency translation related to fair value of long-term investment assets amounting to ₩40 million is included for the years ended December 31, 2020 (2019: ₩212,450 million and 2018: 87,546), respectively.

 

2

Loss on foreign currency translation related to fair value of long-term investment assets amounting to ₩44,185 million is included for the years ended December 31, 2020 (2019: ₩1,931 million and 2018: ₩300), respectively.

31.    Other Income and Expenses

(1) Other income for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Gain on disposal of property, plant and equipment

   38,585        26,158        39,403  

Others

     46,188        62,021        73,407  
  

 

 

    

 

 

    

 

 

 
   84,773        88,179        112,810  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

31.    Other Income and Expenses,  continued

 

(2) Other expenses for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Loss on disposal of property, plant and equipment

   44,955        11,531        59,738  

Loss on disposal of intangible assets

     4,841        7,668        5,545  

Loss on disposal of trade receivables

     6,320        8,564        9,031  

Loss on impairment of intangible assets

     16,544        71        4,483  

Donation

     70,461        59,522        62,041  

Others

     28,454        26,219        37,520  
  

 

 

    

 

 

    

 

 

 
   171,575        113,575        178,358  
  

 

 

    

 

 

    

 

 

 

32.    Income Tax Expense

(1) Income tax expense for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020     2019     2018  
     (In millions of won)  

Current tax:

      

Current tax on profits for the year

   1,113,166       603,692       5,728,798  

Adjustments for the current tax liabilities attributable to prior year, but recognized in current year

     (24,653     (85,520     (13,661
  

 

 

   

 

 

   

 

 

 
     1,088,513       518,172       5,715,137  
  

 

 

   

 

 

   

 

 

 

Deferred tax:

      

Changes in net deferred tax assets

     389,610       (94,611     85,909  
  

 

 

   

 

 

   

 

 

 

Income tax expense

   1,478,123       423,561       5,801,046  
  

 

 

   

 

 

   

 

 

 

(2) The relationship between tax expense and accounting profit for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020     2019     2018  
     (In millions of won)  

Profit before income tax

   6,237,037       2,432,639       21,341,030  

Tax calculated at domestic tax rates applicable to profits in the respective countries

     1,704,823       658,614       5,858,421  

Tax effects of:

      

Tax-exempt income

     (70,922     (36,618     (39,732

Non-deductible expenses

     19,977       11,694       10,008  

Changes in unrecognized deferred tax assets

     8,667       (93,041     88,614  

Tax credits

     (118,011     (102,755     (173,826

Adjustments for the current tax liabilities attributable to prior year, but recognized in current year

     (24,653     (85,520     (13,661

Others

     (41,758     71,187       71,222  
  

 

 

   

 

 

   

 

 

 

Income tax expense

   1,478,123       423,561       5,801,046  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

32.    Income Tax Expense,  continued

 

(3) Income taxes recognized directly in equity for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020     2019     2018  
     (In millions of won)  

Remeasurements of defined benefit liabilities

   169       34,132       29,182  

Gain on valuation of derivatives

     (680     (4,837      
  

 

 

   

 

 

   

 

 

 
   (511     29,295       29,182  
  

 

 

   

 

 

   

 

 

 

33.    Earnings per Share

Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders of the Parent Company by the weighted average number of outstanding ordinary shares for years ended December 31, 2020 and 2019.

(1) Basic earnings per share for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won, except for shares and per share
information)
 

Profit attributable to ordinary shareholders of the Parent Company

   4,755,102        2,005,975        15,540,111  

Weighted average number of outstanding ordinary shares1

     684,001,795        684,001,795        698,278,083  

Basic earnings per share (in won)

   6,952        2,933        22,255  

 

1 

Weighted average number of outstanding ordinary shares is calculated as follows:

 

     2020     2019     2018  
     (In shares)  

Outstanding ordinary shares

     728,002,365       728,002,365       728,002,365  

Acquisition of treasury shares

     (44,000,570     (44,000,570     (29,724,282
  

 

 

   

 

 

   

 

 

 

Weighted average number of outstanding ordinary shares

     684,001,795       684,001,795       698,278,083  
  

 

 

   

 

 

   

 

 

 

(2) Diluted earnings per share for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

    2020     2019     2018  
    (In millions of won, except for shares and per
share amounts)
 

Profit attributable to ordinary shareholders of the Parent Company

  4,755,102       2,005,975       15,540,111  

Weighted average number of diluted outstanding ordinary shares1

    684,139,222       684,089,944       698,364,251  

Diluted earnings per share (in won)

  6,950       2,932       22,252  

 

1 

Weighted average number of diluted ordinary shares outstanding is calculated as follows:

 

     2020      2019      2018  
     (In shares)  

Weighted average number of outstanding ordinary shares

     684,001,795        684,001,795        698,278,083  

Stock options

     137,427        88,149        86,168  
  

 

 

    

 

 

    

 

 

 

Weighted average number of diluted outstanding ordinary shares

     684,139,222        684,089,944        698,364,251  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

34.    Transactions with Related Parties and Others

(1) Details of related parties as of December 31, 2020 are as follows:

 

Type

  

Name of related parties

Associates

  

Stratio, Inc., SK China Company Limited, Gemini Partners Pte. Ltd., TCL Fund,

SK South East Asia Investment Pte. Ltd.,

Hushan Xinju (Chengdu) Venture Investment Center (Smartsource),

Prume Social Farm, Co., Ltd, Wuxi xinfa IC industry park., Ltd.,

Magnus Private Investment Co., Ltd.,

L&S (No.10) Early Stage III Investment Association,

SiFive Inc., YD-SK-KDB Social Value

Joint ventures

  

HITECH Semiconductor (Wuxi) Co., Ltd., Hystars Semiconductor (Wuxi) Co., Ltd.,

Specialized Investment-type Private Equity Investment Trust For Growth Of

Semiconductor, Specialized Investment-type Private Equity Investment Trust

For Win-win System Semiconductor

Other related parties

  

SK Telecom Co., Ltd., which has significant influence over the Group,

SK Holdings Co., Ltd., which has control over SK Telecom Co., Ltd., and their subsidiaries

(2) Significant transactions for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

   

For the year ended December 31, 2020

 
   

Company

  Operating
revenue and
others
    Operating
expense
and others
    Asset
acquisition
    Dividend
income
 
        (In millions of won)  

Associate

  SK China Company Limited   18       8,019              

Joint ventures

  HITECH Semiconductor (Wuxi) Co., Ltd.     4,766       543,575       21,780       15,033  
  Hystars Semiconductor (Wuxi) Co., Ltd.     168                    

Other related parties

  SK Telecom Co., Ltd.1     135,050       166,019       82,044        
  SK Holdings Co., Ltd.2     20,905       264,994       272,980        
  ESSENCORE Limited     675,915                    
  SK Engineering & Construction Co., Ltd.     42,814       8,507       1,375,083        
  SK Energy Co., Ltd.     50,035       72,386              
  SK Networks Co., Ltd.     6,638       9,434       526        
  SKC Solmics Co., Ltd.     623       93,862       178        
  Chungcheong energy service Co., Ltd.     118       24,335              
  SK Materials Co., Ltd.     4,349       95,007              
  SK Siltron Co., Ltd.     32,429       380,571              
  SK Airgas Co., Ltd.     13,220       75,990       110,858        
  Others     173,971       631,656       65,385        
   

 

 

   

 

 

   

 

 

   

 

 

 
    1,161,019       2,374,355       1,928,834       15,033  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Operating expense and others include dividend payments of ₩146,100 million.

 

2 

For the year ended December 31, 2020, royalty paid for the use of the SK brand amounted to ₩54,434 million.

 

G-89


Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

34.    Transactions with Related Parties and Others,  continued

 

   

2019

 
   

Company

  Operating
revenue and
others
    Operating
expense
and others
    Asset
acquisition
    Dividend
income
 
        (In millions of won)  

Associate

  SK China Company Limited   15       10,954              

Joint ventures

  HITECH Semiconductor (Wuxi) Co., Ltd.     4,362       656,911       1,616       14,458  
  Hystars Semiconductor (Wuxi) Co., Ltd.     238                    

Other related parties

  SK Telecom Co., Ltd.1     167,878       242,559       10,699        
  SK Holdings Co., Ltd.2     25,912       265,496       259,280        
  ESSENCORE Limited     708,497                    
  SK Engineering & Construction Co., Ltd.     60,886       1,249       1,851,230        
  SK Energy Co., Ltd.     62,220       73,717              
  SK Networks Co., Ltd.     12,704       12,698              
  SKC Solmics Co., Ltd.     676       82,814       1,067        
  Chungcheong energy service Co., Ltd.     215       27,215              
  SK Materials Co., Ltd.     4,118       79,000              
  SK Siltron Co., Ltd.     32,411       397,327              
  SK Airgas Co., Ltd.     106       72,675              
  Others     163,648       484,678       68,445        
   

 

 

   

 

 

   

 

 

   

 

 

 
    1,243,886       2,407,293       2,192,337       14,458  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Operating expense and others include dividend payments of ₩219,200 million.

 

2 

For the year ended December 31, 2019, royalty paid for the use of the SK brand amounted to ₩82,629 million.

 

   

2018

 
   

Company

  Operating
revenue and
others
    Operating
expense
and others
    Asset
acquisition
    Dividend
income
 
        (In millions of won)  

Associate

  SK China Company Limited         9,699              

Joint ventures

  HITECH Semiconductor (Wuxi) Co., Ltd.     3,442       621,986       1,901       13,120  
  Hystars Semiconductor (Wuxi) Co., Ltd.     162                    

Other related parties

  SK Telecom Co., Ltd.1     313       162,342       46,122        
  SK Holdings Co., Ltd.2     1,465       231,180       539,447        
  ESSENCORE Limited     917,320                    
  SK Engineering & Construction Co., Ltd.     4,038       25,882       2,484,366        
  SK Energy Co., Ltd.     4,040       71,059              
  SK Networks Co., Ltd.           7,190       10,600        
  SKC Solmics Co., Ltd.           21,724       1,439        
  Chungcheong energy service Co., Ltd.           19,112       203        
  SK Materials Co., Ltd.           68,957              
  SK Siltron Co., Ltd.     4,392       338,741              
  SK Airgas Co., Ltd.     2       37,610       259        
  Others     459       321,325       68,205        

Other

  HAPPYNARAE Co., Ltd.3     39       576,043       68,630        
   

 

 

   

 

 

   

 

 

   

 

 

 
    935,672       2,512,850       3,221,172       13,120  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Operating expense and others include dividend payments of ₩146,100 million.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

34.    Transactions with Related Parties and Others,  continued

 

2 

For the year ended December 31, 2018, royalty paid for the use of the SK brand amounted to ₩61,955 million.

 

3 

The amounts represent the transactions prior to the date of acquisition of HAPPYNARAE Co., Ltd.

The above related party transactions include transactions executed based on agreements executed in the course of the Group’s business activities such as purchase or contruction of property, plant and equipment, procurements of gas and raw materials, and system developments and maintenance services.

(3) The balances of significant transactions as of December 31, 2020 and 2019 are as follows:

 

   

2020

 
   

Company

  Trade
receivables
and others
    Other
payables
and others
 
        (In millions of won)  

Associate

  SK China Company Limited   7       8,771  

Joint ventures

  HITECH Semiconductor (Wuxi) Co., Ltd.     198       417,730  
  Hystars Semiconductor (Wuxi) Co., Ltd.     7        

Other related parties

  SK Telecom Co., Ltd.     10,747       7,920  
  SK Holdings Co., Ltd.     1,757       176,752  
  ESSENCORE Limited     55,500        
  SK Engineering & Construction Co., Ltd.     3,397       592,630  
  SK Energy Co., Ltd.     1,204       22,328  
  SK Networks Co., Ltd.     289       1,712  
  SKC solmics Co., Ltd.     74       24,128  
  Chungcheong energy service Co., Ltd.     69       3,295  
  SK Materials Co., Ltd.     411       10,130  
  SK Siltron Co., Ltd.1     44,847       36,792  
  SK Airgas Co., Ltd.     12       390,967  
  Others     31,324       124,499  
   

 

 

   

 

 

 
    149,843       1,817,654  
   

 

 

   

 

 

 

 

1

Trade receivable and others include ₩42,432 million advance paid for the purchase of wafers (See note 35-(9)).

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

34.    Transactions with Related Parties and Others,  continued

 

   

2019

 
   

Company

  Trade
receivables
and others
    Other
payables
and others
 
        (In millions of won)  

Associate

  SK China Company Limited   1       10,883  

Joint ventures

  HITECH Semiconductor (Wuxi) Co., Ltd.     357       799,545  
 

Hystars Semiconductor (Wuxi) Co., Ltd.

           
Other related parties  

SK Telecom Co., Ltd.

    9,334       7,342  
 

SK Holdings Co., Ltd.

    3,668       151,940  
 

ESSENCORE Limited

    37,823        
  SK Engineering & Construction Co., Ltd.     6,012       855,621  
  SK Energy Co., Ltd.     3,207       24,203  
  SK Networks Co., Ltd.     897       7,243  
  SKC solmics Co., Ltd.     55       17,463  
  Chungcheong energy service Co., Ltd.     13       3,599  
  SK Materials Co., Ltd.     360       7,681  
  SK Siltron Co., Ltd.1     99,203       36,395  
  SK Airgas Co., Ltd.     43       277,059  
  Others     20,486       102,535  
   

 

 

   

 

 

 
    181,459       2,301,509  
   

 

 

   

 

 

 

 

1

Trade receivable and others include ₩96,216 million advance paid for the purchase of wafers (See note 35-(9)).

(4) Key management compensation

The Group considers registered directors who have authority and responsibility for planning, directing and controlling the activities of the Group as key management. The compensation paid to key management for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

Details

   2020      2019      2018  
     (In millions of won)  

Salaries

   5,006        3,849        2,999  

Defined benefit plan related expenses

     545        406        351  

Share-based payment

     1,156        954        51  
  

 

 

    

 

 

    

 

 

 
   6,707        5,209        3,401  
  

 

 

    

 

 

    

 

 

 

(5) The right-of-use assets and lease liabilities recognized regarding the lease agreements entered with the Joint venture, HITECH Semiconductor (Wuxi) Co., Ltd, for the year ended December 31, 2020 amount to ₩17,051 million and ₩17,051 million, respectively, and lease payments to the related parties amount to ₩90,627 million for the year ended December 31, 2020. The right-of-use assets and lease liabilities recognized regarding the lease agreements entered with SK Air Gas Co., and other related parties for the year ended December 31, 2020 amount to ₩132,080 million and ₩132,080 million, respectively, and lease payments to the related parties amount to ₩41,593 million for the year ended December 31, 2020.

(6) The Group provides payment guarantee amounting to RMB 702 million for Hystars Semiconductor (Wuxi) Co., Ltd., a joint venture of the Group. (See note 35-(7))

(7) The establishment of the subsidiary is explained in Note 1, and the acquisitions and additional investments of associates and joint ventures are explained in Note 11.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

35.    Commitments and Contingencies

(1)     Significant pending litigations and claims of the Group as of December 31, 2020 are as follows:

(a)     Lawsuit from Netlist, Inc. (“Netlist”)

Netlist filed a lawsuit against the Parent Company and its subsidiaries including SK hynix America Inc. and SK hynix memory solutions America Inc. alleging infringement of multiple patents to the U.S. International Trade Commission (“U.S. ITC”), on September 1, 2016 and on October 31, 2017.

The lawsuit filed to the U.S. ITC on September 1, 2016 was provisionally concluded on January 16, 2018 that the Parent Company and its subsidiaries, SK hynix America Inc. and SK hynix memory solutions America Inc., did not infringe the patents of Netlist. Netlist filed an appeal against the conclusion; however, the U.S. Federal Court of Appeals rejected the petition on December 12, 2019; accordingly, it is finally concluded that the Parent Company and its subsidiaries, SK hynix America Inc. and SK hynix memory solutions America Inc. did not infringe the patents.

Regarding the patent infringement case that was filed on October 31, 2017, the U.S. ITC determined that the Group and its subsidiaries, SK Hynix America Inc. and SK Hynix memory solutions America Inc. did not infringe the patents of Netlist on April 7, 2020. Netlist filed for an appeal on April 29, 2020 and withdrew the appeal on June 23, 2020; accordingly, it is finally concluded that the Parent Company and its subsidiaries, SK hynix America Inc. and SK hynix memory solutions America Inc. did not infringe the patents.

In addition, Netlist filed lawsuits against the Parent Company and its subsidiaries, SK hynix America Inc. and SK hynix memory solutions America Inc., with the U.S. District Court for the Central District of California on August 31, 2016 and June 14, 2017, and filed a lawsuit against the Parent Company and its subsidiary, SK hynix America Inc., with the U.S. District Court for the Western District of Texas on March 17, 2020 and June 15, 2020 for infringement of U.S. patent of Netlist. Subsequent to December 31, 2020, Netlist and the Group jointly moved to dismiss the lawsuits on April 20, 2021 and the process is currently ongoing.

(b)     Price-fixing class-action lawsuits in North America

On April 27, 2018, a class action lawsuit against the Parent Company and its subsidiary, SK hynix America Inc., for price fixing by major DRAM companies (period from June 1, 2016 to February 1, 2018) was filed with the U.S. District Court for the Northern District of California. Similar class action lawsuits have been filed with the U.S. District Court for the Northern District of California, the Supreme Court of British Columbia, the Quebec District Court, the Ontario Federal and District Court and the Israel Court. In December 2020, the U.S. District Court in Northern California ruled against all lawsuits filed by plaintiffs, but due to the possibility of plaintiffs’ disobedience, the Group cannot predict the outcome of these lawsuits as of December 31, 2020.

(c)     The antitrust investigation in China

The State Administration for Market Regulation of China initiated to investigate the violation of the antitrust law regarding on primary DRAM businesses’ sales in China in May 2018, and the investigation has been started. The pending case currently is under investigation. As of December 31, 2020, the Group cannot predict the outcome of these investigation.

(d)     Other patent infringement claims and litigation

In addition to the above litigations, the Group has responded to various disputes related to intellectual property rights and recognizes liabilities when it represents a present obligation as a result of past event and it is probable that an outflow of resources will arise and a loss can be reliably estimated.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

35.    Commitments and Contingencies,  continued

 

(2)     Technology and patent license agreements

The Group has entered into a number of patent license agreements with several companies. The related royalties are paid on a lump-sum or running basis in accordance with the respective agreements. The lump-sum royalty payables are recognized as intangible assets, and the amount is amortized on a straight-line basis for the patent license agreement period and recognized as amortization expense.

(3)    Contract for supply of industrial water

The Group has entered into a renewal contract with Veolia Water Industrial Development Co., Ltd. (“Veolia”) under which the Group purchases industrial water from Veolia during the period of June 2018 through May 2023. According to the contract, the Group is obligated to pay base service charges, which are predetermined and additional service charges which are variable according to the amount of water used.

(4)    Back-end process service contract with HITECH Semiconductor (Wuxi) Co., Ltd. (“HITECH”)

The Group has entered into an agreement with HITECH to be provided with post-process service by HITECH. The conditions of the service provided includes package, package test, modules and others. According to the agreement, the Group is liable to guarantee a certain level of margin to HITECH as the Group has priority to use HITECH’s equipment.

(5)    Assets provided as collateral

Details of assets provided as collateral as of December 31, 2020 are as follows:

 

     Book value      Pledged amount  

Category

   Currency      Amount      Currency    Amount
in USD
     Amount
in KRW
     Remark  
     (In millions of won and millions of foreign currencies)  

Land and buildings

     KRW        55,526      USD      54        58,422       

Borrowings for
equipment and
others
 
 
 
         KRW             5,854  

Machinery

     KRW        5,115,322      USD      7,328        7,973,377  
         KRW             1,020,000     
     

 

 

       

 

 

    

 

 

    
         USD      7,382        8,031,799     
     KRW        5,170,848      KRW             1,025,854     
     

 

 

       

 

 

    

 

 

    

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

35.    Commitments and Contingencies,  continued

 

(6)    Financing agreements

Details of credit lines with financial institutions as of December 31, 2020 are as follows:

 

    Financial
Institution
 

Commitment

  Currency   Amount  
            (In millions of won and
millions of foreign currencies)
 

The Parent Company

  Hana Bank
and others
  Import finance including usance   USD     465  
  Comprehensive limit contract for import and export including usance   USD     1,010  
   

Overdrafts with banks

  KRW     20,000  
   

Accounts receivable factoring contracts which have no right to recourse

  KRW     140,000  

SK hynix Semiconductor (China) Ltd.

  Agricultural
Bank of China
and others
  Import finance including usance   RMB

USD

   

2,450

490

 

 

SK hynix America Inc. and other sales entities

  Citibank and
others
 

Accounts receivable factoring contracts which have no right to recourse

  USD     757  

Domestic subsidiaries

  Hana Bank
and others
  Import finance including usance   USD     45  
   

Loans

  KRW     20,000  

(7)    Details of guarantees provided to others as of December 31, 2020 are as follows:

 

     Currency    Amount     

Remark

     (In millions of U.S. dollars)

Taiwan Semiconductor Manufacturing Company, Limited.1

   USD      80      Guarantees for supply agreement

Wuxi Xinfa Group Co., Ltd.2

   RMB      701      Guarantees for borrowing

 

1

The Group received a deposit of ₩1,000 million as collateral from ADTechnology Inc. regarding payment guarantee for Taiwan Semiconductor Manufacturing Company, Limited.

 

2

The Group provides payment guarantee to Wuxi Xinfa Group Co., Ltd. for borrowings and accrued interests of Hystars Semiconductor (Wuxi) Co., Ltd., a joint venture of the Group.

(8)    Capital commitments

The Group’s commitments in relation to capital expenditures on property, plant and equipment as of December 31, 2020 are ₩3,404,386 million (as of December 31, 2019: ₩232,387 million).

(9)    Long-term purchase agreement for raw materials

The Group has entered into a procurement agreement with SK Siltron Co., Ltd. from 2019 to 2023 for a stable supply of wafer with an advanced payment of ₩150,000 million made in 2017. The advanced payment used in connection with the purchase of wafer during the current period is ₩53,784 million, and the balance of the advance payment as of December 31, 2020, is ₩42,432 million. Meanwhile, SK Siltron Co., Ltd. is providing a certain portion of its property, plant and equipment as collateral to secure the advanced payment.

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

35.    Commitments and Contingencies,  continued

 

(10)    Investment in KIOXIA Holdings Corporation (“KIOXIA”)

In regards to the Group’s interests in KIOXIA through its investments in BCPE Pangea Intermediate holdings Cayman, L.P. and BCPE Pangea Cayman2 Limited, equity shares in KIOXIA owned, directly or indirectly, by the Group are limited to a certain percentage during certain periods after the date of acquisition. In addition, during the same periods, the Group does not have the right in appointing KIOXIA’s directors and is unable to exercise significant influence over decision-making for KIOXIA’s operation and management.

(11)    Acquisition of the entire NAND business division of Intel Corporation

Pursuant to the resolution of Board of Directors on October 20, 2020, the Group decided to acquire the entire NAND business division of Intel Corporation excluding the Optane division of Non-Volatile Memory Solutions Group. The Group entered into a business transfer agreement with Intel Corporation on October 20, 2020. The entire business division is expected to be transferred in two separate processes through subsidiaries that will be newly established overseas, and payment will be made in two installments. Total consideration amount of US$ 9 billion will be paid with the first installment of US$ 7 billion by the end of 2021 and the second installment of US$ 2 billion by March 2025. The closing of the business transfer depends on the satisfaction of an agreed upon set of conditions that include regulatory approvals of governmental authorities and the agreed termination fee shall be paid when the contract is terminated under certain circumstances.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

36.    Statements of Cash Flows

(1) Reconciliations between profit for the year and net cash inflow from operating activities for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020     2019     2018  
     (In millions of won)  

Profit for the year

   4,758,914       2,009,078       15,539,984  

Adjustment

      

Income tax expense

     1,478,123       423,561       5,801,046  

Defined benefit plan related expenses

     251,552       220,999       179,503  

Depreciation of property, plant and equipment

     8,515,134       7,511,794       5,904,156  

Depreciation of investment property

     291       37       84  

Amortization

     960,550       795,169       524,095  

Depreciation of right-of-use assets

     296,218       313,415        

Share-based compensation expenses

     1,591       1,738       1,163  

Loss on disposal of property, plant and equipment

     44,955       11,531       59,738  

Loss on disposal of intangible assets

     4,841       7,668       5,545  

Loss on impairment of intangible assets

     16,544       71       4,483  

Loss on valuation of long-term investment asset

     7,273       241,471       1,282  

Impairment loss on associate investment

           1,695       1,695  

Loss on valuation of financial liabilities

     1,681              

Interest expense

     253,468       245,440       94,635  

Loss on foreign currency translation

     375,504       250,974       181,210  

Loss on disposal of trade receivables

     6,320       8,564       9,031  

Loss(gain) on equity method investments, net

     36,279       (24,328     (14,702

Gain on disposal of property, plant and equipment

     (38,585     (26,158     (39,403

Gain on disposal of intangible assets

     (122            

Gain on valuation of short-term investment assets

     (2,592     (5,811     (16,740

Gain on disposal of short-term investment assets

     (27,510     (58,784     (36,349

Gain on valuation of long-term investment assets

     (1,741,026     (8,237     (182,461

Gain on disposal of long-term investment assets

           (1,218     (5,504

Interest income

     (27,872     (30,062     (62,478

Gain on foreign currency translation

     (595,266     (263,012     (126,094

Others, net

     (9,646     99       (1,984

Changes in operating assets and liabilities

      

Decrease (increase) in trade receivables

     (935,346     2,214,776       (547,255

Decrease (increase) in loans and other receivables

     5,303       41,676       38,102  

Increase in inventories

     (843,842     (851,735     (1,782,384

Decrease (increase) in other assets

     47,350       114,792       (98,632

Increase (decrease) in trade payables

     222,036       (278,529     58,773  

Decrease in other payables

     (6,583     (16,623     (16,161

Increase (decrease) in other non-trade payables

     158,514       (645,164     542,437  

Increase (decrease) in provisions

     12,008       (42,787     (25,183

Increase in other liabilities

     46,961       17,605       118,986  

Payment of defined benefit liabilities

     (585     (4,120     (8,862

Contributions to plan assets

     (355,664     (279,751     (276,739
  

 

 

   

 

 

   

 

 

 

Cash generated from operating activities

   12,916,771       11,895,834       25,825,017  
  

 

 

   

 

 

   

 

 

 

 

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SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

36.    Statements of Cash Flows,  continued

 

(2) Details of significant transactions without inflows and outflows of cash for the years ended December 31, 2020, 2019 and 2018 are as follows:

 

     2020      2019      2018  
     (In millions of won)  

Increase in other payables related to acquisition of property, plant and equipment

     1,721,481        1,786,787        954,918  

Transfer of investment property to property, plant and equipment

            1,105        984  

Transfer of property, plant and equipment to investment property

     209,450                

(3) Changes in liabilities arising from financing activities for the years ended December 31, 2020 and 2019 are as follows:

 

     2020     2019  
     (In millions of won)  

Beginning balance

     12,190,505       5,281,937  

Adjustments on initial application of IFRS 161

           1,123,422  

Impacts of changes in accounting policies2

           435,423  
  

 

 

   

 

 

 

Beginning balance after adjustments

   12,190,505       6,840,782  

Cash flows from financing activities

    

Proceeds from borrowings

     5,173,016       9,833,882  

Repayments of borrowings

     (3,921,310     (4,585,425

Payments of lease liabilities

     (319,740     (390,501

Increase of lease liabilities

     293,855       367,687  

Foreign currency differences

     (557,923     100,129  

Present value discount (interest expense)

     43,885       34,508  

Interest paid

     (6,924     (10,557
  

 

 

   

 

 

 

Ending balance

   12,895,364       12,190,505  
  

 

 

   

 

 

 

 

1

Lease liabilities are recognized upon adoption of IFRS 16 as of January 1, 2019.

 

2

Lease liabilities are adjusted considering the enforceable period of lease contracts upon adoption of IFRS 16 interpretation.

 

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Table of Contents

SK HYNIX, INC. and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2020, 2019 and 2018

 

37.    Share-based payment

(1) The Parent Company accounts granted equity-settled share options to the Parent Company’s key management during the year ended December 31, 2020 and the details of share options as of December 31, 2020 are as follows:

 

     Total numbers of share
option granted
     Exercised      Forfeited or Cancelled      Outstanding at
December 31, 2020
 
     (In shares)  

1st

     99,600                      99,600  

2nd

     99,600                      99,600  

3rd

     99,600                      99,600  

4th

     7,747                      7,747  

5th

     7,223                      7,223  

6th

     8,171               8,171         

7th

     61,487                      61,487  

8th

     61,487                      61,487  

9th

     61,487                      61,487  

10th

     54,020                      54,020  

11th

     6,397                      6,397  
  

 

 

    

 

 

    

 

 

    

 

 

 
     566,819               8,171        558,648  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

    Grant date   Service Period for Vesting     Exercisable Period     Exercise
price
(in Korean
Won)
 

1st

  March 24, 2017     March 24, 2017—March 24, 2019       March 25, 2019—March 24, 2022     48,400  

2nd

  March 24, 2017     March 24, 2017—March 24, 2020       March 25, 2020—March 24, 2023       52,280  

3rd

  March 24, 2017     March 24, 2017—March 24, 2021       March 25, 2021—March 24, 2024       56,460  

4th

  January 1, 2018     January 1, 2018—December 31, 2019       January 1, 2020—December 31, 2022       77,440  

5th

  March 28, 2018     March 28, 2018—March 28, 2020       March 29, 2020—March 28, 2023       83,060  

6th

  Feb 28, 2019     February 28, 2019—February 28, 2021       March 1, 2021—February 29, 2024       73,430  

7th

  March 22, 2019     March 22, 2019—March 22, 2021       March 23, 2021—March 22, 2024       71,560  

8th

  March 22, 2019     March 22, 2019—March 22, 2022       March 23, 2022—March 22, 2025       77,290  

9th

  March 22, 2019     March 22, 2019—March 22, 2023       March 23, 2023—March 22, 2026       83,470  

10th

  March 20, 2020     March 20, 2020—March 20, 2023       March 21, 2023—March 20, 2027       84,730  

11th

  March 20, 2020     March 20, 2020—March 20, 2023       March 21, 2023—March 20, 2027       84,730  

(2) Measurement of fair value

The compensation cost is calculated by applying a binomial option-pricing model in estimating the fair value of the option at grant date. The inputs used are as follows:

 

    1st     2nd     3rd     4th     5th     6th     7th     8th     9th     10th     11th  

Expected volatility

    23.23     23.23     23.23     22.50     25.30     25.60     26.17     26.17     26.17     26.15     26.15

Estimated fair value of share options (in Korean won)

  10,026       9,613       9,296       16,687       18,362       16,505       17,744       16,888       16,093       11,786       11,786  

Dividend yield ratio

    1.20     1.20     1.20     0.78     1.23     1.36     1.98     1.98     1.98     2.10     2.10

Risk free rate

    1.86     1.95     2.07     2.38     2.46     1.89     1.82     1.88     1.91     1.59     1.59

(3) The compensation expense for the year ended December 31, 2020 was ₩1,591 million (2019: ₩1,738 million and 2018: ₩1,163 million).

 

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