annual report of lotte shopping co., ltd. for the year ... · pdf fileannual report of lotte...

Annual Report of Lotte Shopping Co., Ltd.

for the year ended 31 December 2011

Table of Contents I. Overall Condition of Lotte Shopping ............................................................................................ 1

II. Business Description (Wholesale and Retail) .............................................................................. 17

III. Matters Regarding Financial Affairs ............................................................................................. 50

IV. Auditor’s Opinion .......................................................................................................................... 87

V. Management’s Discussion and Analysis ...................................................................................... 90

VI. Corporate Governance and Affiliated Companies ....................................................................... 95

VII. Shares .......................................................................................................................................... 125

VIII. Executives and Employees .......................................................................................................... 130

IX. Transaction Record with Interested Parties ................................................................................. 138

X. Other Relevant Matters ................................................................................................................ 140

XI. Summary Financial Statements ................................................................................................... 144

XII. Attached Statements .................................................................................................................... 165

XIII. The Principal Risks and Uncertainties Facing the Company ....................................................... 166

(EXHIBIT 99-1: CONSOLIDATED FINANCIAL STATEMENTS AS OF OR FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2011 AND 2010 AND INDEPENDENT AUDITORS’ REPORT)

(EXHIBIT 99-2: SEPARATE FINANCIAL STATEMENTS AS OF OR FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2011 AND 2010 AND INDEPENDENT AUDITORS’ REPORT)

1

I. Overall Condition of Lotte Shopping 1. Business Objective

A. Description of Major Consolidated Subsidiaries (Unit: million Won)

Subsidiaries Date of establishment (yyyy/mm/dd)

Address Main business

Total assets as of the end of fiscal year 2010

Legal basis for control

Lotte Card Co., Ltd. 2002.12.03 Lotte Insurance Company Building, 51-1, Namchang-dong, Jung-gu, Seoul, Korea

Card, Capital 5,845,505

Majority ownership of voting shares (Enforcement Decree of the Act on External Audit of Stock Companies Section 1027.13).

Lotte Shopping Holdings (Hongkong), Ltd.

2008.08.12

Room 1808, 18/F, Tower Ⅱ, Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong

Holding Company 1,348,240


Lotte Midopa Co., Ltd. 1964.08.31 713 Sanggye 2-dong, Nowon-gu, Seoul, Korea Distribution 987,626


Lotte Square Co., Ltd. 2010.04.22 1140 Jung-dong, Wonmi-gu, Bucheon-si, Gyeonggi-do, Korea

Distribution 707,748


Lotte Mart China Co., Ltd. and others 2007.03.15 4/F, No. 768, Yang Liu Qing

Rd., Shanghai Distribution 686,599


Korea Seven Co., Ltd. 1999.05.16 Bongcheon-dong, Gwanak-gu, Seoul, Korea Distribution 633,455


Woori Home Shopping & Television Co., Ltd. 2001.05.29

5-21, Yangpyeong-dong, Yeongdeungpo-gu, Seoul, Korea

TV Home Shopping 518,490


Buy the Way Co., Ltd. 1990.06.30 729-21 Bongcheon-dong, Gwanak-gu, Seoul, Korea Distribution 256,692


PT Lotte Shopping Indonesia 1989.10.19 Jl. Lingkar Luar Selatan kav.

6 Ciracas - Jakarta Distribution 204,618


2





eB Card Co., Ltd. 2009.10.19 4-4 Sunae-dong, Bundang-gu, Seongnam-si, Gyeonggi-do, Korea

Electronic banking business 149,668


LHBC Limited 2010.06.04 89 Nexus Way, Camana Bay, Grand Cayman KYI-9007, Cayman Islands

Holding Company 147,227


Lotte Shopping Holdings (Singapore), Ltd.

2008.08.08 19 Keppel Road #03-10 Jit Poh Building Singapore 089058

Holding Company 144,566


Lotte Mart Co., Ltd. 2008.06.02 No.12 Jiu Xian Qiao Road, Chaoyang District, Beijing Distribution 138,499


Lotte Vietnam Shopping Co., Ltd. 2006.10.29

469 Nguyen Huu Tho Q7 Phu Myhung Hcmc Viet Nam



PT Lotte Mart Indonesia 2009.09.28

Jalan Arteri Pondok Indah, Gandaria Selatan South Jakarta



Qingdao Lotte Mart Commercial Co., Ltd. 2007.12.28

Laoshan District Qingdao Cuozhan Wealth Center 2-215

Distribution 99,079


Lucky Pai Ltd. and others 2006.06.09

1379 East Yinggang Rd. Xujing, Qingpu District, Shanghai, 201702, China

TV Home Shopping 53,080


Lotte Boulangerie Co., Ltd. 2000.09.05

456-1 Gwangdeok-ri, Doan-myeon, Jeungpyeong-gun, Chungbuk, Korea

Bakery 49,911


Lotte Songdo Shopping Town Co., Ltd.

2011.03.23 Bench Building, 7-50 Songdo-dong, Yeonsu-gu, Incheon, Korea

Real estate development —


3





NCF Co., Ltd. 2003.03.05 1008-2, Daechi-dong, Gangnam-gu, Seoul, Korea

Apparel manufacturing 28,835


Liaoning Lotte Mart Co., Ltd. 2008.05.22

15F Tower C. Jiarun Plaza 161 Nanjin North Street Heping District Shenyang, China

Distribution 21,570


Lotte Business Management (Tianjn) Co., Ltd

2009.04.29 No. 137, Dongma Road, Nankai district Tianjin, (300090) China

Distribution 20,763


Gyeonggi Smartcard Co., Ltd. 2005.05.20 235-2, Guro 3-dong, Guro-

gu, Seoul, Korea Electronic banking business 11,658


Incheon Smartcard Co., Ltd. 2006.04.23 235-2, Guro 3-dong, Guro-

gu, Seoul, Korea Electronic banking business 9,516


Lotte Cinema Vietnam Co., Ltd. 2008.05.02

Floor 13th, Diamond Plaza, 34 Le Duan, District 1, Ho Chi Minh City, Vietnam

Film screening business 7,199


Lottemart Danang Co., Ltd. 2006.03.20

91 Nguyen, Tat than Haichau, Danang City, Vietnam

Distribution 5,761


Chungnam Smartcard Co., Ltd. 2008.05.06 Guro-gu, Guro 3-dong, 235-

2, Seoul, Korea Electronic banking business 2,383


Lotte Suwon Station Shopping Town Co., Ltd.

2005.03.15 Maesanro 1-ga, 57-105 Paldal-gu, Suwon, Gyeonggi-do, Korea

Real estate development 2,807


Lotte Mart Global Sourcing Center Co., Ltd.

2010.08.30 703A,7F,666Gubei Road, Changning District, Shanghai, China 200336

Distribution 753


4





Lotte Gimhae Development Co., Ltd. 2010.03.08

Gimhae Tourist Resort, Sinmun-ri, Jangyu-myeon, Gimhae-si, Gyeongsangnam-do, Korea

Service Company 515


Lotte Shopping India Pvt., Ltd. 2008.01.04

Upper Ground Floor, No.-4 Mercantile House 15, K. G. Marg New Delhi-110001

Distribution 11


Lotte Hotel & Retail Vietnam Pte. Ltd. 2011.01.17

19 Keppel Road HEX03-10 Jit Poh Building Singapore 089058

Holding company —


Jilin Lotte Mart Co., Ltd. 2011.04.02 No10, Jiefangxi Rd

Chuanying District, JiLin Distribution —


PT. Lotte Shopping Plaza Indonesia 2011.03.04

JL. Linkar Luar Selatan KAV. 5&6 KEL. Susukan KEC. Ciracas, Jakarta, Timur 13750

Distribution —


Lotte Department Store (Shenyang) Co., Ltd.

2011.05.11 HuangHe South Road 105, Huanggu Dist, Shenyang, Liaoning Province, China

Distribution —


Lotte International Department Store(Weihai) Co., Ltd.

2011.06.10 43-6, Heping Road, Weihai, Shandong province, China Distribution —


Lotte Datviet Homeshoppin g Co., Ltd.

2011.11.01 3F LOTTE MART, 469 Nguyen Huu Tho ST Dist 7, Ho Chi Minh City, Vietnam

TV Home Shopping —


Lottemart C&C India Pvt., Ltd. 2011.12.02

503 B, Sigma building, Hiranandani gardens, Powai, Mumbai 400076

Distribution —


The 2nd Supreme SPC 2010.02.22 39 Da-dong, Jung-gu, Seoul, Korea

Special purpose company

228,666


5





The 4th Sprint SPC 2009.05.11 9-1 Namdaemunno 2-ga, Jung-gu, Seoul, Korea


200,386


The 3rd Supreme SPC 2010.12.06 39 Da-dong, Jung-gu, Seoul, Korea


—


The 4th Supreme SPC 2011.10.04 39 Da-dong, Jung-gu, Seoul, Korea


—


* Financial information for fiscal year 2010 is based on Korean GAAP. B. Legal / commercial name of the company: Lotte Shopping Co., Ltd. (the “Company”) C. Date of establishment The Company was incorporated in July 1970 as a corporation engaged in the general distribution business, including department store, discount store and supermarket businesses.

Year. Month Changes

1970.07

1979.11

Founded as Hyeobwoo Industry Co., Ltd.

Changed company name from Hyeobwoo Industry Co., Ltd. to Lotte Shopping Co.,

Ltd.

D. Address, telephone and homepage Address: 1 Sogong-dong, Jung-gu, Seoul Tel: 82-2-771-2500 Homepage: http://www.lotteshopping.com E. Legislation and regulations related to the distribution industry Legislation and regulations related to the distribution industry are as follows.

(a) The Distribution Industry Development Act

The Company should abide by provisions in the Act when opening and operating large stores, including department stores and large marts.

(b) The Monopoly Regulation and Fair Trade Act

The Company should engage in fair and free competition in the market. The Act prohibits the Company from actions that could impede fair competition and imposes certain punishments for violations of the Act.

(c) The Act on the Promotion of Collaborative Cooperation between Large Enterprises and SMEs

The Company might receive recommendations for adjustment in its business activities if the Company’s

http://www.lotteshopping.com/�

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launch or expansion of businesses is considered to have or could potentially have significant adverse effects on the stable management of small and medium-sized enterprises.

(d) Other laws and regulations the Company is subject to include the Construction Act, Parking Lot Act, Urban Traffic Arrangement Promotion Act, Commercial Building Lease Protection Act, Manufactured Objects Liabilities Act and the Food Sanitation Act.

F. Main Business As of December 31, 2011, the Company operated 30 department stores (including six department stores operated pursuant to management agreements), five outlets, one Lotte Mall (Lotte Mall at Esiapolis, opened in April 2011), 95 discount stores, 350 supermarkets and 75 cinemas (including those operated by consignees) in Korea. The Company plans to open additional stores and is moving forward with its outlet, multiplex shopping mall (i.e., a shopping mall located in a suburban or a redevelopment area that has both leisure and shopping facilities), Category Killer (i.e., specialty stores), fashion brand and other businesses. With respect to overseas business activities, the Company opened its first overseas department store in Moscow, Russia, in September 2007. The Company opened its second and third overseas department stores in Beijing and Tianjin, China, in August 2008 and June 2011, respectively. As of December 31, 2011, with respect to its overseas discount store business, the Company operated 94 discount stores in China, two in Vietnam and 28 in Indonesia through separate corporate entities in each jurisdiction. The Company had 42 subsidiaries as of December 31, 2011, and the Company and its subsidiaries (on a consolidated basis, the “Group”) may be divided into the following segments: department store segment, discount store segment, finance (credit card service) segment and other segment.

G. Affiliates The Company has 78 affiliates.

a. Listed companies

Business category Affiliates Number of companies

Food Lotte Confectionary, Lotte Samkang, Lotte Chilsung Beverage 3 Petrochemical Honam Petrochemical, KP Chemical 2 Retail Lotte Shopping, Lotte Midopa 2 Finance / Insurance Lotte Insurance 1

Communications Hyundai Information Technology 1

b. Unlisted companies

Business category Affiliates Number of companies

Food / Pharmaceutical

Lotte Ham, Lotteria, Lotte Fresh Delica, Lotte Boulangerie, Wellga, CH Beverage, Lotte Wine Sales, KIRIN, Bliss, HUI, Chung-buk Soju, Cinema Food

12

Tourism / Leisure Lotte Hotel, Lotte Giants, Lotte Hotel Busan, Lotte Corporation, Lotte Cinema, D-Cinema Korea, Lotte JTB, Lotte Jeju Resort, Lotte Buyeo Resort, Universal Studios Korea Development, Lotte Gimhae Development

11

Retail Lotte International, Lotte Station Building, Lotte Logistics, Korea Seven, Lotte.com, Lotte Asahi Liquor, FRL Korea, Woori Home Shopping, Buy the Way, Lotte Square, Lotte Suwon Station Shopping Town, Lotte DF Global, AK Retail, S&S International, NCF, Lotte Songdo Shopping Town, Korea STL

17

Chemical Korea Fuji Film, Howtech, Sambark, Sambark LFT 4

7

Machinery / Electronics

Lotte Aluminium, Canon Korea Business Solutions 2

Construction Lotte Engineering & Construction, Lotte Asset Development 2 Advertising Daehong Communications, Mobizap Media, M.Hub 3 Communications Lotte Data Communication, Han Paysys 2 Financial Lotte Capital, Lotte Card, KI Bank, Mybi, Busan Hanaro Card, eB

Card, Gyeonggi Smartcard, Incheon Smartcard, Chungnam Smartcard 9

Petrochemicals Seetec, KP Chemtech, Daesan MMA, Honam Mitsui Chemicals 4 Energy Cheongna Energy 1 Real Estate Universal Studios Korea Resort Asset Management Corporation 1 Manufacturing DACC Aerospace 1

Changes that occurred from 1 October 2011 to 31 December 2011: - Added as affiliates: Korea STL, Natuur - Removed as affiliates: Lotte Pharm., Sanjung Beverage, Changdae Trading, Lotte Liquor BG, Pasteur Milk, Natuur, Hyunjung RNS

H. Credit Rating The Group does not receive credit evaluation from credit rating agencies. The below ratings are the results of credit evaluations of the Company.

a. Domestic Credit Rating

Date Securities subject to rating Credit rating Rating agency Type

2011.12 Commercial paper A1 NICE Investors Service Regular rating

2011.12 Commercial paper A1 Korea Investors Service Regular rating

2011.06 Commercial paper A1 NICE Investors Service Primary rating

2011.06 Corporate bonds AA+ NICE Investors Service Regular rating

2011.06 Corporate bonds AA+ Korea Investors Service Regular rating

2011.06 Commercial paper A1 Korea Investors Service Primary rating

2011.06 Corporate bonds AA+ Korea Ratings Regular rating

2011.03 Corporate bonds AA+ Korea Investors Service Primary rating

2011.03 Corporate bonds AA+ NICE Investors Service Primary rating

2010.12 Commercial paper A1 Korea Ratings Regular rating


2010.09 Commercial paper A1 NICE Investors Service Regular rating



2010.05 Commercial paper A1 Korea Ratings Primary rating

2010.05 Corporate bonds AA+ Korea Ratings Regular rating

8

Date Securities subject to rating Credit rating Rating agency Type

2010.05 Commercial paper A1 NICE Investors Service Primary rating





2010.05 Corporate bonds AA+ NICE Investors Service Regular rating





2009.09 Commercial paper A1 Korea Ratings Regular rating




2009.06 Commercial paper A1 Korea Ratings Primary rating



b. Overseas Credit Rating

Date

Securities subject to rating Credit rating

Rating agency

(range of rating) Type

2011.03 Corporate bonds A3 (stable) Moody's

(Aaa~C)

Annual Rating

2011.03 Corporate bonds A- (stable) Fitch

(AAA~D)

Annual Rating


(AAA~D)

Annual Rating


(Aaa~C)

Annual Rating

9

Date

Securities subject to rating Credit rating

Rating agency

(range of rating) Type


(AAA~D)

Annual Rating


(Aaa~C)

Annual Rating

2. Company background

Division Major Subsidiaries Company History

Department

stores

Lotte Shopping (department

store)

1970.07 Establishment of Hyeobwoo Industry Co., Ltd.

1979.01 Relocation of headquarters to #1, Sogong-dong, Jung-gu,

Seoul

1979.11 Name change to Hyeobwoo Industries Co., Ltd. changed

to Lotte Shopping Co., Ltd.

2006.02 Listed on the stock exchange

2010.02 Acquisition of GS Retail Department Store (3 shops)

Lotte Midopa 1964.08 Trade Hall Co., Ltd. established

1975.12 Listed on the stock exchange

2002.10 Becomes a Lotte Group affiliate

Lotte Square 2010.04 Department store business transferred from GS Square

Discount

store

Lotte Shopping (discount

store)

1998. Gangbyeon Store No. 1 opened

2008.05 Acquisition of China Makro (8 discount stores)

2008.11 Acquisition of Indonesia Makro (19 discount stores)

2009.12 Acquisition of Times Ltd. in China (57 discount stores, 11

supermarkets)

2010.05 Acquisition of 14 discount stores from GS Retail

Lotte Vietnam Shopping Co.,

Ltd.

2007. Commencement of construction for Vietnam Hochiminh No.

1 Store

2008.12 Opening of Vietnam No. 1 South Saigon Store

2009. Commencement of construction for Vietnam Hochiminh No.

2 Store

2010.07 Opening of Vietnam No. 2 Store Phutho Store

Qingdao Lotte Mart 2007.12 Establishment of corporation in Qingdao, China

10


Commercial Co., Ltd.

Lotte Mart Co., Ltd. 2008.06 Acquisition of eight Makro stores in China

37 companies in addition to

Lotte Mart China Co., Ltd.

2009.12 Acquisition of 68 stores from Times Ltd. in China

PT Lotte Shopping Indonesia 2008.11 Acquisition of 19 stores from Makro in Indonesia

PT Lotte Mart Indonesia 2009. Retail corporation established

2010.08 Opening of Gandaria City Store

2010.10 Opening of Ratu Plaza Store

2010.11 Opening of Bandung Festival City Store

2011.06 Opening of Panakkukang Store

Finance EB Card 2009.10 Establishment of EB Card Corporation

2010.08 Acquisition of 100% shares of three SPC companies

(Gyeonggi Smart Card Co., Ltd., Incheon Smart Card Co., Ltd.,

Chungnam Smart Card Co., Ltd.)

2010.09 Acquired by Lotte Group (95% by Lotte Card, 5% by Lotte

Information & Communication)

2010.10 Registration for electronic finance business

2010.12 Cashbee prepaid card launched

Lotte Card 2002.09 Signing of acquisition agreement with Dongyang Card by

Lotte Group

2002.12 Lotte Group enters a business alliance agreement with

American Express

2002.12 Establishment of Lotte Card Co., Ltd.

2003.11 Launching of Lotte Card

2003.12 Lotte Department Card Operations acquired from Lotte

Shopping Co., Ltd. after its spin-off

2010.01 Head office transferred to Lotte Insurance Building in

11


Namchang-dong

Others Lotte Shopping

(Supermarket)

2004.03 Acquisition of chain stores from Hanwha Distribution Co.,

Ltd. (25 supermarkets, one distribution center)

2007.05 Acquisition of Big Mart Co., Ltd. (14 supermarkets, one

site)

2007.10 Acquisition Nice Mart (five supermarkets)

Lotte Shopping (Cinema) 1999.10 Opening of Ilsan workplace

2008.12 Opening of Southern Saigon Center (No. 3 Store)

2009.05 Acquisition of ‘DMC’ management rights

2010.11 Establishment of Shenyang SL Cinema Investment

Management Co., Ltd. (China)

2010.12 Opening of Lotte & NN Cinema (Shenyang, China)

2011.05 Opening of Hebei Xingle Cinema (Wuhan, China)

2011.09 Opening of Yinxing Lotte Cinema (Wuhan, China)

Woori Home Shopping 2001.05 Company established

2007.01 Acquired by Lotte Shopping (becomes Lotte Group

affiliate in 2007.02)

2007.05 TV home shopping channel name changed (Woori Home

Shopping → Lotte Home Shopping)

2007.05 Re-approval for broadcasting channel business (second

re-approval)

2008.04 Catalog business launched

2008.11 Distribution center transferred (Gyeonggi Namyangju →

Gyeonggi Gunpo)

2010.02 Transfer of headquarters (Mok-dong, Yangcheon-gu,

Seoul → Yangpyeong-dong, Yeongdeungpo-gu, Seoul)

2010.05 Re-approval for broadcasting channel business (third re-

approval)

2010.08 Acquisition of China Lucky Pai Home Shopping

12


Korea Seven 1988.05 Establishment of Korea Seven Co., Ltd.

1988.07 Execution of Technology Sharing Agreement with

SouthLand Co. (currently 7-Eleven Inc.)

1994.08 Acquired by Lotte Shopping (Department Store CVS

Business Dept.)

1997.06 Merged into Lotteria, renamed “Lotteria Convenience

Store Business Dept.”

1999.04 Split from Lotteria and established as Korea Seven Co.,

Ltd.

2010.01 Agreement to acquire Buy The Way

Buy The Way 2010.04 Merged into Korea Seven

2010.07 Reached over 1,600 stores

Lotte Boulangerie 2000.09 Corporation established

2001.04 Agreement for Technology Sharing (with Japan

Shikishima Bakery)

2006.08 Opening and operation of new factory

2007.07 Commenced supplying Tous les jours bread

2007.09 Received HACCP certification for factories

2010.07 Commenced supplying to Mini Stop convenience stores

2011.01 Cheonho Road Shop opened

Lotte Songdo Shopping Town 2011.03 Lotte Songdo Shopping Town Co., Ltd. established

2011.06 Capital increase

2011.07.01 Purchased of site at Songdo-dong, Yeonsu-gu,

Incheon

Lotte Shopping Holdings

(Singapore), Ltd.

2008.08 Corporation established

2008.10 Indonesia mart wholesale entity established

2009.09 Indonesia mart retail entity established

2011.03 Equity investment to Indonesia department store entity

and others

13



(Hong Kong), Ltd.

2008.08 Corporation established

2009.12 Acquisition of Times

2008.12 Department store’s Tianjin entity established

2011.04 Mart’s Jilin entity established

2011.05 Department store’s Shenyang entity established

2011.06 Department store’s Weihai entity established

LHSC Limited 2010.06 Establishment

2010.07 Acquisition of China Home Shopping Lucky Pai

16 companies including Lucky

Pai Limited

2010.07 Acquired by LHSC Limited

A. Changes in location of headquarters

- January 1979: Relocation of headquarters to 1 Sogong-dong, Jung-gu, Seoul

B. Changes in management

Rank Name Expiration of Current Term

Representative Director Shin, Gyukho March 2013

Representative Director Shin, Dongbin March 2014

Representative Director Lee, Inwon March 2014

Representative Director Hun, Sin March 2014

Standing Director Shin, Youngja March 2014

Outside director Ye, Jongsuk March 2013

Outside director Kim, Wonhei March 2014

Outside director Min, Sangkee March 2014

Outside director Kim, Taehyeon March 2014

Outside director Rhee, Howard Hongro March 2014

Outside director Kim, Seho March 2014

※ Summary of the appointment of the board of directors at the 42nd shareholders’ meeting held on March 23, 2012: - Appointment of standing directors: Shin, Dongbin, Lee, Inwon, Shin, Youngja, Sin, Hun - Appointment of outside directors: Kim, Seho, Rhee, Hongro, Min, Sangkee, Kim, Wonhei, Kim, Taehyeon

C. Acquisitions by the Company

14

(1) Acquisition of department stores and discount stores The Group entered into an agreement to acquire the department store and discount store businesses from GS Retail Co., Ltd. on February 9, 2010. On May 31, 2010, the department store business was acquired by a newly-established subsidiary of the Company, Lotte Square., Ltd, and the discount store business was acquired by the Company. (2) Acquisition of Lucky Pai Limited The Group obtained control of Lucky Pai Limited by acquiring 63.22% of its common stock on September 30, 2010. (3) Acquisition of eB Card Co., Ltd and its subsidiaries The Group obtained control of eB Card Co., Ltd. by acquiring 95% of its common stock for Won 35,508 million on July 27, 2010. In addition, as part of the acquisition, the Company also participated in capital increases by eB Card and acquired newly issued shares. On July 30, 2010, eB Card acquired 100% of Gyeonggi Smartcard Co., Ltd., Incheon Smartcard Co., Ltd., and Chungnam Smartcard Co., Ltd. for Won 52,155 million. Accordingly, the Company also obtained control of these three companies. (4) Acquisition of NCF Co., Ltd The Group acquired 94.5% controlling interest in NCF Co., Ltd. (a fashion company) on December 31, 2010. (5) Acquisition of Buy the Way Inc. The Group acquired 100% of Buy the Way Inc., a private company specializing in the convenience store business, on April 20, 2010. 3. Changes in Capital Stock

A. Changes in Capital Stock (As of December 31, 2011) (Unit: Won, shares)

Date of New Stock Issued Type of issue

Details of the Newly Issued Stock

Type Quantity Par Value per Share

Issued Value Remarks

February 8, 2006 Paid-in capital increase (public subscription)

Common stock 6,857,143 5,000 400,000 LSE listed (GDS)

February 9, 2006 Paid-in capital increase (public subscription)

Common stock 1,714,286 5,000 400,000 KRX listed

March 16, 2006 Paid-in capital increase (public subscription)

Common stock 471,945 5,000 400,000 LSE listed (GDS)

※ The Company’s Global Depositary Shares (“GDSs”) were issued at US$20.67 per GDS, at the ratio of one share of common stock to 20 shares of GDSs. (Applying an exchange rate of Won 967.8 per US$1.00).

B. Outstanding Convertible Bonds

(As of December 31, 2011) (Unit: Won, shares, %)

Type of issue

Date of issue

Date of expiry

Total face amount

Type of convertible stock

Conversion period

Conversion terms Outstanding bonds

Remarks

Rate Price Face amount

Shares upon conversion

First Overseas Convertible Bond

July 5, 2011

July 5, 2016

978,969,250,000

Common Stock

July 5, 2012 ~ June 24, 2016

100% 650,000

978,969,250,000 1,506,106 -

15

Total - - 978,969,250,000

Common Stock - 100% 650,0

00 978,969,250,000 1,506,106 -

※ The number of shares upon conversion was calculated by dividing the total principal amount by the conversion price, disregarding fractional shares.

※ Base on the exchange rate published by Seoul Money Brokerage Services, Ltd. for U.S. dollars and Japanese Yen against Korean Won as of June 15, 2011, the date when the relevant resolution of the Board of Directors was made (W1,083.50 = US$1.00 and W1,345.29 = ¥100)

※ In accordance with K-IFRS 1032, the number of shares and the amount to be issued in connection with the exercise of a conversion right on a convertible security must be fixed for the conversion right to be classified as an equity security. In the Company’s case, while the number of shares to be issued is fixed, the amount of principal to be paid upon maturity if the bonds remain unconverted will vary depending on the exchange rate. As such, the convertible bonds must be classified as a debt security, and the Company recognizes the bonds in its liability accounts, instead of in its equity account.

4. Total Number of Shares, etc. A. Total Number of Shares As of December 31, 2011, the total number of authorized shares was 60,000,000, the total number of issued shares was 29,788,844 and the total number of outstanding shares was 29,043,374. All shares were classified as common shares.

5. Voting Rights

(As of December 31, 2011) (Unit: shares) Type Number of Shares Remarks

Total Issued Shares (A) Common Stock 29,043,374 - Preferred Stock -

Shares without Voting Rights (B) Common Stock - - Preferred Stock -

Shares with Restricted Voting Rights under the Stock Exchange Act and Other Laws (C)

Common Stock - - Preferred Stock -

Shares with Reestablished Voting Rights (D)

Common Stock - Preferred Stock -

Shares with Exercisable Voting Rights (E = A – B – C + D)

Common Stock 29,043,374 - Preferred Stock - -

6. Dividends, Etc.

A. Dividends

(1) Dividends The annual dividend on shares of common stock must be proposed by the Board of Directors and approved at the shareholders’ meeting. The Company decides the dividend amount within the constraints of various factors, such as profitability and financial condition, and in compliance with legal requirements applicable to the issuance of dividends.

(2) Payment Basis of Dividend The dividend can be paid either in cash or stock, and the stock dividend cannot exceed total profits available before the dividend. In the event the dividend is paid in stock and there are at least two classes of stocks, a different class of stock could be issued for dividend payment pursuant to a resolution at the shareholders’ meeting. The dividend is payable to the registered shareholders or rights holders at the end of each fiscal period.

(3) Expiration of Rights to Claim a Dividend The right expires if not exercised within five years. After such expiration, the dividends shall belong to the

16

Company.

B. Dividends for the Past Three Years

Subject 42nd fiscal year 41st fiscal year 40th fiscal year

Par Value per Share (Won) 5,000 5,000 5,000 Net Profit (million Won) 742,937 1,010,144 716,422 Earnings per Share (Won) 25,580 34,781 24,667 Total Cash Dividend (million Won) 43,565 43,565 36,304 Total Stock Dividend (million Won) - - - Cash Dividend Payout Ratio (%) 5.86 4.31 5.07

Cash Dividend Yield (%)

Common Stock 0.45 0.32 0.36

Preferred Stock - - -

Stock Dividend Yield (%)

Common Stock - - -


Cash Dividend per Share (Won)

Common Stock 1,500 1,500 1,250


Stock Dividend per Share

Common Stock - - -


※ The financial information for the 42nd fiscal year was presented in accordance with separate financials prepared under K-IFRS and the financial information for the 41st and 40th fiscal years were presented in accordance with non-consolidated financials prepared under K-GAAP. ※ Calculation of earnings per share for the current year Division Current net profit for common stock Won 742,937 million

Weighted average number of common stock 29,043,374 shares

Earnings per share Won 25,580

17

II. Business Description (Wholesale and Retail) 1. Business Overview

The following table sets forth the Group’s main businesses and subsidiaries organized by business segment:

Business segment Subsidiaries Main businesses

Department store

Lotte Shopping (department store) Department store establishment, management and distribution businesses Lotte Midopa

Lotte Square Discount store Lotte Shopping (discount store) Large discount store establishment, management

and distribution businesses Lotte Vietnam Shopping Co., Ltd. Discount store business in Vietnam Qingdao Lotte Mart Commercial Co., Ltd. Discount store business in China Lotte Mart Co., Ltd. Lotte Mart China Co., Ltd. and 36 other entities PT Lotte Shopping Indonesia Discount store business in Indonesia PT Lotte Mart Indonesia

Finance Lotte Card Credit card business eB Card Co., Ltd. Electronic payment and transportation card system

(AFC system) business Other

Lotte Shopping (Supermarket) Supermarket establishment, management and distribution businesses

Lotte Shopping (Cinema) Producing, investing and distributing movies; management of cinemas

Woori Home Shopping & Television Co., Ltd.

TV home shopping, internet shopping and catalogue shopping businesses

Korea Seven Co., Ltd. Convenience store business Buy the Way Inc. Convenience store business Lotte Boulangerie Co., Ltd. In-store bakery and franchise businesses Lotte Songdo Shopping Town Co., Ltd. Development and management of Lotte Songdo

Shopping Town

Lotte Shopping Holdings (Singapore), Ltd.

Investing in retail businesses in Vietnam, India and Indonesia (six subsidiaries)

Lotte Shopping Holdings (Hongkong), Ltd.

Investing in retail businesses in China (nine subsidiaries)

LHSC Limited Investing in home shopping businesses in China

Lucky Pai Ltd. and 15 other entities Home shopping business in China

The following sets forth the Group’s selected financial information by business segment.

(Unit: million Won, %)

Business

segment Division

42nd fiscal year 41st fiscal year

Amount Percentage of

total Amount

Percentage of

total

Department Store Sales 7,921,005 35.6 7,175,152 37.7

Operating income 864,783 52.0 876,617 54.9

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Business

segment Division

42nd fiscal year 41st fiscal year

Amount Percentage of

total Amount

Percentage of

total

Total assets 15,848,109 48.0 14,227,127 48.8

Discount Store Sales 8,474,744 38.1 7,354,928 38.7


Total assets 9,315,146 28.2 8,647,977 29.7

Finance Sales 1,484,994 6.7 1,314,778 6.9


Total assets 7,655,660 23.2 6,670,129 22.9

Other Sales 4,372,345 19.6 3,172,886 16.7


Total assets 185,726 0.6 -418,213 -1.4

Total Sales 22,253,088 100.0 19,017,744 100.0

Operating income 1,662,900 100.0 1,597,734 100.0

Total assets 33,004,641 100.0 29,127,020 100.0

※ Total refers to the amount after consolidation adjustment. A. Market Status (1) Department Store (A) Characteristics of Industry

According to the definition stipulated in the Retail Industry Promotion Act enacted in 1997, a department store is a directly operated or rented shop with a retail area (excluding areas used to provide services) of over 3,000 m2 with modern sales and consumer facilities that aid consumers in purchasing various products. Unlike other retail enterprises, a department store features a rich variety of products such as clothing, general merchandise, home appliance, furniture, jewelry, and food, offering a variety of services at one location. In addition, it is a big part of urban living and leads in consumer lifestyle by offering a variety of events, such as cultural classes, and service facilities, such as cultural centers, restaurants and cinemas. Recently, department stores have changed their operating strategy by engaging in direct purchasing and setting up multi-shops and developing complex shopping malls, such as lifestyle malls, to increase their competitiveness and emphasize differentiation from their competitors and other distributors.

① Process Industry

An opening of a new department store is traditionally preceded by a commercial power analyses, a location search, and the design and construction of shop floors. In general, building a large department store requires approximately Won 270 billion, and a regional department store requires approximately Won 180 billion. It requires significant funding to secure the underlying real estate and to complete construction. Such heavy initial investment requirements act as the market driving force for early participants while lowering the investment efficiency for latecomers. Furthermore, it can also be a considerable entry barrier for new entrants.

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② Economies of Scale

As the department store industry depends heavily on location, it is beneficial to open multiple premises to reduce operational risk in response to variables such as economies of scale and new store openings of competitors. Once a certain number of stores is in operation, buying power is strengthened to stabilize costs, and various expenses such as those for labor, advertising and general administration, can be reduced through integrated management and marketing.

③ Location-Oriented Industry

Since a department store is a shop floor-based retail channel in which customers visit the premise to carry out purchasing activities, the location of a store is of great importance. Therefore, before a new department store is opened, the size and composition of the local population, income levels, consumption inclinations and transportation conditions are reviewed to evaluate the commercial attractiveness of the site.

Such characteristics of the retail industry mean that the location of the competitor, size of the shop floor, concept, merchandise composition, Visual Merchandising (VMD), interior, marketing, services, capital, sales know-how, convenient facilities and sales strategies have great impact on the operations of a department store. A new store opening by a competitor may increase sales as it heightens customer concentration, but it may also have an adverse effect as it may cause customers to move to other competing stores.

④ Cash Industry

Most customers use both cash and credit cards for their purchases. Card-based sales are usually settled within two to three days from the date of purchase.

⑤ Domestic Business Cycle Industry

As the retail industry is centered on end consumers, it is closely related to changes in domestic income and expenditure. Therefore, retail revenue tends to continue to increase so long as domestic income and consumption increase. A department store reacts sensitively to economic conditions since its merchandise is centered on fashion products or high-price domestic consumption products. Department stores are continually strengthening their high-end strategy in order to differentiate themselves from other retail channels in light of the polarization of consumption patterns.

⑥ Mature Industry

Due to the emergence of new business models and the polarization of consumption patterns, there have been considerable changes in the concept and the merchandizing patterns of department stores. The industry is moving towards the establishment of multiple shops mainly in the newly developing cities and regional urban areas and is expected to rearrange its sales structure to decrease middle to low end products while increasing high quality fashion goods, thereby achieving product specialization and differentiation from competitors. Currently, there is an oligopoly among the market leaders with national sales networks, and the leading stores are increasing their market shares. (B) Growth of Industry The department store business in Korea has continued to grow at a high rate of 9.0% in 2009, 12.6% in 2010 and 11.1% in 2011 as a result of the emphasis on customer service, brand differentiation and marketing efforts on the middle class, unlike in the United States and Japan where the growth rate of the department store business continues to decrease. [Department Store Market]

(Unit: trillion Won, %) 2007 2008 2009 2010 2011 Market Size 19.0 19.8 21.6 24.3 27.0 Growth Rate 3.1% 4.2% 9.0% 12.6% 11.1%

※ Source: National Statistics Office

[Number of Department Stores] (Unit: stores)

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2007 2008 2009 2010 2011 Number of Department Stores 79 78 81 83 86 Increase (Decrease) 2 (1) 3 2 3 ※ Source: National Statistics Office During the economic slump that followed the Asian financial crisis, the gap between major stores with nationwide networks and regionally based stores widened. The market shares of the “Big 3” companies (Lotte, Hyundai and Shinsegae) increased, and many regional department stores merged with larger department stores.

In the future, the Company expects that entry barriers to the department store business will continue to increase, new business districts will emerge in the capital, new towns and rural areas and less competitive department stores will merge with and be acquired by more competitive department stores. The Company expects major department stores to grow and be competitively strengthened by entering into new business sectors, such as the complex shopping mall, premium online mall and premium outlet among others, even though growth in the general department store industry may slow down. In terms of profitability, the department store business continues to be one of the strongest performing businesses within the retail sector.

(C) Characteristics of Changes in Business Conditions Since retail distribution industries such as department stores and discount stores target end consumers,

they are affected by changes in domestic income and expenditure patterns. As such, retail revenue tends to increase so long as domestic income and consumption increase. A department store reacts sensitively to changes in economic conditions since its merchandise is centered on fashion products or high-price domestic consumption products. However, the Company is reducing its sensitivity to market fluctuations by differentiating ourselves from its competitors by promoting quality and directing its marketing efforts on the middle class, who are less sensitive to economic changes. In terms of seasonality, fourth quarter sales, which have relatively higher prices due to sales of winter fashion merchandise, discount sales in October through November and promotional events comprise a large percentage of sales for department stores. (D) Factors of Competition The competitiveness of a department store depends on its location, size, merchandizing structure, brand awareness, buying power and attainment of good quality commercial power. Lotte, Hyundai and Shinsegae all have secured quality commercial power through early market entry and built nationwide networks to retain their respective competitive edge aided by economies of scale with reduced operation costs and strengthened buying power. These factors have made market barriers to entry even higher. Store expansions are being carried out mostly by these “Big 3” companies, solidifying the oligopolistic structure of the market.

While competition within the department store business is dominated by the “Big 3” companies, competition from discount stores, home shopping and other retailers is also intensifying. Department stores in the provincial areas are facing increased competition from retailers who differentiate themselves with quality and from expanding discount stores. In light of the weakening position of department stores in the provincial areas, there is a trend towards large department stores networking with provincial department stores.

The Company expects that department stores will experience weakened sales in food and household goods, categories which overlap with those offered by fast growing discount stores, home shopping and outlets. As a result, department stores are accelerating the implementation of their quality strategy by attracting luxury fashion brands, upgrading shops, expanding the portion of high margin products and introducing premium food and household items. Meanwhile, customer relations management (CRM) has been strengthened by targeting mid to upper income customers to overcome stagnant consumption. Also, another noteworthy recent phenomenon is the increase in the number of large multiple stores that have features, such as merchandizing differentiation, specialized stores, cross-sales, and entertainment venues, to take advantage of the five-day work week.

Some of the smaller department stores that cannot afford to pursue such strategies are specializing in fashion products or differentiating themselves by transforming themselves into outlet stores.

[Market share]

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(Unit: 100 million Won, %) Category 2007 2008 2009 2010 2011 Total Department Store Market Size 190,052 197,999 215,865 243,168

270,061 Lotte Department Store Sales 78,093 83,071 91,978 107,174

120,028 Lotte Department Store Market Share (%)

41.1% 42.0% 42.6% 44.1% 44.4 %

※ Source: National Statistics Office and Company data

※ Sales of the Company’s department stores are gross sales (including sales of leased shops).

※ The revenue of Lotte Department Stores includes 24 stores owned by the Company, as well as six stores operated by the Company pursuant to management contracts with Lotte Midopa, Lotte Station Building and Lotte Square, which are affiliates of the Company.

(2) Discount Stores (A) Characteristics of Industry According to the Distribution Industry Act of 1997, a discount store (or hypermarket) is a store with a retail area (excluding areas used to provide services) of over 3,000 m2 that sells food, consumer electronics and household goods to consumers without the help of sales clerks. Discount stores encourage price stability and consumption by allowing mass purchase, mass exhibition, high turnover of products with lower margins and self-service. In addition, discount stores lead to the streamlining of production, distribution and sales. They also provide services that enable us to purchase good products at lower prices, in addition to the convenience of one-stop shopping through a wide variety of product lines. Moreover, discount stores promote the development of local economies because they provide distribution channels to supply products of small and medium enterprises and special local products to the nationwide areas.

① Location-Based Industry

Like other retail industries, the location of a discount store is critical to its performance. Business status and future store opening plans of current and expected competitors in the same commercial area is one of the criteria for consideration.

② Growing Industry

Discount stores, which were first introduced in 1993 as a new retail concept, have been continuously growing, and such high growth is attributable to the rational purchasing patterns of consumers and the increasing number of stores.

③ Economies of Scale

The ratio of sales to cost for discount stores is approximately 80% due to its focus on lower prices and the cost to open a new store with an operating space of 9,900 m2 is approximately Won 60 to 70 billion. Due to such large expenditures up front, it is difficult for a new store to generate much profit before it enters a stage of regular high-level sales. However, it is possible to expedite the achievement of economies of scale and high profits by exploiting the expansive network of multiple stores.

④ Market Dominance by Large Companies with Sufficient Financing

Because of heavy early investment and market dominance through multiple stores, the market structure is centered on large companies which can bear the financing requirements. Therefore, only those who can build larger stores can remain competitive while smaller stores are left behind.

Discount stores have been growing rapidly since early 2000 due to active market entry by multinational discount stores after the retail market was liberalized in 1996 and the emergence of rationalized consumption patterns after the Asian financial crisis of the late 1990s. Discount store businesses have been growing actively through the opening of new discount stores.

Nevertheless, as the trends of pursuing low priced products and rational purchasing have become the norm, discount stores are maintaining a relatively higher growth rate despite the stagnant domestic economy as

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additional stores are opened.

According to the types of products offered, discount stores can be classified into discount stores, super centers, hypermarkets, membership wholesale clubs and outlets. However, as the types of discount stores in Korea are different compared to the types of discount stores found in the United States, a direct comparison between the two by classification is difficult to make.

General discount store

Full line discount store Primarily sells daily necessities (non-food); Most representative form of U.S. discount stores, focusing on discounted price

Supercenter Discount stores with stronger food selection

Hypermarket Very large discount store combining a general supermarket with strong non-food merchandise selection

Limited discount store

Membership Whole-sale Club Warehouse used as store based on membership, with a relatively limited selection of goods

Outlet Very low priced sales of overstock items from manufacturer or distributors

Specialized discount store (Category Killer)

Specialized discount store selling specific merchandise

Corporate supermarket (Super Supermarket)

Retail stores that are smaller than discount stores but larger than supermarkets

(B) Growth of Industry [Discount Store Market Size Trend] (Unit: trillion Won, %)

2007 2008 2009 2010 2011 Market Size 28.4 30.1 31.3 33.7 36.8 Growth Rate 10.3% 6.1% 3.9% 7.7% 9.2% ※ Source: National Statistics Office

[Number of Discount Stores Trend] (Unit: stores) 2007 2008 2009 2010 2011 Number of Discount Stores 325 355 372 392 408 Increase (Decrease) 32 30 17 20 16 ※ Source: National Statistics Office (C) Characteristics of Changes in Business Conditions Discount stores tend to be less sensitive to market fluctuations because their product line consists mainly of everyday commodities. The Company is continuing to reduce its exposure to economic fluctuations by focusing on lower-priced goods and following customers’ increasingly rationalized consumption patterns. For discount stores, third quarter sales usually comprise a relatively large percentage of annual sales due to the Chuseok holiday. (D) Factors of Competition For discount stores, achieving economies of scale through bulk purchasing of goods, sourcing of high quality merchandise from overseas suppliers and developing private brand (PB) goods are important factors in securing cost competitiveness and creating value for customers.

(E) Market share (Unit: 100 million Won, %)

2007 2008 2009 2010 2011

Discount store market size 283,865 301,138 312,733 337,330 367,995

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Lotte Mart sales 42,553 45,489 48,370 58,795 69,372

Market share (%) 15.0% 15.1% 15.5% 17.5% 18.9%

※ Source: National Statistics Office and Company data.

※ Lotte Mart sales are on a gross basis and include those of leased stores.

(3) Lotte Vietnam Shopping Co., Ltd.

(A) Characteristics of Industry

Until mid-2000s, foreign direct investment in trade, wholesale and retail businesses was subject to prior approval of the government of Vietnam under Vietnamese law. Following Vietnam’s accession to the World Trade Organization (WTO), Vietnamese law was amended to expand the limit on foreign direct investment in these areas to a 51% interest. Until 2010, 100% investments by foreigners were not allowed, and foreigner participation in Vietnam was usually conducted through joint ventures with local companies. Starting in 2011, foreign direct investment of up to a 100% interest in Vietnamese companies is allowed, and this change has attracted foreign companies doing supermarket business into Vietnam. Vietnamese customers are very price-sensitive and the supermarket brands with low-price strategies are very popular. While the inflation rate is rapidly increasing, the discount store (large-scale mart) industry, which sells daily necessities, is expected to continue its growth.

(B) Market Conditions

Since joining the WTO, the government of Vietnam is encouraging more foreign direct investments into the wholesale and retail industry through investor-friendly changes in the applicable domestic administrative and legal restrictions. The wholesale and retail industry in Vietnam has been constantly growing since 1993, and has continued to grow despite recent economic instability. Local and foreign investors are therefore expected to invest more aggressively in these industries to increase their market share.

[Market size trend]

Division 2008 2009 2010 2011

Population (Millions) 86 87 88 89

GDP (USD 100 million)

888 920 1,024 1,207

Per capita (USD) 1,031 1,056 1,160 1,352

Growth rate (%) 6.3 5.3 6.7 5.8

Consumer price index (%) 23.1 6.7 9.2 18.8

※ Source: Planet Retail

(4) Qingdao Lotte Mart Commercial Co., Ltd., Lotte Mart Co., Ltd., Lotte Mart China Co., Ltd. and other entities


Since the introduction of Carrefour to the Chinese market, the discount store industry has been rapidly growing in China owing to the demand by Chinese customers who have readily embraced western values. Chinese customers are sensitive to price and this has acted as an advantage to the discount store brands that implement low-price policy. Daily necessities, which comprise most of the sales of discount stores, are less volatile to changes in the economy.


The rapid growth in China’s economy resulted in a higher GDP and stronger customer purchasing power, which attracted more foreign companies. Foreign investments are actively growing especially in the

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wholesale and retail industries, revolving geographically around major cities. Active domestic economy and urbanization have also created more major cities in China, providing more opportunities for new discount store openings.

[Market size trend]

Division 2008 2009 2010 2011

Population (Millions) 1,328 1,334 1,341 1,348

GDP (USD 100 million) 44,312 48,920 58,710 70,993

Per capita (USD) 3,337 3,665 4,377 5,266

Growth rate (%) 9.6 9.22 10.3 9.5

Consumer price index (%) 5.9 (0.68) 3.3 5.5


(5) PT Lotte Shopping Indonesia and PT Lotte Mart Indonesia


Despite the Indonesian government’s policy to conserve the traditional marketplace-based distribution system run by Indonesians, the number of foreign distribution companies in Indonesia has been recently growing. In the aftermath of economic crisis during the 1990s, price has become the most decisive factor in consumers’ decision making, and this has acted as an advantage to discount stores that adopt low-pricing strategies. The government of Indonesia is also actively encouraging foreign direct investments, as the accumulated capital in the country is low. In the wholesale industry, foreign investors can establish new companies with 100% foreign capital. However, in the retail industry, foreign investors operate through a joint venture with a local partner.


The Indonesian economy has seen a steady growth since the Yudhoyono administration took over the country in 2004, despite the recent global economic downturn. The administration also brought about political and economic stabilization, which led to more foreign investments and growth in trade, as well as an active domestic economy. The abundant raw materials and low labour costs are expected to contribute to the growth of the supermarket industry.

[Market size trend]

2008 2009 2010 2011

Population (Millions) 228 231 237 240

GDP (USD 100 million)

5,109 5,373 7,040 8,279

Per capita (USD) 2,235 2,322 2,962 3,443

Growth rate (%) 6.0 4.5 6.1 6.4

Consumer price index (%) 9.8 4.8 5.1 5.7


(6) Lotte Card Co., Ltd.


Since its introduction in the 1950s, the credit card business has grown and credit cards have become one of the most widely used payment methods in the world. In Korea, the credit card system was introduced first by Shinsegae Department Store in 1969 and was used actively in 1980s when banks began to actively issue credit cards. In particular, the use of credit cards

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increased rapidly at the end of 1990s due to various supportive policies of the government of Korea, but overheated competition in the industry also brought about an industry-wide crisis in Korea. However, these challenges were overcome through enhanced risk management systems and improvement of financing structure, and as a result of subsequent growth, total credit card charge volume amounted to Won 558 trillion in 2011. The credit card industry is considered a mature industry in Korea as more than 60% of consumer transactions are conducted using credit cards, but is expected to continue its steady growing trend. The credit card industry is sensitive to variations in the business cycle and changes in governmental policy. Active charge rates and credit quality of credit card receivables are highly correlated with macroeconomic variables such as consumption and household debts, and the operating results of credit card companies are sensitive to changes in the relevant governmental policies. In addition, the credit card business is also subject to seasonality.


In 2011, while charge volumes grew due to inflation and other reasons, the rate of such growth decreased. Meanwhile, the use of cash advances and credit card loans decreased significantly due to tightened regulation by the government, resulting in a significant slowdown in growth compared to the prior year’s financial results. In general, the operating income of credit card companies improved compared to 2010, but the profitability is expected to diminish due to decrease in credit card loans and increased interest expenses and provisioning costs. The outlook for 2012 is not positive, considering the slowdown of domestic and global economic growth, the increase in household debts and potential for governmental policy changes due to upcoming elections in Korea. Additional factors such as continuing pressure to decrease store commission fees and changes in the credit card market structure are expected to lead to lower profitability for credit card companies. However, charge volumes for check cards are expected to increase more rapidly in light of governmental policy support, and is expected to partially offset the slowdown in growth for credit card-related financial results. (i) Status of credit card businesses (As of December 31, 2011)

Division Company Name Number of businesses Dedicated card companies Lotte, Samsung, Hyundai,

Shinhan, Hana SK, BC, Korea Development Bank (KDB) Capital, KB Kookmin Bank

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Banks issuing credit cards Kyongnam Bank, Industrial Bank, Nonghyup Bank, Daegu Bank, Busan Bank, Woori Bank, SC Jeil Bank, Korea City Bank, Jeju Bank, Suhyup Bank, Jeonbuk Bank, Gwangju Bank, Korea Exchange Bank

13

Source: Press Release from the Credit Finance Association

(ii) Number of credit cards issued and charge volumes

Division Number of credit cards (10 thousand cards)

Number of card holders (10 thousand persons)

Credit card charge volumes

(trillion Won) 2007 8,956 6,608 413.4

2008 9,624 7,351 463.3

2009 10,699 7,795 470.9

2010 11,659 8,428 517.4

2011 12,214 8,126 558.5

Source: Press Release from the Financial Supervisory Service

[Market share trend]

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(Unit: trillion Won, %) Division 2009 2010 2011

Credit card market size by charge volume 470.9 517.4 558.5

Lotte Card’s charge volume 30.7 38.7 47.1

Market share (%) 6.5 7.5 8.4

*Cumulative total ozf domestic and foreign usage including lump-sum payments, installments, cash services, card loans, etc. Source: Financial Statistics Information System, Financial Supervisory Service

(7) eB Card


A prepaid card refers to one of the electronic currencies used to pay transportation fares or make small purchases with the same value as actual money, similar to cash or check cards and credit card. Prepaid cards have contributed greatly to the elimination of the inconvenience of cash payment of transportation fares and subsequent delays during the boarding and alighting time for transports, as well as efficiency in the management for transportation companies. Prepaid cards are expected to be used in transportation and purchasing throughout Korea as their reach is currently being expanded. In addition, with the introduction of the NFC system, it has become possible to use mobile phones to make payments for public transports and at convenience stores.


[Competitive landscape]

Comparisons of competitors in 2011 MYBI eB Card Korea Smart Card

Card Name MYBI Card Cash Bee T Money

Service area Busan, Ulsan, Gyeongsang nam-do, etc.

Gyeonggi-do, Incheon, Chungchung nam-do, etc.

Seoul, Jeju, Pohang, etc.

Bus 9,800 buses 18,301 buses 9,000 buses

Tax 57,977 taxies 40,538 taxies 94,435 taxies

Subway 113 stations 441 stations


(Unit: 100 million Won, %) Division 2009 2010 2011

Market size for prepaid cards (million Won) 1,654 1,914 2,387

EB Card (million Won) 322 388 472

Market share (%) 19.4 20.2 19.8

Other business areas

(8) Lotte Shopping (supermarket)


A supermarket refers to the type of regional distribution business which enables consumers to buy a wide variety of food and daily necessities at one-stop within the regional commercial circles. Supermarkets

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provide various products in a self-serviced manner at cheap prices based on geographical proximity and convenience.


In 2011, the size of supermarket industry was estimated at Won 25.3 trillion and the industry showed a growth rate of approximately 3.7%, which was lower than expected due to the competition between large supermarket chains and small- to medium-sized local merchants. In 2012, the supermarket industry is expected to show a lower growth rate than previous years as a result of certain amendments to the relevant law and enactment of new laws protecting local merchants which restrict the opening of new stores by large supermarket chains. Accordingly, the industry is seeking various ways to continue growing, such as store diversification and new business development.

(9) Lotte Shopping (Cinema)


A movie theater is no longer just a place to watch movies as multiplexes now offer various entertainment platforms such as shopping, recreation and leisure. Movies are considered to be relatively cheap means of entertainment; therefore, the movie theater business is not as sensitive to the economy as other entertainment businesses and movies tend to be more popular during economic downturn.


In 2011, the Korean film industry recorded profits of Won 1.2 trillion, a 7.4% increase from 2010. 1.6 billion movie tickets were sold in 2011, which was a record high, showing a 8.7% increase from last year when 1.5 billion movie tickets were sold.


(Unit: thousand persons, %) Division 2009 2010 2011

Size of the movie cinema market

154,907 146,808 158,858

Lotte Cinema 35,797 36,978 41,856

Market share (%) 23.1% 25.2% 26.3

* Based on ticket buyers in Korea (including those for theatres not owned but managed by Lotte Shopping (Cinema))

(10) Woori Home Shopping


(a) TV Home Shopping

Currently, six companies are running TV home shopping business in Korea. Korea Home Shopping (currently GS Home Shopping) and 39 Home Shopping (currently CJ Home Shopping) started in 1995, three companies, Woori Home Shopping, Hyundai Home Shopping and NS Home Shopping, joined the market in 2001 and h&s mall joined the market in 2011. TV home shopping companies, under the approval of the Korea Communications Commission, furnish customers with product information through TV channels, receive orders, mostly through phone calls, and then deliver the ordered products to customers at their desired locations. Therefore, TV home shopping business operation requires infrastructure, such as broadcasting facilities and logistics systems, strategic products planning and a variety of customer services.

(b) Internet Shopping Mall

Internet shopping malls deliver product information directly to consumers through wholesalers and Internet and allow customers to purchase at their convenience and at cheaper prices.

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(c) Catalog Sales

Catalog sales companies send catalogs describing products information to selected customers, receive orders for products through those catalogs and sell them. Optimization of products for the selected customers and base of profitable customers are the most important elements in this business.


(a) TV Home Shopping

The TV home shopping market experienced rapid growth in its early stage due to the growing number of household subscribers to cable TV. However, the TV home shopping market showed stagnant growth since 2004 when the number of household subscribers to cable TV started to stagnate. Since 2006, when the TV home shopping businesses made efforts to improve customer services as well as to organize the differentiated products for customers, the market has shown a stable growth pattern. TV home shopping companies are currently preparing for a second take-off with various strategies to cope with changes in the market environment such as developments of overseas markets, promotion of “T-Commerce” using the interactive characteristics of digital cable TV and increase of IPTV utilization and mobile commerce services.


The Internet shopping mall market continues to grow mainly due to price competitiveness. It is the driving force of growth in online retail markets. According to data from the National Statistics Office, Internet shopping market showed a growth rate of 23.87% from 2005 to 2009, whereas the entire distribution industry showed an annual growth rate of 5.45%, and the annual transaction amounts in Internet shopping were Won 18.1 trillion, Won 20.6 trillion and Won 24.6 trillion in 2008, 2009 and 2010, respectively.

(c) Catalog Sales

The catalog sales market showed continued growth from its start in 1994 to 2002, but the growth has been slow since 2003 when the electronic commerce started to grow rapidly. Consequently, the market has been reorganized around large catalog companies. Since 2006, the market has been growing around TV home shopping companies as methods of utilizing customer databases become more sophisticated.


(Unit: 100 million Won, %) Division 2009 2010 2011 (Sept. 30)

Market size 22,879 26,366 31,483

Woori Home Shopping 4,341 5,498 6,360

Market share (%) 18.97% 20.85% 20.20

※ Based on publicly disclosed total sales data for the Company’s competitors in Korea (excluding NS Home Shopping).

(11) Korea Seven and Buy the Way

Unlike other distribution channels, convenience stores focus on providing various services and products at a convenient location at the customers’ convenience. This form of distribution business requires a firm basis of social infrastructure, including information technology (IT), and emerges only after a certain level of national income is accomplished. In May 1989, 7-Eleven was introduced as the first convenience store in Korea and the convenience store business kept growing until 1997, when the financial crisis hit Korea. The challenges in 1997 were successfully overcome as convenience stores became popular business item and new services, such as collection of public utility bill payments, were enabled by the developments in IT industry and infrastructure.


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Compared to discount stores and supermarket chains, convenience stores have limited consumer exposure and regional reach because of the small size of stores and limited number of items offered for sale. It is therefore crucial for convenient stores to offer goods that are in high demand by consumers and to optimize inventory management store by store to address the consumers’ needs, which in turn are enabled by human know-how (including in the form of field consultants) based on scientific analysis using IT and information analysis tools provided by headquarters.


Convenience store business recorded a growth rate of 17.3% in 2011 due to the increase in the number of new store openings. The market is expected to continue growing as the demand for convenience stores increases, including as an alternative to discount stores and supermarkets in light of changes to laws to protect small- to medium-sized stores.

(12) Lotte Boulangerie

(A) Characteristics of the industry

The bakery business has been steadily growing as Korean society is becoming more used to western style diet and the consequent decrease in the consumption of rice. The continued increase in the bakery market size has also been linked with the increase in coffee and other beverages demand.


The bakery market can be divided into three segments: franchises, independent bakeries and in-store bakeries. The in-store bakeries have shown a rapid growth together with the increase in the number of large discount stores, but is showing signs of stagnation due to recent trends in restrictions on new store openings of large discount stores. Franchise stores account for approximately 65 to 70% of the total bakery market size while the number of independent bakeries run by individuals has been gradually decreasing.


(Unit:100 million Won, %) Division 2009 2010 2011 (Estimated)

Market size for bakery 21,123 24,707 30,000

Lotte Boulangerie 743 879 1,047

Market share (%) 3.52% 3.56% 3.56

※ Based on total sales data publicly disclosed by the Company’s competitors (including Paris Croissant, Crown Bakery, Shilla Bakery, Tous les jours, Chosun Hotel Bakery, Artisee Boulangerie and Fauchon).

(13) Lotte Songdo Shopping Town


Large scale shopping complexes such as Lotte Songdo Shopping Town are rare in Korea because operation of such complexes requires high level of management capacity and market experience. Particularly, due to recent global economic downturn, financing capacity to build and operate such large shopping complexes has become the most important factor to success in this industry.


Operating large scale shopping complexes like Lotte Songdo Shoppoing Town requires certain level of capital and financing capacity. The Company is one of the few companies capable of running complexes of this scale in Korea.

(14) Lotte Shopping Holdings (Singapore), Lotte Shopping Holdings (Hong Kong) and LHSC Limited

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A holding company refers to a company whose main business is to control operating subsidiaries engaged in a variety of businesses through stock ownership. Holding companies can be divided into two types; first, pure holding companies, which do not carry out any business activities but take dividends as their main revenue source, and, second, operating holding companies which control the business activities of their operating subsidiaries. By establishing and operating the holding companies of separate corporate entities in various countries in Asia, Lotte Shopping Holdings (Singapore), Lotte Shopping Holdings (Hong Kong) and LHSC Limited, the Company endeavors to achieve increased shareholder value stemming from strengthened efficiency in management and increased transparency in the control structure.

(15) Lucky Pai Limited and other entities

(A) Market Conditions

(a)TV Home Shopping

The Chinese TV home shopping industry is rapidly growing despite regulations making home shopping operations subject to license requirement as well as certain capital level requirements. These regulations have downsized the industry by driving out smaller home shopping companies while intensifying competition among larger companies holding licenses.


In China, there were approximately 450 million users of Internet as of the end of 2010, of which 160 million users made purchases through Internet shopping malls, marking an increase of 48.6% from 2009. The total value of transactions amounted to approximately Won 500 billion and is expected to continue growing in the future.

(c) Catalog Sales

The catalog sales market is still in early stages in China only with small, local businesses. Currently, major TV home shopping companies are operating in the catalog market as subordinate businesses.


(Unit: trillion Won, %)

Division 2008 2009 2010 2011 (Estimated)

Market size 2,170 2,452 2,599 2,859

Home Shopping 3.2 4.1 4.7 5.1

Market share (%) 0.15 0.17 0.18 0.18

* Size of entire distribution industry versus home shopping industry.

B. Company Status

(1) Department Store Business (Lotte Shopping, Lotte Midopa and Lotte Square) (A) Business Summary

The first department store (main store) in Sogong-dong, Seoul, opened in December 1979 and was expanded in January 1988. Since then, the Company has been continuously adding new stores and expanding existing ones, including the Jamsil Lotte Department store and shopping mall in Jamsil-dong, Songpa-gu, Seoul, in November of 1988; the Yeongdeungpo branch (managed by Lotte Station Building) in 1991; the Cheongnyangri branch in 1994; the Busan branch in 1995; the Gwanak branch in 1997; the Gwangju branch in 1998; the Bundang, Bupyeong and Ilsan branches in 1999; the Daejeon, Gangnam and Pohang branches in 2000; the Ulsan and Dongnae branches in 2001; the Changwon, Anyang, Incheon and Nowon (managed by Midopa) in 2002; the Daegu branch (managed by Lotte Station Building) and Myeong-

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dong Young Plaza branch in 2003; the Sangin and Jeonju branches in 2004; Avenuel (the luxury goods annex of the main store) in 2005; Mia branch in 2006; Centum City, Cheongju and Daegu Young Plaza branches, as well as the Company’s first overseas store in Moscow, Russia, in 2007; Konkuk Star City and Beijing branches, Gwangju Worldcup outlet mall and Kimhae premium outlet mall in 2008; Gwangbok branch and Gwanju Suwan outlet mall in 2009 and Cheongnyangri annex (station), Acqua outlet mall in Gwangbok and Daegu Yulha outlet mall in 2010. In addition, through mergers and acquisitions, such as the Company’s recent acquisition of three department stores from GS Retail in April 2010, the Company aims to secure its domestic market position while the Company looks to expand in overseas markets.

In 2011, the Company continued to expand domestically and globally and diversify its business portfolio. The Company launched Lotte Mall Esiapolis in Korea and its third overseas department store in Tianjin, China in the first half of 2011. It also opened a premium outlet in Paju and the Lotte Mall Gimpo Airport in the second half of 2011. In 2012, the Company plans to open a new department store in Pyeongchon, Korea. Currently, Lotte Department Store is operating 33 department stores, including 24 department stores in Korea owned by the Company and 3 overseas department stores as well as 6 department stores (Yeongdeungpo Store, Daegu Store, Nowon Store, Jungdong Store, Guri Store and Ansan Store) that it operates pursuant to management contracts. The Company is operating certain department stores pursuant to management agreements with Lotte Midopa, Lotte Station Building and Lotte Square, and receives fees thereunder equal to 10% of the applicable department stores’ operating income before depreciation (which the Company records as other sales under sales).

In October 2002, the Company acquired Midopa Co., Ltd. and changed Midopa Co., Ltd.’s name to Lotte Midopa Co., Ltd. Currently, the Company owns 79.01% of Lotte Midopa’s shares. Lotte Midopa has a branch in Nowon and has leased Young Plaza, located at Namdaemun-ro 2-ga in Seoul, to Lotte Shopping.

Lotte Station Building was founded on September 15, 1986 by Lotte Shopping and the National Railroad Administration with the goal to construct and manage a private capital station complex pursuant to the applicable law on the utilization of government owned rail property. It was the first development project for a private capital station complex in Korea and currently owns the Yeongdeungpo branch of the Lotte department store and another branch at Daegu station. The National Railroad Administration owns 25% of its shares, and Lotte Shopping, along with its related parties, owns 68%.

On February 9, 2010, the Company entered into an agreement to acquire GS Retail Co., Ltd’s department store and large discount mart businesses. On April 22, 2010, the Company established Lotte Square and assigned the department store operations to Lotte Square. Lotte Square also operates the Jungdong Store, Guri Store and Ansan Store, which have been under remodeling since 2010. The Ansan Store reopened in November 2011 and the other two stores are expected to reopen within the first half of 2012. In 2005, the Company opened Avenuel, a luxury specialty store, at its main branch in Sogong-dong. Avenuel targets highest tier customers by introducing international luxury brand goods with the most prestigious reputations. Avenuel, Young Plaza and the main branch of the Lotte department store are centrally located in downtown Seoul, collectively forming an integrated shopping complex “Lotte Town”, together with Lotte Cinema, Lotte Hotel and world class restaurants.

Also, the Company’s Jamsil branch, located in Seoul, has a shopping mall, a discount store, a hotel, Lotte World (the largest indoor theme park in Korea) and an ice-skating rink. And its Busan and Ulsan branches, in the Young-nam area, are an integrated leisure complex with hotels.

Department stores sales are generated mainly from product sales and from other sales. Other sales is primarily comprised of sales of leased stores.

(B) Status and Forecast of New Businesses (i) Outlets The Company decided to commence its outlet business in 2007 and opened the World Cup Gwangju outlet mall in October 2010, Gimhae Premium outlet in December 2008, Gwangju Suwan outlet in September 2009, Daegu Yulha outlet in July 2010 and the Paju premium outlet in December 2011. The Company expects its outlet business to grow, and the Company is planning to open new outlets in key areas in Korea in the future, including the sixth outlet in Buyeo in 2012.

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(ii) Life Style Center In 2008, the Company decided to begin its Life Style Center business, a business based on a new type of shopping center that sells fashion and household goods and has restaurants and entertainment facilities, within a large residential area. In 2011, the Company opened its first Lotte Life Style Mall, Lotte Mall Esiapolis, in the Daegu Bongmu area. (iii) Overseas Business The Company aims to be one of the top-ranking global leaders in the retail distribution business by 2018. With its solid position in the domestic market and 30 years of experience and know-how, the Company plans to establish a strategic presence in the VRIC countries (i.e., Vietnam, Russia, Indonesia and China) by opening new stores and acquiring stores that are already there. As for the Company’s department store business, in September 2007, the Company established a Russian corporation and the Company was the first Korean retail company to open a department store in Russia. In August 2008, the Company opened its first department store in China in Beijing. In 2011, the Company opened its second department store in China in Tianjin, in addition to other department store openings in the VRIC countries. (C) Organizational Chart

(2) Discount Stores

(A) Business Summary Beginning with the opening of its first discount store branch in Gangbyeon in April 1998, under the name of Magnet (since changed to Lotte Mart), the Company has been expanding the number of its discount stores. Such expansion includes the opening of the Lotte World branch in August 1998; followed by the opening of four additional stores, including the Seohyeon branch, in 1999; eight stores, including the Jooyeob branch, in 2000; eight stores, including the Hwamyeong branch, in 2001; eight stores, including the Seosan branch, in 2002; three stores, including the Tongyeong branch, in 2003; four stores, including the Seoul Station branch, in 2004; seven stores, including the Guro branch, in 2005; eight stores, including the Jangam and Uijeongbu branches, in 2006; six stores, including the Gwangju World cup Mall branch, in 2007; seven stores, including

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the Dongnae branch, in 2008; six stores, including the Pyeongtaek branch, in 2009, and 21 stores, including 14 reopened GS Mart stores and the Daegu Yulha, Cheongnyangri, Maseok, Jechun, Cheonahn Asan and Changwon Jungang branches, in 2010. In 2011, the Company opened five stores including a store in Hongseong. Lotte Mart has been proactively responding to changes in consumption trends through aggressive expansion.

(B) Status and Forecast of New Businesses

(i) Category Killers

The term “category killer” refers to retailers that sell a specific product category in customized stores unlike department stores or supermarkets.

On December 6, 2006, the Company entered into a licensing agreement with Toys R Us, a U.S. toy retailer, to introduce Toys R Us stores into Korea. In December 8, 2007, the Company opened its first Toys R Us shop in its Lotte Mart Guro branch followed by subsequent openings of three branches in 2008, one branch in 2009, five branches in 2010 and eight branches in 2011. Also, starting with the opening of a store at Seoul Railway Station in November 2009 , the Company is currently operating 12 Digital Park home appliance stores.

(ii) Gas station business

The Company opened a “Happy Dream Gas Station” at its Lotte Mart Gumi branch in May 2009, which has achieved profits and created value for customers through large sales volumes at low prices since its opening. The company’s gas station business has not only generated direct profits, but has also achieved a synergy effect with the sales of the Lotte Mart Gumi. Following the opening of the first gas station in Gumi, the Company opened the Suji gas station on March 8, 2010, and it is planning to open additional gas stations at other suitable Lotte Mart locations. (C) Organizational Chart

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▶ Lotte Vietnam Shopping Co., Ltd. The Company opened its first store in Vietnam, South Saigon Store, in December 2008, followed by its second store in Vietnam, Phutho Store, in July 2010. The Company has selected Vietnam as one of its target countries for expansion of the discount store business and plans to enhance its presence in Vietnam through aggressive expansion and localization. [Number of stores in Vietnam] (Unit: stores)

Division 2008 2009 2010 2011 Number of stores

1 1 2 2

Increase or decrease

+1 - +1 0

▶ Qingdao Lotte Mart Commercial Co., Ltd., Lotte Mart Co., Ltd., Lotte Mart China Co., Ltd. and 37 other entities

The Company has been actively expanding into the Chinese market, starting with the acquisition of eight Makro stores in China in June 2008. The Company established three more stores in China and acquired Times Ltd.’s discount stores in 2009. The Company is operating 94 stores in China as of the end of 2011 and plans to continue to expand in China.

[Number of stores in China] (Unit: stores)


Shanghai - 68 69 74

Qingdao - 2 3 4

Beijing 8 9 9 12

Shenyang - - 1 4

Cumulative total 8 79 82 94

Increase (decrease) 8 71 3 12 ▶PT Lotte Shopping Indonesia and PT Lotte Mart Indonesia The Company acquired 19 Makro stores in Indonesia in November 2008 and opened four stores through its local retail business subsidiary during 2010 and 2011. As of December 2011, the Company is operating 28 stores in Indonesia and plans to continue to expand in Indonesia. [Number of stores in Indonesia] (Unit: stores)


19 19 22 28

Increase (decrease)

19 - 3 6

Financial Business ▶ Lotte Card One of the Company’s subsidiaries, Lotte Card, is a major credit card company in Korea with the largest distribution and service network. Customers of Lotte Card are provided with the abundant infrastructure of Lotte Group as well as services by various domestic and foreign allies and franchise shops. We are making efforts to strengthen synergy with Lotte Group and continuously expand our external networks to provide more convenience and opportunities for our customers.

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Lotte Card has been leading the market with innovative products and services responsive to customers’ needs and expectations, and Lotte Card has also shown strong operating results. Lotte Card was awarded for its excellence in call center service for three consecutive years in 2008, 2009 and 2010 and acquired ISO27001 on the information protection management system for electronic financial transaction services from the International Standardization Organization as well as KS certification in the call center service for the first time in the industry in 2008. It also received ‘the Grand Prize in the customer satisfaction from Korea Service Grand Award’ under Korean Standards Association and selected as one of the ‘Korea’s 100 Top Companies to Work For’ in 2011 by GWP Korea. ▶ EB Card (A) cashbee Card One of our subsidiaries, EB Card, launched cashbee Card on December 20, 2010. Unlike the then-existing prepaid transportation cards used to pay transportation fares only, cashbee Card can be used to make purchases in addition to its function as transportation card. cashbee Card can be recharged at 7-Eleven and Buy the Way and used to make purchases at 15,318 stores as of 2011.

(B) Mobile cashbee (mobile card) Mobile cashbee was launched on May 25, 2011 as a prepaid mobile card for nationwide transportation based on near field communication (NFC) systems. To use mobile cashbee, it is necessary to install an NFC USIM card dedicated for cashbee to a smartphone supporting NFC and download Lotte cashbee application. Mobile cashbee can also be used to make small purchases at 7-Eleven, Buy the Way, Lotteria and Angel-in-us, among others. Other Businesses ▶ Lotte Shopping (supermarket) Since its establishment in April 2000, Lotte Super opened its first store in Jeonnong-dong and grew nationwide through acquisitions of the chain store business from Hanwha Distribution in 2004 and Big Mart and Nice Mart in 2007 in addition to opening of new stores of its own. Lotte Super also entered the online business by starting an Internet shopping mall in 2009 for the first time in the supermarket industry. It also started franchise business in 2010 in an effort to contribute to local communities by providing job opportunities and improved service. In 2012, Lotte Super plans to strengthen its leading position by acquiring CS Distribution and creating synergy effects from new business such as voluntary franchise business. ▶ Lotte Shopping (Cinema)

Lotte Cinema opened its first movie theater in Ilsan in October 1999 and is currently operating 75 movie theaters in Korea. In May 2008, it became the first Korean company to open a movie theater in Vietnam. It has also expanded to China by opening a movie theater in Songsan in December 2010.

▶ Woori Home Shopping -TV Home Shopping Woori Home Shopping, one of the Company’s subsidiaries, has shown a steady sales growth in the TV home shopping business which is attributable to its continued efforts to provide customers with promotional events, better products and improved quality of broadcasting, among others. It seeks to continue its growth by implementing various sales growth strategies despite the recent challenges caused by negative regulatory environment and heightened competition in broadcasting industry.

-Internet Shopping Mall Woori Home Shopping has also shown significant sales growth in Internet shopping business due to the stable commission-based sales business with department store’s online shopping mall, various promotional events and continuous improvements of products offered for sale. -Catalog Sales In addition, catalog sales business has become a stable source of revenue due to the constant addition of new suppliers and optimization of products and services based on customers’ needs and feedback.

▶Korea Seven and Buy the Way

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Korea Seven, established on April 1, 1999, operates the convenience store business and is headquartered in Boramae-dong, Gwanak-gu, Seoul.

Korea Seven started its business by acquiring the rights to operate convenience store businesses using the trade name “7-Eleven” from Lotteria on May 15, 1999 and expanded by acquiring the assets and liabilities relating to 246 convenience stores of Kolon Mart on January 1, 2000 as well as acquiring the 100% interest in Buy the Way from Korea Retail Holdings B.V. on April 20, 2010. Korea Seven has continuously enhanced its market position by implementing various growth strategies and performance improvements.

Buy the Way, which is also our wholly-owned subsidiary, was established on June 30, 1990 to operate franchise business of retail convenience store, wholesale and retail business, intermediary products trade business, among others.

▶ Lotte Boulangerie Lotte Boulangerie operates bakeries which sell freshly baked goods through in-store bakeries in Lotte Department Stores and Lotte Marts as well as franchise road shops. ▶ Lotte Songdo Shopping Town We have completed the purchase of site for the construction of Songdo Shopping Town and are currently working towards the opening of a commercial facility complex in Songdo, Incheon, in 2015. ▶ Lotte Shopping Holdings(Singapore), Lotte Shopping Holdings(Hong Kong) and LHSC Limited Our subsidiary, Lotte Shopping Holdings (Singapore), is a holding company controlling distribution subsidiaries in India, Indonesia and Vietnam. Lotte Shopping Holdings (Hong Kong) is a holding company of our distribution subsidiaries in China. LHSC Limited is a holding company established to acquire Lucky Pai Limited, a home shopping company, in China. (Unit: Million won)

Name of Holding Company Name of Subsidiary Shareholding

Ratio* Book Value of Invested

Shares Type of

Operating Business

Lotte Shopping Holdings (Singapore)

Lotte Shopping India Pvt.,Ltd 100% 17 Distribution

Lotte Mart India 100% 2,307 Distribution (mart)

PT Lotte Shopping Indonesia

25% 82,432 Distribution (mart)

PT Lotte Mart Indonesia 99% 91,341 Distribution (mart)

Lotte Hotel & Retail Vietnam PTE. LTD.

40% 46,132 Investment company

PT Lotte Shopping Plaza Indonesia

99% 17,127 Distribution (department store)

Lotte Shopping Holdings (Hong Kong)

Lotte Business Management (Tianjin) Co., Limited**


Lotte Mart China Co., Limited 100% 728,672 Distribution (mart)

LHSC Ltd. 49.89 79,270 Investment company

LotteMart Global Sourcing Center Co., Limited

100% 577 Distribution

Liaoning Lotte Mart Co., Limited

59.2% 17,300 Distribution (mart)

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Name of Holding Company Name of Subsidiary Shareholding

Ratio* Book Value of Invested

Shares Type of

Operating Business

Qingdao Lotte Mart Co., Limited

44.9% 43,652 Distribution (mart)

Lotte Department Store (Shenyang) Co., Ltd.


Lotte International Department Store (Weihai) Co.,Ltd .


Jilin Lottemart Co., Ltd. 100% 17,300 Distribution (mart)

LHSC Ltd. Lucky Pai Ltd. 73.8% 147,193 Distribution (home shopping)

* As of 31 December, 2011 (exchange rate 1 USD = Won 1,153.30 is applied.) ** Financial statements prepared on a separate basis under Singapore FRS and HK FRS. ▶ Lucky Pai Limited and other entities -TV Home Shopping Lucky Pai Limited is headquartered in Shanghai, China, with operations in Chongqing, Shandong Province, Yunnan Province, Henan Province and Heilongjiang Province. Among these, Lucky Pai has established a nationwide broadcasting capability through its partnership with Chongqing TV Station which has a nationwide broadcasting license. It plans to gradually expand its business areas given the current status of logistics and delivery infrastructure in China.

-Internet Shopping Currently, the Internet shopping mall business of Lucky Pai accounts for only a small portion of its revenue. Lucky Pai is contemplating to expand its Internet business around Chongqing and is currently working on the system upgrade and business environment improvement in preparations for a gradual expansion to other regions.

-Catalog Sales Lucky Pai’s catalog sales business in China is still at an early stage of development. Lucky Pai plans to expand this business after its TV home shopping and Internet shopping businesses become stabilized.

2. Matters regarding Production and Facilities

A. Operating Facilities (1) Domestic [Department Stores] (As of December 31, 2011) (Unit: m2, millions Won, persons) Division Location Land Building Total Number of

employees Remark

Book value

Rental Area

Book value

Rental Area

Book value

Rental Area

Department Store

Main Seoul 315,544 72,710 38,170 388,253 38,170 365 Owned Jamsil Seoul 1,089,1

09

185,720 1,274,8

29 0 237 Owned

Busan Busan 307,934 83,120 391,054 0 273 Owned Gwanak Seoul 55,436 50,298 105,733 0 83 Owned Cheongnyangni Seoul 180,923 15,092 33,399 196,015 33,399 149 Owned Gwangju Gwangju 50,458 50,260 100,718 0 182 Owned Bundang Gyeonggi-do 10,622 79,634 - 90,256 146 Leased Bupyeong Incheon 32,840 14,814 47,653 0 124 Owned Ilsan Gyeonggi-do 94,977 75,707 170,684 0 172 Owned Daejeon Daejeon 122,93

8 0

122,93 8 177 Leased

Gangnam Seoul 212,618 44,065 256,683 0 145 Owned Pohang Gyeong-buk 13,225 32,422 45,648 0 143 Owned Ulsan Ulsan 285,378 65,716 351,094 0 177 Owned

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Dongnae Busan 82,752 83,263 166,015 0 123 Owned Changwon Gyeong-nam 31,645 43,095 74,740 0 149 Owned Anyang Gyeonggi-do 68,572 0 68,572 150 Leased Incheon Incheon 99,670 89,373 189,042 0 142 Owned Sangin Daegu 27,285 40,973 68,258 0 90 Owned Jeon-ju Jeon-buk 31,775 44,324 76,099 0 155 Owned Mia Seoul 130,798 87,523 218,321 0 96 Owned Centum City Chung-buk 85,733 87,613 173,346 0 109 Owned Star City Seoul 81,063 0 81,063 31 Leased Gwangbok Busan 113,116 277,488 390,604 0 155 Owned Esiapolis Daegu 6,866 71,474 6,866 71,474 32 Leased Gimpo Airport Seoul 14,194 14,194 0 124 Owned Cheongju Chung-buk 2,935 11,244 0 14,179 28 Leased Daegu Daegu 2,403 8,535 0 10,938 28 Leased Gwangju Gwangju 18,108 0 17,108 96 Leased Gimhae Gyeong-nam 43,975 43,975 0 39 Owned Suwan Gwangju 19,825 0 19,825 33 Leased Daegu Daegu 22,962 33,923 56,885 0 35 Owned Paju Gyeonggi-do 52,238 129,112 181,350 0 46 Owned

(2) Overseas (As of December 31, 2011) (Unit: m2, millions Won, persons) Division Location Land Building Total Number of

employees Remark

Book value

Rental Area

Book value

Rental Area

Book value

Rental Area

Department Store

Beijing Beijing, China

75,550 75,550 309 Leased

Tianjin Tianjin, China

49,385 49,385 492 Leased

Moscow Moscow, Russia

33,911 33,911 115 Leased

[Lotte Midopa] (As of December 31, 2011) (Unit: m2, millions Won, persons) Division Location Land Building Total Number of

employees Remark

Book value

Rental Area

Book value

Rental Area

Book value

Rental Area

Nowon Store Nowon-gu, Seoul

191,939 154,574 347,710 235 Includes employees of the Company working at Lotte Midopa under the management contract

[Lotte Square] (As of December 31, 2011) (Unit: m2, millions Won, persons) Division Location Land Building Total Number of

employees Remark

Book value

Rental Area

Book value

Rental Area

Book value

Rental Area

Jungdong Store Buchon-si, Gyeonggi-do

46,715 110,847 22,860 157,562 22,860 198 Includes employees of Lotte Shopping working at Lotte Square under the management contract

Guri Store Guri-si, Gyeonggi-do

85,235 91,263 176,498 191

Ansan Store Ansan-si, Gyeonggi-do

20,720 26,731 2,343 47,451 2,343 106

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[Discount Stores] (1) Domestic (As of December 31, 2011) (Unit: m2, millions Won, persons) Division Location Land Building Total Number of

employees Remark

Book value

Rental Area

Book value

Rental Area

Book value

Rental Area

Discount Store

World store Seoul 278,981 48,963 10,659 327,944 10,659 260 Owned Gangbyeon Seoul 15,656 24,421 74 40,077 74 109 Owned Seohyeon Gyeonggi-do 35,602 16,795 52,397 - 94 Owned Cheongju Chungbuk 5,591 19,074 24,665 - 92 Owned Guri Gyeonggi-do - - 41,902 - 41,902 177 Leased Ulsan Ulsan 62,878 34,309 97,188 - 134 Owned Juyeop Gyeonggi-do 28,633 25,435 54,068 - 116 Leased Bupyeong Incheon - - 22,294 - 22,294 114 Owned Yeonsu Incheon 21,137 13,700 34,837 - 110 Leased Cheonan Chungnam - - 26,557 - 26,557 77 Owned Sang-mu Gwangju 33,358 19,215 52,572 - 125 Owned Saha Busan 13,241 17,577 30,819 - 106 Owned Uijeongbu Gyeonggi-do 20,019 18,255 38,275 - 107 Owned Hwamyeong Busan 24,706 18,057 42,763 - 126 Owned Hwajeong Gyeonggi-do 53,195 19,631 72,826 - 118 Owned Iksan Jeonbuk - - 43,646 - 43,646 135 Leased Geumcheon Seoul 55,632 21,810 77,441 - 107 Owned Yeongdeungpo Seoul 60,559 25,979 86,538 - 129 Owned Seodaejeon Daejeon 30,412 14,944 45,357 - 111 Owned Chungju Chungbuk 83,138 22,775 105,912 - 124 Owned Seosan Chungnam 14,348 14,648 28,996 - 117 Owned Masan Gyeongnam 23,308 16,451 39,759 - 105 Owned Mokpo Jeonnam 19,960 18,218 38,178 - 128 Owned Dobong Seoul - - 38,630 - 38,630 102 Leased Uiwang Gyeonggi-do 82,332 16,948 99,280 - 158 Owned Osan Gyeonggi-do 28,897 16,791 45,688 - 112 Owned Cheomdan Gwangju 51,188 14,131 65,319 - 129 Owned Junggye Seoul 125,964 41,971 167,935 - 167 Owned Cheoncheon Gyeonggi-do 23,594 21,816 45,411 - 100 Owned Seongjeong Chungnam 43,715 20,916 64,631 - 153 Owned Tongyeong Gyeongnam 26,198 19,981 46,179 - 115 Owned Seoul Station Seoul - - 32,241 - 32,241 191 Leased Jangyu Gyeongnam 22,763 23,200 45,962 - 129 Owned Hwaseong Gyeonggi-do 41,578 21,194 62,771 - 72 Owned Woongsang Gyeongnam 14,655 20,577 35,232 - 93 Owned Yangju Gyeonggi-do 19,501 20,929 40,430 - 80 Owned Jinhae Gyeongnam 9,927 27,243 37,170 - 118 Owned Suji Gyeonggi-do - - 43,684 - 43,684 121 Leased Guro Seoul - 16,087 - 59,898 - 75,985 207 Leased Ansan Gyeonggi-do - 19,141 31,550 31,550 19,141 159 Owned/

Leased Yeochun Jeonnam 5,459 16,429 21,889 - 94 Owned Gumi Gyeongbuk 29,318 35,100 64,417 - 171 Owned Jinjang Ulsan 35,283 42,585 77,869 - 134 Owned Sasang Busan - - 50,332 - 50,332 143 Leased Yeosu Jeonnam 16,116 27,203 43,319 - 94 Owned Anseong Gyeonggi-do 31,490 24,759 56,249 - 103 Owned Pohang Gyeongbuk - - 6,893 - 6,893 59 Leased Yeongjongdo Incheon 31,893 25,124 57,017 - 64 Owned Bupyeong Incheon 40,614 34,257 74,872 - 149 Owned Jangam Gyeonggi-do 13,610 17,410 31,019 - 90 Owned Worldcup Gwangju - - 63,866 - 63,866 148 Leased Gunsan Jeonbuk 29,122 32,397 61,519 - 146 Owned Jeju Jeju 168 5,664 418 34,104 586 34,104 98 Leased Hangdong Incheon - 20,486 - 49,981 - 49,981 74 Leased Daedeok Busan - 33,140 - 56,430 - 56,430 187 Leased Samsan Gyeongnam 21,329 48,978 70,308 - 151 Owned Dongnae Daejeon 34,960 44,358 79,318 - 102 Owned City Seven Gyeongnam 16,742 48,967 65,709 - 79 Owned Noeun Daejeon - 11,278 29,850 29,850 11,278 100 Owned/

Leased Dangjin Chungnam 30,927 23,492 54,419 - 101 Owned Jeonju Jeonbuk 13,647 28,933 42,581 - 121 Owned Wa Stadium Gyeonggi-do - - 25,605 - 25,605 60 Leased Songcheon Jeonbuk 26,219 37,820 64,038 - 104 Owned Pyeongtaek Gyeonggi-do 43,650 30,132 73,782 - 133 Owned

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Suwan Gwangju 59,992 65,570 125,562 - 155 Owned Dongducheon Gyeonggi-do 31,347 18,559 49,906 - 95 Owned Jeongeup Jeonbuk 12,579 25,202 37,781 - 80 Owned Gundan Incheon 37,475 26,064 63,539 - 105 Owned Gimpo Gyeonggi-do - - 12,837 - 12,837 59 Leased Chuncheon Kangwon-do 24,593 31,321 55,914 - 104 Owned Sonpa Seoul 38,126 22,075 59,776 60,201 59,776 197 Leased Haengdang Station

Seoul 4,386 8,981 13,367 - 83 Owned

Goyang Gyeonggi-do 23,300 49,621 72,921 - 181 Owned Shi-hwa Gyeonggi-do 28,597 12,668 41,265 - 124 Owned Deokso Gyeonggi-do 30,576 13,144 43,720 - 125 Owned Gwonseon Gyeonggi-do 33,442 2,290 35,732 - 147 Owned Shiheung Gyeonggi-do 28,597 12,668 485 41,265 485 91 Owned/

Leased Sangdang Chungbuk 25,643 26,667 52,310 - 115 Owned Dongdaejeon Daejeon 9,612 20,354 24,626 29,966 24,626 86 Leased Geumjeong Busan 30,576 13,144 43,720 - 125 Owned Banyeo Busan - 11,933 7,075 7,075 11,933 81 Owned/

Leased Samgye Gyeongnam 6,757 4,159 150 10,916 150 89 Owned/

Leased Deokjin Jeonbuk 13,293 5,537 18,830 - 64 Owned Seoksa Kangwon-do 17,880 11,111 28,990 - 116 Owned Daegu-Yulha Daegu 37,307 49,976 87,283 - 147 Owned Cheongnyangni Seoul - - 30,308 - 30,308 155 Leased Maseok Gyeonggi-do - - 20,258 - 20,258 84 Leased Jecheon Chungbuk 10,958 12,085 23,044 - 56 Owned Cheonan-Asan Chungnam - - 43,731 - 43,731 89 Leased Changwon Gyeongnam 31,545 39,525 71,071 - 168 Owned Heungsung Chungnam - - 19,829 - - 74 Leased Busan Busan 51,607 38,233 89,840 - 161 Owned Samyang Seoul 290 - 19,710 290 19,710 111 Owned Gimpo Airport Seoul - 8,351 50,426 8,351 50,426 98 Owned/

Leased Wonju Kangwon-do - - 28,232 - 28,232 219 Leased

(2) Overseas (As of December 31, 2011) (Unit: m2, millions Won, persons) Division Location Land Building Total Number of

employees Remark

Book value

Rental Area

Book value

Rental Area

Book value

Rental Area

Discount Store

Vietnam Ho Chi Minh City, Vietnam

93 5065 73,673 73,766 575 License/Owned

Beijing Beijing, China

19,885 29,150 165,668

49,035 165,668 1,948 Owned/ Leased

Qingdao Qingdao, China

81,824 81,824 708 Leased

Shenyang Shenyang, China

72,338 72,338 848 Leased

Shanghai Shanghai, China

584 1,178,118

584 1,178,118

14,008 Owned/ Leased

Indonesia Jakarta, Indonesia

53,799 123,655 53,976 177,196 53,976 2,181 Owned/ Leased

[Financial Business] ▶ Lotte Card (As of December 31, 2011) (Unit: ㎡, person)

Division Address Land Building Total

Employees Remarks Book Value

Rental Area

Book Value

Rental Area

Book Value

Rental Area

Lotte Card

51-1, Namchang-dong, Jung-gu, Seoul and 138 other locations*

- - - 72,069 - 72,069 1,273 Based on regular employees

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* Includes CRM Center, area supervision office, sales stores, card centers, etc.

[Other Businesses] (As of December 31, 2011) (Unit: ㎡, million won, person)



Rental Area

Book Value

Rental Area

Book Value

Rental Area

Supermarket Jeonnong-dong, Dongdaemun, Seoul and 349 other stores

139,037 79,635 94,443 287,846 204,094 81,197 5,825 Rental, owned

Cinema Goejeong-dong, Seo-gu, Daejeon and 74 others

25,892 0 63,675 101,542 89,567 101,542 303 Rental, owned, commissioned management

Woori Home Shopping (Broadcasting facilities)

21, 5-ga, Yeongdeungpo-gu, Seoul.

- 20,501 - 20,501 - 487 Owned

Korea Seven* Hyehwa-dong, Jongno-gu, Seoul and 10 other stores

10,084 880 10,964 2 Owned

Buy the Way* 482-4, Gung-dong, Yuseong-gu, Daejeon and 4 other stores

1,203 1,064 2,267 2 Owned

* Lists stores which are owned. (2) Overseas offices and entities (As of December 31, 2011) (Unit: ㎡, person)



Rental Area

Book Value

Rental Area

Book Value

Rental Area

Departm

ent store

Beijing Office Beijing, China 261 261 14 Rental

Shanghai Office

Shanghai, China

147 147 5 Rental

Shenyang Office

Shenyang, China

182 182 10 Rental

Weihai Office Weihai, China 611 611 7 Rental

India Office New Delhi, India

41 41 Local company

Rental

Vietnam Office Hochiminh, Vietnam

51 51 7 Rental

Vietnam Office Hanoi, Vietnam 268 268 14 Rental

Indonesia Office

Jakarta, Indonesia

298 298 39 Rental

Milano Office Milano, Italy 103 103 4 Rental

Discount store

Chongqing Office

Shanghai 291 291 3 Rental

Entities India 651 651 4 Rental

Qingdao 710 710 3 Rental

Beijing 8 Located in the store

Shanghai 3,337 3,337 14 Rental

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Rental Area

Book Value

Rental Area

Book Value

Rental Area

Shenyang 804 804 3 Rental

Vietnam 4 Located in the store

Indonesia 2,475 2,475 8 Rental

(3) Other Facilities

(Unit: m2) Business area Center Ownership type Area Lotte Department Bundang Logistics Center Owned 7,091 Lotte Mart Yangji Logistics Center Leased 14,231

Yangsan Logistics Center Owned 5,598 Osan Logistics Center Owned 85,546 Gimhae Logistics Center Owned 54,934

Lotte Super Singal Logistics Center Owned 9,431 Woori Home Shopping

Gyeonggi Logistics Center Leased 19,095 Call Centers (Busan, Daegu) Leased 6,531

B. Plans for the Establishment of New Stores

Division Store Location Expected establishment date

Remarks

Department Stores

Pyeongchon Store

Hogye-dong, Dongan-gu, Anyang-si, Gyeonggi-do, Korea March 2012

Outlets

Cheongju Outlet

Biha-dong, Heungdeok-gu, Cheongju-si, Chungbuk, Korea 2H 2012

Buyeo Premium Outlet

Hapjeong-ri, Gyuam-myeon, Buyeo-gun, Chungcheongnam-do, Korea 2H 2012

Discount Stores

Pyeongchon Hogye-dong, Dongan-gu, Anyang-si,

Gyeonggi-do, Korea March 2012

Naju Songwol-dong, Naju-shi, Jeonnam, Korea May 2012

Cheongju

Biha

Biha-dong, Heungdeok-gu, Cheong-shi,

Korea November 2012

Cheongna Commercial area M4, Cheongna FEZ,

Incheon, Korea December 2012

Chomdan

Humansia 2-

danji

C-3, Chomdan 2 jigu, Gwangju, Korea

December 2012

Incheon Inhyeon-dong, Jung-gu, Incheon, Korea December 2012 * The above plans are subject to change based on future business conditions.

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C. Plans for New Establishment and Purchase of Facilities The Group only shows investment amounts for its department store and discount store businesses herein. The amount for the department store business includes investment amounts for Lotte Shopping department stores, Lotte Midopa and Lotte Square, while the amount for discount stores shows only Korean domestic investment amounts. (1) Investment under Progress (As of December 31, 2011) (Unit: 100 million Won) Business area Division Investment

period Investment asset

Investment effect

Total investment

Prior Investment

Future investment

Department store

New investment 2011~2015 Tangible

asset Increase of sale 17,355 5,370 11,985

Discount store

New investment 2011~2015 Tangible

asset Increase of sale 26,523 2,025 24,498

* above plans are subject to change based on future business conditions.

* The above plans are for new domestic investments only, and do not include ordinary or overseas investments or capital injections or additional investments to existing investments.

(2) Future investment plans (As of December 31, 2011) (Unit: 100 million Won)

Business area Project name

Expected investment Expected annual investment Effects

Asset type Amount (2012) (2013) (2014)

Department store

New and ordinary investments

Tangible asset 14,002 7,987 4,849 1,166

Sales increase

Discount store

New and ordinary investments

Tangible asset 19,662 5,235 7,008

7,419

Sales increase

* The above plans are subject to change based on future business conditions.

* The above plans are for domestic investments or capital injections only, and do not include overseas investments.

3. Matters regarding Sales A. Sales

(Unit: million Won) Division Type Product 42nd fiscal year 41st fiscal year

Department Store

Products Clothes, etc.

Export Domestic 7,407,178 6,724,028 Total 7,407,178 6,724,028

Goods Export Domestic - -

Total - -

Others Rental fee, etc.

Export Domestic 513,827 451,124 Total 513,827 451,124

Total 7,921,005 7,175,152

Discount Store

Products Food, etc.



Total - -

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Total 8,474,744 7,354,928

Finance

Products Export Domestic 4,950 2,055 Total 4,950 2,055


Total - -

Others Commission, etc.


Total 1,484,994 1,314,778

Others

Products Food, etc.


Goods Food, etc.




Total 4,372,345 3,172,886

Total

Products Clothes, Food, etc.

Export - -

Domestic 18,948,555 16,194,017 Total 18,948,555 16,194,017

Goods Clothes, Food, etc.

Export - -

Domestic 82,452 71,575 Total 82,452 71,575


Export - -

Domestic 3,222,081 2,752,152 Total 3,222,081 2,752,152

Total 22,253,088 19,017,744 B. Sales Path, Method and Condition [Department Store and Discount Store Businesses] (1) Sales Path Manufacturer → Lotte Shopping → Consumer

(2) Sales Method and Condition Customers make payments by credit card, cash or gift certificate. In the case of payments made by credit card, final payment is made to the Company’s account two or three business days after a request has been filed with the credit card company.

(3) Sales Strategy As the largest retail company in Korea, Lotte Shopping has prepared the following strategy in order to maximize profitability and shareholder value with the goal of becoming a premier global company.

(A) Strengthening and Expanding the Key Businesses

The Company has been strengthening its core competencies, centering on department stores and discount stores, and plans to enhance its market position in the retail industry in Korea and overseas through continuous new store openings and expansion.

(B) Developing New Retail and Profit Models The Company is developing new retail business models with high growth potential in response to the changing retail environment. As part of this strategy, the Company currently operates its first Young Plaza in

45

Myeongdong, which exclusively targets young consumers who have long term purchasing power. The second and third Young Plaza stores are located in Cheongju and Daegu, respectively. In March 2005, the Company opened the first Avenuel branch, a prestigious luxury brand store that targets customers with high levels of income. In addition, the Company opened Gwangju Worldcup outlet mall and Gimhae Premium outlet mall in 2008, Gwangju Suwan outlet mall in 2009 and Daegu Yulha outlet mall in 2010. The Company has also won a bid to develop the Sky Park project in Gimpo, in which it will develop a shopping complex with Category Killer shops (including shops for baby and sport products), department stores, discount stores, cinema and hotels. The Company believes that the development of such new retail business models will differentiate the Company from competitors and maximize the potential synergies through convergence among department stores, discount stores, supermarkets, convenience stores and Internet shopping malls.

(C) Strengthening of Brand Power and Merchandise Differentiation (“MD”) The Company has the capacity to promptly launch new popular products by scouting out superior brands and products thanks to its competitive advantage in purchasing power from its expansive network of large stores and integrated purchasing. The department store business has been scoping out new products and maximizing its competitiveness through PBs (Private Brands), NPBs (National Private Brands) and multi-shops led by the GF Business Department and the new MD Team. The mart store business has taken the lead in the product differentiation through the development of ‘third-generation PBs’ which focus on diversification and high-quality PB products. In addition, the Company is cooperating with other companies to aid NPBs in launching independent products and is also strengthening MPBs (Manufacturing Private Brands) in order to help small and medium manufacturers with good quality products but weak branding capacities grow under Lotte’s established credibility.

(D) Maximizing Operational Efficiency The Company continues to invest in IT and has improved its BPR process and introduced ERP (SAP-R3) to upgrade its information systems, reduce operating costs and improve operational efficiency. The low cost, high efficiency operation will be strengthened for marketing and store operations as well as integrated product purchases, utilizing the advantages of the economies of scale. The Company also utilizes a KPI-based BSC system in establishing its management strategy and evaluating its performance.

(E) Improving Customer Management and Satisfaction To improve customer management and service, the key asset for any retail operation, the Company promotes the use of credit cards issued by Lotte Card, which is 92.54% owned by the Company. In addition to the typical credit card functions, Lotte Card offers benefits such as discounts in department and discount stores, gifts and mileage programs that are favorable compared to other credit cards. Furthermore, Lotte Card allows the Company to provide customized services to a segment of customers and plan various complimentary events. The Company offers Lotte Member Cards to credit card users and cash customers. The loyalty program launched in November 2005 offers redeemable points for all products and services purchased at any affiliate stores of Lotte Group. For the Company, it will provide the opportunity to understand its customers’ purchasing habits for department stores, discount stores, supermarkets, and cinemas as well as for Group affiliates such as Korea Seven and Lotte Hotel. It can also be used for collaborative promotion strategies and group target marketing along with customer relations management. The Company is implementing a differentiated and refined service strategy so that customers will enjoy visiting its stores. As part of such strategy, the cultural center of each store offers a variety of music, art, health and performance events and provides individualized shopping spaces and an exclusive MVG (Most Valuable Guest) lounge. In addition, various customer facilities such as restaurants, spa and yoga centers are also in operated. The information service provides guide service and other useful information for the shoppers.

[Lotte Card Member Trend] (Unit: million persons) 2009 2010 2011 Number of Card Members 17.3 20.6 23.7 [Financial Business] Not applicable. [Other Businesses] ▶ Woori Home Shopping

46

Merchandisers (MD) are responsible for procuring products by entering into purchase agreements with vendors and for providing information on such products directly to customers through media such as TV, catalog and Internet. Purchased goods are delivered through door-to-door delivery service once payment is made after customers place orders through phone calls, Internet or TV remote control. Woori Home Shopping accepts various payment methods including credit cards, cash, accumulated points and gift coupons. ▶ Korea Seven and Buy the Way Sales are made through face-to-face sales with customers in stores and accepted forms of payments include cash, credit cards or gift coupons. Our convenience store business has three sales strategies: store development by improving profitability and market share; operational innovation by revenue increase and proactive reaction to customers’ needs and brand differentiation by enhancing fresh food lines. 4. Market Risk and Risk Management Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the Group’s return. The Group buys and sells derivatives, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out under strict supervision of the internal risk management. Generally, the Group seeks to apply hedge accounting in order to manage volatility in profit or loss. (1) Currency risk

The Group is exposed to currency risk on borrowings and debentures that are denominated in a currency other than the respective functional currencies of the Group. Currencies that generate exchange positions include U.S. dollars (USD), Japanese Yen (JPY) and others. The objective of exchange risk management is to continue stable financial activities by minimizing uncertainty and profit and loss fluctuations. Foreign currency trade for speculation is strictly prohibited. The Group enters into currency swap transactions with financial institutions to hedge currency risks of foreign currency denominated borrowings and debentures. When the Group needs foreign currencies, the Group enters into a forward exchange contract with major financial institutions to avoid the risks of exchange rate fluctuations. The closing exchange rates as of December 31, 2011, 2010 and January 1, 2010 and the average exchange rates for the years ended December 31, 2011 and 2010 are as follows:

Division Average rate Closing rate

2011 2010 December 31,

2011 December 31,

2010 January 1, 2010

USD 1,108.11 1,156.26 1,153.30 1,138.90 1,167.60 EUR 1,541.42 1,532.94 1,494.10 1,513.60 1,674.28 JPY 13.9131 13.2056 14.8516 13.9708 12.6282

The Group regularly measures exchange risks on Korean Won against foreign currency fluctuations. The Group assumes that foreign currency exchange rates fluctuate 10% at the end of reporting period, and others variables are not changed. Sensitivity analysis of income before taxes from changes of foreign currency exchange rate as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

(Unit: millions Won)

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

10% increase

10% decrease

10% increase

10% decrease

10% increase

10% decrease

USD (45,944) 45,944 709 (709) 6,604 (6,604) EUR (18) 18 (74) 74 (99) 99 JPY (44,576) 44,576 (41,891) 41,891 (37,870) 37,870

47

Total (90,538) 90,538 (41,256) 41,256 (31,365) 31,365 The sensitivity analysis above is related to the monetary assets and liabilities, denominated in a currency other than the Group’s functional currency, as of December 31, 2011, 2010 and January 1, 2010 of the Company and its consolidated subsidiaries in Korea. (2) Interest rate risk

Interest rate risk is the risk of changes in interest income and expense from deposits and borrowings due to fluctuations in the market interest rate. Interest rate risk of the Group arises from variable interest rate financial instruments and borrowings. The purpose of interest rate risk management is to minimize value fluctuation of financial assets and liabilities that occur from uncertainty caused by changes in interest rates. The Group makes interest swap transactions with financial institutions to hedge interest rate risk of variable borrowings and debentures. The interest rate profile of the Group’s variable interest-bearing financial instruments was as follows for the dates indicated:


Sensitivity analysis of interest income and expenses from changes in interest rates as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


Division December 31, 2011 December 31, 2010 January 1, 2010 100bps

up 100bps down

100bps up

100bps down

100bps up

100bps down

Interest income 4,116 (4,116) 3,981 (3,981) 4,472 (4,472) Interest expense 7,865 (7,865) 7,237 (7,237) 2,316 (2,316)

Borrowings and debentures for which the Company has entered into interest rate swap transactions are not included. 5. Status of Derivatives Trade A. Status of Derivatives Contracts (1) Description of derivatives

Type Description Description Trade Put option Right to sell shares of common stock of KIBNET at a specified

price Cash flow hedge Currency swap Principal amounts of debentures in USD and JPY and borrowings

in USD at maturity are fixed to Korean Won. USD and JPY variable interest is fixed to Korean Won are fixed to Korean Won fixed interest.

(2) Fair value of outstanding derivatives as of the dates indicated are summarized as follows:

Type Description

Korean Won (thousands) December 31, 2011 December 31, 2010 January 1, 2010 Assets Liabilities Assets Liabilities Assets Liabilities

Trade Put option 1,697 - 34,879 - 31,817 - Cash flow hedge

Currency swap 47,814 23,164 203,248 48,042 195,330 3,220

Interest swap 312 12,898 - 21,354 - -

Division December 31, 2011

December 31, 2010

January 1, 2010

Variable rate instruments:

Financial assets 378,997 381,632 447,155

Financial liabilities 2,925,941 3,917,048 2,016,950

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Total

49,823 36,062 238,127 69,396 227,147 3,220 (3) Valuation gain (loss) of derivative instruments for the year ended December 31, 2011 are as follows:

Type of derivatives Description

Korean Won (millions) Valuation gain (loss) Remarks

Trade Put option (34,879) Loss on valuation of derivative instruments 201 Gain on valuation of derivatives instruments

(card business) Cash flow hedge

Currency swap

18,978 Gain on valuation of derivative instruments (426) Loss on valuation of derivative instruments

20,661 Gain on valuation of derivatives instruments (card business)

Interest swap 25,460 Unrealized gain on valuation of derivative instruments, net of tax effect

B. Risk Management

(1) The Company’s risk management objective is to increase the corporate value by minimizing the impact of exchange rate fluctuations on its profit and losses. (2) The Company hedges risks with respect to foreign currency denominated assets and liabilities when they arise in light of the amount and market conditions. (3) The Company hedges risks with respect to interest rate fluctuations when they arise in light of the amount and market conditions. (4) The Company does not enter into foreign currency related trades for speculative purposes. 6. Major Management Contracts A. Department Store Business The Company has entered into management contracts with Lotte Midopa, Lotte Building Station and Lotte Square to manage department stores owned by such associates. The Company receives 10% of the operating income (before accounting for depreciation costs) as management fees. B.Financial Service Business Lotte Card has entered into card issuance agreements with American Express Company, Master Card International, Visa International and JCB International whereby these companies receive from Lotte Card certain percentage of the credit purchase amounts made on the credit cards issued pursuant to such agreements. C.Other Businesses

(1) Woori Home Shopping

Woori Home Shopping has entered into partnership agreements and partnership card issuance agreements with BC Card Co., Ltd. and Shinhan Card Co., Ltd. as well as a delivery service agreement with Korea Express Inc. It also has entered into broadcasting program supply agreements with multiple cable TV stations.

(2) Korea Seven

Korea Seven has entered into trademark and operational technology licensing agreements with 7-Eleven, Inc., pursuant to which Korea Seven pays 0.6% to 1% of net sales amount as license fees. Also, Korea Seven has granted 7-Eleven, Inc. the right to purchase the shares of Korea Seven up to a total of 10% of its total outstanding shares on January 1 of every year starting from 2003.

49

(3) Lotte Boulangerie

Lotte Boulangerie entered into a technology license agreement with Shikishima Baking Co., Ltd. on April 20, 2001. Lotte Boulangerie paid an upfront fee of JPY 10 million and has been paying a semiannual fee of 1% of the total sales of the applicable goods.

(4) NCF

NCF has a royalty agreement with Nice Claup Co., Ltd. pursuant to which NCF pays Nice Claup a sales royalty fee of 2.2%, and a production royalty fee of 0.3%, of net sales from December 1, 2010 to March 31, 2016.

7. Research and development activities [Department Store Segment] ▶ Lotte Shopping (Department Store) (A) Distribution Strategy Research Center 1. Organization - Head: 1 person - Lead researchers: 2 people - Researchers: 5 people 2. Responsibilities - Identify and analyze a wide range of strategic issues related to the Company. - In connection with achieving the Company’s 2018 vision goals, conduct research on new business opportunities and improvements to the Company’s corporate culture. - Provide information to the board members by preparing CEO Reports. - Translation, publication and internal distribution of retail related materials to cultivate business management knowledge. - Research current and future outlook and important issues related to the retail industry. - Monitor outside consultants and improve consultancy standards. [Finance Segment] ▶ EB Card A. R&D organization - Head: 1 person - Lead researchers: 2 people - Researchers: 5 people

B. R&D records - Development of cashbee card / SAM and system improvement according to the project for the nationwide compatibility of transportation / distribution - Development of charge (re-charge) / payment terminals according to the use of prepaid electronic payments - Development of performance improvement technology for the existing product groups according to AFC business - System improvement project for the re-creation of AFC / distribution - Development of national standard SAM and card - Charge and payment of cashbee inside and outside the group - Development and delivery of Lotte ATM module 8. Other matters for investment decision-making A. Social contribution activity Lotte Shopping utilizes its nation-wide establishments and stores by developing an effective social contribution activity which meets each location’s specialty. Each store freely organizes a volunteering group which directly visits for genuine assistance and extends voluntary work to regional company’s under-

50

privileged neighbors such as lower-class children and young boys/girls, solitary elderly persons, handicapped, etc. III. Matters Regarding Financial Affairs 1. Summary Consolidated Financial Information

For the Year Ended December 31, Statement of Comprehensive Income Data 2010 2011 (in billions of Won, except

earnings per share) Sales ................................................................................................. W 19,018 W 22,253 Cost of sales ..................................................................................... (13,089) (15,251) Gross profit ...................................................................................... 5,929 7,002 Selling, general and administrative expenses ................................... (4,271) (5,183) Other operating income ..................................................................... 97 59 Other operating expense ................................................................... (157) (215) Operating income ............................................................................ 1,598 1,663 Finance income ................................................................................. 180 257 Finance expense ............................................................................... (312) (427) Equity method income of investments in associates ......................... 74 62 Profit before income tax ................................................................. 1,540 1,555 Income tax expense .......................................................................... (404) (542) Profit from continuing operations ................................................. 1,136 1,013 Discontinued operations Loss from discontinued operations, net of tax of nil .......................... (32) — Profit for the year ............................................................................ 1,104 1,013 Other comprehensive income (loss), net of tax: Change in fair value of available-for-sale financial assets ................. 75 12 Exchange differences on translating foreign operations .................... (7) 39 Effective portion of changes in fair value of cash flow hedges .......... (20) 25 Defined benefit plan actuarial losses ................................................. (28) (11) Change in equity of equity method investments ................................ 23 (49) Tax effects ......................................................................................... (14) (16)

Other comprehensive income for the year, net of tax.................. 29 0

Total comprehensive income for the year .................................... W 1,133 W 1,013 Profit attributable to:

Owners of the Company .............................................................. 1,035 932 Non-controlling interests .............................................................. 69 81

W 1,104 W 1,013 Total comprehensive income attributable to:

Owners of the Company .............................................................. 1,059 917 Non-controlling interests .............................................................. 74 96

W 1,133 W 1,013

Earnings (loss) per share in Won Basic and diluted earnings per share – Continuing operations .... 37 32 Basic and diluted loss per share – Discontinued operations ........ (1) — W 36 W 32

51

As of December 31, Statement of Financial Position Data 2010 2011 (in billions of Won)

Assets Cash and cash equivalents ............................................ W 1,242 W 1,958 Trade and other receivables .......................................... 461 637 Other financial assets .................................................... 6,487 7,733 Inventories ..................................................................... 1,670 2,042 Other current non-financial assets ................................. 169 358

Total current assets..................................................... 10,029 12,728 Investments in associates .............................................. 869 941 Other financial assets .................................................... 1,610 1,651 Property, plant and equipment, net ................................ 12,652 13,154 Investment property ....................................................... 633 641 Goodwill ......................................................................... 2,050 2,067 Other intangible assets, net ........................................... 217 640 Other non-financial assets ............................................. 1,067 1,183 Deferred tax assets........................................................ 65 56

Total non-current assets ............................................. 19,163 20,333

Total assets W 29,192 W 33,061

Liabilities Current portion of borrowings and debentures, net of debenture issuance costs ..............................................

W 3,337 W 3,447

Trade and other payables .............................................. 4,037 4,724 Other financial liabilities ................................................. 430 472 Income taxes payable .................................................... 285 184 Unearned revenues ....................................................... 164 184 Provisions ...................................................................... 33 38 Other current non-financial liabilities .............................. 717 862

Total current liabilities ................................................ 9,003 9,911 Borrowings and debentures, net of debenture issuance costs and excluding current portion ................

5,059 6,739

Other financial liabilities ................................................. 119 165 Employee benefit liabilities ............................................ 144 157 Deferred tax liabilities .................................................... 1,166 1,337 Long-term unearned revenues ...................................... 22 21 Provisions ...................................................................... 37 35 Other non-financial liabilities .......................................... - 17

Total non-current liabilities ......................................... 6,547 8,471 Total liabilities .............................................................. 15,550 18,382

Equity Common stock of W5,000 par value

Authorized – 60,000,000 shares Issued and outstanding – 29,043,374 shares ......... 145 145

Capital surplus ............................................................... 3,622 3,622 Capital adjustments ....................................................... (16) (31) Retained earnings ......................................................... 9,211 10,092 Accumulated other comprehensive income 147 138 Stockholders’ equity attributable to owners of the

Company ................................................................... 13,109 13,966

Non-controlling interests ............................................ 533 713

Total equity .................................................................. 13,642 14,679

Total liabilities and equity ........................................... W 29,192 W 33,061

2. Notes to Presentation of Financial Information A. Applicable accounting standards

52

The following are the major accounting policies that the Company has applied:

(a) Statement of Compliance The consolidated financial statements have been prepared in accordance with Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Corporations in the Republic of Korea. These are the Group’s first consolidated financial statements prepared in accordance with K-IFRS and K-IFRS No. 1101 First-time Adoption of Korean International Financial Reporting Standards (“K-IFRS No. 1101”) has been applied. The Group’s date of transition to K-IFRS is January 1, 2010, and the effect of the transition from Korean Generally Accepted Accounting Principles (“K-GAAP”) to K-IFRS on the Group’s reported financial position and financial performance is explained in note 41. The consolidated financial statements were authorized for issuance by the Board of Directors on February 28, 2012.

(b) Basis of Measurement The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement 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 available-for-sale financial assets are measured at fair value 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 and unrecognized past service costs

(c) Functional and Presentation Currency These consolidated financial statements are presented in Korean won, which is the Parent Company’s functional currency and the currency of the primary economic environment in which the Group operates.

(d) Use of Estimates and Judgments The preparation of the consolidated financial statements in conformity with K-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 in which the estimates are revised and in any future periods affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following notes: Note 13 – Classification of investment property Note 34 – Lease classification 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: Note 6 – Allowance for financial assets Note 8 – Financial instruments Note 14 – Intangible assets Note 19 – Provisions

Note 21 – Employee benefits Note 32 – Income taxes Note 36 – Contingent liabilities and financial commitments

53

Significant Accounting Policies The significant accounting policies applied by the Group in preparation of its consolidated financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening K-IFRS statement of financial position at January 1, 2010 for the purpose of the transition to K-IFRS, unless otherwise indicated.

(a) Operating Segment A segment is a distinguishable component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues that relate to transactions with any of the Group’s other components. All operating segments’ operating results are regularly reviewed by the Group’s chief operating decision maker in making decisions on how to allocate resources and in assessing performance, and for which discrete financial information is available. Segment results that are reported to the Group’s chief operating decision maker include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. The Group has four operating segments which consist of department stores, discount stores, credit card service and others, as described in note 36.

(b) Basis of Consolidation

(i) Subsidiaries A subsidiary is an entity controlled by the Group, where control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. If a member of the Group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated financial statements.

(ii) Special purpose entities The Group has established a number of special purpose entities (SPEs) for trading and investment purposes. The Group does not have any direct or indirect shareholdings in these entities. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE’s risks and rewards, the Group concludes that it controls the SPE.

(iii) 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. Intra-group losses are recognized as expense if intra-group losses indicate an impairment that requires recognition in the consolidated financial statements.

(iv) Non-controlling interests Non-controlling interests in a subsidiary are accounted for separately from the parent’s ownership interests in a subsidiary. Each component of net profit or loss and other comprehensive income is attributed to the owners of the parent and non-controlling interest holders, even when the allocation reduces the non-controlling interest balance below zero.

(c) Business Combinations

(i) Business combinations A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control.

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Each identifiable asset and liability is measured at its acquisition-date fair value except for below: - Leases and insurance contracts are required to be classified on the basis of their contractual terms and

other factors - Only those contingent liabilities assumed in a business combination that are a present obligation and

can be measured reliably are recognized - Deferred tax assets or liabilities are recognized and measured in accordance with K-IFRS No.1012

Income Taxes - Employee benefit arrangements are recognized and measured in accordance with K-IFRS No.1019

Employee Benefits - Reacquired rights are measured in accordance with special provisions

As of the acquisition date, non-controlling interests in the acquiree are measured as the non-controlling interests' proportionate share of the acquiree's identifiable net assets.

The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer. However, any portion of the acquirer's share-based payment awards exchanged for awards held by the acquiree's employees that is included in consideration transferred in the business combination shall be measured in accordance with the method described above rather than at fair value.

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Acquisition-related costs, other than those associated with the issuance of debt or equity securities, are expensed in the periods in which the costs are incurred and the services are received. The costs to issue debt or equity securities are recognized in accordance with K-IFRS No.1032 Financial Instruments: Presentation and K-IFRS No.1039 Financial Instruments: Recognition and Measurement.

(ii) Goodwill The Group measures goodwill at the acquisition date as: - the fair value of the consideration transferred; plus - the recognized amount of any non-controlling interests in the acquiree; plus - if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the

acquiree; less - the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities

assumed. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

As part of its transition to K-IFRS, the Group elected to restate only those business combinations which occurred on or after January 1, 2010 in accordance with K-IFRS. In respect of acquisitions prior to January 1, 2010, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP, K-GAAP.

(d) Associates and Jointly Controlled Entities

An associate is an entity in which the Group has significant influence, but not control, over the entity’s financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement, and require unanimous consent for strategic financial and operating decisions. The investment in an associate is initially recognized at cost 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 after the date of acquisition. Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group losses recognized as expense if intra-group losses indicate an impairment that requires

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recognition in the consolidated financial statements. If an associate uses accounting policies different from those of the Company for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in applying the equity method. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has to make payments on behalf of the investee for further losses.

(e) Cash and Cash Equivalents

Cash and cash equivalents comprise cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and are used by the Group in management of its short-term commitments. Generally equity investments are excluded from cash and cash equivalents. However, redeemable preference shares, for which the period from the acquisition to redemption is short, are classified as cash and cash equivalents.

(f) Inventories

The cost of inventories is based on the first-in first-out principle, and includes expenditures for acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating 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 are 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, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.

(g) Non-derivative Financial Assets The Group recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Group recognizes financial assets in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

(i) Financial assets at fair value through profit or loss A financial asset is classified as financial assets are classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

(ii) Held-to-maturity investments A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method.

(iii) Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an

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active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method except for loans and receivables of which the effect of discounting is immaterial.

(iv) Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost. When a financial asset is derecognized or impairment losses are recognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Dividends on an available-for-sale equity instrument are recognized in profit or loss when the Group’s right to receive payment is established.

(v) De-recognition of financial assets 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 on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

(h) Derivative Financial Instruments, including hedge accounting Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are either recognized in profit or loss or, when the derivatives are designated in a hedging relationship and the hedge is determined to be an effective hedge, other comprehensive income.

(i) 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 designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency 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. The Group makes an assessment, both at the inception of the hedge relationship as well as on a quarterly basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80%-125%. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income. Fair value hedge Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the consolidated statement of comprehensive income. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from

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gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting 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.

(ii) Other derivative financial instruments Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

(i) Impairment of Financial Assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset 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. However, losses expected as a result of future events, regardless of likelihood, are not recognized. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

(i) Financial assets measured at amortized cost An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Group can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account.

(ii) Financial assets carried at cost If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is

not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be reversed.

(iii) Available-for-sale financial assets When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses

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recognized in profit or loss for an investment in an equity instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

(j) Property, Plant and Equipment Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. 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. In addition, in the preparation of the opening K-IFRS consolidated statement of financial position on the date of transition to K-IFRS, the Group measures certain property, plant and equipment except for buildings at fair value at the date of transition, which is deemed cost, in accordance with K-IFRS No. 1101. Subsequent to initial recognition, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. 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 item will flow to the Group and the cost of the item can be measured reliably. 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, 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. A component that is significant compared to the total cost of property, plant and equipment is depreciated over its separate useful life. 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 in profit or loss. The estimated useful lives of the Group’s assets are as follows: Useful lives (years)

Buildings 10 ~ 50 Structures 5 ~ 48 Machinery 2 ~ 30 Vehicles 3 ~ 9 Display fixtures 4 ~ 10 Other property, plant and equipment (“Other PP&E”) 2 ~ 20

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.

(k) Intangible Assets Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses. Amortization of intangible assets except for goodwill 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, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having indefinite useful lives and not amortized.

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Useful lives (years)

Industrial property rights 5 ~ 10 Rights to use facility 4 ~ 20 Film copyrights Duration of related revenue to be realized Other intangible assets 2 ~ 10

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 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.

Goodwill recognized on business combination is included in intangible assets. The Group retroactively restated amounts related to business combinations that occurred after January 1, 2010, in accordance with K-IFRS. Goodwill related to business combinations that occurred before January 1, 2010 is included on the basis of its deemed cost, which represents the amount recognized under K-GAAP. Goodwill acquired after January 1, 2010 is recognized as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the Group’s interest in the fair value of the acquiree’s net identifiable assets acquired and liabilities assumed exceeds consideration, the difference is immediately recognized in the statement of income for the period. Goodwill is measured at cost less accumulated impairment losses. The acquisition of additional non-controlling interest while retaining control is accounted for as shareholder transaction and as a result no goodwill is recognized.

(l) Investment Property

Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property. Investment property is measured initially at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses

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 item will flow to the Group and the cost of the item can be measured reliably. 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. Investment properties, except for land, are depreciated on a straight-line basis over 10 to 50 years, the estimated useful lives. Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. The change is accounted for as a change in an accounting estimate.

(m) Impairment of Non-financial Assets The carrying amounts of the Group’s non-financial assets, other than assets arising from 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 amount to their carrying amount. The Group estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable amount of an asset, then 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 reflect 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.

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An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss. Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. 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.

(n) Leases The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where 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.

(i) Finance leases At the commencement of the lease term, the Group recognizes as finance assets and finance liabilities in its consolidated statements 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 charge and the reduction of the outstanding liability. The finance charge 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 lessee adopts for depreciable assets that are owned. If there is no reasonable certainty that the lessee 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 asset may be impaired.

(ii) 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 period of the lease.

(o) 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. The Group immediately recognizes other borrowing costs as an expense. To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be 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 shall not exceed the amount of borrowing costs incurred

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during that period.

(p) 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.

(i) 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, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

(ii) 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 acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. The Group derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

(q) Employee Benefits

(i) 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 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.

(ii) 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 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, less the fair value of any related assets. The present value is determined by discounting the expected future cash flows using the interest rate of corporate bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise.

(iii) Retirement benefits: defined contribution plans When an employee has rendered 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.

(q) Employee Benefits, Continued

(iv) Retirement benefits: defined benefit plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit plans is calculated by estimating 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. The fair value of plan assets is deducted. The calculation is

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performed annually by an independent actuary using the projected unit credit method. The discount rate is the yield at the reporting date on corporate bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The Group recognizes all actuarial gains and losses arising from actuarial assumption changes and experiential adjustments in other comprehensive income when incurred. 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 total of cumulative unrecognized past service cost and 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. Past service costs which are the change in the present value of the defined benefits obligation for employee service in prior periods, resulting in the current period from the introduction of, or change to post-employment benefits, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, a defined benefit plan, the Group recognizes the past service cost immediately.

(r) 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 shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The Group provides an allowance for credit card assets at the amount that equals the product of the following:

unused credit commitment multiplied by credit conversion factor and provision rate per BASEL discounted by the effective interest rate.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. 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.

(s) Foreign Currencies

(i) 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 using the reporting date’s exchange rate. 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, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

(ii) Foreign operations If the presentation currency of the Group is different from a foreign operation’s functional currency, the

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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. 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. Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income in the translation reserve.

(t) Equity 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. Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the Company’s shareholders. Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in profit or loss as accrued. 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 retains treasury shares, the consideration paid or received is directly recognized in equity.

(u) Revenue Revenue from sale of goods, rendering of services or use of the Group assets is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates and are recognized as a reduction of revenue. Goods sold Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The Company, Lotte Midopa Co., Ltd. and Lotte Square Co., Ltd. recognize sales on a gross basis for merchandise of which the Company, Lotte Midopa Co., Ltd. and Lotte Square Co., Ltd. bear the overall inventory risk in connection with purchase contracts with vendors where the merchandise may only be returned for a full refund prior to the end of the relevant season (for seasonal merchandise) or within 90 days from delivery (for non-seasonal merchandise). The Group recognizes sales on a net basis for merchandise

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that may be returned to vendors at any time. Customer Loyalty Programs For customer loyalty programs, the fair value of the consideration received or receivable from the initial sale is allocated between the award credits (“points”) and the other components of the sale. The Group supplies all of the awards with its products. The amount allocated to the points is estimated by reference to the fair value of its products for which they could be redeemed, since the fair value of the points themselves is not directly measurable. The fair value of its products is estimated taking into account the expected redemption rate and the timing of such expected redemptions. Such amount is deferred and revenue is recognized only when the points are redeemed and the Group has fulfilled its obligations to supply its products.

(u) Revenue, Continued Commissions When the Group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commission made by the Group. Rental income Rental income, net of lease incentives granted, from investment property is recognized in profit or loss on a straight-line basis over the term of the lease. Income of card business The Group recognizes interest and fee income from cardholders and merchants on an accrual basis. Certain fees associated with lending activities which meet specified criteria, are deferred and amortized over the life of the loan as an adjustment to the carrying amount of the loan. The amortization of deferred fee is recognized as operating revenue.

(v) Finance Income and Finance Costs Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, changes in the fair value of financial assets at fair value through profit or loss, 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 method. Dividend income is recognized in profit or loss on the date that the Group’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, dividends on preference shares classified as liabilities, changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognized on financial assets, and losses on hedging instruments that are recognized in profit or loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.

(w) 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 other comprehensive income.

(i) 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 any adjustment to tax payable in respect of previous years. 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.

(ii) 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. A deferred tax liability is recognized for all taxable temporary differences. A deferred tax asset

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is recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized. However, deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting profit or loss nor taxable income. 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 a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries and associates, 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 settle current tax liabilities and assets on a net basis.

(x) 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 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 convertible notes.

(y) Discontinued operations A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative consolidated statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative period.

(z) New Standards and Interpretations not yet adopted

The following new standards, interpretations and amendments to existing standards have been published and are mandatory for the Group for annual periods beginning after January 1, 2011, and the Group has not early adopted them. Management believes the impacts of these new pronouncements on the Group’s consolidated financial statements are not significant.

(i) Amendments to K-IFRS No. 1107 Financial Instruments: Disclosures

The amendments require disclosing the nature of the transferred assets, their carrying amount, and the description of risks and rewards for each class of transferred financial assets that are not derecognized in their entirety. If the Group derecognizes transferred financial assets but still has their specific risks and rewards, the amendments require additional disclosures on their effect of risks. The amendments will be applied prospectively for the Group’s annual periods beginning on or after July 1, 2011.

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(ii) Amendments to K-IFRS No. 1019 Employee Benefits

The standard requires recognition of actuarial gains and losses immediately in other comprehensive income and to calculate expected return on plan assets based on the rate used to discount the defined benefit obligation. The standard will be applied retrospectively for the Group’s annual periods beginning on or after January 1, 2013.

(iii) K-IFRS No. 1113 Fair Value Measurement The standard defines fair value and a single framework for fair value, and requires disclosures about fair value measurements. The standard will be applied prospectively for the Group’s annual periods beginning on or after January 1, 2013.

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3. Summary Non-Consolidated Financial Information

Korean won (millions)

December 31, 2011

December 31, 2010

Assets Cash and cash equivalents ￦ 1,336,911

625,347

Trade and other receivables

512,422

427,729 Other financial assets

279,087

280,445

Inventories

1,484,170

1,241,239 Other current non-financial

assets

120,156

80,941 Total current assets

3,732,746

2,655,701

Investments in associates and subsidiaries

4,972,343

4,640,059

Other financial assets

939,114

945,333 Property and equipment, net

11,115,381

11,022,546

Investment property

413,844

441,312 Goodwill

384,913

380,285

Other intangible assets, net

506,155

98,070 Other non-financial assets

777,834

703,993

Total non-current assets

19,109,584

18,231,598

Total assets ￦ 22,842,330

20,887,299


December 31, 2011

December 31, 2010

Liabilities Borrowings and debentures,

net of issuance costs ￦ 1,209,011

1,482,305 Trade and other payables

3,048,650

2,706,802

Other financial liabilities

288,226

283,694 Income taxes payable

114,758

209,863

Unearned revenues

81,608

77,383 Provisions

3,443

3,758

Other current non-financial liabilities

528,291

509,910 Total current liabilities

5,273,987

5,273,715

Borrowings and debentures, net of issuance costs

2,993,314

1,831,952


39,535

28,192 Employee benefit liabilities

128,026

107,324

Deferred tax liabilities

1,190,343

1,079,898 Long-term unearned revenues

2,017

1,983

Total non-current liabilities

4,353,235

3,049,349

Total liabilities

9,627,222

8,323,064 Equity

Common stock of ￦5,000 par value Authorized - 60,000,000 shares Issued and outstanding - 29,043,374 shares

145,217

145,217

Capital surplus

3,622,183

3,622,183 Retained earnings

9,405,868

8,713,656

Accumulated other comprehensive income

41,840

83,179

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Total equity

13,215,108

12,564,235

Total liabilities and equity ￦ 22,842,330

20,887,299

Korean won (millions, except for earnings per share)

2011 2010

Sales ￦ 15,181,722

13,344,682 Cost of sales

(10,647,566)

(9,373,055)

Gross profit

4,534,156

3,971,627

Selling, general and administrative expenses

(3,281,135)

(2,798,504) Other operating income

42,318

81,844

Other operating expense

(65,827)

(67,701) Operating income

1,229,512

1,187,266

Finance income

250,400

162,753

Finance expense

(357,932)

(317,972) Profit before income tax

1,121,980

1,032,047

Income tax expense

(379,043)

(253,754)

Profit for the year

742,937

778,293

Other comprehensive income (loss), net of tax: Change in fair value of available-for-sale financial assets

(59,817)

43,065 Effective portion of changes in fair value of cash flow

hedges

8,768

(6,985) Defined benefit plan actuarial losses

(10,221)

(26,778)

Tax effects

12,772

(1,739) Other comprehensive income (loss) for the year, net of tax

(48,498)

7,563

Total comprehensive income for the year ￦ 694,439

785,856

Earnings per share in won Basic and diluted earnings per share ￦ 25,580 26,798

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As of December 31, Statement of Financial Position Data 2010 2011 (in billions of Won)

Assets Cash and cash equivalents ............................................ W 1,242 W 1,958 Trade and other receivables .......................................... 461 637 Other financial assets .................................................... 6,487 7,733 Inventories ..................................................................... 1,670 2,042 Other current non-financial assets ................................. 169 358

Total current assets..................................................... 10,029 12,728 Investments in associates .............................................. 869 941 Other financial assets .................................................... 1,610 1,651 Property, plant and equipment, net ................................ 12,652 13,154 Investment property ....................................................... 633 641 Goodwill ......................................................................... 2,050 2,067 Other intangible assets, net ........................................... 217 640 Other non-financial assets ............................................. 1,067 1,183 Deferred tax assets........................................................ 65 56

Total non-current assets ............................................. 19,163 20,333

Total assets W 29,192 W 33,061

Liabilities Current portion of borrowings and debentures, net of debenture issuance costs ..............................................

W 3,337 W 3,447

Trade and other payables .............................................. 4,037 4,724 Other financial liabilities ................................................. 430 472 Income taxes payable .................................................... 285 184 Unearned revenues ....................................................... 164 184 Provisions ...................................................................... 33 38 Other current non-financial liabilities .............................. 717 862

Total current liabilities ................................................ 9,003 9,911 Borrowings and debentures, net of debenture issuance costs and excluding current portion ................

5,059 6,739

Other financial liabilities ................................................. 119 165 Employee benefit liabilities ............................................ 144 157 Deferred tax liabilities .................................................... 1,166 1,337 Long-term unearned revenues ...................................... 22 21 Provisions ...................................................................... 37 35 Other non-financial liabilities .......................................... - 17

Total non-current liabilities ......................................... 6,547 8,471 Total liabilities .............................................................. 15,550 18,382

Equity Common stock of W5,000 par value

Authorized – 60,000,000 shares Issued and outstanding – 29,043,374 shares ......... 145 145

Capital surplus ............................................................... 3,622 3,622 Capital adjustments ....................................................... (16) (31) Retained earnings ......................................................... 9,211 10,092 Accumulated other comprehensive income 147 138 Stockholders’ equity attributable to owners of the

Company ................................................................... 13,109 13,966

Non-controlling interests ............................................ 533 713

Total equity .................................................................. 13,642 14,679

Total liabilities and equity ........................................... W 29,192 W 33,061

4. Notes to Presentation of Financial Information A. Applicable accounting standards

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The following are the major accounting policies that the Company has applied:

(a) Statement of Compliance The separate financial statements have been prepared in accordance with Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Corporations in the Republic of Korea. These are the Company’s first separate financial statements prepared in accordance with K-IFRS and K-IFRS No. 1101 First-time Adoption of Korean International Financial Reporting Standards (“K-IFRS No. 1101”) has been applied. The Company’s date of transition to K-IFRS is January 1, 2010, and the effect of the transition from Korean Generally Accepted Accounting Principles (“K-GAAP”) to K-IFRS on the Company’s reported financial position and financial performance is explained in note 39. The separate financial statements were authorized for issuance by the Board of Directors on February 28, 2012.

(b) Basis of Measurement The separate financial statements have been prepared on the historical cost basis except for the following material items in the statement 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 available-for-sale financial assets are measured at fair value 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 and unrecognized past service costs

(c) Functional and Presentation Currency These separate financial statements are presented in Korean won, which is the Company’s functional currency and the currency of the primary economic environment in which the Company operates.

(d) Use of Estimates and Judgments The preparation of the separate financial statements in conformity with K-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 in which the estimates are revised and in any future periods affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the separate financial statements is included in the following notes: Note 13 – Classification of investment property Note 34 – Lease classification 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: Note 5 – Allowance for financial assets Note 7 – Financial instruments Note 14 – Intangible assets Note 19 – Provisions

Note 21 – Employee benefits Note 32 – Income taxes Note 35 – Contingent liabilities and financial commitments Significant Accounting Policies

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The significant accounting policies applied by the Company in preparation of its separate financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these separate financial statements and in preparing the opening K-IFRS statement of financial position at January 1, 2010 for the purpose of the transition to K-IFRS, unless otherwise indicated.

(a) Operating Segment The Company has disclosed information related to operating segments and geographic information in consolidated financial statements in accordance with K-IFRS No. 1108 Operating Segments.

(b) Investments in Associates and Subsidiaries

These separate financial statements are prepared and presented in accordance with K-IFRS No. 1027 Consolidated and Separate Financial Statements. The Company applied the cost method to investments in subsidiaries and associates in accordance with K-IFRS No. 1027. The carrying amount under previous GAAP on the date of transition to K-IFRS is considered to be the deemed cost of investments in subsidiaries and associates on the date of transition. Dividends from subsidiaries or associates are recognized in profit or loss when the right to receive the dividend is established.


(iii) Business combinations A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. Each identifiable asset and liability is measured at its acquisition-date fair value except for below: - Leases and insurance contracts are required to be classified on the basis of their contractual terms and

other factors - Only those contingent liabilities assumed in a business combination that are a present obligation and

can be measured reliably are recognized - Deferred tax assets or liabilities are recognized and measured in accordance with K-IFRS No.1012

Income Taxes - Employee benefit arrangements are recognized and measured in accordance with K-IFRS No.1019

Employee Benefits - Reacquired rights are measured in accordance with special provisions

As of the acquisition date, non-controlling interests in the acquiree are measured as the non-controlling interests' proportionate share of the acquiree's identifiable net assets.

The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer. However, any portion of the acquirer's share-based payment awards exchanged for awards held by the acquiree's employees that is included in consideration transferred in the business combination shall be measured in accordance with the method described above rather than at fair value.

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Acquisition-related costs, other than those associated with the issuance of debt or equity securities, are expensed in the periods in which the costs are incurred and the services are received. The costs to issue debt or equity securities are recognized in accordance with K-IFRS No.1032 Financial Instruments: Presentation and K-IFRS No.1039 Financial Instruments: Recognition and Measurement.

(iv) Goodwill The Company measures goodwill at the acquisition date as: - the fair value of the consideration transferred; plus - the recognized amount of any non-controlling interests in the acquiree; plus - if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the

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acquiree; less - the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities

assumed. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

As part of its transition to K-IFRS, the Company elected to restate only those business combinations which occurred on or after January 1, 2010 in accordance with K-IFRS. In respect of acquisitions prior to January 1, 2010, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP, K-GAAP.

(d) Cash and Cash Equivalents

Cash and cash equivalents comprise cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and are used by the Company in management of its short-term commitments. Generally equity investments are excluded from cash and cash equivalents. However, redeemable preference shares, for which the period from the acquisition to redemption is short, are classified as cash and cash equivalents.

(e) Inventories

The cost of inventories is based on the first-in first-out principle, and includes expenditures for acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating 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 are 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, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.

(f) Non-derivative Financial Assets The Company recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Company recognizes financial assets in the separate statement of financial position when the Company becomes a party to the contractual provisions of the instrument. Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

(v) Financial assets at fair value through profit or loss A financial asset is classified as financial assets are classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

(vi) Held-to-maturity investments A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Company has the positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method.

(vii) Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an

73

active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method except for loans and receivables of which the effect of discounting is immaterial.

(viii) Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables. Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost. When a financial asset is derecognized or impairment losses are recognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Dividends on an available-for-sale equity instrument are recognized in profit or loss when the Company’s right to receive payment is established.

(v) De-recognition of financial assets The Company 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 on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability. If the Company retains substantially all the risks and rewards of ownership of the transferred financial assets, the Company continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

(g) Derivative Financial Instruments, including hedge accounting Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are either recognized in profit or loss or, when the derivatives are designated in a hedging relationship and the hedge is determined to be an effective hedge, other comprehensive income.

(iii) Hedge accounting The Company holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to manage interest rate risk and foreign exchange risk. The Company designated derivatives as hedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge). On initial designation of the hedge, the Company 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. The Company makes an assessment, both at the inception of the hedge relationship as well as on a quarterly basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80%-125%. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income. Fair value hedge Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the separate statement of comprehensive income. The Company discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment

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arising from gain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting 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.

(iv) Other derivative financial instruments Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized immediately in profit or loss.

(h) Impairment of Financial Assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset 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. However, losses expected as a result of future events, regardless of likelihood, are not recognized. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

(iv) Financial assets measured at amortized cost An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Company can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account.

(v) Financial assets carried at cost If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is

not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be reversed.

(vi) Available-for-sale financial assets When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses

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recognized in profit or loss for an investment in an equity instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

(i) Property and Equipment Property and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and accumulated impairment losses. 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. In addition, in the preparation of the opening K-IFRS separate statement of financial position on the date of transition to K-IFRS, the Company measures certain property and equipment except for buildings at fair value at the date of transition, which is deemed cost, in accordance with K-IFRS No. 1101. Subsequent to initial recognition, an item of property and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Subsequent costs are recognized in the carrying amount of property and equipment at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. 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 in profit or loss. The estimated useful lives of the Company’s assets are as follows: Useful lives (years)

Buildings 10 ~ 50 Structures 10 ~ 40 Machinery 4 ~ 30 Vehicles 5 Display fixtures 5 Other property and equipment (“Other PP&E”) 5

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.

(j) Intangible Assets Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses. Amortization of intangible assets except for goodwill 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, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having indefinite useful lives and not amortized.

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Industrial property rights 5 Rights to use facility 10 ~ 20 Other intangible assets 10

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 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.

Goodwill recognized on business combination is included in intangible assets. The Company retroactively restated amounts related to business combinations that occurred after January 1, 2010, in accordance with K-IFRS. Goodwill related to business combinations that occurred before January 1, 2010 is included on the basis of its deemed cost, which represents the amount recognized under K-GAAP. Goodwill acquired after January 1, 2010 is recognized as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the Company’s interest in the fair value of the acquiree’s net identifiable assets acquired and liabilities assumed exceeds consideration, the difference is immediately recognized in the statement of income for the period. Goodwill is measured at cost less accumulated impairment losses. The acquisition of additional non-controlling interest while retaining control is accounted for as shareholder transaction and as a result no goodwill is recognized.

(k) Investment Property

Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property. Investment property is measured initially at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses

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 item will flow to the Company and the cost of the item can be measured reliably. 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. Investment properties, except for land, are depreciated on a straight-line basis over 10 to 50 years, the estimated useful lives. Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. The change is accounted for as a change in an accounting estimate.

(l) Impairment of Non-financial Assets The carrying amounts of the Company’s non-financial assets, other than assets arising from 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 amount to their carrying amount. The Company estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable amount of an asset, then the Company 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 reflect 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.

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An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss. Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. 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.

(m) Leases The Company classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Company assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

(iii) Finance leases At the commencement of the lease term, the Company recognizes as finance assets and finance liabilities in its separate statements 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 charge and the reduction of the outstanding liability. The finance charge 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 lessee adopts for depreciable assets that are owned. If there is no reasonable certainty that the lessee 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 Company reviews to determine whether the leased asset may be impaired.

(iv) 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 period of the lease.

(n) Borrowing Costs The Company 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 Company borrows funds specifically for the purpose of obtaining a qualifying asset, the Company 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. The Company immediately recognizes other borrowing costs as an expense. To the extent that the Company borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Company shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Company 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 Company capitalizes during a period shall not exceed the amount of borrowing

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costs incurred during that period.

(o) Non-derivative Financial Liabilities The Company 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 Company recognizes financial liabilities in the separate statement of financial position when the Company becomes a party to the contractual provisions of the financial liability.

(iii) 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, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

(iv) 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 acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. The Company derecognizes a financial liability from the separate statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

(p) Employee Benefits

(v) 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 the related service. When an employee has rendered service to the Company during an accounting period, the Company recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

(vi) 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 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, less the fair value of any related assets. The present value is determined by discounting the expected future cash flows using the interest rate of corporate bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise.

(vii) Retirement benefits: defined contribution plans When an employee has rendered service to the Company during a period, the Company 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 Company 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.

(p) Employee Benefits, Continued

(viii) Retirement benefits: defined benefit plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of defined benefit plans is calculated by estimating 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. The fair value of plan assets is deducted. The calculation is

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performed annually by an independent actuary using the projected unit credit method. The discount rate is the yield at the reporting date on corporate bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The Company recognizes all actuarial gains and losses arising from actuarial assumption changes and experiential adjustments in other comprehensive income when incurred. When the fair value of plan assets exceeds the present value of the defined benefit obligation, the Company recognizes an asset, to the extent of the total of cumulative unrecognized past service cost and 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. Past service costs which are the change in the present value of the defined benefits obligation for employee service in prior periods, resulting in the current period from the introduction of, or change to post-employment benefits, is recognized as an expense on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, a defined benefit plan, the Company recognizes the past service cost immediately.

(q) Provisions Provisions are recognized when the Company 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 shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. 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.

(r) Foreign Currencies

(iii) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Company entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency using the reporting date’s exchange rate. 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, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

(iv) Foreign operations If the presentation currency of the Company 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.

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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. 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. Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income in the translation reserve.

(s) Equity 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. Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the Company’s shareholders. Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in profit or loss as accrued. When the Company 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 Company acquires and retains treasury shares, the consideration paid or received is directly recognized in equity.

(t) Revenue Revenue from sale of goods, rendering of services or use of the Company assets is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates and are recognized as a reduction of revenue. Goods sold Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The Company recognizes sales on a gross basis for merchandise of which the Company bears the overall inventory risk in connection with purchase contracts with vendors where the merchandise may only be returned for a full refund prior to the end of the relevant season (for seasonal merchandise) or within 90 days from delivery (for non-seasonal merchandise). The Company recognizes sales on a net basis for merchandise that may be returned to vendors at any time. Customer Loyalty Programs For customer loyalty programs, the fair value of the consideration received or receivable from the initial sale is allocated between the award credits (“points”) and the other components of the sale. The Company supplies all of the awards with its products. The amount allocated to the points is estimated by reference to the fair value of its products for which they could be redeemed, since the fair value of the points themselves

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is not directly measurable. The fair value of its products is estimated taking into account the expected redemption rate and the timing of such expected redemptions. Such amount is deferred and revenue is recognized only when the points are redeemed and the Company has fulfilled its obligations to supply its products.

(t) Revenue, Continued Commissions When the Company acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commission made by the Company. Rental income Rental income, net of lease incentives granted, from investment property is recognized in profit or loss on a straight-line basis over the term of the lease.

(u) Finance Income and Finance Costs Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, changes in the fair value of financial assets at fair value through profit or loss, 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 method. Dividend income is recognized in profit or loss on the date that the Company’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, dividends on preference shares classified as liabilities, changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognized on financial assets, and losses on hedging instruments that are recognized in profit or loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.

(v) Income Taxes Income tax expense comprises current and deferred tax. Pursuant to the income tax laws and regulations in Korea, the Company and its subsidiaries file separate tax returns therefore the Company’s income tax is determined on a separate standalone basis. 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 other comprehensive income.

(iii) 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 any adjustment to tax payable in respect of previous years. 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.

(v) Income Taxes, Continued

(iv) 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. A deferred tax liability is recognized for all taxable temporary differences. A deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized. However, deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting profit or loss nor taxable income. The Company 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

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Company is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Company recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries and associates, 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 Company 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 settle current tax liabilities and assets on a net basis.

(w) Earnings per Share The Company 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 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 convertible notes.

(x) New Standards and Interpretations Not Yet Adopted The following new standards, interpretations and amendments to existing standards have been published and are mandatory for the Company for annual periods beginning after January 1, 2011, and the Company has not early adopted them. Management believes the impacts of these new pronouncements on the Company’s separate financial statements are not significant.

(iv) Amendments to K-IFRS No. 1107 Financial Instruments: Disclosures

The amendments require disclosing the nature of the transferred assets, their carrying amount, and the description of risks and rewards for each class of transferred financial assets that are not derecognized in their entirety. If the Company derecognizes transferred financial assets but still has their specific risks and rewards, the amendments require additional disclosures on their effect of risks. The amendments will be applied prospectively for the Company’s annual periods beginning on or after July 1, 2011.

(v) Amendments to K-IFRS No. 1019 Employee Benefits

The standard requires recognition of actuarial gains and losses immediately in other comprehensive income and to calculate expected return on plan assets based on the rate used to discount the defined benefit obligation. The standard will be applied retrospectively for the Company’s annual periods beginning on or after January 1, 2013.

(vi) K-IFRS No. 1113 Fair Value Measurement

The standard defines fair value and a single framework for fair value, and requires disclosures about fair value measurements. The standard will be applied prospectively for the Company’s annual periods beginning on or after January 1, 2013. 5. Transition to Korean International Financial Reporting Standards (“K-IFRS”)

(a) The exemptions the Group adopted in accordance with K-IFRS No.1101 First-time Adoption of K-IFRS K-IFRS No.1101 permits those companies adopting K-IFRS for the first time certain exemptions from the full

83

requirements of K-IFRS in the transition period. The Group has taken the following key exemptions. Business combination Business combinations prior to the date of transition are not restated. Cumulative translation differences The Group regards the accumulated translation difference of overseas operations as zero (“0”). Deemed cost to fair value or the revaluation amount The Group measures some property, plant and equipment except for buildings at deemed cost which is fair value at the date of transition. Borrowing costs The Group capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset after the date of transition to K-IFRS.

(b) The effects of the adoption of K-IFRSs on the Group’s financial position as of January 1, 2010 are as follows:

Korean won (millions) Total assets Total liabilities Total equity K-GAAP ￦ 24,423,378

11,258,111

13,165,267

Adjustment for: Change in gains and losses on disposal of

property, plant and equipment ①

29,511

-

29,511 Change in depreciation method of property, plant and equipment ②

(11,760)

(11,888)

128

Component accounting of property, plant and equipment ③

(269,667)

127

(269,794)

Provision for sales return ④ (1,452)

1,556

(3,008) Impairment of financial assets ⑤ (12,901)

(167,039)

154,138

Changes in scope of associates ⑥ (345,733)

(159,740)

(185,993) Employee benefits ⑦ 1,470

51,007

(49,537)

Present value of deposit ⑧ (29,171)

(2,818)

(26,353) Customer loyalty programs ⑨ -

8,754

(8,754)

Impairment of assets ⑩ (6,291)

(1,236)

(5,055) Depreciation of annual fee for credit card on straight-line basis ⑪

-

15,747

(15,747)

Deferred loan income from card assets ⑫ 1,650

321

1,329 Deferred tax assets ⑬ (32,286)

204,821

(237,107)

Others 1

1

- Total adjustment (676,629)

(60,387)

(616,242)

K-IFRS ￦ 23,746,749

11,197,724

12,549,025

(c) The effects of the adoption of K-IFRSs on the Group’s financial position as of December 31, 2010 and

comprehensive income for the year ended December 31, 2010 are as follows:


Total assets Total liabilities Total equity Net income

Total comprehensive

income K-GAAP ￦ 30,249,887

16,101,370

14,148,517

1,043,834

991,962

Adjustment for: Change in gains and 26

-

26

(156,174)

(1,191)

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losses on disposal of property, plant and equipment ①

Change in depreciation method of property, plant and equipment ②

116,372

-

116,372

86,504

86,504 Component accounting of property, plant and equipment ③

(311,915)

127

(312,042)

(46,061)

(46,061) Provision for sales return ④

(2,889)

1,689

(4,578)

(1,570)

(1,570)

Impairment of financial assets ⑤

(16,121)

(192,651)

176,530

25,888

25,888

Changes in scope of associates ⑥

(989,884)

(730,408)

(259,476)

15,920

(31,718)

Employee benefits ⑦ 6,765

93,058

(86,293)

(12,039)

(33,772) Present value of deposit ⑧

(33,265)

(2,891)

(30,374)

(4,028)

(4,028)

Customer loyalty programs ⑨

-

9,551

(9,551)

(797)

(797)

Impairment of assets ⑩ 158,280

(1,235)

159,515

164,571

164,571 Depreciation of annual fee for credit card on straight-line basis ⑪

-

17,998

(17,998)

(2,251)

(2,251) Deferred loan income from card assets ⑫

2,873

-

2,873

2,237

2,237

Deferred tax assets ⑬ 1,048

250,577

(249,529)

(19,594)

(19,594) Others ⑭ 10,353

2,347

8,006

7,209

2,405

Total adjustment (1,058,357)

(551,838)

(506,519)

59,815

140,623

K-IFRS ￦ 29,191,530

15,549,532

13,641,998

1,103,649

1,132,585

① Change in gains and losses on disposal of property, plant and equipment The Group measures some property, plant and equipment except for buildings at deemed cost which is fair value at the date of transition in accordance with K-IFRS No.1101. When the Group disposed of property, plant and equipment which are measured at deemed cost, gains and losses on disposal of property, plant and equipment were changed. ② Change in depreciation method of property, plant and equipment In accordance with K-IFRS, property, plant and equipment which are depreciated with the declining-balance method under K-GAAP, are depreciated on a straight-line basis that reflects the appropriate pattern in which the asset’s future economic benefits are expected to be consumed. ③ Component accounting of property, plant and equipment In accordance with K-IFRS, a component that is significant compared to the total cost of property, plant and equipment is depreciated over separate useful lives. ④ Provision for sales return In accordance with K-IFRS, the Group estimates the possibility of returns and recognizes as provision for sales return. ⑤ Impairment of financial assets In accordance with K-IFRS, the Group first assesses whether objective evidence of impairments exists individually for financial assets and then, assesses whether objective evidence of impairment exists collectively for other financial assets by group of financial assets with similar credit risk characteristics. ⑥ Changes in scope of associates

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In accordance with K-IFRS, the Group reclassified investment securities as available-for-sale financial assets and investments in associate. Available-for-sale financial assets are measured at fair value, and investments in associate are recognized under the equity method. While under K-GAAP, the scope for associates is different due to the prescribed entities. ⑦ Employee benefits Post-employment benefit: In accordance with K-GAAP, the Group records the liabilities for its retirement

and severance benefit obligations which would be payable if all employees left the Group at the end of the reporting period. In accordance with K-IFRS, the measurement of the retirement and severance benefit obligations are calculated actuarially using the projected unit credit method based on certain assumptions to calculate the present value.

Short-term employee benefit: According to K-IFRS, the Group recognizes the expected cost of short-term employee benefits in the form of compensated absence as a liability, when employees render service that increases their entitlement to future compensated absences.

Long-term employee benefit: Other long-term employee benefits include employee benefits that do not settle within twelve months after the end of the period in which the employees renders the related service, and 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, less the fair value of any related assets.

⑧ Present value of leasehold deposits and leasehold deposits received In accordance with K-GAAP, the Group recognizes leasehold deposits and leasehold deposits received as nominal amount of deposits. In accordance with K-IFRS, leasehold deposits and leasehold deposits received are measured at amortized cost using the effective interest method. ⑨ Customer Loyalty Programs In accordance with K-GAAP, the Group recognized a provision for the costs of the product to be provided in the future from using the points. However, in accordance with K-IFRS, the revenue to be incurred in the future from using the points is deferred at first and the Group recognizes the unearned revenues as sales when the points are redeemed. ⑩ Impairment of assets In accordance with K-IFRS, the Group does not amortize goodwill and perform the impairment test. The carrying amounts of the Group’s non-financial 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. While under K-GAAP goodwill is amortized on a straight line basis over the estimated useful lives. ⑪ Depreciation of annual fee for credit card on straight-line basis In accordance with K-IFRS, annual fees for credit cards are depreciated on a straight-line basis over the duration of the related service to be rendered. While under K-GAAP, the revenue is recognized fully upon receipt. ⑫ Deferred loan income from card assets In accordance with K-IFRS, deferred loan income from card assets is recognized as revenue over the loan period using the effective interest method. While under K-GAAP, such income is recognized in full upon occurrence. ⑬ Deferred tax effects The Group reflected the tax effects in relation to the adjustments in transition to K-IFRS. Also, in accordance with K-IFRS, the current deferred tax assets (liabilities) are reclassified to the non-current deferred tax assets (liabilities). ⑭ Others Investment in properties: In accordance with K-GAAP, properties held to earn rentals or for capital

appreciation were classified and accounted for as property, plant and equipment. However, in accordance with K-IFRS, it is classified as investment property.

Guarantee deposits for membership: In accordance with K-GAAP, guarantee deposits for membership recognized as other non-current assets are recorded as intangible assets with indefinite useful lives.

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Website costs: The Group recognizes development costs of its website, not directly related to operating activity, as expenses in the incurred period.

Bank overdraft: Bank overdraft, which must be repaid upon request from financial institutions and which constitutes a part of cash management, has been reclassified from cash flows from financing activities to cash and cash equivalents under K-IFRS.

(d) Explanation of material adjustments to the consolidated statement of cash flows

In accordance with K-GAAP, interest expense, interest income, dividends income and income tax expenses were presented as non-cash items in operating activities. While in accordance with K-IFRS, interest paid are recognized as cash flows from financing activities, and interest received and dividends received are recognized as cash flows from investing activities. Income tax paid is recognized as cash flows from operating activities. Bank overdraft, which must be repaid upon request from financial institutions and which constitutes a part of cash management, has been reclassified from cash flows from financing activities to cash and cash equivalence under K-IFRS. Except for the explanation above, there are not other significant differences on cash flow statement between K-IFRS and K-GAAP. 5. Changes in scope of consolidated subsidiaries as of December 31, 2010

Description Subsidiaries

Subsidiaries consolidated under K GAAP because the Company was a 30%-plus largest shareholder, but which are outside the scope of consolidation under K IFRS

Lotteria, Daehong Communications, Lotte Data Communications, KI Bank, MYBI, Busan Hanaro Card, Lotte Europe Holdings B.V., ZAO Lotte Rus, Lotte KF Rus LLC, Lotte Shopping Rus LLC, Confectionary Rus Kaluga LLC, Coralis S.A., Coralis Vietnam Co., Ltd., Burger King Japan Co., Ltd., Vietnam Lotteria Co., Ltd.

Subsidiaries which were not consolidated under K GAAP because the total asset size as of the preceding fiscal year was below Won 10 billion but which are consolidated under K IFRS

The 4th Sprint SPC, the 1st Supreme SPC, the 2nd Supreme SPC, Lotte Gimhae Development, Lotte Suwon Station Shopping Town, Lotte Shopping India Pvt., Ltd., Lotte Business Management (Tianjin) Co., Ltd., LotteMart Global Sourcing Center Co., Ltd., Lotte Cinema Vietnam Co., Ltd.

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IV. Auditor’s Opinion

1. Audit (Review) Opinion on Consolidated Financial Statements A. Name of Auditor / Accountants

42nd fiscal year 41st fiscal year 40th fiscal year Samjong KPMG Samjong KPMG Samjong KPMG

B. Audit (Review) Opinion (1) Audit Opinion Summary for the Current Business Year The auditor has audited the consolidated financial statements of Lotte Shopping Co., Ltd. and its subsidiaries as attached as of and for the years ended December 31, 2011 and December 31, 2010. The auditor has carried out the audit in accordance with generally accepted audit standards in Korea, which require that the audit should be planned and practiced to reasonably ensure that those consolidated financial statements are not indicated in distortion in a material way. The audit includes the application and verification of methods in due diligence for the auditing evidence backing the public announcements in details in addition to amounts on the consolidated financial statements. In addition, the audit includes evaluations on accounting principles and significant accounting estimations which management has applied, in order to prepare the consolidated financial statements in addition to evaluations on the overall indications in detail throughout the consolidate financial statements. As a result of the audit, the aforesaid consolidated financial statements fairly show the financial condition of Lotte Shopping Co., Ltd. and its consolidated subsidiaries as of December 31, 2011 and 2010 and its results of operations, changes in capital and details in cash flow for both fiscal years ending on the said dates in accordance with the International Financial Reporting Standards (IFRS) adopted in Korea. (2) Audit (Review) Opinion

Business year Opinion (or review) Summary 42nd fiscal year Adequate No issue indicated 41st fiscal year Adequate No issue indicated 40th fiscal year Adequate No issue indicated

(3) Summary of Remarks

Fiscal year Remarks

42nd fiscal year 1) Pursuant to K-IFRS 1101, the Company presented its financial information for 2011 (and, for comparative purposes, 2010) in accordance with K-IFRS.

41st fiscal year

1) The Company reevaluated the estimated useful life of its tangible assets during the 2010. After the reevaluation, tangible assets, outstanding corporate taxes, net asset value and net profits increased by Won 108.2 billion, Won 26.2 billion, Won 82.0 billion and Won 82.0 billion, respectively. 2) The Company made an agreement for the business transfer and succession for GS Retail Co., Ltd.’s department store and the large discount mart businesses on 9 February 2010. Accordingly, the department store business sector was acquired through Lotte Square Co., Ltd. as a subsidiary that was newly established in the first half of 2010, and the large discount mart business sector was acquired by the Company on 31 May 2010.

88

40th fiscal year

1) Profit and loss on a discontinued business The Company’s board of directors resolved to transfer the food business division to Lotte Samkang Co., Ltd. on September 18, 2009. Accordingly, the Company entered into a transfer agreement on September 18, 2009 and transferred the assets and liabilities of its food business division to Lotte Samkang Co., Ltd. on September 30, 2009. As of September 30, 2009, the book value of the transferred assets was Won 25.0 billion and the book value of the transferred liabilities was Won 4.0 billion. 2) Physical Division In the general shareholders’ meeting held on November 20, 2009, the Company decided to physically split the KKD Business Division, and the split was implemented on December 31, 2009. As a newly established company, Lotte KKD’s main business includes the manufacture and sale of donuts, coffee, and other processed foods for franchise sales. Lotte KKD’s capital stock at end year was recorded at Won 2 billion, and the Company currently owns all of its issued shares. 3) Reevaluation of Tangible Assets The Company conducted a reevaluation of its lands through the reevaluation model provided in the Statement of Korea Accounting Standard No. 5 (Tangible Assets). The Company’s land, deferred income tax credits, and net asset value increased to Won 3.6 trillion, Won 786 billion, and Won 2.8 trillion respectively in comparison to the cost method evaluation results. Net profit was reduced by Won 5.7 billion. The previous year’s financial statements were not recomposed for comparison purposes.

C. Audit Contracts (Unit: million Won, hours)

Term Auditor Division Fee Total hours

42nd fiscal year Samjong KPMG

Review of quarterly and semi-annual financial statements Audit of non-consolidated and consolidated financial statements

600 14,100

41st fiscal year Samjong KPMG


500 6,620

40th fiscal year Samjong KPMG


500 5,900

D. Contracts regarding Non-Audit Services with Outside Auditor (Unit: million Won)

Term Date of conclusion Division Service

period Fee Remarks

42nd fiscal year N/A

41st fiscal year N/A

40th fiscal year N/A

2. Changes in Auditor - Not applicable. 3. Matters regarding internal control

89

A. Internal Control (1) Summary of auditing procedures a. Organization of the Audit Committee and availability of permanent status - Park Kyungbeom (non-permanent), Kim Sehun (non-permanent), Lee Hongroh (non-permanent) b. Auditing schedule - Auditing anytime during the year c. Major auditing procedures ① Audit on accounting The auditor has viewed books and their related documents on accounting for the accounting audit, while reviewing financial statements and their annex statements closely. The auditor has carried out investigations by applying comparisons, due diligence, presence, queries and other appropriate auditing procedures if any of those is deemed necessary in carrying out the audit. ② Audit on businesses The auditor has been reported on business activities from directors if such reporting is deemed necessary, while attending the board of directors meeting and other important meetings for the audit on businesses. In addition, the auditor has carried out investigations using proper methods including close reviews on details, while viewing documents on important businesses. (2) Audit opinion (1) Matters on statement of financial position and statement of comprehensive income - Both the statement of financial position and statement of comprehensive income accurately indicate the conditions of assets, profits or losses for the Company in accordance with laws and the Articles of Incorporation. (2) Matters on business report - Business reports have accurately indicated business situations of the Company in accordance with laws and the Articles of Incorporation. (3) Matters on statements of appropriation of retained earnings or deficit disposition statements - Statements of appropriation of retained earnings have been prepared in compliance with laws and the Articles of Incorporation and effectively in line with the Company’s financial situations and other circumstances.

B. Internal Financial Reporting Management System With respect to the 42nd fiscal year, the Audit Committee has found that the Company’s internal financial reporting management system has been effectively designed and maintained, and concluded its evaluation without additional findings or identifying violations. The Audit Committee reported its evaluation results to the Board of Directors on February 28, 2012. C. Evaluation of Internal Control System Samjong KPMG evaluated the Company’s internal financial reporting management system in connection with its audit report for the 42nd fiscal year, and as a result gave an opinion that they did not find any issue which deviated from the model standards from a materiality standpoint.

90

V. Management's Discussion and Analysis 1. Caution on Forward-Looking Information The activities, events or phenomena predicted by the Company in this business report reflect the Company’s stance on the events and financial performance that occurred at the time of preparing the reported documents. Such forward-looking information is based upon the various assumptions related to future business environment, and such assumptions may be proven as inaccurate. Moreover, such assumptions contain the risk of resulting in major discrepancies between the predicted values and the actual result, uncertainty and other such factors. Factors that could result in such major differences include, but are not limited to, factors related to the Company’s internal business operation and external environment. The Company does not hold the responsibility of making reports to correct the predictions to reflect the risks or uncertainties that arise after the preparation of the prediction. In conclusion, it is not possible to fully confirm that the results or matters predicted by the Company on this business report will be realized, or that the effects predicted at the time of the report will arise. Please note that the predictions recorded on the report were prepared in relation to the report’s preparation date, and that the Company has no plans in updating such risk factors or predictions. 2. Introduction Lotte Shopping Co., Ltd. owns 24 department stores, 95 discount stores, 350 supermarkets and 42 theaters as of the end of 2011. It has 42 consolidated subsidiaries, including 19 domestic companies and 23 overseas companies and 19 of them are major subsidiaries.

The Group can be subdivided into department store business, discount store business, financial business and other business segments to reflect the Group’s diversified business portfolio in accordance with the characteristics of goods and services offered, features of respective markets and sales methods.

The department store business segment consists of Lotte Shopping Department Store, Lotte Midopa and Lotte Square. The discount store business segment includes Lotte Shopping discount stores and overseas operating subsidiaries in China, Indonesia and Vietnam. The financial business segment consists of subsidiaries such as Lotte Card and EB Card. Other business segment includes subsidiaries such as Lotte Shopping Super, Lotte Shopping Cinema, Woori Home Shopping and Korea Seven.

In 2011, the Group recorded sound operating results with Won 22,253 billion of sales and Won 1,663 billion of operating income despite the challenging market environment.

3. Financial status and sales performance A. Financial status The Company’s total assets reached Won 33.5 trillion, an increase of 13.3% year-on-year; liabilities reached Won 18.3 trillion with an increase of 18.3%; and the total capital reached Won 14.7 trillion with an increase of 7.6%. Such increases as compared to the previous year are mainly attributable to related investments and increase in tangible and intangible assets reflecting our expansion in Korea and overseas market, as well as an increase in borrowings due to financing activities to fund such new investments.

(Unit: million Won)

Division 42nd fiscal year

41st fiscal year 40th fiscal year

Total assets 33,004,641

29,127,020

23,696,759

1. Current assets 12,728,160

10,029,260

7,448,876

Cash and cash equivalents 1,958,204

1,242,426

998,865

Trade and other receivables 636,502

461,341

359,373

Other financial assets 7,732,819

6,487,294

4,606,799

Inventories 2,042,285

1,669,798

1,360,126

91

Income tax refund receivable 983

506

195

Other current non-financial assets 357,366

167,895

123,517

2. Non-current assets 20,276,481

19,097,760

16,247,883

Investments in associates 940,720

869,505

671,946


1,609,875

1,413,512

Property, plant and equipment, net 13,153,613

12,651,614

11,396,268

Investment property 640,896

632,798

743,572

Goodwill 2,067,205

2,050,139

999,009

Other intangible assets, net 639,812

217,004

119,783

Other non-financial assets 1,182,999

1,066,824

903,793

Total liabilities 18,325,636

15,485,022

11,147,733

1. Current liabilities 9,911,008 15,485,022 6,432,197

2. Non-current liabilities 8,414,628 9,002,711 4,715,536

Total capital 14,679,005

13,641,998

12,549,026

1. Stockholders' equity attributable to owners of the Company

13,966,234

13,109,410

12,088,096

Capital Stock 145,217

145,217

145,217

Consolidated Capital Surplus 3,622,183

3,622,183

3,622,183

Consolidated Capital Adjustment (30,867)

(16,097)

(16,271)

Consolidated Accumulated Other Comprehensive Income

10,091,896

9,211,526

8,235,315

Retained earnings 137,806

146,581

101,652

2. Non-controlling interests 712,770 532,588 460,929

※ Stability Indicators Division 42nd Fiscal Year 41st Fiscal Year 40th Fiscal Year Current ratio (%) 128.4 111.4 115.8

Debt ratio (%) 124.8 113.5 88.8

Borrowings and bonds payable ratio (%)

30.9 28.9 22.6

The ratio of interest coverage to operating profits

8.7 8.9 -

Note: 1) Current ratio= (current assets/current liability)*100 2) Debt ratio= (total liabilities/total assets)*100 3) Borrowings and bonds payable ratio= (loan/total assets)*100 Borrowings= short-term loan + current portion of bonds payable + bonds payable + long-term loan 4) The ratio of interest coverage to operating profits=operating profits/interest expense

92

B. Business Performance In 2011, total sales was Won 22.3 trillion, operating profits was Won 1.7 trillion and net income was Won 1.1 trillion, which represented an increase of 17.0% and 4.1% and a decrease of 8.2% when compared to last year, respectively. (Unit: million Won) Division 42nd Fiscal Year 41st Fiscal Year

Gross profit 22,253,088 19,017,744

Operating income 1,662,900 1,597,734

Profit before income tax 1,555,241 1,540,223

Profit for the year 1,012,600 1,103,649

Profit attributable to owners of the Company 931,815 1,034,705

Profit attributable to non-controlling interests 80,785 68,944

Total comprehensive income for the year 1,012,585 1,132,585

Total comprehensive attributable to owners of the Company 916,317 1,058,753

Total comprehensive attributable to non-controlling interests 96,268 73,832

Earnings per share in Won 32,084 35,626 ※ Profitability Indicators

Division 42nd fiscal year 41st fiscal year

Operating Profit to Net Sales Ratio (%)

7.5 8.4

Net profit rate to sales (%) 4.6 5.8

Net profit to total assets (%) 3.3 4.2

Return on equity (%) 7.2 16.2

The ratio of operating cash flow to total assets (%)

1.5 0.0

Note: 1) Operating Profit to Net Sales Ratio = (operating profits/total sales amount)*100 2) Net profit rate to sales= (net profit/total sales amount)*100 3) Net profit to total assets= (net profit/average total assets)*100 4) Return on equity= (net profit/average equity)*100 5) The ratio of operating cash flow to total assets=(cash flow from operating activities/average total assets)*100

※ Growth Rate and Activity Indicators


Growth rate of sales (%) 17.0 -

Growth rate of operating profit (%) 4.1 -

Growth rate of current net income (%)

(8.2) -

93


Growth rate of total assets (%) 13.3 -

Asset turnover ratio (turn) 0.7 0.7

1) Growth rate of sales= (current year’s net sales/prior year’s net sales)*100-100 2) Growth rate of operating profit= (current year’s operating profit/prior year’s operating profit)*100-100 3) Growth rate of current net income= (current year’s operating profit/prior year’s operating profit)*100-100 4) Growth rate of total assets= (current year’s assets/prior year’s assets)*100-100 5) Asset turnover ratio= total sales amount/average total assets 4. Liquidity and Financing A. Liquidity Status The details of the Company’s cash and liquid assets are as follows: (Unit: million Won) Division 42nd fiscal year 41st fiscal year Growth Cash and cash equivalents

1,958,204 1,242,426 715,778

Short term deposit 745,294 412,451 332,843

Total 2,703,498 1,654,877 1,048,621 B. Financing (1) Financing during the reporting period

(Unit: 100 million Won)

Division Beginning balance

Increase in the current period

Decrease in the current period Ending balance Financing cost

Short-term borrowings

12,986 27,529 28,745 11,769 1.69~7.44%

Long-term borrowings

8,635 2,765 286 11,114 3.40~7.12%

Bonds 62,445 25,776 9,081 79,141 2.13~8.59%

Total 84,066 56,070 38,112 102,024

*For borrowings/bonds in foreign currency, increases or decreases in the current period reflect valuation amounts. (2) Debt maturity schedule

(Unit: 100 million Won)

(3) Details and impact on the Company of the negative covenants in its financing documents

Financed fund Negative Covenants Impact from failure of observance

Division 2012 2013 2014

Short-term borrowings

11,769


7,628 893 2,593

Bonds 14,905 18,846 24,009

Total 34,302 19,739 26,602

94

Financed fund Negative Covenants Impact from failure of observance

57th round corporate bond

· Keep 200% or less of debt ratio · Keep the annual asset disposal below Won 1 trillion · Keep guaranteed security below 200% of total capital

Event of default

58th (2) round corporate bond

· Debt / equity ratio of 2 times or less · EBITDA / Interest expenses of 3 times or less

Event of default

ING Bond · Keep asset backed security (ABS) below 20% of total capital Event of default

5. Off-Balance Sheet Transactions A. Regarding Payment Guarantees, Contingency Liabilities and Covenants Please refer to ‘3. Contingent Liabilities, etc’ in the current year’s business report 'X. Other Relevant Matters.’

6. Other Important Matters for Investment Decisions A. Matters on important accounting policies and projections Beginning this year, the Company has prepared the consolidated financial statements in accordance with K-IFRS, with January 1, 2010 as the conversion date, according to ‘the initial adoption of Korean International Financial Reporting Standards (K-IFRS) in No. 1101 of K-IFRS. The financial statements for the preceding period as compared and displayed have also been prepared in accordance with K-IFRS which has been applied in a consistent manner to the statement of financial position as of January 1, 2010. According to K-IFRS, major adjustments for our company have been applied on a consolidated basis, including changes in the amortization of tangible assets, employee payroll, customer loyalty system, redemption of good will amortization, damage to assets, and damage to financial assets among others, while adopting indemnity clauses for business consolidations, cumulative foreign currency conversion differences, fair value or re-evaluation with the deemed cost, and borrowing cost.

95

VI. Corporate Governance and Affiliated Companies 1. Matters regarding Board of Directors. A. Overview of Board of Directors (1) Composition of Board of Directors 1. Currently, the Company’s board of directors (“BOD”) is comprised of 11 permanent directors and 6 outside directors. 2. BOD decides important matters according to the basic management policies of the Company, matters delegated from the general meeting of shareholders and matters required by the Articles of Incorporation or applicable laws. (2) BOD committees BOD may have subcommittees to achieve efficient and timely decision-making. The Company currently has an Audit Committee and an Outside Director Nomination Committee. Details regarding operations, authority and composition of such committees are decided by BOD or relevant laws. B. Matters regarding BOD committees (1) Name, directors, objectives and authority

Name of Committee Composition Name Objectives and Authority Remarks

Audit Committee

Three or more directors (at least two-thirds of whom must be outside directors) Currently composed of 3 outside directors

Park, Kyungbeom; Kim, Sehun; Lee, Hongroh

① The committee audits the Company’s accounting and operations. ② The committee reviews the appropriateness of its performances and regulations every year. If necessary, it proposes revisions to BOD. ③ The committee handles the issues specified in the Paragraph 1, 2 or by laws or the Articles of Incorporation and issues delegated by BOD.

Outside Director Nomination Committee

Two or more directors (at least half of whom must be outside directors) Currently composed of 1 outside director and 1 permanent director

Lee, Chulwoo; Park, Kyungbeom

① The committee recommends candidates for outside directors to the general meeting of shareholders. ② The committee must recommend those candidates recommended by shareholders with applicable rights under Clause 2 of Article 542 of the Commercial Code. ③ The committee handles the issues specified in Paragraphs 1 and 2 above or by laws or Articles of Incorporation and issues delegated by BOD.

C. Independence of Directors (1) Applicable standards (a) Below persons should not be an outside director according Clause 3, Article 382 and Clause 8, Article 542 of Commercial Code.

96

1. If the largest shareholder is a natural person – himself/herself, spouse or direct ascendant/descendant.

2. If the largest shareholder is a legal person – directors, auditor or respondent of the legal person. 3. Person who has the largest shareholding in a listed company or his/her specially related parties

under the Presidential Decree, based on the total issued shares of the listed company excluding shares without voting rights.

(b) There was no outside director candidate or outside director of the Company who should be disqualified under the above standards. (2) Nominator, duties and relationship with the largest shareholder

Name Main Job Nominator Duties Relationship with largest shareholder

Shin, Kyukho Representative director of Lotte Shopping

BOD Representative director

Specially related to largest shareholder

Shin, Dongbin Representative director of Lotte Shopping


Largest shareholder

Lee, Cheolwoo

Representative director of Lotte Shopping

BOD Representative director, chairman of BOD, chairman of Outside Director Nomination Committee

-

Lee, Inwon Representative director of Lotte Shopping


-

Shin, Youngja President of Lotte Shopping BOD Permanent Director

Specially related to largest shareholder

Jwa, Seunghee

President of Korea Society for Regulatory Studies


Outside Director -

Kim, Seho Advisor, Lee & Ko Outside Director Nomination Committee

Outside Director -

Park, Kyungbeom

Incumbent Outside Director of Lotte Shopping


Member of Audit Committee

-

Kim, Sehun Incumbent President of the Internet Information Protection Council under Korea Communications Commission



-

Ye, Jongsuk Dean of Graduate School of Global Management, Hanyang University


Outside Director -

Lee, Hongroh Incumbent Outside Director of the Korea Stock Exchange



-

(3) Method to elect outside director (a) The Outside Director Nomination Committee should nominate among qualified persons according to the applicable laws based on Article 32 of Company’s Articles of Incorporation. Details for evaluating qualification will be decided by the Outside Director Nomination Committee. (b) Status of the Outside Director Nomination Committee is as follows:

97

Name Position Outside director Remark Lee, Cheolwoo Chairman No More than 50% of the outside directors.

(In compliance with the conditions of Equity Markets Law, Article 25) Park, Kyungbeom Committee

member Yes

2. Matters regarding Auditing A. Audit Committee (1) Personal information of the members

Name Education & Career Remarks Park, Kyungbeom 1998 Master of economics, Graduate School of Business,

Yonsei University 2000 Head of Management (Executive Director), Supermarket Business of Lotte Shopping Co., Ltd. 2002 General Manager (Executive Director), Supermarket Business of Lotte Shopping Co., Ltd. 2003 Head of Supermarket Business and Merchandise Division of Lotte Shopping Co., Ltd. 2006 Head of Strategic Innovation, Supermarket Business of Lotte Shopping Co., Ltd. 2008 Standing Advisor of Korea Metal Can Resources Association

Outside Director

Kim, Sehun 1972 Bachelor of physics, Seoul National University 1979 Master of Business Science, Stanford University 1982 Ph.D. of Business Science, Stanford University 1986 Professor of the Department of Business Information, Arizona State University 2003 President of Korea Institute of Information Security and Cryptology 2004 Advisory Member of National Intelligence Service (Current) President of Information Protection Policy Committee of Korea Institute of Information Security and Cryptology (Current) President of Internet Information Protection Council under Korea Communications Commission

Outside Director

Lee, Hongroh 1970 Department of Foreign Language Education, College of Education, Seoul National University 1984 Master of Economics, Vanderbilt University 2004 Ph.D. of Business, Hannam University 2001 Planning and Management Official of Korea Customs Service (Commissioner) 2004 Head of Customs Office, Head Office of Central Seoul 2005 CEO & President of D&B Korea Co., Ltd. 2008 Vice Chairman of Nice D&B Co., Ltd.

(Current) Outside Director of the Korea Stock Exchange

Outside Director

(2) Audit body (a) Composition of the committee 1. The committee must consist of more than three members and at least two-thirds of the members must be outside directors.

Also, as according to Commercial Law, Article 542, Clause 11, an audit committee should have 1 or more accounting or financial specialists as per executive decree, and the chief of the audit committee is to be an outside director.

(b) Disqualifying factors 1. Persons to whom the below factors apply may not be appointed as an outside director member of the Audit Committee of a listed company, and shall be disqualified from serving as such, under the Clauses 10 and 11 of Article 542 of the Commercial Code.

2. Director or employee who is engaged in the standing affairs of a company or who has been so engaged within the most recent two years.

98

3. Person who can influence the management of the company as determined in the relevant Presidential Decree.

(c) Appointment or termination of Audit Committee members 1. The general meeting of shareholders has the authority to appoint and terminate members of the Audit Committee, pursuant to Clause 12.1 of Article 542 of the Commercial Code. Member of Audit Committee should be appointed among the appointed directors in the general meeting of shareholders.

2. Also, in the event that the largest shareholder, its specially related persons and other relevant persons as determined in the applicable Presidential Decree hold in excess of 3% of the total issued shares of a listed company (excluding shares without voting rights), such holder(s) may not excise its voting rights with respect to such shares in excess regarding the time of appointment or termination of the auditor or outside director member of the Audit Committee.

3. Voting Rights of Shareholders The Company did not adopt the cumulative voting system prescribed under Clause 2 of Article 382 of Commercial Law or the regular or electronic voting systems.

99

4. Affiliated Companies (As of December 31, 2011) (Unit: %)

Investee company / Investor company

Lotte Confectionery Co., Ltd.

Lotte Chilsung Beverage Co. Ltd.

Lotte Samkang Co., Ltd.

Lotte Aluminum Co., Ltd.

Lotte Ham Co., Ltd.

Lotte Construction Co., Ltd.

Lotte International Co., Ltd.

Lotte Shopping Co., Ltd.

Lotte Giants Co., Ltd.

Lotteria Co., Ltd.

Honam Petrochemical Corp

Korea Fuji Film Corp

Lotte Confectionary Co., Ltd. 1.0 11.4 9.8 1.4 8.5 30.0 13.6 0.9

Lotte Chilsung Beverage Co. Ltd - 9.8 0.1 3.0 1.9 4.3 20.0 1.3 5.0

Lotte Samkang Co., Ltd. 0.0 0.4 5.0

Lotte Aluminum Co., Ltd. 15.3 8.4 - 9.2 6.2 5.0 2.6

Lotte Ham Co., Ltd. 45.0 1.2

Lotte Construction Co., Ltd. 1.3 0.5 - 6.0 1.0

Hotel Lotte Co., Ltd. 3.2 5.8 8.6 13.0 0.3 35.4 34.6 9.6 18.8 13.6 7.1

Busan Lotte Hotel Co., Ltd. 4.8 3.9 0.8 11.3

Lotte International Co., Ltd - 0.9 56.8

Lotte Shopping Co., Ltd. 6.0 10.6 - 30.0 30.8

Lotte Logistics Corp. 0.9 13.7

Lotteria Co., Ltd. 2.0 0.2 1.0 - 2.1

Honam Petrochemical Corp. 28.9 -

Korea Fuji Film Co., Ltd. 0.3 8.5 9.0 -

Daehong Communications INC. 0.8 3.1 1.1

Lotte Corporation Co., Ltd. 33.6

100






Lotte Ham Co., Ltd.





Lotteria Co., Ltd.



Lotte Capital Co., Ltd.

Lotte Data Communication Company 4.9 1.1 5.2

KP Chemical Corp. 8.1 3.6

Lotte Card Co., Ltd. 1.5

Lotte.com Co., Ltd. 0.9

Lotte Midopa Co., Ltd. 3.0 6.0 3.7 6.0 4.4 7.9

Lotte Boulangerie Co., Ltd. 0.4

Lotte Fresh Delica Co., Ltd.

Lotte Station Building Co., Ltd. 2.2

Lotte Insurance Co., Ltd.

Sambark LFT Co., Ltd.

Mybi Co., Ltd.

Korea Seven Co., Ltd.

Lotte Asset Development Co., Ltd.

Lotte DF Global Co., Ltd.

eB Card Co., Ltd.

101






Lotte Ham Co., Ltd.





Lotteria Co., Ltd.



Hyundai Information Technology

Chung-buk Soju

Total 24.6 33.2 36.7 42.1 46.8 89.3 82.2 38.0 100.0 84.6 47.3 74.5

Investee company / Investor company Daehong Communications

Lotte Cannon Co., Ltd.

Lotte Station Building Co., Ltd.

Lotte Corporation Co., Ltd.

Lotte.com Co., Ltd.

Lotte Logistics Co., Ltd.


Lotte Data Communication Company

Korea seven Co., Ltd.


Lotte Boulangerie Co., Ltd.

Lotte Asahi Liquor Co., Ltd.

Lotte Confectionary Co., Ltd. 8.9 0.0 11.3 4.6 6.1 16.5 9.0

Lotte Chilsung Beverage Co. Ltd 0.0 7.0 4.6 1.5 1.5 9.0 85.0

Lotte Samkang Co., Ltd. 7.5 1.2 0.4 9.0

Lotte Aluminum Co., Ltd. 5.6

Lotte Ham Co., Ltd. 10.0 0.5

Lotte Construction Co., Ltd. 11.8

Hotel Lotte Co., Ltd. 12.8 28.9 31.1 17.2 8.8 26.6 2.9 27.1

Busan Lotte Hotel Co., Ltd. 1.0 11.5

Lotte International Co., Ltd 1.0 0.2

Lotte Shopping Co., Ltd. 30.0 25.0 34.4 4.6 20.2 51.1 90.5

Lotte Logistics Corp. 9.0 - 13.8

Lotteria Co., Ltd. 12.5 17.3 2.6 34.5

102





Lotte.com Co., Ltd.








Honam Petrochemical Corp. 4.6 27.1

Korea Fuji Film Co., Ltd. 3.5 1.7

Daehong Communications INC. - 2.9 18.3 8.2 28.1

Lotte Corporation Co., Ltd. -

Lotte Capital Co., Ltd. -

Lotte Data Communication Company 5.6 0.2 -

KP Chemical Corp.

Lotte Card Co., Ltd.

Lotte.com Co., Ltd. -

Lotte Midopa Co., Ltd. 2.1

Lotte Boulangerie Co., Ltd. -

Lotte Fresh Delica Co., Ltd. 5.0 -

Lotte Station Building Co., Ltd. -



Mybi Co., Ltd.

Korea Seven Co., Ltd. -

103





Lotte.com Co., Ltd.










eB Card Co., Ltd.


Chung-buk Soju

Total 68.8 50.0 45.5 31.1 88.1 49.7 88.3 73.6 81.4 81.4 90.5 85.0


Lotte Midopa Co., Ltd.


Seetec Co., Ltd.

KP Chemical Corp KP Chemtech

FRL Korea

Wellga Cheongra Energy

Daesan MMA

Woori Home Shopping Co. Ltd

Lotte JTB Co., Ltd.

Lotte Assets Development Co., Ltd.

Lotte Confectionary Co., Ltd. 7.2

Lotte Chilsung Beverage Co. Ltd 14.1

Lotte Samkang Co., Ltd. 100.0


Lotte Ham Co., Ltd.

Lotte Construction Co., Ltd. 50.0 11.8

Hotel Lotte Co., Ltd. 1.2 7.2

Busan Lotte Hotel Co., Ltd. 1.0

104




Seetec Co., Ltd.


FRL Korea


Daesan MMA


Lotte JTB Co., Ltd.


Lotte International Co., Ltd

Lotte Shopping Co., Ltd. 79.0 92.5 49.0 53.0 32.0

Lotte Logistics Corp.

Lotteria Co., Ltd.

Honam Petrochemical Corp. 50.0 51.9 50.0 14.4

Korea Fuji Film Co., Ltd.

Daehong Communications INC.


Lotte Capital Co., Ltd. 4.6


KP Chemical Corp. - 100.0 6.2

Lotte Card Co., Ltd. -


Lotte Midopa Co., Ltd. - 7.2




105




Seetec Co., Ltd.


FRL Korea


Daesan MMA


Lotte JTB Co., Ltd.




Mybi Co., Ltd.


Lotte Asset Development Co., Ltd. -


eB Card Co., Ltd.


Chung-buk Soju

Total 79.0 99.4 50.0 51.9 100.0 49.0 100.0 50.0 50.0 53.0 50.0 100.0

Investee company / Investor company D-Cinema of Korea Lotte Insurance

Hayo Technology KI Bank Co., Ltd. Lotte Jeju Resort Lotte Buyeo

Resort CH beverage Lotte Wine

Sambark Sambark LFT

Mybi Busan Hanaro Card

Lotte Confectionary Co., Ltd. 12.5 11.1

Lotte Chilsung Beverage Co. Ltd 12.5 11.1 100.0 100.0



106




Sambark Sambark LFT


Lotte Ham Co., Ltd.

Lotte Construction Co., Ltd. 12.5 22.2

Hotel Lotte Co., Ltd. 27.7 37.5 22.2

Busan Lotte Hotel Co., Ltd. 2.0 4.1

Lotte International Co., Ltd 11.1

Lotte Shopping Co., Ltd. 50.0 12.5 22.2


Lotteria Co., Ltd.

Honam Petrochemical Corp. 91.0 93.3 76.5


Daehong Communications INC. 4.6 12.5



Lotte Data Communication Company 27.6 45.1

KP Chemical Corp.

Lotte Card Co., Ltd. 2.9 5.0


107




Sambark Sambark LFT






Lotte Insurance Co., Ltd. 5.0

Sambark LFT Co., Ltd. 6.7 -

Mybi Co., Ltd. - 60.0




eB Card Co., Ltd. 13.0


Chung-buk Soju

Total 50.0 62.0 93.9 55.2 100.0 100.0 100.0 100.0 100.0 76.5 67.1 60.0


Busan Lotte Hotel

Kirin Han Paysys Universal Studios Korea Resort Development

Lotte Gimhae Development

Buy the way Inc. Lotte Square Lotte Suwon Station Shopping Town

Lotte DF Global Lotte DF Retail

eB Card Gyeonggi Smartcard

108


Busan Lotte Hotel






Lotte Confectionary Co., Ltd. 100.0

Lotte Chilsung Beverage Co. Ltd



Lotte Ham Co., Ltd.


Hotel Lotte Co., Ltd. 0.0 33.9 91.9

Busan Lotte Hotel Co., Ltd. -


Lotte Shopping Co., Ltd. 100.0 100.0 95.0


Lotteria Co., Ltd.

Honam Petrochemical Corp.


Daehong Communications INC.



109


Busan Lotte Hotel






Lotte Data Communication Company 31.5 5.0

KP Chemical Corp.

Lotte Card Co., Ltd. 95.0

Lotte.com Co., Ltd.







Mybi Co., Ltd. 19.6

Korea Seven Co., Ltd. 100.0

Lotte Asset Development Co., Ltd. 14.8 5.0

Lotte DF Global Co., Ltd. - 96.4

eB Card Co., Ltd. - 100.0


110


Busan Lotte Hotel






Chung-buk Soju

Total 0.0 100.0 51.1 48.7 100.0 100.0 100.0 100.0 91.9 96.4 100.0 100.0


Inchon Smartcard

Chungnam Smartcard

Universal Studios Korea Resort Asset Management Corporation

DACC Bliss NCF Co. Ltd.

Honam Mitsui Chemicals

Mobizap Media Hyundai Information Technology

M.Hub Lotte Songdo Shopping Town

Chung-buk Soju

HUI

한국

에스티엘

Lotte Confectionary Co., Ltd.

Lotte Chilsung Beverage Co. Ltd 100.0



Lotte Ham Co., Ltd.


Hotel Lotte Co., Ltd.

Busan Lotte Hotel Co., Ltd.


Lotte Shopping Co., Ltd. 30.0 94.5 39.2 50.0


Lotteria Co., Ltd.

111


Inchon Smartcard

Chungnam Smartcard






Chung-buk Soju

HUI

한국

에스티엘

Honam Petrochemical Corp. 56.0 50.0


Daehong Communications INC. 60.0 85.1



Lotte Data Communication Company 52.3

KP Chemical Corp.


Lotte.com Co., Ltd.

Lotte Midopa Co., Ltd. 19.6






Mybi Co., Ltd.

112


Inchon Smartcard

Chungnam Smartcard






Chung-buk Soju

HUI

한국

에스티엘


Lotte Asset Development Co., Ltd. 30.2 9.8


eB Card Co., Ltd. 100.0 100.0

Hyundai Information Technology 0.0

Chung-buk Soju - 90.0

Total 100.0 100.0 30.2 56.0 30.0 94.5 50.0 60.0 52.3 85.1 100.0 100.0 90.0 50.0

※ Hotel Lotte, Cinema Trading and S&S International are among the affiliated companies that are excluded from the list of invested companies as they have no shares owned by other affiliated companies.

※ Changes in the affiliated companies during October 1, 2011 – December 31, 2011 (83 companies → 78 companies) Affiliates included: 2 companies (STL, Natuur) Affiliates excluded: 7 companies (Pharmaceutical, Sanjeong Drinks, Changdae Shipping, Lotte Liquor, Pasteur, Natuur, Hyungjung R-Essence) B. Equity investment

(As of December 31, 2011) (Unit: %)

Name of Company

Date of initial acquisition

Purpose

Amount of initial

acquisition

Beginning balance Increase (Decrease) Ending balance The most recent fiscal year Financial Status

Number of Shares Equity Ratio Book Value

Acquisition (disposal) Evaluation Gain/loss

Number of Shares Equity Ratio Book Value Total Assets Current year

Net Income Qty Amount

Lotte Station Building (unlisted) 1986.09.15

Equity investment

250 900,000 25.00 157,380 - - - 900,000 25.00 157,380 1,007,921 75,615

113

Name of Company


Purpose

Amount of initial

acquisition






Daehong Communications (unlisted) 1996.12.23

Equity investment

6,277 12,000 30.00 27,285 - - - 12,000 30.00 27,285 441,775 7,433

Lotte.com (unlisted) 2000.01.05

Equity investment

2,000 1,600,000 34.39 11,610 - - - 1,600,000 34.39 11,610 148,018 6,423

Lotte Boulangerie (unlisted) 2000.09.05

Equity investment

3,000 4,020,222 90.54 9,530 - - - 4,020,222 90.54 9,530 56,126 - 3,011

Lotte Midopa (listed) 2002.10.15

Equity investment

25

7,379 51,475,843 79.01 582,875 - - - 51,475,843 79.01 582,875 1,058,431 47,429

Lotte Card (unlisted) 2002.11.30

Equity investment

3

4,701 69,995,159 92.54 982,950 - - - 69,995,159 92.54 982,950 7,541,569 184,290

Lotte Capital (unlisted) 2001.12.31

Equity investment

6,259 6,731,600 20.22 70,214 - - - 6,731,600 20.22 70,214 4,158,076 85,221

Lotteria (unlisted) 2001.12.27

Equity investment

3

9,719 148,212 32.17 83,333 - - - 148,212 30.81 83,333 776,420 39,541

114

Name of Company


Purpose

Amount of initial

acquisition






FRL Korea (unlisted) 2004.12.16

Equity investment

2,940 2,352,000 49.00 24,827 - - - 2,352,000 49.00 24,827 187,301 41,270

Woori Home Shopping (unlisted) 2006.07.03

Equity investment

2

8,600 4,242,796 53.03 393,213 - - - 4,242,796 53.03 393,213 639,604 87,399

Lake Park (unlisted) 2006.12.29

Equity investment

1,912 860,400 23.90 5,636 - - - 860,400 23.90 5,636 41,090 2,214

Lotte Assets Development (unlisted) 2007.07.31

Equity investment

30 8,234,153 31.31 36,233 1,449,420 7,247 - 9,683,573 31.96 43,480 202,199 - 4,389

Zara Retail Korea (unlisted) 2007.01.18

Equity investment

130 302,600 20.00 16,106 - - - 302,600 20.00 16,106 112,015 5,307

Korea Seven (unlisted) 2009.09.25

Equity investment

2

8,184 18,526,176 51.44 82,471 - - - 18,526,176 51.14 82,471 769,815 30,618

Lotte Buyeo Resort (unlisted) 2008.10.21

Equity investment

6,667 3,333,333 22.22 16,673 - - - 3,333,333 22.22 16,673 177,117 - 8,061

115

Name of Company


Purpose

Amount of initial

acquisition






Lotte Gimhae Development (unlisted) 2010.03.18

Equity investment

300 60,000 100.00 300 - - - 60,000 100.00 300 603 84

Lotte Suwon Station Shopping Town (unlisted) 2010.04.30

Equity investment

48 475,000 95.00 48 28,500,000 14,250 - 28,975,000 95.00 14,298 15,590 - 263

Lotte Square (unlisted) 2010.04.23

Equity investment

50 1,733,473 100.00 520,042 - - - 1,733,473 100.00 520,042 782,256 11,776

Bliss (unlisted) 2010.12.30

Equity investment

150 30,000 30.00 150 - - - 30,000 30.00 150 2,726 - 2,215

NCF (unlisted) 2010.12.30

Equity investment

1

8,876 567,000 94.50 18,876 - - - 567,000 94.50 18,876 32,517 4,065

Lotte Giants (unlisted) 1982.04.21

Equity investment

30 6,000 30.00 823 - - - 6,000 30.00 823 12,682 3,669

Lake Park Asset Management (unlisted) 2006.12.18

Equity investment

72 14,340 23.90 72 - - - 14,340 23.90 72 1,593 4

116

Name of Company


Purpose

Amount of initial

acquisition






Lotte Songdo Shopping Town 2011.06.27

Equity investment

4

0,000 - - - 8,000,000 40,000 - 8,000,000 39.22 40,000 180,492 - 354

Hemisphere Film Investors II LLC (unlisted) 2011.07.29

Equity investment

578 - - - - 23,261 - - 100.00 23,261 21,633 - 2,595

STL (unlisted) 2011.08.24

Equity investment

1,000 - - - 200,000 1,000 - 200,000 50.00 1,000 2,666 - 848

Isu Entertainment (unlisted) 2005.12.14

Equity investment

3,000 30 37.50 1,962 - 30 - 1,962 - - - - - -

D-cinema of Korea (unlisted) 2008.01.28

Equity investment

1,500 300,000 50.00 - - - - 300,000 50.00 - 77,645 - 2,071

M Venture Cultural Vitalization Investment Association (unlisted)

2009.10.01

Equity investment

2,500 250 25.00 2,500 - - - 250 25.00 2,500 10,721 584

117

Name of Company


Purpose

Amount of initial

acquisition






Capital One Diversity Cinema Special Investment Association (unlisted)

2010.03.18

Equity investment

1,000 100 20.00 1,000 - - - 100 20.00 1,000 4,600 - 305

So Big Contents Investment Union (unlisted) 2011.01.03

Equity investment

4,000 - - - 400 4,000 - 400 26.67 4,000 14,943 - 57

Capital One Middle-Low Budget Cinema Fund (unlisted)

2011.05.24

Equity investment

3,000 - - - 30 3,000 - 30 25.00 3,000 11,828 - 352

CJ Capital No. 14 Cultural Contents Investment Union

(Unlisted) 2011.11.02

Equity investment

6,000 - - - 60 6,000 - 60 30.00 6,000 20,085 31

Busan Bank (listed) 1987.09.23

Equity investment

2,775 5,259,597 2.72 75,475 - - - 17,357 5,259,597 2.72 58,119 3,249,906 122,570

Shinhan Financial Group (listed) 1997.12.31

Equity investment

637 311,118 0.07 16,458 - - - 4,091 311,118 0.07 12,367 30,844,250 1,672,908

118

Name of Company


Purpose

Amount of initial

acquisition






The Korea Express (listed) 2008.03.06

Equity investment

4

9,910 332,046 1.46 31,279 - 332,046 - 24,903 - 6,375 - - - 2,930,160 53,244

Agentrics (unlisted) 2005.12.10

Equity investment

879 1,913,479 1.91 346 - 1,913,479 - 346 - - - - - -

M Cieta Development (unlisted) 2006.09.01

Equity investment

1,960 499,800 5.55 2,499 - - - 499,800 5.55 2,499 40,960 - 167

Corona Development (unlisted) 2006.11.30

Equity investment

100 172,000 2.00 860 - - - 172,000 2.00 860 7,846 -5,397

Union Arc Development (unlisted) 2008.06.03

Equity investment

1,815 362,980 1.10 1,815 - - - 362,980 1.10 1,815 85,806 - 1,801

Bichae Nuri Development (unlisted) 2008.06.09

Equity investment

150 171,600 3.00 858 - - - 171,600 3.00 858 181,875 - 5,502

119

Name of Company


Purpose

Amount of initial

acquisition






Daol Union Ark Private Equity Real Estate Investment No. 1 (unlisted)

2008.06.03

Equity investment

1,320 1,319,920,000 3.99 1,320 - - - 1,319,920,000 3.99 1,320 - -

Cosmo Investment (unlisted) 2009.03.27

Equity investment

8,165 32,840 3.88 9,811 - - 47 32,840 3.88 9,857 86,930 12,427

Lotte International (unlisted) 2006.11.30

Equity investment

1,638 94,785 10.58 51,831 - - - 16,633 94,785 10.58 35,197 1,821,494 - 1,991

Lotte Aluminum (unlisted) 2000.11.23

Equity investment

3,000 62,609 6.03 34,576 - - 1,730 62,609 6.03 36,306 1,694,943 6,184

Lotte Logistics (after the merge) (unlisted) 2007.09.28

Equity investment

4,000 66,308 4.64 6,340 - - 720 66,308 4.64 7,060 550,745 13,971

Lotte Jeju Resort (unlisted) 2008.09.19

Equity investment

2,500 1,000,000 12.50 5,000 - - - 1,000,000 12.50 5,000 131,525 - 4,196

120

Name of Company


Purpose

Amount of initial

acquisition






CJ Venture Investment No. 12 Global Contents Investment Partnership (unlisted)

2009.11.20

Equity investment

1,500 15 3.58 1,500 - - - 15 3.58 1,500 39,814 - 1,660

East Gate Media Contents & Technology Fund (unlisted)

2010.08.30

Equity investment

5,000 50 14.71 5,000 - - - 50 14.71 5,000 33,323 - 760

ISU-Renaissance Contents Fund (unlisted) 2011.01.13

Equity investment

2,000 - - - 40 2,000 - 40 13.33 2,000 14,849 - 230

So Big Media Contents Investment Union No.5 (unlisted)

2006.11.30

Equity investment

1,800 18 18.00 1,800 - - - 18 18.00 1,800 7,859 - 662

So Big Global Contents

Investment Union (Unlisted)

2011.11.04 Equity

investment

4,000 - - - 400 4,000 - 400 16.18 4,000 22,425 - 88

121

Name of Company


Purpose

Amount of initial

acquisition






Lotte Europe Holdings B.V.

(unlisted) 2008.05.30

Investment in holding company 12

4,379 177,322 30.81 110,908 - - - 177,322 30.81 110,908 429,849 - 130

Intime Lotte Department Store (unlisted)(1) 2008.08.30

Investment in

department store

1

0,339 - 50.00 - - - - - 50.00 0 36,820 - 28,149

Lotte Shopping Holdings (Hongkong) (unlisted)

2008.10.27

Investment in holding company

259 750,033,135 100.00 874,318 65,786,459 71,681 - 815,819,594 100.00 945,999 940,220 - 41

Lotte Shopping Holdings (Singapore) (unlisted)

2008.10.28

Investment in holding company

101 131,014,763 100.00 147,826 76,950,000 84,878 - 207,964,763 100.00 232,705 239,737 - 39

Coralis (unlisted) 2009.10.29

Equity investment

1

7,418 573,750 45.00 43,808 213,711 11,323 - 787,461 45.00 55,131 121,805 - 1,459

122

Name of Company


Purpose

Amount of initial

acquisition






Lotte Vietnam Shopping (unlisted)(1) 2006.12.15

Investment in discount

store

3,749 - 80.00 - - 47,666 - - 94.55 47,666 132,728 - 15,994

Qingdao Lotte Mart Commercial (unlisted)(1) 2008.01.18


store

3

3,219 - 53.85 30,048 - 9,816 - - 53.84 39,864 129,919 - 20,937

Lotte Mart Co., Ltd.(unlisted)(1) 2008.06.02


store 18

3,033 - 100.00 158,134 - - - - 100.00 158,134 194,770 - 7,879

Liaoning Lotte Mart Co., Ltd. (unlisted)(1) 2008.07.24


store

2,107 - 76.92 10,841 - - - - 40.00 10,841 33,485 - 7,407

PT Lotte Shopping Indonesia (unlisted)

2008.11.20


store

21

9,737 2,622,812 55.00 214,068 - - - 2,622,812 55.00 214,068 257,485 11,573

123

Name of Company


Purpose

Amount of initial

acquisition






Lotte Cinema Vietnam Co., Ltd.(unlisted)(1) 2008.05.02

Investment in cinema

3,000 - 90.00 3,248 - 3,851 - - 90.00 7,099 10,972 - 1,033

Shenyang SL Cinema Investment Management Co., Ltd.(unlisted)(1)

2010.11.16

Investment in cinema

752 - 49.14 752 - 744 - - 49.00 1,496 2,807 - 620

Hubei XL Cinema

Co., Ltd.

.(unlisted) (*)

2011.06.24 Investment

in cinema

2,048 - - - - 5,530 - - 49.00 5,530 12,173 - 958

Lotte Properties

(Shenyang)

Limited (unlisted)

2009.01.16 Equity

investment

2

9,018 29,928,756 17.93 41,919 - - - 29,928,756 17.93 41,919 360,212 - 4,390

Total 2,420,47

0,470 - 4,928,745 178,854,965 313,034 - 41,960

2,599,325,4

35 - 5,199,820 - -

※ Separate financial statements based on K-IFRS are applied to financial situations for the latest business year (2011). ※ Cost methods are applied to the book value for the above companies to be invested (provided that companies to be evaluated with the market price and fair value are excluded).

124

※ (＊) No share has been issued in accordance with the related laws in the local country.

125

VII. Shares 1. The Largest Shareholder and Specially Related Parties

(As of December 31, 2011) (Unit: shares, %)

Name Relationship Type of Shares

Shareholding

Reason for Change At the beginning of the period At the end of the period

Number of Shares

Shareholding Ratio

Number of Shares

Shareholding Ratio

Shin, Dongbin Himself Common share 4,237,627 14.59 4,237,627 14.59 -

Shin, Dongju Relative Common share 4,235,883 14.58 4,235,883 14.58 -

Shin, Kyukho Relative Common share

293,877 1.01 293,877 1.01 -

Shin, Yeongja Relative

Common share

229,005 0.79 232,818 0.80

Purchase on the stock

exchange

(3,813 shares)

Hotel Lotte Co., Ltd. Related company

Common share 2,781,947 9.58 2,781,947 9.58 -

Korea Fuji Film Co., Ltd. Related company

Common share 2,474,543 8.52 2,474,543 8.52 -

Lotte Confectionary Co., Ltd.

Related company

Common share 2,474,543 8.52 2,474,543 8.52 -


Related company

Common share 1,515,653 5.22 1,515,653 5.22 -

Lotte Chilsung Co., Ltd. Related company Common share 1,237,272 4.26 1,237,272 4.26 -


Related company

Common share 300,019 1.03 300,019 1.03 -

Busan Lotte Hotel, Co., Ltd.

Related company

Common share 246,720 0.85 246,720 0.85 -

Jang, Seonyun Relative

Common share

900 0 1,600 0


exchange

(700 shares)

Shin, Yumi Relative Common share

28,903 0.1 28,903 0.1 -

Kim, Seho Board of Directors

Common share

421 0 469 0


exchange

(48 shares)

Park, Kyungbeom

Board of Directors Common share 27 0 27 0 -

126

Name Relationship Type of Shares

Shareholding

Reason for Change At the beginning of the period At the end of the period

Number of Shares

Shareholding Ratio

Number of Shares

Shareholding Ratio

Lotte Samdong Welfare Foundation

Foundation

Common share 47,888 0.16 47,888 0.16 -

Yuwon Industry Co., Ltd. Other Common share 3,000 0 3,000 0 -

Seo, Mikyeong Other Common share

30,531 0.11 30,531 0.11 -

Jang, Jaeyoung Other Common share

950 0 950 0 -

Yu, Juyoung Other Common share

499 0 499 0 -

Total

Common share 20,140,208 69.35 20,144,769 69.36


exchange

(4,561 shares)

Preferred Share 0 0 0 0 -

Other 0 0 0 0 -

※ For the period January 1, 2011 ~ December 31, 2011.

※ The number of specially related parties: 19

Information regarding the Largest Shareholder

Name Academic Background Career Background Shin, Dongbin 1977 Graduated from Aoyama Gakuin University, majored

in economics 1980 MBA, Columbia University

1990 Executive Director, Honam Petrochemical Co. Ltd. 2000 Director, Lotte Shopping Co., Ltd. 2011 Representative Director, Lotte Group

※ Changes since the reporting date:

Shareholding resolutions made at the 42nd annual general meeting of shareholders (held on March 23, 2012):

- Re-appointment of standing directors: Dongbin Shin, Inwon Lee, Youngja Shin - New appointment of standing director: Hun Sin - Expiration of term of standing director: Chulwoo Lee - Re-appointment of outside director: Sehun Kim, Hongro Rhee - New appointment of outside director: Sangkee Min, Wonhei Kim, Taehyeon Kim - Expiration of term of outside directors: Kyeongbum Park, Seunghee Joa, Seheon Kim 2. Changes of the largest shareholder

There has not been any change in the largest shareholder during the reporting period (for the recent three business years).

127

3. Distribution of Shares

A. Shareholders Owning More than 5% of the Shares

(As of December 31, 2011) (Unit: shares, %)

No Name Common Share Number of Shares Equity Ratio Remarks

1 Shin, Dongbin 4,237,627 14.59 2 Shin, Dongju 4,235,883 14.58 3 Hotel Lotte Co., Ltd. 2,781,947 9.58 4 Fuji Film Co., Ltd. 2,474,543 8.52 5 Lotte Confectionary Co., Ltd. 2,474,543 8.52

6 Lotte Data Communication Company, Ltd.

1,515,653 5.22

Employee stock ownership association 58,062 0.20

128

4. Distribution of Shares (As of December 31, 2011) (Unit: persons, shares, %)

Division Number of Shareholders Percentage Number of

Shares Percentage Remarks

Minority Shareholders 27,090 99.89% 7,955,795 27.38%

5. Shares

Subscription right according to the articles of the Company

① Shareholders of the Company has a subscription right for issuance of new shares, in proportion to the number of shares that shareholders own.

② Despite article 1, new shares can be issued to those other than the

current shareholders in the following occasions. However, the total number of shares issued should not be more than 50% of the total number of issued shares, except in case (3).

(1) Initial Public Offering in order to list shares into the stock market, or underwriter acquires stocks for subscription

(2) Issuance of new shares through a public offering according to No. 6, article 165 of Securities Exchange Act, upon decision of the board of directors.

(3) Preferential distribution of new shares to members of Employee Stock Ownership Association pursuant to Article 32 of Employees’ Welfare Law or No 7 of article 165 of Securities Exchange Act. (4) Issuance of new shares according to the issuance of DR pursuant to Clause 16 of Article 165 of Securities Exchange Act

(5) Issuance of new shares according to Foreign Investment Promotion Law to induce foreign investment, as needed for business

(6) Issuance of new shares to domestic or overseas financial institutions for financing in urgency

(7) Issuance of new shares to a concerned affiliated company for the introduction of technology

③ In the event that shareholders give up or lose their subscription right

or odd-lot stocks are occurred, the board of directors will decide disposal of above mentioned shares. (Clause 10 – Subscription right)

Settlement date December 31 Regular meeting of shareholders

Within 3 months after settlement

Closing date of list of shareholders’ names

Stock transfer, registration or cancellation of a pledge, or indication of trust property or cancellation of such registration in relation to the Company shall be suspended during the period of January 1 through January 31 every year. (Articles of Incorporation, Clause 14 -- Closing of Stockholder's List and Date of Record).

Type of shares 1, 5, 10, 50, 100, 500, 1000, 10000 Shares (8 types in total) Transfer agent Korea Securities Depository

Shareholders’ privilege - Posting of Public Notice

The Korea Economic Daily

6. Stock Price and Transaction Record of Stocks for the last six months A. Domestic Stock Market

(Unit: Won, shares) Type July

2011 August 2011

September 2011

October 2011

November 2011

December 2011

Common Stock

Maximum 502,000 486,500 441,500 424,000 404,500 358,500

129

Minimum 455,500 410,000 367,000 368,000 338,500 314,000 Average 486,524 454,909 404,400 393,825 368,409 337,952

Transaction Volume

Highest transaction volume

190,563 214,973 133,403 157,886 151,507 122,779

Lowest transaction volume

53,069 63,730 44,097 41,880 35,906 36,351

Monthly transaction volume

1,913,773 2,639,108 1,863,633 1,497,980 1,832,319 1,440,791

B. Overseas Stock Markets

[Exchange: London Stock Exchange] (Unit: USD) Type July

2011 August 2011

September 2011

October 2011

November 2011

December 2011

Common Stock

Maximum 23.43 22.62 20.4 18.85 17.9 15.87 Minimum 21.69 18.71 15.6 15.39 14.85 13.28 Average 22.82 21.13 17.97 16.88 16.28 14.60

130

VIII. Executives and Employees 1. Status of Executives and Employees A. Executives (As of March 30, 2012) (Unit: shares)

Name DOB Position Registration

Share

Common share

Common share

Shin, Kyukho October 1922 Executive

Chairman Representative Director 293,877 -

Shin, Dongbin February 1955 Chairman Representative Director 4,237,627 -

Lee, Inwon August 1947 Vice-Chairman Representative Director - -

Sin, Hun September 1954 President Representative Director 142 -

Shin, Youngja October 1942 Standing Director Standing Director 232,818 -

Kim, Wonhei October 1952 Outside Director Outside Director - -

Min, Sang-kee January 1948 Outside Director Outside Director - -

Kim, Taehyeon June 1955 Outside Director Outside Director - -

Rhee, Hongroh December 1952 Outside Director Outside Director - -

Kim, Seho June 1953 Outside Director Outside Director 469 -

Ye, Jongsuk December 1953 Outside Director Outside Director - -

※ Status on the above registered directors is based on the day that the business report is submitted. ※ Changes after the day of accounting settlements Resolutions from 42nd Annual General Meeting of Shareholders (March 23, 2012) - Reappointment of outside directors: Shin Dongbin, Lee Inwon, Shin Youngja - New appointment of inside director: Sin Hun - Retirement of inside director (tenure expired): Lee Chulwoo - Reappointment of outside directors: Kim Seho, Rhee Hongro - New appointment of outside directors: Min Sangkee, Kim Wonhei, Kim Taehyeon - Retirement of outside directors (tenure expired): Park Gyeongbeom, Joa Seunghee, Kim Seheon

131

[Non-registered Executives]

(Unit: shares) Name Date of

Birth (yyyy.mm)

Position Duties 주요경력 Common

shares Remarks

Lee, Cheolwoo Mar. 1943 President in charge of overall management

President in charge of overall management

1965 Graduated from Seoul National Univ., majored in agricultural economics 1970 Master in management, Seoul National Univ. 1999 Ph.D. in management, Aju Univ. 2007 Representative Director of Lotte Shopping

Chae, Jungbyung

Nov. 1950 President Supports 1974 Graduated from Yonsei Univ., majored in economics

Hwang, Gakgyu

Apr. 1955 President International affairs

1977 Graduated from Seoul National Univ., majored in chemical engineering

65

Noh, Byungyong

Jun. 1951 President President in charge of overall management for mart

1976 Graduated from Yonsei Univ., majored in management

10

So, Jinse May 1950 Representative Director

President 2006 Graduated from Korea Univ., majored in public administration

142 Chief Executive Officer, Korea Seven and Buy the Way

Son, Gwangik Sep. 1954 Representative Director in charge of overall management

1982 Graduated from Hankuk Univ. of Foreign Studies, majored in Russian

Kim, Jaehwa Jul. 1954 Vice President Auditor 1985 Graduated from Gyeonggi Univ., majored in accounting

Kim, Chihyun Dec. 1955 Vice President Operations 1981 Graduated from Yeungnam Univ., majored in international trade

Kim, Sunghoi Jun. 1943 Executive Director

Secretary affairs

1965 Graduated from Korea Univ., majored in agricultural chemistry

Yoon, Jongmin Nov. 1960 Executive Director

Personnel affairs

1983 Graduated from Seoul National Univ., majored in philosophy

Gang, Heetae Apr. 1959 Executive Director

Head of Merchant Dept.

1987 Graduated from Kyunghee Univ., majored in English literature

111 Chief Executive Officer, Lotte Midopa and Lotte Square

Kim, Hyunsoo Jun. 1956 Executive Director

Head of Financial Sector

1985 Graduated from Hanyang Univ., majored in accounting

119

Gu, Jayoung Aug. 1955 Executive Director

Head of China business Dept.

1981 Graduated from Korea Univ., majored in statistics 1984 Graduated from Graduate School of Management, Korea Univ.

270

Kim, Jongin Mar. 1963 Executive Director

Head of Strategy Dept.

1986 Graduated from Seoul National Univ., major in economics

24

Jung, Seungin Jun. 1958 Executive Director

Head of Digital Business Dept.

1987 Graduated from Korea Univ., majored in management

92

Park, Donggi Dec. 1957 Managing Director

Labor affairs 1984 Graduated from Jeonbuk Univ., majored in management

41

Yoo, Jedon Aug. 1960 Managing Director

Secretary affairs

1983 Graduated from Chungang Univ., majored in management

132

Name Date of Birth (yyyy.mm)


shares Remarks

Lee, Changwon

Mar. 1959 Managing Director

Public relations 1984 Graduated from Korea Univ., majored in English literature

Lee, Ilmin Jun. 1959 Managing Director

Secretary affairs

1982 Graduated from Chungnam Univ., majored in architectural engineering 1990 Master of management, Mercer Univ.

47

Jang, Sunwook Jan. 1958 Managing Director

Operations 1986 Graduated from Korea Univ., majored in education

Cha, Wonchun Dec. 1957 Managing Director

Operations 1979 Graduated from Chosun Univ., majored in management 1981 Master of accounting, Chosun Univ.

Park, Hyunchul Oct. 1960 Managing Director

Operations 1984 Graduated from Kyungpook Univ., majored in statistics

Lee, Chungik Nov. 1964 Managing Director

International affairs

1987 Graduated from Seoul National Univ., majored in food engineering

24

Kim Inkwon Jan. 1969 Managing Director

Legal affairs 1993 Graduated from Korea Univ., majored in law 2007 Master of civil and commercial laws, Qinghua Univ.

Lim, Byungyeon

Sep. 1964 Managing Director

Future Strategy Center

1987 Graduated from Seoul National Univ., majored in chemical engineering 1989 Master of chemical engineering, Seoul National Univ. 2002 Ph.D. of chemical engineering, KAIST

Min, Gwanggi Jan. 1956 Managing Director

Head of China Business Dept.

1983 Graduated from Kookmin Univ., majored in politics and diplomacy

127

Kim, Changrak Dec. 1957 Managing Director

Head of Sales Dept. 1

1981 Graduated from Sungkyunkwan Univ., majored in textile engineering

119 Chief Executive Officer, Lotte Station Building

Kwon, Kyungyeol

Dec. 1960 Managing Director

Head of Daejeon Store

1987 Graduated from Konkuk Univ., majored in textile engineering

Park, Hosung Sep. 1958 Managing Director

Head of Sales Dept. 2

1984 Graduated from Korea Univ., majored in agricultural economics

102

Lee, Gap Sep. 1962 Managing Director

Head of Marketing Dept.

1988 Graduated from Korea Univ., majored in social affairs

85

Lee, Wansin Oct. 1960 Managing Director

Head of Headquarter Store

1987 Graduated from Korea Univ., majored in Chinese literature 1999 Graduated from Graduate School of Yonsei Univ., majored in management 2010 Ph.D. of management, Graduate School of Konkuk Univ.

86

Lee, Janghwa Jun. 1959 Managing Director

Head of Jamsil Store

1988 Graduated from Dongkuk Univ., majored in international trade

86

Choi, Choonseok

Mar. 1960 Managing Director

Head of Merchandize Dept.

1986 Graduated from kwangwun Univ., majored in management

86

Park, Yoonseong

Feb. 1957 Managing Director

Head of Customer Dept.

1982 Graduated from Chungang Univ., majored in vocal music

127

133



shares Remarks

Kim, Kyunghwan

Feb. 1961 Managing Director

Head of New Business Dept.

1983 Graduated from Yonsei Univ., majored in electronic engineering 1988 Graduated from Graduate School of Industry, Yonsei Univ., majored in computing service

Moon, Yongpyo

Apr. 1962 Managing Director

Head of Southeastern Asia

1988 Graduated from Yeungnam Univ., majored in textile engineering

32

Lee, Jaechan Feb. 1960 Managing Director

Head of managerial supports


Cho, Sungyeop

Jan. 1955 Managing Director

Head of overseas business

2004 Graduated from Kyunghee Univ., majored in history

40

Lee, Younghyun

Dec. 1958 Managing Director

Head of planning

2000 Graduated from Kookmin Univ., majored in law

24

Lee, Dongho Jun. 1962 Managing Director

Head of marketing

1986 Graduated from Hankuk Univ. of Foreign Studies, majored in Portuguese

40

Jang, Hoju Aug. 1960 Director Finance 1987 Graduated from Korea Univ., majored in management

Newly appointed in Feb. 2012

Nam, Ikwoo Jan. 1962 Director Operation 1988 Graduated from Korea Univ., majored in management


Choi, Kirim Jan. 1965 Director Legal affairs 1987 Graduated from Korea Univ., majored in law

Jeon, Young min

May 1967 Director Personnel affairs

1989 Graduated from Korea Univ., majored in philosophy 2000 Master of personnel organization, Korea Univ. 2009 Ph.D. (completion) of management, Kyunghee Univ.

Jeong, Gyeongmun

Feb. 1964 Director International affairs

1988 Graduated from Seoul National Univ., majored in chemical engineering


Kim, Taewan Mar. 1965 Director International affairs

1989 Graduated from Hanyang Univ., majored in management


Cha, Wucheol Jan. 1968 Director Auditor 1990 Graduated from Kyunghee Univ., majored in food processing

16 Newly appointed in Feb. 2012

Hwang, Yongseok

Feb. 1970 Director Labor affairs 1995 Graduated from Dongguk Univ., majored in law


Hyun, Chunghyo

Nov. 1966 Director Finance 1996 Graduated from Columbia Univ., majored in economics and politics


Lee, Jinsung

Feb. 1969 Director Future Strategy Center

1992 Graduated from Seoul National Univ., majored in international economics 1997 Master of economics, Seoul National Univ. 2002 MBA of strategy/marketing, Chicago Univ.

Kang Sunghyun

Jan. 1970 Director Future Strategy Center

1995 Graduated from Yonsei Univ., majored in management 1997 Ecole HEC MBA

Shin, Gwangcheol

Nov. 1967 Director Future Strategy Center

1992 Graduated from Sungkyunkwan Univ., majored in economics 1994 Master of economics, Sungkyunkwan Univ. 2002 Ph.D. in economics, Sungkyunkwan Univ.


Kim, Chansu Mar. 1965 Director Distribution 1987 Graduated from Kyungpook Newly appointed in

134



shares Remarks

CFD National Univ., majored in agricultural chemical

Feb. 2012

Jung, Donghyuk

Jul. 1962 Director Head of Russian Business

1988 Graduated from Kyunghee Univ., majored in international trade

32

Ku, Soohoi Feb. 1958 Director Head of Vietnamese Business

1987 Graduated from Jeonju Univ., majored in management

86

Go, Gwanghoo May 1962 Director Head of overseas fashion

1985 Graduated from Seoul National Univ., majored in Korean literature

Noh, Yoonchul Apr. 1961 Director Head of new business

1984 Graduated from Dongeui Univ., majored in architecture

Kim, Sewan Apr. 1965 Director Head of GF business


71

Cho, Taehak Mar. 1961 Director Shenyang Project Team Manager

1984 Graduated from Dankook Univ., majored in Chinese literature

86

Seol, Pungjin Apr. 1961 Director Head of Busan Headquarter Store

1987 Graduated from Hanyang Univ., majored in textile engineering

86

Hong, Sungho Feb. 1962 Director Head of Daegu Store

1987 Graduated from Konkuk Univ., majored in textile engineering

86

Jang, Soohyun Jun. 1964 Director Head of managerial supports

1989 Graduated from Hankuk Univ. of Foreign Studies, majored in politics and diplomacy

104

Hwang, Beomseok

Sep. 1965 Director Head of women fashion

1992 Graduated from Hanyang Univ., majored in law

71

Woo, Kyungjoo Jun. 1961 Director Head of development

1985 Graduated from Hanyang Univ., majored in English literature

Kim, Youngkyun

Oct. 1960 Director Head of PB development

1983 Graduated from Sungkyunkwan Univ., majored in international trade

Kim, Gyusung Jan. 1960 Director Head of clothing and sundries

1987 Graduated from Dongkuk Univ., majored in law

Park, Jongdo May 1961 Director General Manager of Northern Chinese Region

1987 Graduated from Yeungnam Univ., majored in public administration

86

Nam, Changhee

Oct. 1966 Director Head of marketing

1992 Graduated from Hanyang Univ., majored in German literature

96

Lee, Inchul Jun. 1959 Director Head of southeastern region and Jeju customers

1982 Graduated from Dankook Univ., majored in public administration

Kim, Jonghwan May 1962 Director Head of processed food

1990 Graduated from Seoul National Univ., majored in Agriculture

32

Jang, Daesik Dec. 1966 Director Head of DP merchandize

1989 Graduated from Cheongju Univ., majored in industrial engineering

Kang, Jonghyun

May 1964 Director Head of supports

1990 Graduated from Univ. of Seoul, majored in accounting

Hong, Sungbok

Sept. 1957 Director Head of overall sales management

1978 Graduated from Seongdong Commercial High School

16

Kim, Seunghee Apr. 1965 Director Head of development

1991 Graduated from Woosuk Univ., majored in biology

135



shares Remarks

Song,Youngtak Jul. 1965 Director Head of processing and living

1992 Graduated from Sogang Univ., majored in economics

40

Jung, Wonho Feb. 1969 Director Head of marketing

1995 Graduated from Chungang Univ., majored in international trade

55

Lee, Donggu Feb. 1958 Director Head of Cheongryangri Store

1981 Graduated from Inha Univ., majored in public administration

103

Guk, Jungbeom

Oct. 1958 Director Head of Ulsan Store

1987 Graduated from Inha Univ., majored in accounting

40

Choi, Wonil Sep. 1962 Director Head of Dongrae Store

1984 Graduated from Chungbuk Univ., majored in management

Kim, Taehwa Dec. 1959 Director Head of Gimpo Airport Store

1986 Graduated from Dankook Univ., majored in management

86

Jang, Jun Dec. 1958 Director General Manager of Design Dept.

1982 Graduated from Hongik Univ., majored in industrial design 1985 Graduated from Graduate School of Hongik Univ., majored in industrial design

32

Cho, Hakhyun March 1959

Director Head of Nowon Store

1986 Graduated from Hanyang Univ., majored in economics

24

Jeon, Hyungsik Mar. 1963 Director Head of living fashion

1986 Graduated from Sogang Univ., majored in newspaper and broadcasting

79

Park, Daehun Aug. 1964 Director Head of ethical management

1986 Graduated from Hannam Univ., majored in management 1994 Graduated from Graduate School of Education, Yonsei Univ.

75

Jung, Yunsung Mar. 1965 Director Head of Tianjin Dongmaru Store


79

Hwang, Gyuwan

Feb. 1965 Director Head of Gwangbok Store

1989 Graduated from Dongkuk Univ., majored in information management

71

Hwang, Youngguen

Jan. 1967 Director Head of Ilsan Store

1992 Graduated from Chungang Univ., majored in newspaper and broadcasting

71

Baek, Insoo Jun. 1965 Director Head of Distribution Strategy Research Center

1988 Graduated from Korea Univ., majored in international trade 1991 Graduated from Graduate School of Commerce, Waseda Univ., Japan 2003 Ph.D. of Commerce, Graduate School of Waseda Univ., Japan

15

Lee, Changhyun

Mar. 1961 Director Head of Yeongdeungpo Store

1985 Graduated from Dankook Univ., majored in textile engineering


Lee, Chanseok Dec. 1961 Director Head of Pyeongchon Store

1989 Graduated from Sungkyunkwan Univ., majored in mathematics


Shim, Gyeongseop

Aug. 1964 Director Head of sundries

1987 Graduated from Chungnam Univ., majored in social study


Kim, Seongsu Jan. 1964 Director Head of Anyang Store

1990 Graduated from Yeungnam Univ., majored in textile engineering


Nam, Taehong Aug. 1964 Director China project 1990 Graduated from Korea Univ., majored in politics and diplomacy


Ryu, Minryeol Mar. 1966 Director Head of Gwangju Store

1991 Graduated from Dongguk Univ., majored in management


Jo, Yeongje Apr. 1966 Director Head of EC 1989 Graduated from Sogang Univ., 71 Newly appointed in

136



shares Remarks

majored in economics Feb. 2012

Baek, Wunseong

Jun. 1965 Director Head of Changwon Store

1992 Graduated from Kyunghee Univ., majored in public administration


Ki, Wongyu Dec. 1965 Director Head of Men's sports

1992 Graduated from Sogang Univ., majored in press and broadcasting


Lee, Hoseol Jul. 1970 Director Head of Planning



Woo, Kiljo Aug. 1966 Director Head of food 1992 Graduated from Korea Univ., majored in law


Park, Munsu Dec. 1962 Director Head of Incheon Store

1989 Graduated from Yeungnam Univ., majored in law


Min, Hyeonseok

Jun. 1967 Director Head of overseas business

1991 Graduated from Wisconsin Univ. in the U.S., majored in economics 1996 Graduated from Graduate School of Hokkaido in Japan, majored in management


Kim, Wugyeong

Feb. 1967 Director Planning IR Director

1991 Graduated from Korea Univ., majored in English literature 2000 Graduated from Washington Univ. in the U.S., majored in management


Seol, Kihwan Jun. 1964 Director Head of Gwanak Store

1990 Graduated from Hankuk Univ. of Foreign Studies, majored in management


Hahn, Byeongmoon

Jun. 1963 Director Head of public relations

1986 Graduated from Korea Univ., majored in English literature

32

Lee, Hyunkyo Oct. 1963 Director Head of overseas strategy

1989 Graduated from Korea Univ., majored in English education

Hong, Pyungkyu

Sep. 1962 Director President of Vietnamese corporation

1989 Graduated from Dongkuk Univ., majored in management

55

Jung, Byunghwa

Feb. 1964 Director Head of Seoul & Gangwon Customers

1989 Graduated from Yeungnam Univ., majored in international trade

Ryu, Byungho Mar. 1966 Director General Manager of Chongqing business

1989 Graduated from Pusan Univ., majored in Chinese literature

24

Jo, Dohang Nov. 1962 Director Head of finance

1988 Graduated from Dongkuk Univ., majored in accounting

Oh, Ilgeun Jul. 1968 Director Director of New Development Dept. 1

1993 Graduated from Sogang Univ., majored in management 2000 Graduated from Graduate School of Finance & Accounting, Sogang Univ.

39

Hong, Wonsik Jun. 1966 Director Head of ethics and innovation

1992 Graduated from Korea Univ., majored in livestock 1994 Graduated from Graduate School of Korea Univ., majored in livestock processing


Yoon, Jugyeong

Apr. 1965 Director President of Indonesian retail corporation

1991 Graduated from Chungang Univ., majored in applied statistics 2009 Graduated from Graduate School of Chungang Univ. majored in international management


Bang, Chansik Feb. 1966 Director General Manager of Eastern China

1991 Graduated from Yeungnam Univ., majored in economics


Song, Seungseon

Jun. 1971 Director Director of online business

1994 Graduated from Seoul National Univ., majored in natural fabrics 2006 Graduated from Graduate


137



shares Remarks

School of Yonsei Univ., majored in management

Seo, Jaehyung Oct. 1964 Director Head of Strategy & Innovation

1986 Graduated from Seoul National Univ., majored in agriculture

Kim, Yonggu Oct. 1960 Director Head of Sales Dept. 2

1989 Graduated from Konkuk Univ., majored in management


Han, Hyeongseok

Jun. 1965 Director Change Management TFT Manager

1992 Graduated from Kyunghee Univ., majored in management


You, Seungchul

Feb. 1962 Director Head of cinema business

1989 Graduated from Dongeui Univ., majored in management

32

Lee, Gwanro Feb. 1963 Director Head of managerial supports

1994 Graduated from Wonkwang Univ., majored in English literature


Jeong, Hoseok Mar. 1966 Director Head of CP supports

1990 Graduated from Dongkuk Univ., majored in economics


※ The status of above non-registered executives is as of the day of submission of this report to the FSS. B. Employees (As of December 31, 2011) (Unit: persons, year, thousand Won)

Division Gender

The number of staff Average number of

working years

Year

compensation

Average

compensation

per person

Remarks Full-time Contracted Other Total

Department

Store

Male 1,932 1 - 1,933 9.23 144,086,684 74,928 -

Female 2,835 365 - 3,200 8.23 93,701,798 32,649 -

Discount

Store

Male 3,459 570 - 4,029 5.95 154,575,000 39,942 -

Female 4,864 2,938 - 7,802 3.79 125,965,000 19,897 -

Other Male 2,050 635 - 2,685 3.11 83,935,386 33,900 -

Female 1,963 3,189 - 5,152 2.04 82,578,991 17,118 -

Total 17,103 7,698 - 24,801 4.70 684,842,859 30,719 - 2. Compensation A. Compensation of Directors

(Unit: million Won) Division Total amount Approved amount Remarks Director 8,196

11,000

5 registered directors Outside Director 144 3 outside directors Audit Director 132 3 audit directors(outside

directors) ※ Figures represent five directors and six outside directors (including 3 audit directors).

138

IX. Transaction Record with Interested Parties A. Credit Transactions with the Largest Shareholder 1. Loans

(Unit: USD10,000)

Company Name Relation Account

Changed detail Accrued interest Note

Beginning Increase Decrease Ending Lotte Vietnam Shopping Co., Ltd.

Overseas affiliate

Loan 2,600 2,600

Intime Department Store Co., Ltd.

Overseas affiliate

Loan 732 732 105 - Loan Term: January 23, 2009 to January 20, 2012

Total

3,332 2,600 732 105

2. Collateral

(Unit: RMB1,000, million Won)

Company Name Relation

Details of Transactions Note

Beginning Increase Decrease Ending


Affiliate

RMB 78,000 RMB

78,000

ㆍ Collateral granted in favor of Woori Bank Beijing Branch ㆍ Collateral type: Savings ㆍ Period of collateral: April 30, 2010 to April 29, 2011

KRW 12,000 KRW 12,000

ㆍ Collateral granted in favor of Woori Bank Beijing Branch ㆍ Collateral type: Savings ㆍ Period of collateral: April 29, 2010 to April 27, 2011

3. Guarantee of Obligations

(Unit: USD1,000, RMB1,000, IDR100 million, VND100 million)

Company Name Relation Details of Transactions

Note Beginning Increase Decrease Ending


Affiliate

RMB 70,000 RMB 70,000 Agreed interest is

included

USD 8,125 USD 8.125 Agreed interest is

included

139

Lotte Vietnam Shopping Co., Ltd.

Affiliate

USD 60,000 USD60,000

Agreed interest is included

VND 2,600 VND 2,600 Agreed interest is

included

USD 27,000

USD 27,000 Agreed interest is

included

USD 15,000 USD 15,000

Agreed interest is included

Lotte Shopping RUS Ltd. Affiliate USD

10,000 USD 10,000 Agreed interest is included

PT Lotte Shopping Indonesia Affiliate IDR 3,500 IDR

3,500 Agreed interest is not included

Liaoning Lotte Mart Co., Ltd. Affiliate RMB

100,000 RMB 90,000

RMB 100,000

Agreed interest is not included

Lotte Cinema Vietnam Co., Ltd. USD

6,000 USD 6,000 Agreed interest is not included

140

X. Other Relevant Matters 1. Report of Major Matters Regarding Management

Not applicable.

2. Summary of the Minutes from the General Meeting of Shareholders

Date Matters Decision Remarks 42nd General Meeting of Shareholders (March 23, 2012)

Agenda No. 1: Approval of the 42nd fiscal year balance sheet, statement of profit and loss, disposal receipt of retained earnings (plan) Agenda No. 2: Changes in the Articles of Incorporation Agenda No. 3: Appointment of directors -No. 3-1: Appointment of outside directors -No. 3-2: Appointment of inside directors -No. 3-3: Appointment of auditors Agenda No. 4: Approval of compensation limit for directors

Approved

41st general meeting of shareholders (March 18, 2011)

Agenda No.1: Approval of the 41st fiscal year balance sheet, statement of profit and loss, disposal receipt of retained earnings (plan) Agenda No. 2: Changes in the Articles of Incorporation Agenda No. 3: Appointment of directors -Agenda No. 3-1: Appointment of outside directors -Agenda No. 3-2: Appointment of directors Agenda No. 4: Approval of compensation limit for directors

Approved

40th general meeting of shareholders (March 26, 2010)

Agenda No.1: Approval of the 40th fiscal year balance sheet, statement of profit and loss, disposal receipt of retained earnings (plan) Agenda No. 2: Changes in the Articles of Incorporation Agenda No. 3: Appointment of directors -Agenda No. 3-1: Appointment of outside directors -Agenda No. 3-2: Appointment of directors -Agenda No. 3-3: Appointment of Audit Committee members Agenda No. 4: Approval of compensation limit for directors

Approved -

39th general meeting of shareholders (March 20, 2009)

Agenda No.1: Approval of the 39th fiscal year balance sheet, statement of profit and loss, disposal receipt of retained earnings (plan) Agenda No. 2: Changes in the Articles of Incorporation Agenda No. 3: Appointment of directors

Approved

141

-Agenda No. 3-1: Appointment of outside directors -Agenda No. 3-2: Appointment of directors Agenda No. 4: Approval of compensation limit for directors

3. Matters on contingent liabilities A. Major legal proceedings Our company’s management expects no material impact on our company’s financial situations from final results on the proceedings. (1) Major lawsuits where the Company is a plaintiff

Division Company (Plaintiff) Lawsuit Details Claimed Amount (in Won) Remarks

Department store

Lotte Shopping Lawsuit seeking cancellation of expenses and 3 other case

4,740,609,000

Lotte Midopa Lawsuit for delivery -

Lotte Square Lawsuit for delivery -

Discount store

Lotte Shopping Lawsuit seeking cancellation of prohibition on construction

40,000,000

Finance Lotte Card Credit collection and 793 other cases 3,730,000,000

Others Lotte Shopping (Super) Insurance claim and 4 other cases 4,115,248,000

Lotte Shopping (Cinema)

Lawsuit for repayment of loan and 2 other cases

2,467,468,000

(2) Major lawsuits where the Company is a defendant

Division Company (Defendant) Lawsuit Details Claimed Amount

(in Won) Remarks

Department store

Lotte Shopping Claim for the payment of construction fees relating to transfer of electric facilities and 3 other cases

3,418,067,000

Discount store

Lotte Shopping Indemnification and 2 other cases 894,158,000

Finance Lotte Card Indemnification and 18 other cases 11,093,000,000

EB Card Lawsuit for the nullification on the business split

20,000,000

Others Woori Home Shopping Cancellation of the registration on the fixed collateral establishment and another case

2,445,657,000

Lotte Shopping (Super) Lawsuit for the dismantlement of outdoor devices and 2 other cases

2,626,506,000

Lotte Shopping (Cinema)

Indemnification and another case 552,891,000

Korea Seven Payment of the agreed money and 10 other cases

506,346,000

Buy The Way Delivery of building and 6 other cases

475,102,000

B. Notes and checks for pledges or collaterals

142

(As of December 31, 2011) (Unit: million Won) Division Submitted Place Sheets Amount Remarks

Department store Lotte Midopa

Bank (note) 653 -

Bank (check) 93 -

Others Korea Seven Corporation 1 500

A sheet of promissory note was provides as pledge for the contract performance guarantee in relation with the building

lease to Korea Center Academy.

* One of our subsidiaries Lotte Midopa has not collected 93 checks and 653 notes, provided for collaterals on liabilities which have been cleared in the past, from its related customers although those cleared liabilities have been fully repaid, the company’s management considers that little possibility exists to pay those uncollected notes and check as mentioned before. * One of our subsidiaries Lotte Card bears liabilities on collaterals for defects if asset backed card credits fail to have qualifications or reasons such as arrears occur. If asset backed securities are based on trust, trust companies might request Lotte Card to entrust additional assets more than a certain amount if the transferred assets fail to keep a certain level. In addition, a limited company specialized in asset backed securities has to bear obligations for earlier repayment of asset backed securities if the circumstance falls under certain reasons provided in the related agreement, such that the average portfolio profitability for three settlement periods in a row becomes lower than the average basic cost ratio for the same period in case of asset backed securities or the balance of the modified principal on asset backed securities at the ending day of every settlement period becomes lower than the minimum balance of principal on asset backed securities. C. Guarantee for liabilities (consolidated) (1) The following details include payment guarantees for persons with special relationships and collaterals and payment guarantees provided for persons with special relationships by the consolidated entities, but there is no collateral or payment guarantee provided by persons with special relationships. (As of December 31, 2011)

Company Name (Debtor) Place For Payment

Guarantee Guaranteed Amount Term of Guarantee Remarks

Intime Lotte Department Store Co., Ltd.

Woori Bank KRW 12,000,000,000 2011.04.29~2012.04.27 Provided for deposit collaterals

Standard Chartered

RMB 70,000,000 2011.04.01~2012.03.31 Payment guarantee for financing

Shinhan Bank USD 8,125,000 2011.11.16~2012.11.12 Payment guarantee for financing

Lotte Shopping Rus Ltd. Korea Development Bank

USD 10,000,000 2010.05.13~2013.05.12 Payment guarantee for financing

(2) Other than the above payment guarantees, the consolidated entity provided 50% respectively for the contract performance of The Cinema Of Korea with CJ CGV when the VPF Agreement of Twentieth Century Fox Film Corporation was concluded with The Cinema Of Korea in October 2008. In addition, the consolidated entity guaranteed the contract performance of Burger King Japan Co., Ltd. when the royalty agreement (3.5% of net sales, USD 25,000 per store upon the opening of a store) was concluded between Burger King Japan Co., Ltd. and BK ASIAPAC, PTE. Ltd. D. Other contingent liabilities The following details include major agreements between the consolidate entity and financial institutions as of the end of the current period. (Unit of won currency: 1,000 won)

Division Limit Used Amount

143

Division Limit Used Amount

General loan

KRW 609,803,060 240,959,434

CNY 709,471,032 567,980,031

IDR 618,423,782,803 598,423,782,803

HKD 166,000,000 166,000,000

Discount on notes receivable

KRW 220,000,000 110,364,000

Purchase card KRW 312,000,000 47,457,586

Bank overdraft KRW 84,000,000 877

Opening of import L/C USD 13,500,000 2,962,485

4. Regulatory actions and other situations A. Regulatory actions

Division Company Date Subject of regulatory

action

Content of regulatory

action Reason and Governing Laws

Company’s Actions to Prevent

Recurrence

Financial Business Sector

Lotte Card 2008.03.05 Lotte Card Correction order and penalty imposition

Correction order and penalty (finally 205 million won) were imposed due to violation against No. 1 of Clause 1 of Article 19 in the Fair Transaction Act in relation with collusions on the paid unit price of DDC fees which are paid to VAN companies.

Training for executives and employees to prevent recurrence

Lotte Card 2010.03.22 Lotte Card Caution by Financial Supervisory Service

Caution by Financial Supervisory Service due to the excessive providing of gifts when credit card members are recruited.

Cancelation of contract with the related solicitors and education to prevent recurrence

B. Major matters after the reporting date The Group acquired 97.37% shares of CS Distribution Co., Ltd on January 2012, which became a consolidated subsidiary, and paid an acquisition price of approximately Won 244,880 million in the transaction. D. Use of direct financed fund (1) Details on the use of privately financed fund (As of December 31, 2011) (Unit: Won)

Division Paid date Paid amount Plan to use the

fund

Status of actual fund

use

Reasons for

differences

Issue of

convertible bonds July 5, 2011 960,003,000,000

Overseas

investment and

repayment of foreign

currency borrowing

Overseas investment

and repayment of

foreign currency

borrowing

-

※ Applied exchange rate on the paid date (July 5, 2011) (USD : 1,063.8D won, JPY : 13.1724 won)

144

XI. Summary Financial Statements 1. Summary Consolidated Financial Information Consolidated Statements of Financial Position As of December 31, 2011, 2010 and January 1, 2010


December 31, 2011

December 31, 2010

January 1, 2010

Assets

Cash and cash equivalents ￦ 1,958,204

1,242,426 998,865 Trade and other receivables 636,502

461,341 359,373


6,487,294 4,606,799 Inventories

2,042,285

1,669,798 1,360,126

Income tax refund receivable

983

506 195 Other current non-financial

assets

357,367

167,895 123,518 Total current assets

12,728,160

10,029,260 7,448,876

Investments in associates

940,720

869,505 671,946 Other financial assets

1,651,237

1,609,875 1,413,512

Property, plant and equipment, net

13,153,613

12,651,614 11,396,268

Investment property

640,896

632,798 743,572 Goodwill

2,067,205

2,050,139 999,009


639,812

217,004 119,783 Other non-financial assets

1,182,998

1,066,825 903,793

Deferred tax assets

56,479

64,510 49,990 Total non-current assets

20,332,960

19,162,270 16,297,873


29,191,530 23,746,749 Korean won (millions)

December 31, 2011

December 31, 2010

January 1, 2010

Liabilities

Borrowings and debentures,

net of debenture issuance costs ￦ 3,447,284

3,336,879 1,878,777 Trade and other payables

4,724,017

4,036,750 3,269,020


471,507

429,583 300,448 Income tax payables

184,153

285,563 161,204

Unearned revenues

184,365

163,904 146,912 Provisions

38,016

33,330 24,422


861,666

716,702 651,415 Total current liabilities

9,911,008

9,002,711 6,432,198

Borrowings and debentures, net of debentures issuance costs

6,738,647

5,058,546 3,457,841


165,276

119,485 35,425 Employee benefit liabilities

157,267

143,522 101,261


1,336,596

1,166,143 1,119,696 Long-term unearned revenues

21,411

21,906 19,587

Provisions

35,392

37,157 30,245 Other non-financial liabilities

16,518

62 1,471


8,471,107

6,546,821 4,765,526

Total liabilities

18,382,115

15,549,532 11,197,724

145

Equity


145,217

145,217 145,217

Capital surplus

3,622,183

3,622,183 3,622,183 Capital adjustments

(30,867)

(16,097) (16,271)

Retained earnings

10,091,896

9,211,526 8,235,315 Accumulated other comprehensive

income

137,806

146,581 101,652 Stockholders' equity attributable

to owners of the Company

13,966,235

13,109,410 12,088,096 Non-controlling interests

712,770

532,588 460,929

Total equity

14,679,005

13,641,998 12,549,025


29,191,530 23,746,749

Consolidated Statements of Comprehensive Income For the years ended December 31, 2011 and 2010


2011 2010

Sales ￦ 22,253,088


(15,251,394)

(13,088,638)

Gross profit

7,001,694

5,929,106


(5,182,852)


59,220

97,360


(215,162)


1,662,900

1,597,734

Finance income

257,265

180,281

Finance expense

(426,657)

(312,035) Equity method income of investments in associates

61,733

74,243

Profit before income tax

1,555,241

1,540,223 Income tax expense

(542,641)

(404,173)

Profit from continuing operations

1,012,600

1,136,050

Discontinued operations Loss from discontinued operations, net of tax of nil

-

(32,401) Profit for the year ￦ 1,012,600

1,103,649

Other comprehensive income, net of tax: Change in fair value of available-for-sale financial assets

11,928

75,095 Exchange differences on translating foreign operations

39,152

(6,690)

Effective portion of changes in fair value of cash flow hedges

25,460

(20,488)

Defined benefit plan actuarial losses

(10,993)

(27,765) Change in equity of equity method investments

(49,393)

22,471

Tax effects

(16,169)


(15)

28,936

Total comprehensive income for the year ￦ 1,012,585

1,132,585 Profit attributable to:

146

- Owners of the Company

931,815

1,034,705 - Non-controlling interests

80,785

68,944

1,012,600

1,103,649

Total comprehensive income attributable to: - Owners of the Company

916,316

1,058,753 - Non-controlling interests

96,269

73,832

1,012,585

1,132,585

Earnings per share in won - Basic and diluted earnings per share – Continuing

operations

32,084

36,742 - Basic and diluted loss per share – Discontinued operations

- (1,116)

￦ 32,084

35,626

147

Consolidated Statements of Change in Equity For the years ended December 31, 2011 and 2010


Capital stock

Capital surplus

Capital adjustments

Retained earnings

Accumulated other

comprehensive income

Stockholders’ equity

attributable to owners of the

Company

Non-controlling interests Total equity

Balance at January 1, 2010 ￦ 145,217

3,622,183

(16,271)

8,235,315

101,652

12,088,096 460,929

12,549,025

Total comprehensive income for the year

-

Profit for the year

-

-

-

1,034,705

-

1,034,705 68,944

1,103,649 Other comprehensive income:

Change in fair value of available-for-sale financial assets

-

-

-

-

49,988

49,988 4,990

54,978

Exchange differences on translating foreign operations

-

-

-

-

(7,310)

(7,310) 619

(6,691)


-

-

-

-

(12,795)

(12,795) (779)

(13,574)


-

-

-

(20,881)

-

(20,881) (852)

(21,733) Change in equity of equity method

investments

-

-

-

-

15,046

15,046 910

15,956 Sub total

-

-

-

(20,881)

44,929

24,048 4,888

28,936


-

-

-

1,013,824

44,929

1,058,753 73,832

1,132,585

Transactions with owners of the Company, recognized directly in equity:

Dividends to owners of the Company

-

-

-

(36,304)

-

(36,304) -

(36,304) Business combination and others

-

-

174

(1,309)

-

(1,135) (2,173)

(3,308)

Balance at December 31, 2010 ￦ 145,217 3,622,183 (16,097) 9,211,526 146,581 13,109,410 532,588 13,641,998

148


Capital stock

Capital surplus

Capital adjustments

Retained earnings

Accumulated other

comprehensive income (loss)

Stockholders’ equity

attributable to owners of the

Company

Non-controlling interests Total equity

Balance at January 1, 2011 ￦ 145,217 3,622,183 (16,097) 9,211,526 146,581 13,109,410 532,588 13,641,998 Total comprehensive income for the year:

Profit for the year

-

-

-

931,815

-

931,815 80,785

1,012,600 Other comprehensive income:


-

-

-

-

(20,323)

(20,323) 12,337

(7,986)


-

-

-

-

37,394

37,394 1,612

39,006


-

-

-

-

16,730

16,730 896

17,626


-

-

-

(6,724)

-

(6,724) (1,115)

(7,839) Change in equity of equity method

investments

-

-

-

-

(42,576)

(42,576) 1,754

(40,822) Sub total

-

-

-

(6,724)

(8,775)

(15,499) 15,484

(15)


-

-

-

925,091

(8,775)

916,316 96,269

1,012,585



-

-

-

(43,565)

-

(43,565) (10,077)

(53,642) Capital increase from non-controlling

interest

-

-

-

-

-

- 91,664

91,664 Other

-

-

(14,770)

(1,156)

-

(15,926) 2,326

(13,600)


149

Consolidated Statements of Cash Flows For the years ended December 31, 2011 and 2010


2011 2010

Cash flows from operating activities Profit for the year ￦ 1,012,600

1,103,649

Income tax expense

542,641

404,173 Post-employment benefits

77,273

58,266

Long-term employee benefits

7,587

17,700 Depreciation

482,002

408,249

Amortization

77,902

39,343 Loss on foreign currency translation

84,194

99,822

Loss on disposal of property, plant and equipment

24,148

36,501 Loss on disposition of derivative instruments

19,904

27

Loss on valuation of derivative instruments

35,305

22,600 Equity method loss of investments in associates

25,600

17,697

Rental expenses

30,761

26,928 Other expenses

112,743

101,597

Gain on foreign currency translation

(1,008)

(24,620) Gain on disposal of property, plant and equipment

(10,303)

(55,792)

Equity method gain of investments in associates

(87,333)

(91,940) Gain on transaction of derivative instruments

(26,492)

(10,052)

Gain on valuation of derivative instruments

(18,978)

(57,657) Other income

(76,505)

(15,793)

Income of card business

(659,640)

(606,692) Cost of card business

380,156

372,350

Interest expense

191,325

178,794 Interest income

(105,673)

(79,222)

Dividends income

(6,448)

(3,318) Trade receivables

(117,433)

(80,459)

Other receivables

(66,539)

(32,506) Other financial assets

(1,113,285)

(1,924,291)

Inventories

(384,965)

(268,694) Other non-financial assets

(264,602)

(278,060)

Trade payables

427,897

621,105 Other payables

240,286

57,954


58,284

79,001 Unearned revenues

20,158

11,777

Provisions

(9,665)

(5,745) Other non-financial liabilities

147,480

83,072

Payment of post-employment benefits

(48,194)

(90,563) Plan assets

(42,196)

7,644

Income tax paid

(491,470)

(297,308) Interest received

621,403

508,123

Interest paid

(218,343)

(163,302) Dividends received

421

50

Net cash provided by operating activities ￦ 870,998

170,408


2011 2010

Cash flows from investing activities Decrease of deposits ￦ 604,560

1,105,345

150

Decrease of loans

40,231

30,531 Sale of available-for-sale financial assets

77,235

9,943

Sale of investments in associates

2,166

1,030 Proceeds from disposal of property, plant and

equipment

141,074

483,645 Proceeds from disposal of intangible assets

1,042

535

Decrease of other non-financial assets

4,672

67,538 Increase of short-term financial assets

(903,838)

(1,042,113)

Increase of loans

(19,149)

(65,045) Purchase of available-for-sale financial assets

(30,324)

(60,834)

Purchase of investments in associates

(63,735)

(105,456) Purchase of investment properties

(3,350)

(36,409)

Acquisition of property, plant and equipment

(1,592,148)

(1,165,585) Acquisition of intangible assets

(82,026)

(137,480)

Acquisition of other investments

(10,331)

(96,686) Business combinations, net of cash acquired

-

(1,811,059)

Interest received

64,462

52,483 Dividends received

12,895

8,425

Net cash used in investing activities ￦ (1,756,564)

(2,761,192)


2011 2010

Cash flows from financing activities Proceeds from borrowings ￦ 7,104,970

14,401,792

Proceeds from issuance of debentures

3,495,255

2,937,098 Capital contribution from non-controlling

interests

89,258

47,305 Repayment of borrowings

(7,827,431)

(12,609,582)

Redemption of debentures

(1,024,169)

(1,674,883) Cash outflows from other financing activities

(1,123)

(5,082)

Acquisition of additional ownership in subsidiaries

(19,699)

-

Interest paid

(168,033)

(220,947) Dividends paid

(53,642)

(45,442)

Net cash provided by financing activities ￦ 1,595,386

2,830,259

Net increase in cash and cash equivalents

709,820

239,475 Cash and cash equivalents at beginning of

the year

1,242,426

998,865 Impact of foreign currency exchange rates

on cash and cash equivalents

(137)

(262) Exchange differences on translating foreign

operations

6,095

4,348

Cash and cash equivalents at end of the year ￦ 1,958,204

1,242,426

151

2. Summary Non-Consolidated Financial Information

Non-Consolidated Statements of Financial Position As of December 31, 2011, 2010 and January 1, 2010


December 31, 2011

December 31, 2010

January 1, 2010

Assets

Cash and cash equivalents ￦ 1,336,911

625,347 422,787 Trade and other receivables

512,422

427,729 327,360


279,087

280,445 178,165 Inventories

1,484,170

1,241,239 1,099,857

Other current non-financial assets

120,156

80,941 51,869

Total current assets

3,732,746

2,655,701 2,080,038

Investments in associates and subsidiaries

4,972,343

4,640,059 3,859,467


939,114

945,333 780,856 Property and equipment, net

11,115,381

11,022,546 10,353,399

Investment property

413,844

441,312 568,001 Goodwill

384,913

380,285 36,444


506,155

98,070 98,590 Other non-financial assets

777,834

703,993 569,163


19,109,584

18,231,598 16,265,920


20,887,299 18,345,958 Korean won (millions)

December 31, 2011

December 31, 2010

January 1, 2010

Liabilities


net of issuance costs ￦ 1,209,011

1,482,305 136,187 Trade and other payables

3,048,650

2,706,802 2,505,457


288,226

283,694 284,246 Income taxes payable

114,758

209,863 112,306

Unearned revenues

81,608

77,383 76,953 Provisions

3,443

3,758 2,979


528,291

509,910 424,710 Total current liabilities

5,273,987

5,273,715 3,542,838

Borrowings and debentures, net of issuance costs

2,993,314

1,831,952 1,781,073


39,535

28,192 11,255 Employee benefit liabilities

128,026

107,324 68,146


1,190,343

1,079,898 1,126,946 Long-term unearned revenues

2,017

1,983 1,017


4,353,235

3,049,349 2,988,437

Total liabilities

9,627,222

8,323,064 6,531,275 Equity


145,217

145,217 145,217

152

Capital surplus

3,622,183

3,622,183 3,622,183 Retained earnings

9,405,868

8,713,656 7,992,553


41,840

83,179 54,730

Total equity

13,215,108

12,564,235 11,814,683


20,887,299 18,345,958

Non-Consolidated Statements of Comprehensive Income For the years ended December 31, 2011 and 2010


2011 2010

Sales ￦ 15,181,722


(10,647,566)

(9,373,055)

Gross profit

4,534,156

3,971,627


(3,281,135)


42,318

81,844


(65,827)


1,229,512

1,187,266

Finance income

250,400

162,753

Finance expense

(357,932)

(317,972) Profit before income tax

1,121,980

1,032,047

Income tax expense

(379,043)

(253,754)

Profit for the year

742,937

778,293

Other comprehensive income (loss), net of tax: Change in fair value of available-for-sale financial assets

(59,817)

43,065 Effective portion of changes in fair value of cash flow

hedges

8,768

(6,985) Defined benefit plan actuarial losses

(10,221)

(26,778)

Tax effects

12,772


(48,498)

7,563

Total comprehensive income for the year ￦ 694,439

785,856

Earnings per share in won Basic and diluted earnings per share ￦ 25,580 26,798

153

Non-Consolidated Statements of Change in Equity For the years ended December 31, 2011 and 2010


Capital stock

Capital surplus

Retained earnings

Accumulated other comprehensive income Total equity


3,622,183

7,992,553

54,730

11,814,683


Profit for the year

-

-

778,293

-

778,293 Other comprehensive income:


-

-

-

33,591

33,591


-

-

-

(5,142)

(5,142)


-

-

(20,886)

-

(20,886) Subtotal

-

-

(20,886)

28,449

7,563


-

-

757,407

28,449

785,856


Dividends

-

-

(36,304)

-

(36,304)

Balance at December 31, 2010 ￦ 145,217 3,622,183 8,713,656 83,179 12,564,235

154


Capital stock

Capital surplus

Retained earnings


Total stockholders’ equity

Balance at January 1, 2011 ￦ 145,217 3,622,183 8,713,656 83,179 12,564,235


Profit for the year

- - 742,937 - 742,937 Other comprehensive income:


- - - (48,148) (48,148)


- - - 6,809 6,809


- - (7,159) - (7,159) Subtotal

- - (7,159) (41,339) (48,498)

Total comprehensive income for the

year

- - 735,778 (41,339) 694,439


Dividends

- - (43,566) - (43,566)


155

Non-Consolidated Statements of Cash Flows For the years ended December 31, 2011 and 2010


2011 2010

Cash flows from operating activities

Profit for the period ￦ 742,937

778,293 Income tax expense

379,043

253,754

Post-employment benefits expense

59,649

42,688 Long-term employee benefits expense

6,221

14,896

Depreciation

308,541

269,616 Amortization

65,528

36,041

Loss on valuation of inventory

-

1,144 Loss due to inventory shrinkage

23,115

17,125

Loss on foreign exchange translation

72,524

95,409 Loss on disposal of property and equipment

17,179

32,967


35,305

22,600 Loss on disposition of derivative instruments

19,904

-

Rental expenses

27,194

23,946 Loss on disposal of investments in associates and

subsidiaries

-

32,788 Loss on valuation of financial liabilities at fair value through

profit or loss

54,544

- Other bad debt expenses

400

11,853


(562)

(23,368) Reversal of allowance for bad debt

(16,894)

-

Gain on disposal of property and equipment

(9,095)

(55,719) Reversal of loss on valuation of inventories

(2,878)

-

Rental income

(2,741)

(5,395) Gain on disposal of available-for-sale financial assets

(62,777)

-


(18,978)

(57,657) Gain on transaction of derivative instruments

(26,492)

(10,052)

Other,net

618 962 Interest expense

149,757

141,846

Interest income

(69,942)

(53,232) Dividends income

(21,474)

(18,227)

Increase in trade receivables

(72,565)

(58,046) Increase in other receivables

(4,106)

(28,465)

Increase in other financial assets

(86,316)

(27,654) Increase in inventories

(269,617)

(141,216)

Increase in other non-financial assets

(88,869)

(215,959) Increase in trade payables

272,075

295,503

Increase (decrease) in other payables

87,946

(61,381) Increase in other financial liabilities

25,345

56,171

Increase (decrease) unearned revenues

3,013

(1,570) Increase (decrease) in provisions

(315)

779

Increase in other non-financial liabilities

18,060

84,729 Payment of post-employment benefits

(28,913)

(29,567)

Decrease in plan assets

(32,685)

(29,179) Income tax paid

(350,931)

(206,413)

Net cash provided by operating activities ￦ 1,202,748

1,190,010


2011 2010

Cash flows from investing activities

156

Proceeds from sale of short-term financial assets ￦ 612,825

157,032 Proceeds from repayments of loans

36,445

29,190

Proceeds from sale of available-for-sale financial assets

74,747

8,943 Proceeds from sale of held-to-maturity investments

-

1,000

Proceeds from sale of investments in associates and subsidiaries

2,166

591

Proceeds from disposal of property and equipment

134,176

485,168 Proceeds from disposal of intangible assets

235

528

Purchase of short-term financial assets

(724,982)

(126,936) Purchase of loans

(2,200)

(62,625)

Purchase of available-for-sale financial assets

(10,743)

(19,177) Acquisition of investments in associates and subsidiaries

(334,246)

(813,971)

Acquisition of property and equipment

(993,715)

(865,751) Purchase of investment properties

(1,665)

(38,661)

Acquisition of intangible assets

(58,313)

(43,488) Business combination, net of cash acquired

-

(826,543)

Increase of other assets

(3,421)

- Decrease of other assets

575

11

Interest received

41,968

36,724 Dividends received

21,474

18,227


(2,059,738)


2011 2010

Cash flows from financing activities

Proceeds from borrowings ￦ 1,884,500 9,740,239 Proceeds from issuance of debentures 1,940,774 825,056 Repayment of short-term borrowings (2,094,500) (9,130,361) Redemption of debentures and long-term

borrowings (831,681) (131,500) Interest paid (142,038) (194,859) Dividends paid (43,565) (36,304) Net cash provided by financing activities ￦ 713,490 1,072,271 Net increase in cash and cash equivalents 711,564 202,543 Cash and cash equivalents at beginning of

year 625,347 422,787 Impact of foreign currency exchange rates

on cash and cash equivalents - 17 Cash and cash equivalents at end of year ￦ 1,336,911 625,347

157

2. Establishment of allowances for doubtful accounts A. Establishment of Allowances for Doubtful Accounts for the Past Three Years

(Unit: million Won, %)

Period Accounts Total trade receivables

Allowances for doubtful accounts

Ratio of allowances for doubtful accounts

42nd fiscal year

Trade receivables 444,143 4,387 1.0

Other receivables 204,286 7,541 3.7

Short-term loans 17,384 9,682 55.7 Advance payments 117,821 2,622 2.2

Accrued income 51,228 2,248 4.4 Total 834,862 26,480 3.2

41st fiscal year

Trade receivables 324,302 3,667 1.1

Other receivables 145,683 4,978 3.4

Short-term loans 28,695 26,576 92.6 Advance payments 72,644 2,116 2.9 Accrued income 43,048 1,661 3.9 Total 614,372 38,998 6.3

40th fiscal year

Trade receivables 392,484 10,359 2,6 Other receivables 43,790 8,852 20.2 Short-term loans 141,838 6,035 4.3 Advance payments 134,772 2,594 1.9 Accrued income 47,772 447 0.9 Total 760,656 28,287 3.7

※ The financial information for the 40th fiscal year was presented in accordance with the K-GAAP. B. Changes in the Status of Bad Debt Allowance for the Past Three Fiscal Years

(Unit: million Won) Division 42nd fiscal year 41st fiscal year 40th fiscal year 1. Balance of allowances at beginning of period 38,998 23,720 14,690 2. Net allowance for doubtful accounts ([1]－[2]±[3]) 34 106 521 [1] Amount written-off 34 106 407 [2] Recovered amount [3] Other changes 114 3. Reversal of allowances for doubtful acconts (12,484) 15,384 14,118 4. Total balance of allowances for doubtful accounts at

the end of period 26,480 38,998 28,287

C. Policy for Establishment of Allowances for Doubtful Accounts Regarding Trade Receivables

The Company sets the allowance for doubtful accounts based on individual analysis of each trade receivable and the estimated amount of losses from past experience. When the principal of the trade receivable is adjusted unfavorably to creditors due to the commencement of liquidation procedure, composition procedure or by mutual agreement with both parties, the difference between the current value of future cash flow and the book value is treated as an allowance. Furthermore, based on a case by case analysis, the Company sets up an allowance for doubtful accounts for balance of trade receivables, non-trade receivables and advance payments.

158

D. Balance of Trade Receivables as of the End of the Relevant Fiscal Year

Not applicable.

3. Inventory Status

(a) Inventory Status for the Past Three Fiscal Years

(Unit: million Won)

Business area Account 42nd fiscal year 41st fiscal year 40th fiscal

year Remark

Department store

Merchandise 1,210,922 1,029,997 885,138 Goods - - Work in process - - Semi-manufactured goods

- -

Raw materials - - Other materials - - Stored goods - - Goods to arrive - - Land - - Finished housing - - Unfinished housing - - Other sites - - Subtotal 1,210,992 1,029,977 885,138

Discount store

Merchandise 631,972 485,643 262,973 Goods - - Work in process - - Semi-manufactured goods

- -

Raw materials - - Other materials - - Stored goods 1,683 1,367 Goods to arrive 72 115 557 Land 879 2,610 Finished housing - - 1,757 Unfinished housing 18,575 - Other sites - - Subtotal 653,181 489,735 265,287

Financial busienss

Merchandise 1,919 377 1,798 Goods - - Work in process - - Semi-manufactured goods

- -

Raw materials - - Other materials - - Stored goods - -

Goods to arrive - - Land - - Finished housing - - Unfinished housing - -

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Other sites - - Subtotal 1,919 377 1,798

Other

Merchandise 163,325 141,162 85,513 Goods 7,438 25 Work in process 1,576 565 160 Semi-manufactured goods

- -

Raw materials 1,444 1,145 7,144 Other materials 353 188 1,654 Stored goods 2,040 1,246 4,552 Goods to arrive 86 - 77 Land - Finished housing - - Unfinished housing - - Other sites - - Subtotal 176,263 149,710 99,125

Total

Merchandise 2,008,138 1,657,158 1,235,422 Goods 7,438 5,405 25 Work in process 1,576 565 160 Semi-manufactured goods

0 -

Raw materials 1,444 1,145 7,144 Other materials 353 188 1,653 Stored goods 3,723 2,613 4,552 Goods to arrive 158 115 634 Land 879 2,610 Finished housing - 1,757 Unfinished housing 18,575 - Other sites - Subtotal 2,042,285 1,669,798 1,251,349

Inventory as percentage of total assets (%)[Inventory÷Assets×100]

6.19% 5.73% 5.12%

Inventory turnover (times) [Annualized cost of sales÷{(Period start inventory＋Period end inventory)÷2}]

8.2times 8.6times 9.1times

※ The financial information for the 40th fiscal year was presented in accordance with the K-GAAP.

(b) Due Diligence Details of Inventories

1. Date of due diligence

Business unit Department Store Discount Store Others

Date of due diligence December 14 November 1 to November 30 November 1~December 30

2. The Company does not review its inventories in the presence of its independent auditors on a

quarterly or half-yearly basis, but does so at the end of fiscal year. 3. Status of long-term stockpile inventories

160

(Unit: million Won)

Accounts Acquisition cost Retained amounts

Valuation increase (decrease) during period

Amounts at end of period Remarks

Merchandise 2,029,311 2,029,311 21,173 2,008,138

Total 2,029,311 2,029,311 21,173 2,008,138

4. Changes in the Accounting Standards for the Past Five Fiscal Years and Reasons for the Change

42nd fiscal year (a)The Group’s prepared its first consolidated financial statements starting in January 1, 2010 in accordance with K-IFRS No.1101 First-time Adoption of K-IFRS. The accounting policies in note 3 to the consolidated financial statements have been applied in preparing the consolidated financial statements for the year ended December 31, 2011, the comparative information for the year ended December 31, 2010, for the year ended December 31, 2010 and the preparation of an opening statement of financial position under K-IFRS as of January 1, 2010. The Group applied various major policies such as those relating to depreciation, wages, customer loyalty programs and impairment of assets in accordance with K-IFRS, and took an exemption for business combination, cumulative translation differences, deemed cost to fair value or the revaluation amount and borrowing costs. 41st fiscal year (a) Application of the Financial Accounting Standards During 2010, the Company changed its accounting method of estimating the useful life of tangible assets. As a result, depreciation costs decreased to Won 108,213 million, and tangible assets, outstanding corporate taxes and retained earnings increased to Won 108,213 million, Won 26,187 million and Won 82,026 million, respectively. 40th fiscal year (a) Application of the Financial Accounting Standards

Due to an amendment to Statements of Korea Accounting Standards (“SKAS”) No. 5 “Tangible Assets” the Company reevaluated the book value of its land assets after taking into account accumulated impairment losses. The Company did not apply this reevaluation retroactively to past fiscal periods. Except as described above, all accounting policies of the Company remained identical to those of the prior fiscal year.

39th fiscal year (a) Application of the Financial Accounting Standards

The Company prepared its financial statements in accordance with Korean GAAP. Due to an amendment to SKAS No. 15 “Equity Method of Accounting,” the Company changed its accounting policy to conform to the revised equity method of accounting. As a result of such change, the equity method income for the fiscal year and the income surplus at the end of the fiscal year increased by Won 2,338,246 thousand and Won 11,813,489 thousand, respectively, and equity method investments, capital surplus, equity method capital change and equity method negative capital change of the Company showed a decrease of Won 12,961,842 thousand, an increase of Won 1,227,379 thousand, a decrease of Won 20,433,433 thousand and an increase of Won 81,033 thousand, respectively, during the fiscal year.

Except as described above, all accounting policies of the Company remained identical to those of the prior fiscal year.

38th fiscal year (a) Application of the Financial Accounting Standards

The Company prepared its financial statements in accordance with Korean GAAP, including SKAS No. 21 “Preparation and Presentation of Financial Statements,” No. 22 “Share based Payment” and No. 23 “Earnings Per Share”. In accordance with the Company’s adoption of SKAS No. 21 “Preparation and

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Presentation of Financial Statements,” certain items in the financial statements covering prior periods were re-classified for comparison purposes. In addition, the Company decided on early adoption of the amended SKAS No.2 “Interim Financial Statements,” and prepared its cash flow statement and statement of change in equity for cumulative interim periods only in accordance with the amended SKAS No.2.

5. Commercial Paper Securities Issuances (a) Schedule of Commercial Paper Securities Issuances (As of December 31, 2011) (Unit: million Won, %)

Date of Issuance

(mm/dd/yyyy) Issue Size

(Face Value) Interest Rate Rating Maturity Date (mm/dd/yyyy) Issue Status

01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 10,000 3.73% A1 04/21/2011 Repaid 01/20/2011 20,000 2.88% A1 01/21/2011 Repaid 01/28/2011 50,000 3.72% A1 04/28/2011 Repaid 01/28/2011 50,000 3.72% A1 04/28/2011 Repaid 01/28/2011 20,000 3.67% A1 04/28/2011 Repaid 01/28/2011 20,000 3.67% A1 04/28/2011 Repaid 01/28/2011 20,000 3.67% A1 04/28/2011 Repaid 01/28/2011 20,000 3.67% A1 04/28/2011 Repaid 01/28/2011 20,000 3.67% A1 04/28/2011 Repaid 01/31/2011 50,000 2.96% A1 02/01/2011 Repaid 01/31/2011 13,000 3.20% A1 02/01/2011 Repaid 01/31/2011 25,000 3.20% A1 02/01/2011 Repaid 02/21/2011 50,000 2.97% A1 02/22/2011 Repaid 02/21/2011 10,000 2.97% A1 02/22/2011 Repaid 02/21/2011 10,000 2.97% A1 02/22/2011 Repaid 02/21/2011 10,000 2.97% A1 02/22/2011 Repaid 02/21/2011 10,000 2.97% A1 02/22/2011 Repaid 02/21/2011 10,000 2.97% A1 02/22/2011 Repaid 02/21/2011 10,000 2.97% A1 02/22/2011 Repaid 02/21/2011 10,000 3.00% A1 02/24/2011 Repaid 02/21/2011 40,000 2.97% A1 02/22/2011 Repaid 02/21/2011 39,000 2.97% A1 02/22/2011 Repaid 02/22/2011 10,000 2.97% A1 02/23/2011 Repaid 02/22/2011 10,000 2.97% A1 02/23/2011 Repaid 02/22/2011 10,000 2.97% A1 02/23/2011 Repaid

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02/22/2011 10,000 2.97% A1 02/23/2011 Repaid 02/22/2011 10,000 2.97% A1 02/24/2011 Repaid 02/22/2011 38,000 2.97% A1 02/24/2011 Repaid 02/25/2011 10,000 3.08% A1 03/02/2011 Repaid 02/25/2011 10,000 3.08% A1 03/02/2011 Repaid 02/28/2011 10,000 3.03% A1 03/02/2011 Repaid 02/28/2011 10,000 3.03% A1 03/02/2011 Repaid 02/28/2011 10,000 3.03% A1 03/02/2011 Repaid 02/28/2011 10,000 3.03% A1 03/02/2011 Repaid 02/28/2011 10,000 3.03% A1 03/02/2011 Repaid 02/28/2011 10,000 3.03% A1 03/02/2011 Repaid 02/28/2011 10,000 3.03% A1 03/02/2011 Repaid 03/02/2011 10,000 2.97% A1 03/02/2011 Repaid 03/02/2011 15,000 2.97% A1 03/02/2011 Repaid 03/30/2011 10,000 3.18% A1 03/03/2011 Repaid 03/30/2011 10,000 3.18% A1 03/03/2011 Repaid 04/21/2011 10,000 4.15% A1 03/31/2011 Repaid 04/21/2011 10,000 4.15% A1 03/31/2011 Repaid 04/21/2011 10,000 4.15% A1 07/21/2011 Repaid 04/21/2011 10,000 4.15% A1 07/21/2011 Repaid 04/21/2011 10,000 4.15% A1 07/21/2011 Repaid 04/21/2011 10,000 4.15% A1 07/21/2011 Repaid 04/21/2011 10,000 4.15% A1 07/21/2011 Repaid 04/21/2011 10,000 4.15% A1 07/21/2011 Repaid 04/21/2011 10,000 4.15% A1 07/21/2011 Repaid 04/21/2011 10,000 4.15% A1 07/21/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.60% A1 06/30/2011 Repaid 04/28/2011 10,000 3.61% A1 06/30/2011 Repaid 05/25/2011 36,000 3.25% A1 05/26/2011 Repaid 05/31/2011 12,000 3.31% A1 06/01/2011 Repaid 06/20/2011 26,500 3.42% A1 06/21/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid

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06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.74% A1 09/30/2011 Repaid 06/30/2011 10,000 3.65% A1 07/01/2011 Repaid 06/30/2011 40,000 3.70% A1 07/01/2011 Repaid 07/01/2011 20,000 3.63% A1 07/04/2011 Repaid 07/01/2011 5,000 3.63% A1 07/04/2011 Repaid 07/11/2011 50,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 10,000 3.58% A1 07/12/2011 Repaid 07/11/2011 6,000 3.58% A1 07/12/2011 Repaid 07/12/2011 10,000 3.58% A1 07/13/2011 Repaid 07/12/2011 10,000 3.58% A1 07/13/2011 Repaid 07/12/2011 9,000 3.58% A1 07/13/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 07/21/2011 10,000 4.34% A1 10/20/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/04/2011 10,000 4.03% A1 12/30/2011 Repaid 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding

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10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 10,000 4.32% A1 01/20/2012 Outstanding 10/20/2011 30,000 3.45% A1 10/21/2011 Repaid 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding 11/21/2011 10,000 3.60% A1 02/21/2012 Outstanding

Total 1,884,500

(b) Amount of Outstanding Commercial Paper Securities (As of December 31, 2011) (Unit: million Won) Remaining maturity period

Under 10 days

Under 30 days

Under 90 days

Under 180 days

Under 1 year

More than 1 year

Total

Amount outstanding

- 100,000 100,000 - - - 200,000

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XII. Attached Statements 1. Estimating Fair Value and Impairment of Financial Assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset 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. However, losses expected as a result of future events, regardless of likelihood, are not recognized. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized. (i) Financial assets measured at amortized cost An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Group can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account. (ii) Financial assets carried at cost If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses shall not be reversed. (iii) Available-for-sale financial assets When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

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XIII. The Principal Risks and Uncertainties Facing the Company Risks Relating to the Retail Industry

The retail industry in Korea is highly competitive.

The Korean retail industry in general, and the department store and discount store segments in particular, are intensely competitive. We compete principally with national and international operators of retail chains in Korea, such as Shinsegae Co., Ltd. and Hyundai Department Store Co., Ltd. in the department store segment, and E-Mart Co., Ltd. and Homeplus Co., Ltd. in the discount store segment. We also face increased competition from television home shopping and online retailers which are able to sell directly to consumers at significantly lower operating costs than traditional retailers such as us, particularly in the discount store segment. See “—Our discount store business may face increasing competition from internet and home shopping sales.” Competition occurs principally on the basis of merchandise selection and quality, price, store location and design, customer service and amenities, inventory and advertising. We also compete, to a lesser extent, with small local retailers, such as traditional open markets, particularly in the supermarket segment, as well as with specialty retailers. See “Business—Competition.”

Actions taken by our competitors, as well as actions taken by us to maintain our competitiveness and reputation, have placed and will continue to place pressure on our growth strategy, margins and profitability. In particular segments of the Korean retail market, some of our competitors may have greater financial resources, greater purchasing economies of scale and lower cost bases, any of which may give them a competitive advantage over us. Certain of our competitors have announced plans to modernize and expand their operations in Korea and abroad. Our competitors may own and operate newer, better located and more attractive retail stores than us. An increase in the number of such competing stores, particularly in close proximity to our stores, may increase competition for customer traffic and reduce the relative attractiveness of our stores. These and other actions by our competitors may cause us to respond by incurring additional costs in order to make our stores more appealing to customers, adopting more aggressive marketing or pricing initiatives or executing our growth strategy more rapidly, all of which may be unsuccessful. Any erosion in our market position in the Korean retail industry as a result of our inability to compete effectively would have a material and adverse effect on our business, financial condition and results of operations.

Discount stores, which represent a sizable segment of the Korean retail market, are generally less profitable than other modern retail formats.

Discount stores represent a sizable segment of the Korean retail market, accounting for approximately 16.9% of the Korean retail market in terms of revenues in 2011, according to the Korea National Statistical Office. Discount stores are the single largest retail force in Korea, generating revenues of approximately W37 trillion in 2011, according to the same source. Our discount store sales in Korea account for a significant part of our overall sales, representing 27.7% and 27.6% of our total consolidated gross sales (prior to consolidation adjustments) for the years ended December 31, 2010 and 2011, respectively. Due to intense competition in this market segment, primarily in the area of price, our profit margins are generally lower for discount stores than for our department stores. In the event that the percentage of our sales generated by discount stores grows as a result of acquisitions, new store openings or otherwise, we may experience a decline in our overall profit margins in the future, which may have an adverse effect on our business, financial condition and results of operations.

Further consolidation in the Korean retail industry may adversely affect our market position.

The retail industry in Korea has been undergoing consolidation over the past decade, with large national and international retail chains gaining market share at the expense of smaller regional or local

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retail chains and independently-operated retail stores. For example, in 2006, Shinsegae acquired the 16 discount stores in Korea previously operated by Wal-Mart, and E-Land acquired the 32 discount stores in Korea previously operated by Carrefour, which were resold by E-land to Homeplus in 2008. In May 2010, we acquired three department stores and 14 discount stores from GS Retail. In January 2012, we acquired a 97.4% equity interest in CS Mart Co., Ltd., which operated a chain of 237 supermarkets in Korea as of January 31, 2012. See “Business—History.” We believe that further consolidation will likely occur as competition intensifies and economies of scale become increasingly important. Future consolidation may occur rapidly and materially alter the competitive landscape in Korea. Some of our current competitors and potential future competitors, including international operators of retail chains that seek to enter the Korean market, may be larger and better capitalized than we are and, as a result, may be better positioned to take advantage of strategic acquisition and consolidation opportunities. There can be no assurance that such industry consolidation will not occur to the material detriment of our market position or that such developments will not materially and adversely affect our business, financial condition and results of operations.

Our discount store business may face increasing competition from internet and home shopping sales.

In recent years, retail sales over the internet and through home shopping television channels have increased significantly in Korea. Such retailers are able to sell directly to consumers, diminishing the importance of traditional distribution channels. Certain internet, home shopping and other non-store retailers have significantly lower operating costs than traditional retailers such as us because they do not rely on an expensive network of retail points of sale or a large sales force. As a result, such retailers are able to offer their products at lower costs than we do and in certain cases are able to bypass retailing intermediaries and deliver high quality merchandise directly to consumers. We believe that our target customers in the discount store segment are increasingly using the internet and home shopping channels to shop for merchandise, in particular consumer electronics products and other household goods, at bargain prices, and that they are likely to continue doing so. Such sales do not presently pose a significant threat to our retail operations conducted through traditional distribution channels. Moreover, we have in recent years made significant efforts to capitalize on growing e-commerce opportunities, including through the activities of our consolidated subsidiary Woori Home Shopping & Television Co., Ltd. as well as our associate Lotte.com Inc., to complement our retail store operations. See “Business—Operations—Other Businesses.” However, if e-commerce and retail sales through the internet and the home shopping channels continue to grow, consumers’ reliance on traditional distribution channels, which comprise a substantial majority of our business, could be materially diminished and, to the extent we are unable to increase our sales through our internet and home shopping channels to offset the decrease in sales from our retail store operations, our financial condition, results of operations and business prospects would be materially and adversely affected.

Our retail businesses are susceptible to seasonal fluctuations and extreme or unseasonable weather conditions.

Our retail businesses are susceptible to seasonal fluctuations. Although such fluctuations historically have not been large, past experience indicates that, in the department store segment, peaks in sales occur during the fourth quarter of the year, primarily due to a concentration of promotional sales and other promotional events in the months of October and November, and the comparatively higher unit price of winter products. We have historically also reported higher sales in the months of January and April, primarily due to our post-winter and pre-summer clearance sales. In the discount store segment, peaks in sales occur during the third quarter of the year, primarily due to the summer and Korean Thanksgiving holidays. We incur additional expenses in advance of peak selling periods to acquire additional inventory and carry out marketing and advertising activities. If sales during our peak selling periods are significantly lower than we expect for any reason, we may be unable to adjust our expenses in a timely manner and may be left with a substantial amount of unsold inventory, especially in seasonal merchandise that is difficult to liquidate after the applicable season.

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In addition, extreme weather conditions in the areas in which our stores are located may have a material adverse effect on our business, financial condition and results of operations. For example, heavy snowfall, typhoons or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory, particularly our discount store inventory, incompatible with such unseasonable conditions. These prolonged unseasonable weather conditions could adversely affect our business, financial condition and results of operations.

Slowing growth of the department store segment in Korea could impair our ability to grow profitably.

We believe that the Korean department store segment is showing signs of slowing growth in sales. The total number of department stores in Korea increased significantly during the 1990s and reached a peak in the late 1990s, before decreasing over the past decade. In addition, in recent years, department stores have faced increasing competition from alternative modern retail formats such as discount stores, internet shopping malls and home shopping networks. As a result of these and other factors, sales of low-end products have shifted in recent years from department stores to such alternative retail formats, particularly discount stores. We cannot assure you that we will be able to sustain or achieve future growth in same store sales of our department stores. Due to Korea’s concentrated population and the relatively high degree of penetration of its department store segment, our growth prospects in the department store segment are likely to depend to a large extent on future growth in Korean gross domestic product, acquisitions of existing department stores or overseas expansion, and we cannot give you any assurance that any of these events will occur.

Risks Relating to Our Business

We have in the past engaged and may in the future engage in acquisitions, and we may be unable to successfully integrate the companies or businesses we acquire into our operations.

We have historically sought to continue to grow in size through selective acquisitions that we believe would be beneficial to us. See “Business—History.” From time to time, we may acquire or invest in additional companies or businesses, including those overseas, that may complement our business. The success of our past and future acquisitions and investments depends on a number of factors, including:

• our ability to identify suitable opportunities for investment or acquisition;

• our ability to reach an acquisition or investment agreement on price and other terms that are satisfactory to us, or at all;

• the extent to which we are able to exercise control over the acquired company;

• the economic, business or other strategic objectives and goals of the acquired or investee company compared to those of our company; and

• our ability to successfully integrate the acquired company or business.

If we are unsuccessful in our acquisitions and investments, we may not be able to fully implement our business strategy to maintain or grow our business, and our results of operations and financial condition may suffer as a result.

Purchases of the merchandise that we sell are generally discretionary and are therefore particularly susceptible to economic slowdowns.

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Many of the items that we sell at our department stores and discount stores, particularly luxury apparel, accessories and other fashion products, represent discretionary purchases for consumers. Consumers are generally more able and willing to make discretionary purchases during periods in which favorable economic conditions prevail. A general slowdown in the Korean economy or an uncertain economic outlook may adversely affect consumer confidence and spending levels. Moreover, because many of the items that we sell are discretionary purchases, we may experience a decline in sales that is proportionally greater than the level of general economic decline. Challenging macroeconomic conditions may also impact our customers’ ability to obtain consumer credit. Accordingly, adverse changes in consumer confidence, employment levels, interest rates, inflation, tax rates, the real estate or financial markets, consumer debt levels and energy costs or other aspects of the Korean economy that affect retail customers could result in decreased purchases of merchandise at our stores, which would negatively affect our business, results of operations and financial condition. For example, department store sales in Korea, including aggregate sales of our department stores, have generally decreased in the first quarter of 2012 compared to the first quarter of 2011 on a same-store basis, reflecting a deterioration in consumer confidence between the two periods. According to data compiled by the Ministry of Knowledge Economy, aggregate department store sales in Korea decreased 0.2% from the first quarter of 2011 to the first quarter of 2012 on a same-store basis. While our results of operations for the first quarter of 2012 have not yet been reviewed by our independent accountants and are therefore preliminary and subject to change, we believe that our operating income for the first quarter of 2012 compared to the corresponding period in 2011 would track such recent market trend in respect of department store sales in Korea.

The success of our business depends on our ability to anticipate and respond to constantly changing fashion trends and consumer demands in a timely manner.

Our success depends in large part on our ability to identify fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. The merchandise that we sell must appeal to consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Consequently, we depend in part upon the continuing favorable market response to the creative efforts of our purchasing and marketing teams as well as the expertise of our suppliers to anticipate trends and fashions that will appeal to our consumer base. We and our suppliers make decisions regarding the purchase of merchandise well in advance of the season in which it will be sold. Any failure on our part and on the part of our suppliers to anticipate, identify and respond effectively to changing consumer demands and fashion trends will adversely affect our sales.

There can be no assurance that our orders for merchandise will match actual demand. If we or our suppliers are unable to successfully predict or respond to sales demand or to changing styles or trends, our sales will decrease and we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory, which could have a material adverse effect on our business, financial condition and results of operations. At the same time, if we fail to purchase a sufficient quantity of popular merchandise in a timely manner, particularly luxury designer merchandise that we import from Europe, orders for which need to be placed well in advance of the season in which it will be sold, we may experience inventory shortfalls. This may cause us to lose sales.

There can be no assurance that future store openings will be successful.

As part of our growth strategy, we plan to open additional department stores, discount stores and supermarkets in Korea and overseas markets in the future, particularly in China where we plan to significantly expand our discount store operations over the next several years, subject to market conditions. We also expect to open additional convenience stores in Korea. There can be no assurance that these stores, or any other stores that we might open in the future, will open on time or be successful or that our overall gross profit will increase as a result of opening these stores. In addition, the opening of new stores could result in the diversion of sales from our existing stores in certain cases, which may cause a reduction in our gross profit.

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Successful execution of our expansion plans will depend upon a number of factors, including:

• the identification and securing of prime store sites;

• the negotiation of acceptable financial terms for land purchases, leases, construction, product purchases, insurance and other transactions;

• the hiring, training and retention of qualified personnel;

• the level of existing and future competition in areas where new stores are to be located, including expansion within our established markets where new stores may draw sales away from our existing stores;

• our ability to integrate new stores into our operations on a profitable basis;

• the capability of our existing distribution system to accommodate new stores;

• local and regional economic conditions; and

• general macroeconomic conditions in Korea and other countries where our new stores are to be located.

Our failure to predict accurately the demographic or retail environment in implementing our expansion plans could have a material adverse effect on our business, financial condition and results of operations. There can be no assurances that we will be able to open new stores on a timely or profitable basis.

Furthermore, we have in recent years expanded our retail operations to include new retail formats such as specialty stores, including so-called “category killer” stores (such as Toys R Us, a specialty store focusing on toys, and Digital Park, which focuses on consumer electronics) that aim to dominate a particular product category, as well as continuing our efforts to introduce other new retail formats such as shopping malls. See “Business—Operations—Other Businesses.” Some of these retail formats have limited operating histories in Korea, and there can be no assurance that such formats will prove popular with Korean consumers in the long term. If our expansion into new retail formats for niche markets is unsuccessful, our business, financial condition and results of operations could suffer.

We may fail to realize the anticipated benefits of the merger of our subsidiaries into us.

We have in the past merged and may in the future merge with our subsidiaries to create synergies, growth opportunities and cost savings from merging our subsidiaries into us. The realization of these anticipated benefits may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. These factors include:

• difficulties in integrating the operations of our subsidiaries with ours, including information systems, personnel, policies and procedures, and in reorganizing or reducing overlapping personnel, operations, marketing networks and administrative functions; and

• unforeseen risks relating to the merger that may become apparent in the future, including the exercise of appraisal rights by other shareholders of our subsidiaries in the case of our subsidiaries not wholly owned by us.

Accordingly, we cannot assure you that we will realize the anticipated benefits of the mergers or that the mergers will not adversely affect our combined business, financial condition and results of operations.

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Regulatory and other impediments to the expansion of our operations to overseas markets could adversely affect our business prospects.

We have in recent years commenced retail operations in China, Russia, Indonesia and Vietnam. As of December 31, 2011, we operated two department stores (one of which was owned by an associate) and 94 discount stores in China, one department store (owned by an associate) in Russia, 28 discount stores in Indonesia and two discount stores in Vietnam. See “Business—Operations—Other Businesses—Overseas Businesses.” We plan to continue the expansion of our retail operations in these countries as well as considering expanding to other overseas markets, subject to market conditions. Our ability to successfully execute our expansion plan overseas depends in large part on how effectively we can identify and respond to the lifestyle and fashion preferences of our target customer base in these new markets. We are also subject to other risks associated with doing business abroad, including:

• inability to adapt to local business customs and practices and competitive dynamics;

• difficulty in obtaining licenses or other regulatory approvals;

• inability to secure new store sites on acceptable terms;

• sluggish or negative economic growth and consumer demand;

• adverse changes in laws and policies affecting labor, trade, environmental compliance, investment and property development;

• varying standards and practices of the regulatory, tax, judicial and administrative bodies of the relevant foreign jurisdiction;

• delays in shipments or deliveries;

• inability to maintain a consistent level of quality for the products and services we provide;

• inability to successfully market our brand;

• difficulty hiring and retaining qualified store managers and other employees;

• political strife, social turmoil or deteriorating economic conditions;

• military hostilities or acts of terrorism; and

• epidemics or outbreaks such as avian or swine flu or severe acute respiratory syndrome (“SARS”).

In addition, we have limited experience conducting business operations overseas. Our overseas expansion plans will also require significant capital expenditures, which may exceed our current expectations. The realization of any or all of these risks, individually or in the aggregate, in any new overseas markets we enter may have a material adverse effect on our business, financial condition and results of operations.

Our operations are concentrated in the Seoul metropolitan area and in our Seoul flagship department stores in particular.

As of December 31, 2011, 18 out of our 30 department stores in Korea were located in the Seoul metropolitan area (which includes Seoul and its surrounding satellite cities in Gyeonggi-do), where approximately 49% of Korea’s population resides. In addition, as of such date, 45 out of our 95 discount

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stores in Korea were located in the Seoul metropolitan area. Our business will be materially and adversely affected if we experience a significant decrease in revenues from these stores. Changes in the demographic or retail environment of our Seoul stores, particularly our two flagship department stores in Myungdong and Jamsil, could result in a significant decrease in our revenues. In addition, sales of our Seoul area stores are highly sensitive to events and conditions in the Seoul metropolitan area, and any prolonged period of extreme or unseasonable weather conditions, natural or man-made disasters, sustained downturn in economic conditions or increased local competition, could cause our Seoul area stores to suffer a decrease in sales and materially and adversely affect our business, financial condition and results of operations.

The reputation of, and value associated with, our brand name are critical to our business and if we are unable to enforce our intellectual property rights, or if we are accused of infringing on a third party’s intellectual property rights, our business may suffer.

The Lotte brand name is an important asset of our business. We co-own our trademarks and service marks, including the “Lotte,” “Lotte Young Plaza” and “Lotte Mart” marks and the “3L” logo, with Hotel Lotte Co., Ltd. and Lotte Confectionery Co., Ltd., which are affiliates within the Lotte Group. See “Lotte Group.” We also independently own the “Lotte Super,” “Lotte Super Store” and “Avenuel” marks. Our trademarks and service marks are registered in Korea, as well as Russia, China, Vietnam and Indonesia. Maintaining the reputation of, and value associated with, the Lotte name is central to the success of our business but there can be no assurance that our business strategy and its implementation will accomplish this objective. One or more of our affiliates which co-own our trademarks and service marks may engage in activities that jeopardize our ability to protect the brand name or may engage in activities that damage the brand reputation. Moreover, we are unable to predict the effect that any future foreign or domestic intellectual property legislation or regulation may have on our ability to enforce our intellectual property rights. The loss or reduction of any of our significant proprietary rights, or any substantial erosion in the reputation of, or value associated with, the Lotte name, could have a material adverse effect on our business, financial condition and results of operations.

We are not aware of any claims of infringement or other challenges to our right to register or use our marks in Korea or any other jurisdiction. However, there can be no assurance that third parties will not assert claims against us alleging infringement, misappropriation or other violations of their trademark or other proprietary rights, whether or not such claims have merit. Such claims may be time consuming and expensive to defend and could result in our being required to cease using the trademark or other rights and selling the allegedly infringing products. This might have a significant impact on our sales and cause us to incur significant litigation or licensing costs and expenses.

We depend on a limited number of facilities for the distribution of merchandise to our discount stores and supermarkets.

We currently maintain four distribution centers for our discount stores, in Gimhae (which facility is shared by our supermarkets division), Yangji, Yangsan and Osan, and one additional distribution center for our supermarkets, in Shingal. We also maintain one distribution center located in Bundang, which we use on a limited basis during specific times of the year to warehouse merchandise for our department stores. However, our department stores mostly receive deliveries directly from suppliers. Any major breakdown of plant or equipment, or accidents such as a serious fire or flood, in our distribution centers might significantly impact our ability to distribute products to our stores and maintain an adequate product supply chain. In addition, we may open new distribution centers (including in the overseas markets where we operate) or relocate or close our current distribution centers in the future as our discount store, supermarket and other retail operations continue to expand and change. Any significant disruption to the operations of our current distribution facilities, or during and after the transition to new facilities which we may open in the future, could have an adverse effect on the in-store inventory of our discount stores and supermarkets, and therefore could materially and adversely affect our business, financial condition and results of operations.

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Our department store business is dependent in part on our relationships with popular designers and other suppliers.

Merchandise assortment is a critical competitive factor in the luxury retail business. Our success in the department store business depends in part on initiating and maintaining strong relationships with popular designers and other suppliers. Most of these relationships are not subject to exclusive contractual arrangements and we have no legal assurance that these relationships will continue. Moreover, most of the brands of our most popular designers and other suppliers are sold by our competitors and many of our designers and other suppliers also have their own dedicated retail stores. While we do not rely on any specific designer or supplier for a material portion of our retail operations, if one or more of our designers or other suppliers were to cease providing us with adequate supplies of merchandise or, conversely, were to increase sales of merchandise through its own stores or to the stores of our competitors, our business, financial condition and results of operations could be adversely affected. In addition, any decline in the popularity of any of the main brands we sell could also have such an effect upon us.

Lotte Card may experience increases in delinquencies in, and a deterioration in the asset quality of, its credit card portfolio.

We own 92.5% of Lotte Card, which is a consolidated subsidiary engaged in the credit card business. See “Business—Operations— Other Businesses.” As of December 31, 2011, the outstanding balance of Lotte Card’s credit card receivables overdue by one month or more amounted to W81 billion on a managed assets basis, and the delinquency ratio (representing the ratio of such delinquent balances to total outstanding credit card receivables, including restructured loans) was 1.96% on a managed assets basis.

Delinquencies in credit card receivables may increase in the future as a result of, among other things, adverse economic developments in Korea, difficulties experienced by other credit card issuers that adversely affect Lotte Card’s customers, additional government regulation or the inability of Korean consumers to manage increased household debt, as reflected, for example, in the practice among some credit card holders of obtaining multiple credit cards and using cash advances from one card to make payments due on others. In addition, increased exposure to consumer debt means that Lotte Card is more exposed to changes in economic conditions affecting Korean consumers. Accordingly, economic difficulties in Korea that hurt those consumers could result in deterioration in the credit quality of Lotte Card’s credit card portfolio. For example, a rise in unemployment or an increase in interest rates in Korea, which have been at historically low levels in recent years, could adversely affect the ability of consumers to make payments and increase the likelihood of potential defaults.

Furthermore, the credit card industry in Korea is highly competitive, and many of the Korean credit card companies, banks and bank affiliates with which we compete have greater market shares, are significantly larger and have more financial resources than we do, including a larger and more diversified asset, capital and funding base. As a result of competition in the Korean credit card segment, we may experience difficulty in securing and maintaining customers with the credit quality and on credit terms necessary to achieve our business objectives in this area. In addition, we may face growing market saturation, increased interest rate competition, pressure to lower fee rates applicable to our credit cards and higher marketing expenses, which in turn may adversely affect the quality of our credit card assets and the profitability of our credit card business.

Any deterioration in the asset quality of Lotte Card’s credit card portfolio for the above or other reasons would require Lotte Card to increase its loan loss provisions and charge-offs, which may adversely affect our financial condition and results of operations.

The interests of our controlling shareholders could conflict with those of holders of the Notes.

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Members of the Shin family, including Messrs. Kyukho Shin, Dongjoo Shin and Dongbin Shin and Ms. Youngja Shin, and companies controlled by them collectively owned, directly or indirectly, approximately 69% of our outstanding common shares as of December 31, 2011. As a result, they are in a position to elect and remove our directors and control the outcome of most matters submitted to our shareholders’ meetings for a vote. These controlling shareholders are able to control or significantly influence the outcome of any vote on any proposed amendment to our articles of incorporation, merger proposal, proposed substantial sale of assets or other major corporate transactions. The interests of our controlling shareholders could conflict with the interests of holders of the Notes.

We are dependent on key management and other personnel.

Our future success depends, in large part, on the continued service of our key executive officers and managers who possess significant expertise and knowledge of our business, customers and markets. Our dependence on such key management and other personnel will become more pronounced as we continue to execute our plans to expand into overseas markets as well as into new retail formats, such as shopping malls and specialty stores (including category killer stores). Any loss or interruption of the services of these individuals, or failure to attract and retain other qualified new personnel, could significantly reduce our ability to effectively manage our operations. There can be no assurance that we would be able to find appropriate replacements on a timely basis or at all for our key executive officers and managers should the need arise.

Our corporate credit ratings or the credit ratings on our outstanding debt securities may be lowered or withdrawn in the future.

Our corporate credit rating and the credit ratings of our outstanding public debt by any rating agency may decline in the future if in its judgment any event or circumstance so warrants, including in the event we incur additional indebtedness in connection with any material acquisitions or for any other purpose.

We have historically sought to grow in size through selective acquisitions that we believe would be beneficial to us. Most recently, in January 2012, we acquired a 97.4% controlling interest in CS Mart Co., Ltd. for a purchase price of W245 billion. We cannot assure you that we will not incur significant amounts of debt in the future whether in connection with an acquisition or otherwise, or that our corporate rating or the ratings for any of our outstanding debt securities will not decline or be withdrawn in connection therewith or for other reasons. Any such rating decline or withdrawal could adversely affect the market price of the Notes and may adversely impact our ability to raise new funds or refinance maturing debt on commercially reasonable terms.

We are exposed to foreign currency fluctuations.

Our business is subject to risks due to fluctuations in exchange rates. In recent years, the value of the Won relative to major foreign currencies, including the U.S. dollar and Chinese Renminbi, has fluctuated significantly. Although we may benefit from any weakening in the exchange rates of these foreign currencies against the Won to the extent we generate sales primarily in Won and incur costs denominated in these foreign currencies with respect to products or services we purchase from overseas suppliers, we could be adversely affected by future unfavorable shifts in currency exchange rates, such as the depreciation of the Won, if our foreign currency exposure is not hedged through derivative financial instruments. A majority of our long-term financial liabilities denominated in foreign currencies are hedged through derivative financial instruments. In addition, we seek to reduce our exposure to foreign exchange rate risk by matching, as far as possible, receipts and payments in the individual currency and also by borrowing in currencies other than Won (such as U.S. dollars, Japanese Yen and Renminbi) to meet our capital expenditure requirements denominated in such currencies. We cannot assure you that such hedging and other actions we take to reduce our foreign exchange rate risk will always be effective. Accordingly, a depreciation of the Won against the U.S. dollar or other foreign currencies in which our current or future liabilities are denominated may result in foreign exchange losses with respect to

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unhedged or ineffectively hedged positions, and, to the extent the cost increases resulting from such depreciation of the Won cannot be passed through to our customers or such depreciation of the Won does not result in an offsetting increase in the Won value of our sales generated overseas in foreign currencies, could adversely affect our results of operations and financial condition.

We may experience difficulties in securing adequate access to capital in the future.

As of December 31, 2011, we had a working capital surplus, which represents current assets net of current liabilities, of W2,817 billion. Current liabilities mainly comprised trade and other payables of W4,724 billion and short-term borrowings and debentures, net of debenture issuance costs, of W3,447 billion. In the event that we are unable to generate sufficient cash flow from our operations to meet our operating expenditure needs, our operations will have to be funded by other financing activities. In addition, in order to secure the funding required for our expansion strategy, capital expenditures and our other capital requirements, we may need to incur additional debt or issue additional equity to finance these and future investments. We may not be able to secure such funding, on acceptable terms or at all, due to a number of factors such as general market and economic conditions, a decline in our creditworthiness and deterioration in our business prospects. Our inability to fund our current operations or to finance new stores, future acquisitions and other investments could affect the viability of our business and lead to a decline in our competitiveness or the loss of potential business opportunities, which may have a material adverse effect on our business, financial condition and results of operations.

A disruption in our information technology systems could adversely affect our operations.

Our business activities rely to a significant degree on the efficient and uninterrupted operation of our various computer and communications systems and those of third parties. The primary site for our computer and communications systems is located at Seoul. All of our stores are linked through a common computer network that facilitates the flow of information among the stores and to our management. We maintain backup systems for our computer and communication systems at our primary site. We also have an off-site disaster recovery center, which we relocated to Daejeon in January 2011. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious programs and other events. In addition, any significant breakdown of plant or equipment, accidents such as a serious flood or fire or other significant disruption to the operations of these facilities could affect our ability to manage our information technology systems, which in turn could adversely affect our business.

We cannot assure you that we will be able to maintain and upgrade our information technology systems in a manner that will avoid interruptions or disruptions of such systems. A failure or inability to maintain and upgrade our information technology systems may have an adverse effect on our business.

Labor disruptions could affect our results of operations.

As of December 31, 2011, approximately 8.7% of our employees in Korea (excluding those of our subsidiaries) were union members, and sales employees accounted for substantially all of these members. We have a collective bargaining agreement with our labor union, which is negotiated once every two years. Wage rate increases are also negotiated once every two years. We believe that overall our relationship with our employees and the union is good. Since the formation of our first union in 1987, we have not experienced any work slowdowns, work stoppages or strikes. However, there can be no assurance that a work slowdown, work stoppage or strike will not occur, in particular prior to or upon the expiration of our labor agreements. Furthermore, pursuant to an amendment to the Trade Union and Labor Relations Adjustment Act which is effective from July 2011, multiple labor unions may be established in any of our companies. Such a development could materially and adversely affect the stability of our relationship with our employees and unions. Work slowdowns, stoppages or other labor-related developments affecting us could have a material adverse effect on our business, financial

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condition and results of operations.

Complaints or litigation from customers and other third parties could adversely affect us.

We are subject to complaints and litigation from our customers, employees or other third parties, alleging health, environmental, safety or operational concerns, nuisance, negligence or failure to comply with applicable laws and regulations. These claims, even if successfully disposed of without direct adverse financial effect, could have a material adverse effect on our reputation and divert our financial and management resources from more beneficial uses. While we do not believe that any of these claims to which we are currently subject will have a material adverse effect on us, there is no guarantee that we will not be subject to future claims that may have such an effect on our business, financial conditions or results of operations.

Risks Relating to Regulation

We are subject to numerous laws and regulations that could affect our operations.

Our operations are subject to governmental regulation concerning, among other things:

• our competitive and marketplace conduct, including fair trade;

• establishment or acquisition of stores, including large-scale stores and supermarkets;

• export and import restrictions and other customs regulations;

• the consumer finance and credit card businesses;

• consumer, data and personal information protection;

• the advertisement, promotion and sale of merchandise;

• product safety;

• national and local environmental laws and regulations;

• the health, safety and working conditions of our employees;

• the safety of our food products; and

• the safety of our stores and their accessibility for the disabled.

Although we undertake to monitor changes in these laws and regulations, if we fail to promptly implement any action required by any change in these laws or regulations or if any such laws or regulations are violated by us or by third parties that supply goods or services to us, we could experience delays in shipments and receipt of goods or be subject to fines, injunctions or other penalties under the controlling laws and regulations. Any of these events could have a material adverse effect on our business, reputation, financial condition and results of operations. We also require licenses to undertake certain of our activities, and any loss of, or restrictions on, these licenses could have an adverse effect on our business.

In particular, under recent amendments to the Distribution Industry Development Act of Korea (the “DIDA”) which became effective in November 2010 for a period of five years, local governmental authorities in Korea may restrict or impose burdensome conditions on large retailers in opening and operating stores in certain areas designated for the protection of small local retailers or traditional open

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markets, and an increasing number of local governmental authorities have implemented or are implementing such protective measures. The DIDA was amended in June 2011 to expand the geographic scope of areas designated for the protection of traditional open markets and, effective from January 2012, further amended to allow local governmental authorities to impose mandatory closure times and/or days to stores registered either as a large-scale marketplace or a semi-large store, subject to certain conditions. As a result, certain local governmental authorities (including those in the Seoul metropolitan area) have implemented, or are in the process of implementing, requirements for discount stores and supermarkets operated by large retailers to close on certain designated days (such as every other Sunday). Furthermore, an amendment to the Act on the Promotion of Collaborative Cooperation between Large Enterprises and Small-Medium Enterprises, which became effective in January 2011, allows small- and medium-sized retailers (acting through a recognized industry association or in groups) to bring regulatory proceedings against large corporations that open new stores (directly or indirectly through stores that are owned and operated by individual franchisees but are at least 51% funded by large corporations) in the vicinity of their businesses, which may result in various restrictions on the opening or expansion of stores by large corporations such as us. In addition, in January 2012, the Act on Fair Dealings in Large-Scale Distribution Business, which prohibits large-scale distribution businesses such as us from engaging in various activities specified as unfair business dealings (such as certain reductions of payments to suppliers or refusals or delays in accepting products from suppliers), came into effect. See “Business — Regulations.” Such new regulatory restrictions may impair our ability to expand our supermarket and discount store businesses, which may have a material adverse effect on our results of operations and financial condition.

We are also subject to national and local environmental laws and regulations. These environmental laws and regulations are constantly changing, as are the priorities of those who enforce them. We cannot assure you that environmental conditions relating to prior, existing or future properties will not have a material adverse effect on our business, financial condition or results of operations.

Our transactions with our subsidiaries, affiliates and other member companies of the Lotte Group may be restricted under Korean fair trade and tax regulations.

Our business operations and transactions with our subsidiaries, affiliates and other companies within the Lotte Group are subject to ongoing scrutiny by the Korean Fair Trade Commission (the “FTC”), as to, among other things, whether such transactions constitute undue financial support among companies of the same business group. Our material business transactions with our subsidiaries, affiliates and member companies of the Lotte Group will be subject to approval by our board of directors and will require public disclosure. Since 2005, we have received two corrective orders from the FTC for providing undue financial support to our affiliates pursuant to which we paid total fines of W1.3 billion. Any future determinations by the FTC that we have engaged in transactions that violated the relevant laws and FTC regulations may have a material adverse effect on the price of the Notes.

Under Korean tax law, there is an inherent risk that our transactions with related parties (or any person or company that is related to us) may be challenged by the Korean tax authorities if such transactions are viewed as having been made on terms that were not on an arm’s-length basis. If the Korean tax authorities determine that certain of our transactions with related parties were not made on an arm’s-length basis, we would not be permitted to deduct the amount equivalent to such undue financial support as expenses.

In addition, our retail business operations are subject to ongoing scrutiny by the FTC in connection with potential violations of relevant laws and FTC regulations governing the retail industry. We are not permitted, among other things, to (i) unduly return products, in whole or in part, that we have purchased from our suppliers, (ii) unduly reduce the purchase price after we have purchased products from our suppliers, (iii) delay payment of the purchase price to our suppliers or our store lessees without justifiable reasons, (iv) make any undue and coercive demands for special discounts or free gifts to our suppliers or our store lessees and (v) unduly charge product promotion costs to our suppliers. Since 2005, in addition

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to the above-mentioned two corrective orders for providing undue financial support to our affiliates, we have received 12 corrective orders from the FTC for engaging in certain of these and other unfair business practices, pursuant to which we took corrective measures and paid a total of W1.8 billion in penalties. If the FTC determines in the future that we have engaged in these or any other types of unfair business practices, we may be subject to additional corrective measures, ordered to publicize such corrective measures and/or pay a fine, which may have an adverse effect on our business and market reputation.

We face the risk of exposure to product liability claims and adverse publicity in connection with the sale of products.

The manufacture, processing, distribution and sale of products entail an inherent risk of product liability, product recall and adverse publicity. In Korea, product liability is divided into two types: primary liability, which applies to manufacturers, processors and importers of products, and secondary liability, which applies to sellers of products. A party found liable in a product liability case will be obligated to compensate for the death, injury or property damage of a consumer that results from the product defect. We may be subject to primary liability as a processor of food products, an importer of products and a seller of goods manufactured by third parties but packaged and sold under our label.

Secondary liability attaches in product liability cases where the seller of goods is unwilling or unable to identify the manufacturer of a defective product. In such a case, since the consumer cannot identify the manufacturer who is the primary party responsible for the product defect, the consumer may pursue an action for secondary product liability against the seller. If we know, or should know, the identity of the manufacturer of a defective product sold by us and yet we do not reveal the identity of such manufacturer, we may be exposed to product liability claims even though we did not manufacture, process or import the defective product.

There can be no assurance that product liability claims of this nature will not be asserted against us or that we will not be obligated to perform recalls in the future. If a product liability claim is successful, our insurance may not be adequate to cover all liabilities we may incur, and we may not be able to continue to maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. If we do not have adequate insurance or contractual indemnification available to us, product liability claims relating to defective food products could have a material adverse effect on our ability to successfully market our products and on our business, financial condition and results of operations.

In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding any assertion that the products we sell caused illness or injury could have a material adverse effect on our reputation with existing and potential customers and on our business, financial condition and results of operations.

Restrictions on our ability to dismiss non-full-time employees may result in increases of labor costs and severance payment reserves.

As of December 31, 2011, we employed 24,801 people in Korea (excluding employees of our subsidiaries), of which 17,103 were full-time members (including regular employees and contract-based employees) of our staff, and 7,698 were temporary employees. Contract-based employees typically perform more specialized tasks and services compared to the regular members of our staff and include, among others, in-store nurse practitioners, public address system announcers and designers. Because our staffing requirements fluctuate during the year as a result of the seasonality of the retail industry, we typically also employ temporary workers, including full-time interns and part-time point-of-sale, or POS, technicians. Because we hire contract-based and temporary employees, we are subject to the restrictions posed by the Act on Protection of Fixed-Term or Part-Time Employees (the “Non-regular Employee Act”). Under the Non-regular Employee Act, we are prohibited from discriminating, without justifiable grounds, against fixed-term employees who perform the same or similar duties as those of the

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regular employees in respect of wages and other labor conditions. In particular, if we hire fixed-term employees for a period exceeding two years, we must treat them as regular employees in terms of wages and benefits and may not terminate their employment without justifiable grounds, even after the expiration of the fixed-term employment contract. These and other restrictions on our treatment of non-full-time employees could result in increased labor costs and severance payment reserves, which may have an adverse effect on our business, financial condition and results of operations.

Risks Relating to Korea

If economic conditions in Korea deteriorate, our current business and future growth could be materially and adversely affected.

We are incorporated in Korea and a significant 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 future growth of the Korean economy is subject to many factors beyond our control.

The Korean economy is closely tied to, and is affected by developments in, the global economy. Due to recent liquidity and credit concerns and volatility in the global financial markets, the value of the Won relative to the U.S. dollar and other foreign currencies and the stock prices of Korean companies have fluctuated significantly in recent years. In particular, there has been increased volatility following the downgrading by Standard & Poor’s Rating Services of the long-term sovereign credit rating of the United States to “AA+” from “AAA” in August 2011 as well as increasing financial difficulties affecting European countries including Greece, Spain, Portugal and Italy, and the overall prospects for the Korean and global economies in 2012 and beyond remain uncertain. Any future deterioration of the Korean and global economies could adversely affect our business, results of operations and financial condition.

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

• difficulties in the financial sector in Europe and elsewhere and increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;

• declines in consumer confidence and a slowdown in consumer spending;

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

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

• increasing delinquencies and credit defaults by retail and small- and medium-sized enterprise borrowers;

• the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);

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

• social and labor unrest;

• substantial decreases in the market prices of Korean real estate;

180

• a decrease in tax revenues and a substantial increase in the Korean government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased government budget deficit;

• 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;

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

• the occurrence of severe health epidemics in Korea and other parts of the world;

• deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;

• 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 and North Africa and any material disruption in the global supply of oil or increase in the price of oil;

• the occurrence of natural disasters in Korea or other parts of the world, particularly in trading partners (such as the March 2011 earthquake in Japan, which also resulted in the release of radioactive materials from a nuclear plant that had been damaged by the earthquake); and

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

Escalations in tensions with North Korea could have an adverse effect on us and the market value of the Notes.

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 current and future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-il designated his third son, Kim Jong-eun, as his successor prior to his death, the eventual outcome of such leadership transition remains uncertain. Only limited information is available about Kim Jong-eun, who is reported to be in his late twenties, and it remains unclear which individuals or factions, if any, will share political power with Kim Jong-eun or assume the leadership if the transition is not successful.

In addition, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapons and long-range missile programs as well as its hostile military actions against Korea. North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 followed by a nuclear test in October 2006, which increased tensions in the region and elicited strong objections worldwide. In May 2009, North Korea announced that it had successfully conducted a second nuclear test. In response, the United Nations Security Council unanimously passed a resolution that condemned North Korea for the nuclear test and decided to expand and tighten sanctions against North Korea. In March 2010, a Korean warship was destroyed by an underwater explosion, killing many of the crewmen on board. In May 2010, the Korean government formally accused North Korea of causing the sinking, which North Korea denied the responsibility and threatened retaliation for any attempt to punish it over the incident. In November 2010, North Korea reportedly fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the western maritime border between Korea and North Korea,

181

killing two Korean soldiers and two civilians, wounding many others and causing significant property damage. Korea responded by firing artillery shells back and putting the military on its highest level of alert. The Korean government condemned North Korea for the act and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges. For example, in November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.

There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on our operations and the market value of the Notes.

There are special risks involved with investing in securities of Korean companies, including the possibility of restrictions being imposed by the Korean 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, including the Notes, that are not typical for investments in securities of companies in other jurisdictions.

Under the Korean Foreign Exchange Transaction Law, if the government deems that certain emergency circumstances, including sudden fluctuations in interest rates or exchange rates, extreme difficulty in stabilizing the balance of payments or substantial disturbance in the Korean financial and capital markets, are likely to occur, it may impose any necessary restriction such as requiring Korean or foreign investors to obtain prior approval from the Minister of Strategy and Finance 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.

EXHIBIT 99-1 : CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2011 AND 2010 AND INDEPENDENT AUDITORS’ REPORT

LOTTE SHOPPING CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements

December 31, 2011 and 2010

(With Independent Auditors’ Report Thereon)

Contents

Page

Independent Auditors’ Report 1

Consolidated Statements of Financial Position 3

Consolidated Statements of Comprehensive Income 5

Consolidated Statements of Changes in Equity 6

Consolidated Statements of Cash Flows 8

Notes to the Consolidated Financial Statements 11

Independent Auditors’ Report

Based on a report originally issued in Korean

The Board of Directors and Shareholders

Lotte Shopping Co., Ltd.:

We have audited the accompanying consolidated statements of financial position of Lotte Shopping Co., Ltd. and its

subsidiaries (the “Group”) as of December 31, 2011, 2010 and January 1, 2010, and the related consolidated statements of

comprehensive income, consolidated statements of changes in equity and cash flows for the years ended December 31,

2011 and 2010. Management is responsible for the preparation and fair presentation of these consolidated financial

statements in accordance with Korean International Financial Reporting Standards. Our responsibility is to express an

opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of

certain subsidiaries including Korea Seven Co., Ltd., whose financial statements represent 9.38%, 8.85% and 7.34% of the

consolidated total assets as of December 31, 2011, 2010 and January 1, 2010, respectively, and 17.54% and 17.91% of the

consolidated total sales for the years ended December 31, 2011 and 2010, respectively. Those financial statements were

audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts

included for those companies, is based solely on the reports of the other auditors.

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

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

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

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

principles used and significant estimates made by management, as well as evaluating the overall financial statement

presentation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our

opinion.

In our opinion, based on our audits and other auditors’ reports, the consolidated financial statements referred to above

present fairly, in all material respects, the financial position of the Group as of December 31, 2011, 2010 and January 1,

2010 and its financial performance and its cash flows for the years ended December 31, 2011 and 2010, in accordance with

Korean International Financial Reporting Standards.

Without qualifying our opinion, we draw attention to the following:

The procedures and practices utilized in the Republic of Korea to audit such consolidated financial statements may differ

from those generally accepted and applied in other countries. Accordingly, this report and the accompanying consolidated

financial statements are for use by those knowledgeable about Korean auditing standards and their application in practice.

KPMG Samjong Accounting Corp.

Seoul, Korea

March 14, 2012

2

This report is effective as of March 14, 2012, the audit report date. Certain subsequent events or circumstances, which may

occur between the audit report date and the time of reading this report, could have a material impact on the accompanying

consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the

above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

3

LOTTE SHOPPING CO., LTD. AND SUBSIDIARIES

Consolidated Statements of Financial Position

As of December 31, 2011, 2010 and January 1, 2010


Notes

December

31, 2011

December

31, 2010

January

1, 2010

Assets

Cash and cash equivalents

5,8,31,33 ￦ 1,958,204

1,242,426 998,865


5,6,8,38

636,502

461,341 359,373


5,7,8,22,31,38

7,732,819

6,487,294 4,606,799

Inventories

9

2,042,285

1,669,798 1,360,126

Income tax refund receivable

983

506 195

Other current non-financial assets

10,38

357,367

167,895 123,518


12,728,160

10,029,260 7,448,876

Investments in associates

11

940,720

869,505 671,946


5,7,8,22,31,38

1,651,237

1,609,875 1,413,512

Property, plant and equipment, net

12

13,153,613

12,651,614 11,396,268

Investment property

13

640,896

632,798 743,572

Goodwill

14

2,067,205

2,050,139 999,009


14

639,812

217,004 119,783

Other non-financial assets

10

1,182,998

1,066,825 903,793

Deferred tax assets

32

56,479

64,510 49,990


20,332,960

19,162,270 16,297,873

Total assets

￦ 33,061,120

29,191,530 23,746,749

See accompanying notes to the consolidated financial statements.

4


Consolidated Statements of Financial Position, Continued



Notes

December

31, 2011

December

31, 2010

January

1, 2010

Liabilities


net of debenture issuance costs

5,8,17,31,38 ￦ 3,447,284

3,336,879 1,878,777

Trade and other payables

5,8,15,38

4,724,017

4,036,750 3,269,020


5,8,16,22,31

471,507

429,583 300,448

Income tax payables

32

184,153

285,563 161,204

Unearned revenues

18

184,365

163,904 146,912

Provisions

19

38,016

33,330 24,422


20

861,666

716,702 651,415

Total current liabilities

9,911,008

9,002,711 6,432,198


net of debentures issuance costs

5,8,17,31,38

6,738,647

5,058,546 3,457,841


5,8,16,22,31,38

165,276

119,485 35,425

Employee benefit liabilities

21

157,267

143,522 101,261


32

1,336,596

1,166,143 1,119,696

Long-term unearned revenues

18

21,411

21,906 19,587

Provisions

19

35,392

37,157 30,245

Other non-financial liabilities

20

16,518

62 1,471


8,471,107

6,546,821 4,765,526

Total liabilities

18,382,115

15,549,532 11,197,724

Equity

Common stock of ￦5,000 par value

Authorized - 60,000,000 shares

Issued and outstanding - 29,043,374

shares

1,23

145,217

145,217 145,217

Capital surplus

23

3,622,183

3,622,183 3,622,183

Capital adjustments

(30,867)

(16,097) (16,271)

Retained earnings

24

10,091,896

9,211,526 8,235,315

Accumulated other comprehensive

income

25

137,806

146,581 101,652

Stockholders' equity attributable to

owners of the Company

13,966,235

13,109,410 12,088,096

Non-controlling interests

712,770

532,588 460,929

Total equity

14,679,005

13,641,998 12,549,025

Total liabilities and equity

￦ 33,061,120

29,191,530 23,746,749



Consolidated Statements of Comprehensive Income

5

For the years ended December 31, 2011 and 2010

Korean won

(millions, except for earnings per share)

Notes

2011 2010

Sales

27,35,36,38 ￦ 22,253,088

19,017,744

Cost of sales

27,29,38

(15,251,394)

(13,088,638)

Gross profit

7,001,694

5,929,106


28,29

(5,182,852)

(4,271,095)

Other operating income

28

59,220

97,360


28

(215,162)

(157,637)

Operating income

30,35

1,662,900

1,597,734

Finance income

31

257,265

180,281

Finance expense

31

(426,657)

(312,035)

Equity method income of investments in associates

11

61,733

74,243


1,555,241

1,540,223

Income tax expense

32

(542,641)

(404,173)

Profit from continuing operations

1,012,600

1,136,050

Discontinued operations

Loss from discontinued operations, net of tax of nil

-

(32,401)

Profit for the year

￦ 1,012,600

1,103,649

Other comprehensive income, net of tax:

25


11,928

75,095


39,152

(6,690)


25,460

(20,488)


(10,993)

(27,765)

Change in equity of equity method investments

(49,393)

22,471

Tax effects

(16,169)

(13,687)

Other comprehensive income (loss) for the year, net of tax

(15)

28,936


￦ 1,012,585

1,132,585

Profit attributable to:


931,815

1,034,705

- Non-controlling interests

80,785

68,944

1,012,600

1,103,649

Total comprehensive income attributable to:


916,316

1,058,753

- Non-controlling interests

96,269

73,832

1,012,585

1,132,585

Earnings per share in won

26

- Basic and diluted earnings per share – Continuing operations

32,084 36,742

- Basic and diluted loss per share – Discontinued operations

- (1,116)

￦ 32,084

35,626


6


Consolidated Statements of Changes in Equity



Capital

stock

Capital

surplus

Capital

adjustments

Retained

earnings

Accumulated other

comprehensive

income

Stockholders’

equity

attributable to

owners of the

Company

Non-controlling

interests Total equity


3,622,183

(16,271)

8,235,315

101,652

12,088,096 460,929

12,549,025


year

-

Profit for the year

-

-

-

1,034,705

-

1,034,705 68,944

1,103,649

Other comprehensive income:


-

-

-

-

49,988

49,988 4,990

54,978

Exchange differences on translating

foreign operations

-

-

-

-

(7,310)

(7,310) 619

(6,691)

Effective portion of changes in fair value

of cash flow hedges

-

-

-

-

(12,795)

(12,795) (779)

(13,574)


-

-

-

(20,881)

-

(20,881) (852)

(21,733)

Change in equity of equity method

investments

-

-

-

-

15,046

15,046 910

15,956

Sub total

-

-

-

(20,881)

44,929

24,048 4,888

28,936


-

-

-

1,013,824

44,929

1,058,753 73,832

1,132,585

Transactions with owners of the

Company, recognized directly in

equity:


-

-

-

(36,304)

-

(36,304) -

(36,304)

Business combination and others

-

-

174

(1,309)

-

(1,135) (2,173)

(3,308)




7

Consolidated Statements of Changes in Equity, Continued



Capital

stock

Capital

surplus

Capital

adjustments Retained

earnings

Accumulated other

comprehensive

income (loss)

Stockholders’

equity

attributable to

owners of the

Company

Non-controlling

interests Total equity


3,622,183

(16,097)

9,211,526

146,581

13,109,410 532,588

13,641,998


year:

Profit for the year

-

-

-

931,815

-

931,815 80,785

1,012,600


Change in fair value of available-for-sale

financial assets

-

-

-

-

(20,323)

(20,323) 12,337

(7,986)


foreign operations

-

-

-

-

37,394

37,394 1,612

39,006


-

-

-

-

16,730

16,730 896

17,626


-

-

-

(6,724)

-

(6,724) (1,115)

(7,839)

Change in equity of equity method investments

-

-

-

-

(42,576)

(42,576) 1,754

(40,822)

Sub total

-

-

-

(6,724)

(8,775)

(15,499) 15,484

(15)


-

-

-

925,091

(8,775)

916,316 96,269

1,012,585



equity:


-

-

-

(43,565)

-

(43,565) (10,077)

(53,642)

Capital increase from non-controlling

interest

-

-

-

-

-

- 91,664

91,664

Other

-

-

(14,770)

(1,156)

-

(15,926) 2,326

(13,600)



8


Consolidated Statements of Cash Flows



2011 2010

Cash flows from operating activities Profit for the year ￦ 1,012,600

1,103,649

Income tax expense

542,641

404,173

Post-employment benefits

77,273

58,266


7,587

17,700

Depreciation

482,002

408,249

Amortization

77,902

39,343

Loss on foreign currency translation

84,194

99,822


24,148

36,501

Loss on disposition of derivative instruments

19,904

27


35,305

22,600

Equity method loss of investments in associates

25,600

17,697

Rental expenses

30,761

26,928

Other expenses

112,743

101,597


(1,008)

(24,620)

Gain on disposal of property, plant and equipment

(10,303)

(55,792)

Equity method gain of investments in associates

(87,333)

(91,940)

Gain on transaction of derivative instruments

(26,492)

(10,052)


(18,978)

(57,657)

Other income

(76,505)

(15,793)


(659,640)

(606,692)

Cost of card business

380,156

372,350

Interest expense

191,325

178,794

Interest income

(105,673)

(79,222)

Dividends income

(6,448)

(3,318)

Trade receivables

(117,433)

(80,459)

Other receivables

(66,539)

(32,506)


(1,113,285)

(1,924,291)

Inventories

(384,965)

(268,694)


(264,602)

(278,060)

Trade payables

427,897

621,105

Other payables

240,286

57,954


58,284

79,001

Unearned revenues

20,158

11,777

Provisions

(9,665)

(5,745)

Other non-financial liabilities

147,480

83,072


(48,194)

(90,563)

Plan assets

(42,196)

7,644

Income tax paid

(491,470)

(297,308)

Interest received

621,403

508,123

Interest paid

(218,343)

(163,302)

Dividends received

421

50

Net cash provided by operating activities ￦ 870,998

170,408


9


Consolidated Statements of Cash Flows, Continued



2011 2010


Decrease of deposits ￦ 604,560

1,105,345

Decrease of loans

40,231

30,531

Sale of available-for-sale financial assets

77,235

9,943

Sale of investments in associates

2,166

1,030

Proceeds from disposal of property, plant and equipment

141,074

483,645

Proceeds from disposal of intangible assets

1,042

535

Decrease of other non-financial assets

4,672

67,538

Increase of short-term financial assets

(903,838)

(1,042,113)

Increase of loans

(19,149)

(65,045)


(30,324)

(60,834)

Purchase of investments in associates

(63,735)

(105,456)

Purchase of investment properties

(3,350)

(36,409)

Acquisition of property, plant and equipment

(1,592,148)

(1,165,585)


(82,026)

(137,480)

Acquisition of other investments

(10,331)

(96,686)

Business combinations, net of cash acquired

-

(1,811,059)

Interest received

64,462

52,483

Dividends received

12,895

8,425


(2,761,192)


10


Consolidated Statements of Cash Flows, Continued



2011 2010


Proceeds from borrowings ￦ 7,104,970

14,401,792

Proceeds from issuance of debentures

3,495,255

2,937,098

Capital contribution from non-controlling interests

89,258

47,305

Repayment of borrowings

(7,827,431)

(12,609,582)

Redemption of debentures

(1,024,169)

(1,674,883)

Cash outflows from other financing activities

(1,123)

(5,082)

Acquisition of additional ownership in subsidiaries

(19,699)

-

Interest paid

(168,033)

(220,947)

Dividends paid

(53,642)

(45,442)

Net cash provided by financing activities ￦ 1,595,386

2,830,259

Net increase in cash and cash equivalents

709,820

239,475

Cash and cash equivalents at beginning of the

year

1,242,426

998,865

Impact of foreign currency exchange rates on

cash and cash equivalents

(137)

(262)

Exchange differences on translating foreign

operations

6,095

4,348

Cash and cash equivalents at end of the year ￦ 1,958,204

1,242,426



Notes to the Consolidated Financial Statements


11

1. General Description of Reporting Entity

(a) Organization and Description of the Company

Lotte Shopping Co., Ltd. (the “Company”) was established on July 2, 1970 in the Republic of Korea to engage in retail

operations through department stores, discount stores and supermarkets. In addition to the retail operations, the

Company’s business includes a chain of multiplex movie theaters under the brand name of Lotte Cinema and a clothing

retail division. The Company was listed on the Korea Exchange and the London Stock Exchange through an initial public

offering in February 2006.

The stockholders of the Company as of December 31, 2011 are as follows:

(b) Description of Subsidiaries

The consolidated financial statements of the Company comprise the Company and its subsidiaries (together referred to as

the “Group” and individually as “Group entities”) and the Group’s interest in associates and jointly controlled entities. A

summary of the subsidiaries of the Company as of December 31, 2011, 2010 and January 1, 2010 is as follows:

December 31, 2011

Subsidiaries

Location Products or services

Fiscal

year

Percentage of

ownership (%)


Korea

Distribution

Dec. 31

79.01


Korea

Credit card, capital

Dec. 31

92.54

eB Card Co., Ltd.

Korea

Electronic banking

business

Dec. 31

95.00

Gyeonggi Smartcard Co., Ltd.

Korea

Electronic banking

business

Dec. 31

100.00

Inchon Smartcard Co., Ltd.

Korea

Electronic banking

business

Dec. 31

100.00

Chungnam Smartcard Co., Ltd.

Korea

Electronic banking

business

Dec. 31

100.00

Woori Home Shopping & Television

Co., Ltd.

Korea

Distribution

Dec. 31

53.03

Stockholder

Number

of shares

Ownership (%)

Shin, Dong Bin 4,237,627

14.60%

Shin, Dong Ju 4,235,883

14.60%

Shin, Kyuk Ho 293,877

1.00%

Shin, Young Ja 232,818

0.80%

Hotel Lotte Co., Ltd. 2,781,947

9.60%

Korea Fuji Film Co., Ltd. 2,474,543

8.50%

Lotte Confectionery Co., Ltd. 2,474,543

8.50%

Lotte Data Communication Company 1,515,653

5.20%

Lotte Chilsung Beverage Co., Ltd. 1,237,272

4.30%

Lotte Engineering & Construction Co., Ltd. 300,019

1.00%

Hotel Lotte Pusan Co., Ltd. 246,720

0.90%

Others 9,012,472

31.00%

Total 29,043,374

100.00%




12

1. General Description of the Parent Group, Continued

(b) Description of Subsidiaries, Continued

December 31, 2011

Subsidiaries


Fiscal

year

Percentage of

ownership (%)


Korea

Distribution

Dec. 31

51.14

Buy the way Inc.

Korea

Distribution

Dec. 31

100.00


Korea

Bakery

Dec. 31

90.54

Lotte Square Co., Ltd.

Korea

Distribution

Dec. 31

100.00

NCF Co., Ltd.

Korea

Apparel

manufacturing

Dec. 31

94.50

Lotte Gimhae Development Co., Ltd.

Korea

Service company

Dec. 31

100.00

Lotte Suwon Station Shopping Town

Co., Ltd.

Korea

Real estate

development

Dec. 31

95.00

Lotte Songdo Shopping Town Co.,

Ltd.

Korea

Real estate

development

Dec. 31

58.82


Vietnam

Distribution

Dec. 31

94.55

Qingdao Lotte Mart Commercial Co.,

Ltd.

China

Distribution

Dec. 31

100.00

Lotte Mart Co., Ltd.

China

Distribution

Dec. 31

100.00

Lotte Shopping Holdings (Singapore),

Ltd.

Singapore

Holding company

Dec. 31

100.00

PT. Lotte Shopping Indonesia

Indonesia

Distribution

Dec. 31

80.00

PT. Lotte Mart Indonesia

Indonesia

Distribution

Dec. 31

100.00

Lotte Shopping India Pvt., Ltd.

India

Distribution

Dec. 31

100.00

Lotte Hotel & Retail Vietnam Pte.

Ltd.

Singapore

Holding company

Dec. 31

60.00


(Hong Kong), Ltd.

Hong

Kong

Holding company

Dec. 31

100.00

Lotte Mart China Co., Ltd. and its

subsidiaries

China

Distribution

Dec. 31

100.00

Lotte Home Shopping Company

Limited

Cayman

Holding company

Dec. 31

88.98

Lucky Pai Ltd. and its subsidiaries

China

Distribution

Dec. 31

73.80

Lotte Business Management (Tianjin)

Co., Ltd.

China

Distribution

Dec. 31

100.00

Lotte Mart Global Sourcing Center

Co., Ltd.

China

Trading company

Dec. 31

100.00

Liaoning Lotte Mart Co., Ltd.

China

Distribution

Dec. 31

100.00

Lotte Cinema Vietnam Co., Ltd.

Vietnam

Cinema

Dec. 31

90.00

Jilin Lotte Mart Co., Ltd.

China

Distribution

Dec. 31

100.00




13



December 31, 2011

Subsidiaries


Fiscal

year

Percentage of

ownership (%)

PT. Lotte Shopping Plaza Indonesia

Indonesia

Distribution

Dec. 31

100.00

Lotte Department Store(Shenyang)

Co., Ltd.

China

Distribution

Dec. 31

100.00

Lotte International Department

Store(Weihai) Co., Ltd. China

Distribution

Dec. 31

100.00

Lotte DatViet Homeshopping Co.,

Ltd.

Vietnam

Distribution

Dec. 31

63.03

Lottemart Danang Co., Ltd.

Vietnam

Distribution

Dec. 31

100.00

Lottemart C&C India Pvt. Ltd.

India

Distribution

Dec. 31

100.00

The 4th Sprint (*)

Korea

SPC

Dec. 31

0.90

The 2nd Supreme (*)

Korea

SPC

Dec. 31

0.90

The 3rd Supreme (*)

Korea

SPC

Dec. 31

0.90

The 4th Supreme (*)

Korea

SPC

Dec. 31

0.90

(*) The Group possesses substantial risks and rewards of Special Purpose Company (SPC) specializing in factoring credit

card sale receivables.

December 31, 2010

Subsidiaries


Fiscal

year

Percentage of

ownership (%)


Korea

Distribution

Dec. 31

79.01


Korea


Dec. 31

92.54

eB Card Co., Ltd.

Korea

Electronic banking

business

Dec. 31

95.00


Korea

Electronic banking

business

Dec. 31

100.00


Korea

Electronic banking

business

Dec. 31

100.00


Korea

Electronic banking

business

Dec. 31

100.00


Co., Ltd.

Korea

Distribution

Dec. 31

53.03


Korea

Distribution

Dec. 31

51.44

Buy the way Inc.

Korea

Distribution

Dec. 31

100.00


Korea

Bakery

Dec. 31

90.54

Lotte Square Co., Ltd.

Korea

Distribution

Dec. 31

100.00

NCF Co., Ltd.

Korea

Apparel

manufacturing

Dec. 31

94.50

Lotte Gimhae Development Co., Ltd.

Korea

Service company

Dec. 31

100.00




14



December 31, 2010

Subsidiaries


Fiscal

year

Percentage of

ownership (%)


Co., Ltd.

Korea

Real estate

development

Dec. 31

95.00


Vietnam

Distribution

Dec. 31

80.00


Ltd.

China

Distribution

Dec. 31

100.00


China

Distribution

Dec. 31

100.00


Ltd.

Singapore

Holding company

Dec. 31

100.00


Indonesia

Distribution

Dec. 31

80.00


Indonesia

Distribution

Dec. 31

100.00


India

Distribution

Dec. 31

100.00


(Hong Kong), Ltd.

Hong

Kong

Holding company

Dec. 31

100.00


subsidiaries China

Distribution

Dec. 31

100.00


Limited Cayman

Holding company

Dec. 31

88.23


China

Distribution

Dec. 31

63.22


Co., Ltd. China

Distribution

Dec. 31

100.00


Co., Ltd. China

Trading company

Dec. 31

100.00


China

Distribution

Dec. 31

100.00


Vietnam

Cinema

Dec. 31

90.00

The 4th Sprint (*)

Korea

SPC

Dec. 31

0.90

The 1st Supreme (*)

Korea

SPC

Dec. 31

0.90

The 2nd Supreme (*)

Korea

SPC

Dec. 31

0.90






15



January 1, 2010

Subsidiaries

Location

Products or

services

Fiscal

year

Percentage of

ownership (%)


Korea

Distribution

Dec. 31

79.01


Korea

Credit card,

capital

Dec. 31

92.54


Co., Ltd.

Korea

Distribution

Dec. 31

53.03


Korea

Distribution

Dec. 31

50.12


Korea

Bakery

Dec. 31

95.71

Lotte Krispy Kreme Doughnuts co.,

Ltd.

Korea

Food

manufacturing

Dec. 31

100.00


Vietnam

Distribution

Dec. 31

80.00


Ltd.

China

Distribution

Dec. 31

100.00


China

Distribution

Dec. 31

100.00


Ltd.

Singapore

Holding company

Dec. 31

100.00


Indonesia

Distribution

Dec. 31

80.00


Indonesia

Distribution

Dec. 31

100.00


India

Distribution

Dec. 31

100.00


(Hong Kong), Ltd.

Hong

Kong

Holding company

Dec. 31

100.00


subsidiaries China

Distribution

Dec. 31

100.00


Co., Ltd.

China

Distribution

Dec. 31

100.00


China

Distribution

Dec. 31

100.00


Vietnam

Cinema

Dec. 31

90.00

KKD Lotte Holdings Co., Ltd.

Hong

Kong

Holding company

Dec. 31

100.00

Krispykreme-lotte(Shanghai)co., Ltd.

China

Food

manufacturing

Dec. 31

100.00

KKD(Shanghai)Food. co., Ltd.

China

Bakery

Dec. 31

100.00

The 4th Sprint (*)

Korea

SPC

Dec. 31

0.90

The 1st Supreme (*) Korea

SPC

Dec. 31

0.90






16


(c) Financial Information of Subsidiaries as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Company

December 31, 2011 Korean won (millions)

Total

assets

Total

liabilities Sales

Net income

(loss)

Lotte Midopa Co., Ltd. ￦ 1,058,431 219,513 405,798 47,429

Lotte Card Co., Ltd. 7,541,569 6,035,433 1,438,574 184,290

eB Card Co., Ltd. 159,199 98,674 35,340 (6,383)

Gyeonggi Smartcard Co., Ltd. 16,963 6,302 19,596 3,676

Inchon Smartcard Co., Ltd. 15,568 8,326 10,714 1,538

Chungnam Smartcard Co., Ltd. 3,617 5,874 384 (933)

Woori Home Shopping & Television Co., Ltd. 639,604 278,010 636,015 87,399

Korea Seven Co., Ltd. 769,815 562,273 1,353,510 30,618

Buy the way Inc. 260,600 122,162 639,287 22,022

Lotte Boulangerie Co., Ltd. 56,126 49,204 90,569 (3,011)

Lotte Square Co., Ltd. 782,256 239,036 452,352 11,776

NCF Co., Ltd. 32,517 14,297 48,501 4,065

Lotte Gimhae Development Co., Ltd. 603 184 1,846 84

Lotte Suwon Station Shopping Town Co., Ltd. 15,590 952 - (263)

Lotte Songdo Shopping Town Co., Ltd. 180,492 79,353 - (354)

Lotte Vietnam Shopping Co., Ltd. 132,728 124,604 61,585 (15,994)

Qingdao Lotte Mart Commercial Co., Ltd. 129,919 80,794 28,135 (20,937)

Lotte Mart Co., Ltd. 194,770 154,246 299,634 (7,879)

Lotte Shopping Holdings (Singapore), Ltd. 239,737 19 - (39)

PT. Lotte Shopping Indonesia 257,485 144,110 775,122 11,573

PT. Lotte Mart Indonesia 205,347 128,998 105,435 (13,711)

Lotte Shopping India Pvt., Ltd. 6 65 - (1)

Lotte Hotel & Retail Vietnam Pte. Ltd. 114,300 389 - (1,362)

Lotte Shopping Holdings (Hong Kong), Ltd. 940,220 33 - (41)

Lotte Mart China Co., Ltd. and its subsidiaries 766,011 521,157 927,164 1,153

Lotte Home Shopping Company Limited 157,800 17 - 15

Lucky Pai Ltd. and its subsidiaries 39,733 27,147 74,082 (13,043)

Lotte Business Management (Tianjin) Co., Ltd. 34,921 12,664 9,055 (21,141)

Lotte Mart Global Sourcing Center Co., Ltd. 357 1,143 890 (1,307)

Liaoning Lotte Mart Co., Ltd. 33,485 15,465 20,058 (7,407)

Lotte Cinema Vietnam Co., Ltd. 10,972 7,630 3,208 (1,033)

Jilin Lotte Mart Co., Ltd. 23,402 9,814 12,811 (4,043)

PT. Lotte Shopping Plaza Indonesia 14,995 250 - (1,521)

Lotte Department Store (Shenyang) Co., Ltd. 3,062 7 - (463)

Lotte International Department Store (Weihai) Co., Ltd. 3,257 6 - (279)

Lotte DatViet Homeshopping Co., Ltd. 2,749 409 - (104)

Lottemart Danang Co., Ltd. 5,761 6 - (4)

Lottemart C&C India Pvt. Ltd. 2,190 - - (98)

The 4th Sprint 100,204 100,194 7,488 -

The 2nd Supreme 228,723 233,316 10,902 -

The 3rd Supreme 337,945 346,101 10,773 -

The 4th Supreme 161,054 161,886 731 -




17


(c) Financial Information of Subsidiaries as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows,

Continued:

Company


Total

assets

Total

liabilities Sales

Net income

(loss)

Lotte Midopa Co., Ltd. ￦ 943,001 191,891 388,680 48,909

Lotte Card Co., Ltd. 6,572,277 5,272,846 1,299,319 159,840

eB Card Co., Ltd. 147,129 80,221 17,380 807

Gyeonggi Smartcard Co., Ltd. 20,453 13,468 18,657 3,441

Inchon Smartcard Co., Ltd. 18,112 12,408 12,890 1,710

Chungnam Smartcard Co., Ltd. 3,293 4,618 462 (581)

Woori Home Shopping & Television Co., Ltd. 520,506 233,625 526,587 75,089

Korea Seven Co., Ltd. 633,318 456,172 974,780 15,147

Buy the way Inc. 259,813 128,311 638,697 13,924

Lotte Boulangerie Co., Ltd. 50,256 40,314 77,020 (169)

Lotte Square Co., Ltd. 720,326 188,859 311,672 9,877

NCF Co., Ltd. 29,334 15,169 48,928 3,054

Lotte Gimhae Development Co., Ltd. 515 180 901 35

Lotte Suwon Station Shopping Town Co., Ltd. 2,807 2,827 - 79

Lotte Vietnam Shopping Co., Ltd. 120,598 143,355 46,963 (15,862)

Qingdao Lotte Mart Commercial Co., Ltd. 97,850 49,112 25,059 (16,645)

Lotte Mart Co., Ltd. 137,665 91,439 263,573 (6,077)

Lotte Shopping Holdings (Singapore), Ltd. 149,146 19 - (38)

PT. Lotte Shopping Indonesia 188,828 87,792 751,016 13,277

PT. Lotte Mart Indonesia 98,428 30,465 23,841 (3,324)

Lotte Shopping India Pvt., Ltd. 11 78 - (3)

Lotte Shopping Holdings (Hong Kong), Ltd. 867,255 22 - (94)

Lotte Mart China Co., Ltd. and its subsidiaries 686,599 456,334 905,428 9,717

Lotte Home Shopping Company Limited 147,227 21 - (22)

Lucky Pai Ltd. and its subsidiaries 53,532 31,646 15,542 (3,085)

Lotte Business Management (Tianjin) Co., Ltd. 20,756 829 - (2,476)

Lotte Mart Global Sourcing Center Co., Ltd. 753 181 - -

Liaoning Lotte Mart Co., Ltd. 21,209 10,379 6,949 (3,544)

Lotte Cinema Vietnam Co., Ltd. 6,730 6,890 2,553 (1,602)

The 4th Sprint 200,386 200,376 10,126 -

The 1st Supreme 338,926 341,919 12,440 -

The 2nd Supreme 228,666 239,061 8,431 -




18


(c) Financial Information of Subsidiaries as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows,

Continued:

January 1, 2010


Company

Total

assets

Total

liabilities

Total

Capital

Lotte Midopa Co., Ltd. ￦ 863,668 186,427 677,241

Lotte Card Co., Ltd. 4,588,796 3,441,559 1,147,237

Woori Home Shopping & Television Co., Ltd. 430,189 200,686 229,503

Korea Seven Co., Ltd. 289,257 225,848 63,409

Lotte Boulangerie Co., Ltd. 48,150 38,370 9,780

Lotte Krispy Kreme Doughnuts co., Ltd. (*) 86,218 5,100 81,118

Lotte Vietnam Shopping Co., Ltd. 129,305 137,307 (8,002)

Qingdao Lotte Mart Commercial Co., Ltd. 87,040 56,993 30,047

Lotte Mart Co., Ltd. 129,887 77,962 51,925

Lotte Shopping Holdings (Singapore), Ltd. 118,181 18 118,163

PT. Lotte Shopping Indonesia 165,791 79,477 86,314

PT. Lotte Mart Indonesia 36,538 7 36,531

Lotte Shopping India Pvt., Ltd. 16 80 (64)

Lotte Shopping Holdings (Hong Kong), Ltd. 792,975 47,753 745,222

Lotte Mart China Co., Ltd. and its subsidiaries 627,643 409,031 218,612

Lotte Business Management (Tianjin) Co., Ltd. 6,427 217 6,210

Liaoning Lotte Mart Co., Ltd. 10,845 4 10,841

Lotte Cinema Vietnam Co., Ltd. 5,664 5,573 91

KKD Lotte Holdings Co., Ltd. 4,409 4 4,405

Krispykreme-lotte(Shanghai)co., Ltd. 1,957 460 1,497

KKD (Shanghai)Food. co., Ltd. 201 38 163

The 4th Sprint 200,388 200,378 10

The 1st Supreme 346,535 350,396 (3,861)

(*) The company was established by spin-off from the Group and merged to Lotteria Co., Ltd, an associate of the Group, in

2010.




19


(d) The Entities included in Subsidiaries for Consolidation in 2011 are as follows:

Description

Subsidiaries

Acquired shares in 2011

Lotte Songdo Shopping Town Co., Ltd.

Lottemart Danang Co., Ltd.

Established entity in 2011

The 3rd Supreme

The 4th Supreme

Lotte Hotel & Retail Vietnam Pte. Ltd.

Jilin Lottemart Co., Ltd.


Lotte Department Store(Shenyang) Co., Ltd.

Lotte International Department Store(Weihai) Co., Ltd.

Lotte DatViet Homeshopping Co., Ltd.

Lottemart C&C India Pvt. Ltd.

(e) The Entity excluded from Subsidiaries for Consolidation in 2011 is as follows:

Description

Subsidiaries

Dissolution in 2011

The 1st Supreme




20

2. Basis of Preparation

(a) Statement of Compliance

The consolidated financial statements have been prepared in accordance with Korean International Financial Reporting

Standards (“K-IFRS”), as prescribed in the Act on External Audits of Corporations in the Republic of Korea.

These are the Group’s first consolidated financial statements prepared in accordance with K-IFRS and K-IFRS No. 1101

First-time Adoption of Korean International Financial Reporting Standards (“K-IFRS No. 1101”) has been applied. The

Group’s date of transition to K-IFRS is January 1, 2010, and the effect of the transition from Korean Generally Accepted

Accounting Principles (“K-GAAP”) to K-IFRS on the Group’s reported financial position and financial performance is

explained in note 41.

The consolidated financial statements were authorized for issuance by the Board of Directors on February 28, 2012.

(b) Basis of Measurement

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

items in the statement 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

available-for-sale financial assets are measured at fair value

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 and unrecognized past service costs

(c) Functional and Presentation Currency

These consolidated financial statements are presented in Korean won, which is the Parent Company’s functional currency

and the currency of the primary economic environment in which the Group operates.

(d) Use of Estimates and Judgments

The preparation of the consolidated financial statements in conformity with K-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 in which the estimates are revised and in any future periods affected.




21

2. Basis of Preparation, Continued

(d) Use of Estimates and Judgments, Continued

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts

recognized in the consolidated financial statements is included in the following notes:

Note 13 – Classification of investment property

Note 34 – Lease classification

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:

Note 6 – Allowance for financial assets

Note 8 – Financial instruments

Note 14 – Intangible assets

Note 19 – Provisions

Note 21 – Employee benefits

Note 32 – Income taxes

Note 36 – Contingent liabilities and financial commitments




22

3. Significant Accounting Policies

The significant accounting policies applied by the Group in preparation of its consolidated financial statements are included

below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated

financial statements and in preparing the opening K-IFRS statement of financial position at January 1, 2010 for the purpose

of the transition to K-IFRS, unless otherwise indicated.

(a) Operating Segment

A segment is a distinguishable component of the Group that engages in business activities from which it may earn revenues

and incur expenses, including revenues that relate to transactions with any of the Group’s other components. All

operating segments’ operating results are regularly reviewed by the Group’s chief operating decision maker in making

decisions on how to allocate resources and in assessing performance, and for which discrete financial information is

available.

Segment results that are reported to the Group’s chief operating decision maker include items directly attributable to a

segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred

during the period to acquire property, plant and equipment, and intangible assets other than goodwill.

The Group has four operating segments which consist of department stores, discount stores, credit card service and others,

as described in note 36.

(b) Basis of Consolidation

(i) Subsidiaries

A subsidiary is an entity controlled by the Group, where control is the power to govern the financial and operating policies

of the entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are

currently exercisable or convertible are considered when assessing whether the Group controls another entity. The

financial statements of subsidiaries are included in the consolidated financial statements from the date that control

commences until the date that control ceases.

If a member of the Group uses accounting policies other than those adopted in the consolidated financial statements for like

transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing

the consolidated financial statements.

(ii) Special purpose entities

The Group has established a number of special purpose entities (SPEs) for trading and investment purposes. The Group

does not have any direct or indirect shareholdings in these entities. An SPE is consolidated if, based on an evaluation of the

substance of its relationship with the Group and the SPE’s risks and rewards, the Group concludes that it controls the SPE.

(iii) 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. Intra-group losses are recognized as expense if intra-group

losses indicate an impairment that requires recognition in the consolidated financial statements.

(iv) Non-controlling interests

Non-controlling interests in a subsidiary are accounted for separately from the parent’s ownership interests in a subsidiary.

Each component of net profit or loss and other comprehensive income is attributed to the owners of the parent and non-

controlling interest holders, even when the allocation reduces the non-controlling interest balance below zero.




23

3. Significant Accounting Policies, Continued


(i) Business combinations

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or

businesses under common control.

Each identifiable asset and liability is measured at its acquisition-date fair value except for below:

- Leases and insurance contracts are required to be classified on the basis of their contractual terms and other factors

- Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured

reliably are recognized

- Deferred tax assets or liabilities are recognized and measured in accordance with K-IFRS No.1012 Income Taxes

- Employee benefit arrangements are recognized and measured in accordance with K-IFRS No.1019 Employee Benefits

- Reacquired rights are measured in accordance with special provisions

As of the acquisition date, non-controlling interests in the acquiree are measured as the non-controlling interests'

proportionate share of the acquiree's identifiable net assets.

The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the

sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to

former owners of the acquiree and the equity interests issued by the acquirer. However, any portion of the acquirer's

share-based payment awards exchanged for awards held by the acquiree's employees that is included in consideration

transferred in the business combination shall be measured in accordance with the method described above rather than at fair

value.

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees;

advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the

costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities.

Acquisition-related costs, other than those associated with the issuance of debt or equity securities, are expensed in the

periods in which the costs are incurred and the services are received. The costs to issue debt or equity securities are

recognized in accordance with K-IFRS No.1032 Financial Instruments: Presentation and K-IFRS No.1039 Financial

Instruments: Recognition and Measurement.

(ii) Goodwill

The Group measures goodwill at the acquisition date as:

- the fair value of the consideration transferred; plus

- the recognized amount of any non-controlling interests in the acquiree; plus

- if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less

- the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

As part of its transition to K-IFRS, the Group elected to restate only those business combinations which occurred on or

after January 1, 2010 in accordance with K-IFRS. In respect of acquisitions prior to January 1, 2010, goodwill is included

on the basis of its deemed cost, which represents the amount recorded under previous GAAP, K-GAAP.




24


(d) Associates and Jointly Controlled Entities

An associate is an entity in which the Group has significant influence, but not control, over the entity’s financial and

operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the

voting power of another entity.

Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement, and

require unanimous consent for strategic financial and operating decisions.

The investment in an associate is initially recognized at cost 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 after the date of acquisition. Intra-group

balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in

preparing the consolidated financial statements. Intra-group losses recognized as expense if intra-group losses indicate an

impairment that requires recognition in the consolidated financial statements.

If an associate uses accounting policies different from those of the Company for like transactions and events in similar

circumstances, appropriate adjustments are made to its financial statements in applying the equity method.

When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest,

including any long-term investments, is reduced to nil and the recognition of further losses is discontinued except to the

extent that the Group has an obligation or has to make payments on behalf of the investee for further losses.

(e) Cash and Cash Equivalents

Cash and cash equivalents comprise cash on hand, demand deposits, and short-term, highly liquid investments that are

readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and are

used by the Group in management of its short-term commitments. Generally equity investments are excluded from cash

and cash equivalents. However, redeemable preference shares, for which the period from the acquisition to redemption is

short, are classified as cash and cash equivalents.

(f) Inventories

The cost of inventories is based on the first-in first-out principle, and includes expenditures for acquiring the inventories,

production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the

case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based

on normal operating 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 are 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, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the

reversal occurs.




25


(g) Non-derivative Financial Assets

The Group recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair

value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets.

The Group recognizes financial assets in the consolidated statement of financial position when the Group becomes a party

to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset

not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

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

A financial asset is classified as financial assets are classified at fair value through profit or loss if it is held for trading or is

designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss

when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are

recognized in profit or loss.

(ii) Held-to-maturity investments

A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Group has the

positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial

recognition, held-to-maturity investments are measured at amortized cost using the effective interest method.

(iii) Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market.

Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method

except for loans and receivables of which the effect of discounting is immaterial.

(iv) Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are

not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables.

Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect,

recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market

price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be

settled by delivery of such unquoted equity instruments are measured at cost. When a financial asset is derecognized or

impairment losses are recognized, the cumulative gain or loss previously recognized in other comprehensive income is

reclassified from equity to profit or loss. Dividends on an available-for-sale equity instrument are recognized in profit or

loss when the Group’s right to receive payment is established.

(v) De-recognition of financial assets

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 on the financial asset in a transaction in which substantially all the risks and

rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or

retained by the Group is recognized as a separate asset or liability.

If the Group retains substantially all the risks and rewards of ownership of the transferred financial assets, the Group

continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.




26


(h) Derivative Financial Instruments, including hedge accounting

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value,

and changes therein are either recognized in profit or loss or, when the derivatives are designated in a hedging relationship

and the hedge is determined to be an effective hedge, other comprehensive income.

(i) 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 designated derivatives as hedging instruments to hedge the risk of

changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign currency 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. The Group makes an assessment, both

at the inception of the hedge relationship as well as on a quarterly basis, whether the hedging instruments are expected to be

“highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period

for which the hedge is designated, and whether the actual results of each hedge are within a range of 80%-125%. For a

cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an

exposure to variations in cash flows that could ultimately affect reported net income.

Fair value hedge

Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss.

The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or

loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the

consolidated statement of comprehensive income.

The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, or

if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged

item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting 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.

(ii) Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized

immediately in profit or loss.




27


(i) Impairment of Financial Assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there

is objective evidence that it is impaired. A financial asset 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. However, losses expected as a result of future events, regardless of

likelihood, are not recognized.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is

objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

(i) Financial assets measured at amortized cost

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its

carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest

rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured

by using prices from any observable current market transactions. The Group can recognize impairment losses directly or

establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases

and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an

improvement in the debtor's credit rating), the previously recognized impairment loss shall be reversed either directly or by

adjusting an allowance account.

(ii) Financial assets carried at cost

If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at

fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled

by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference

between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the

current market rate of return for a similar financial asset. Such impairment losses shall not be reversed.

(iii) Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive

income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other

comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the

financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity

instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair

value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event

occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the

amount of the reversal recognized in profit or loss.




28


(j) Property, Plant and Equipment

Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less

accumulated depreciation and accumulated impairment losses. 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. In

addition, in the preparation of the opening K-IFRS consolidated statement of financial position on the date of transition to

K-IFRS, the Group measures certain property, plant and equipment except for buildings at fair value at the date of

transition, which is deemed cost, in accordance with K-IFRS No. 1101.

Subsequent to initial recognition, an item of property, plant and equipment shall be carried at its cost less any accumulated

depreciation and any accumulated impairment losses.

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 item will flow to the Group and the cost of

the item can be measured reliably. 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, 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. A component

that is significant compared to the total cost of property, plant and equipment is depreciated over its separate useful life.

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 in profit or loss.

The estimated useful lives of the Group’s assets are as follows:


Buildings 10 ~ 50

Structures 5 ~ 48

Machinery 2 ~ 30

Vehicles 3 ~ 9

Display fixtures 4 ~ 10

Other property, plant and equipment (“Other PP&E”) 2 ~ 20

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.




29


(k) Intangible Assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and

accumulated impairment losses.

Amortization of intangible assets except for goodwill 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,

as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this

intangible asset is determined as having indefinite useful lives and not amortized.


Industrial property rights 5 ~ 10

Rights to use facility 4 ~ 20

Film copyrights Duration of related revenue to be realized

Other intangible assets 2 ~ 10

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 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.

Goodwill recognized on business combination is included in intangible assets. The Group retroactively restated amounts

related to business combinations that occurred after January 1, 2010, in accordance with K-IFRS. Goodwill related to

business combinations that occurred before January 1, 2010 is included on the basis of its deemed cost, which represents

the amount recognized under K-GAAP. Goodwill acquired after January 1, 2010 is recognized as the fair value of the

consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net

recognized amount of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date.

When the Group’s interest in the fair value of the acquiree’s net identifiable assets acquired and liabilities assumed exceeds

consideration, the difference is immediately recognized in the statement of income for the period.

Goodwill is measured at cost less accumulated impairment losses. The acquisition of additional non-controlling interest

while retaining control is accounted for as shareholder transaction and as a result no goodwill is recognized.




30


(l) Investment Property

Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property.

Investment property is measured initially at its cost. Transaction costs are included in the initial measurement.

Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses

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 item will flow to the Group and the cost of the item can be

measured reliably. 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.

Investment properties, except for land, are depreciated on a straight-line basis over 10 to 50 years, the estimated useful lives.

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

The change is accounted for as a change in an accounting estimate.

(m) Impairment of Non-financial Assets

The carrying amounts of the Group’s non-financial assets, other than assets arising from 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 amount to their

carrying amount.

The Group estimates the recoverable amount of an individual asset, if it is impossible to measure the individual recoverable

amount of an asset, then 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 reflect 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. Impairment

losses are recognized in profit or loss.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising

from the goodwill acquired. 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.




31


(n) Leases

The Group classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where

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.

(i) Finance leases

At the commencement of the lease term, the Group recognizes as finance assets and finance liabilities in its consolidated

statements 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 charge and the reduction of the outstanding liability. The

finance charge 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 lessee adopts for depreciable assets that are owned. If there is

no reasonable certainty that the lessee 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 asset may be impaired.

(ii) 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 period of the lease.

(o) 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. The Group

immediately recognizes other borrowing costs as an expense. To the extent that the Group borrows funds generally and

uses them for the purpose of obtaining a qualifying asset, the Group shall determine the amount of borrowing costs eligible

for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be 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 shall not exceed the amount of borrowing costs incurred during that period.




32


(p) 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.

(i) 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, transaction costs that

are directly attributable to the acquisition are recognized in profit or loss as incurred.

(ii) 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 acquisition. Subsequent to initial recognition, other financial

liabilities are measured at amortized cost using the effective interest method.

The Group derecognizes a financial liability from the consolidated statement of financial position when it is extinguished

(i.e. when the obligation specified in the contract is discharged, cancelled or expires).

(q) Employee Benefits

(i) 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 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.

(ii) 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 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, less the fair value of any related

assets. The present value is determined by discounting the expected future cash flows using the interest rate of corporate

bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same

currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in

the period in which they arise.

(iii) Retirement benefits: defined contribution plans

When an employee has rendered 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.




33


(q) Employee Benefits, Continued

(iv) Retirement benefits: defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net

obligation in respect of defined benefit plans is calculated by estimating 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.

The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the

projected unit credit method.

The discount rate is the yield at the reporting date on corporate bonds that have maturity dates approximating the terms of

the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The

Group recognizes all actuarial gains and losses arising from actuarial assumption changes and experiential adjustments in

other comprehensive income when incurred.

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 total of cumulative unrecognized past service cost and 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.

Past service costs which are the change in the present value of the defined benefits obligation for employee service in prior

periods, resulting in the current period from the introduction of, or change to post-employment benefits, is recognized as an

expense on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits

are already vested immediately following the introduction of, or changes to, a defined benefit plan, the Group recognizes

the past service cost immediately.

(r) 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 shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the

entity settles the obligation. The reimbursement shall be treated as a separate asset.

The Group provides an allowance for credit card assets at the amount that equals the product of the following:

unused credit commitment multiplied by credit conversion factor and

provision rate per BASEL discounted by the effective interest rate.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. 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.




34


(s) Foreign Currencies

(i) 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 using the reporting date’s exchange rate. 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, a financial liability designated as a hedge of the net investment in a

foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income. Non-monetary

items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of

the transaction.

(ii) 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.

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.

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the

settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to

form part of the net investment in the foreign operation, are recognized in other comprehensive income in the translation

reserve.




35


(t) Equity 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.

Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any

dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the

Company’s shareholders.

Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders,

or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in profit or loss as

accrued.

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 retains treasury shares, the

consideration paid or received is directly recognized in equity.

(u) Revenue

Revenue from sale of goods, rendering of services or use of the Group assets is measured at the fair value of the

consideration received or receivable, net of returns, trade discounts and volume rebates and are recognized as a reduction of

revenue.

Goods sold

Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the

significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the

associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement

with the goods, and the amount of revenue can be measured reliably.

The Company, Lotte Midopa Co., Ltd. and Lotte Square Co., Ltd. recognize sales on a gross basis for merchandise of

which the Company, Lotte Midopa Co., Ltd. and Lotte Square Co., Ltd. bear the overall inventory risk in connection with

purchase contracts with vendors where the merchandise may only be returned for a full refund prior to the end of the

relevant season (for seasonal merchandise) or within 90 days from delivery (for non-seasonal merchandise). The Group

recognizes sales on a net basis for merchandise that may be returned to vendors at any time.

Customer Loyalty Programs

For customer loyalty programs, the fair value of the consideration received or receivable from the initial sale is allocated

between the award credits (“points”) and the other components of the sale. The Group supplies all of the awards with its

products. The amount allocated to the points is estimated by reference to the fair value of its products for which they

could be redeemed, since the fair value of the points themselves is not directly measurable. The fair value of its products

is estimated taking into account the expected redemption rate and the timing of such expected redemptions. Such amount

is deferred and revenue is recognized only when the points are redeemed and the Group has fulfilled its obligations to

supply its products.




36


(u) Revenue, Continued

Commissions

When the Group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the

net amount of commission made by the Group.

Rental income

Rental income, net of lease incentives granted, from investment property is recognized in profit or loss on a straight-line

basis over the term of the lease.


The Group recognizes interest and fee income from cardholders and merchants on an accrual basis. Certain fees

associated with lending activities which meet specified criteria, are deferred and amortized over the life of the loan as an

adjustment to the carrying amount of the loan. The amortization of deferred fee is recognized as operating revenue.

(v) Finance Income and Finance Costs

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend

income, gains on the disposal of available-for-sale financial assets, changes in the fair value of financial assets at fair value

through profit or loss, 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 method. Dividend income is recognized in profit or loss

on the date that the Group’s right to receive payment is established, which in the case of quoted securities is the ex-

dividend date.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, dividends on preference

shares classified as liabilities, changes in the fair value of financial assets at fair value through profit or loss, impairment

losses recognized on financial assets, and losses on hedging instruments that are recognized in profit or loss. Borrowing

costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in

profit or loss using the effective interest method.




37


(w) 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 other

comprehensive income.

(i) 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 any adjustment to tax payable in respect of previous years.

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.

(ii) 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. A deferred

tax liability is recognized for all taxable temporary differences. A deferred tax asset is recognized for all deductible

temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized.

However, deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on

the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business

combination and that affects neither accounting profit or loss nor taxable income.

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 a deferred tax asset for all deductible temporary differences arising from investments in

subsidiaries and associates, 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 settle current tax

liabilities and assets on a net basis.




38


(x) 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 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 convertible notes.

(y) Discontinued operations

A discontinued operation is a component of the Group’s business that represents a separate major line of business or

geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a

view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to

be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative

consolidated statement of comprehensive income is re-presented as if the operation had been discontinued from the start of

the comparative period.

(z) New Standards and Interpretations not yet adopted

The following new standards, interpretations and amendments to existing standards have been published and are mandatory

for the Group for annual periods beginning after January 1, 2011, and the Group has not early adopted them.

Management believes the impacts of these new pronouncements on the Group’s consolidated financial statements are not

significant.


The amendments require disclosing the nature of the transferred assets, their carrying amount, and the description of risks

and rewards for each class of transferred financial assets that are not derecognized in their entirety. If the Group

derecognizes transferred financial assets but still has their specific risks and rewards, the amendments require additional

disclosures on their effect of risks. The amendments will be applied prospectively for the Group’s annual periods

beginning on or after July 1, 2011.


The standard requires recognition of actuarial gains and losses immediately in other comprehensive income and to calculate

expected return on plan assets based on the rate used to discount the defined benefit obligation. The standard will be

applied retrospectively for the Group’s annual periods beginning on or after January 1, 2013.

(iii) K-IFRS No. 1113 Fair Value Measurement

The standard defines fair value and a single framework for fair value, and requires disclosures about fair value

measurements. The standard will be applied prospectively for the Group’s annual periods beginning on or after January 1,

2013.




39

4. Business Combination and Additional Acquisitions from Entities Under Common Control

(a) Business combination

Significant business combinations of the Group are as follows:

(i) Acquisition of department stores and discount stores

The Group entered into an agreement to acquire department stores and discount stores from GS Retail Co., Ltd on February

9, 2010. On May 31, 2010, the related department stores business was acquired by a subsidiary of the Group, Lotte

Square., Ltd, established in 2010, and the related discount stores business was acquired by the Company. There was no

contingent consideration. Goodwill arising from the acquisition primarily results from synergies the Company and its

subsidiaries expect to be realized. The amounts of sales and net profit of department stores from GS Retail Co., Ltd since

the acquisition date to December 31, 2010 in consolidated sales and net profit amounted to ￦311,672 million and ￦9,877

million, respectively. The amounts of sales and net profit of discount stores from GS Retail Co., Ltd since the acquisition

date to December 31, 2010 in consolidated sales and net profit amounted to ￦388,446 million and ￦9,880 million,

respectively.

(ii) Stock Acquisition of Lucky Pai Limited

The Group obtained control of Lucky Pai Limited by acquiring 63.22% of its capital stock for September 30, 2010 in order

to expand the Group’s home shopping business in China. There was no contingent consideration. Goodwill arising from

the acquisition primarily results from synergies the Company and its subsidiaries expect to be realized. The amounts of

sales and net profit of department stores since the acquisition date to December 31, 2010 in consolidated sales and net loss

amounted to ￦15,542 million and ￦3,085 million, respectively.

(iii) Acquisition of eB Card Co., Ltd and its subsidiaries

The Group obtained control of eB Card Co., Ltd. by acquiring 95% of its capital stock for ￦35,508 million in cash on July

27, 2010. In addition, as part of the acquisition, the Group also participated in the share offering by eB Card Co., Ltd. for

￦61,163 million. On July 30, 2010, separate from the above acquisition, eB Card Co., Ltd acquired 100% of the capital

stock of Gyeonggi Smartcard Co., Ltd., Inchon Smartcard Co., Ltd., and Chungnam Smartcard Co., Ltd. for ￦52,155

million. The eB Card Co., Ltd and its subsidiaries are engaged in issuing transportation card and managing related

services. There was no contingent consideration. Goodwill arising from the acquisition primarily results from synergies the

Company and its subsidiaries expect to be realized. The amounts of sales and net profit of department stores since the

acquisition date to December 31, 2010 in consolidated sales and net loss amounted to ￦21,065 million and ￦2,643

million, respectively.

(iv) Acquisition of NCF Co., Ltd

The Group acquired 94.5% and control of the capital stock of a fashion company, NCF Co., Ltd on December 31, 2010 in

order to expend the Group’s fashion business. There was no contingent consideration.

(v) Acquisition of Buy the way Inc.

The Group acquired 100% of the capital stock of a private entity, Buy the way Inc., specializing in the convenience store

business on April 20, 2010 in order to increase the Group’s market share of convenience stores business. There was no

contingent consideration. Goodwill arising from the acquisition primarily results from synergies the Company and its

subsidiaries expect to be realized. The amounts of sales and net profit since the acquisition date to December 31, 2010 in

consolidated sales and net profit amounted to ￦335,379 million and ￦8,958 million, respectively.




40

4. Business Combination and Additional Acquisitions from Entities Under Common Control, Continued

(a) Business combination, continued

The following summarized pro-forma consolidated statement of comprehensive income information assumes that all the

above acquisitions occurred as of January 1, 2010. The pro-forma results reflect certain adjustments related to the

acquisition, such as increased depreciation and amortization expense on assets acquired resulting from the fair valuation of

assets acquired in place on acquisition dates. The pro-forma results do not include any anticipated cost synergies or other

effects of the planned integration of the acquirees.

If the Group had acquired the above businesses as of January 1, 2010, pro-forma consolidated sales and pro-forma

consolidated net profit for the year ended December 31, 2010 would have been ￦19,717,601 million and ￦1,108,088

million, respectively.

The following summarizes major classes of consideration transferred at the acquisition dates.


Description

GS Retail Co., Ltd

Department store

business

GS Retail Co.,

Ltd discount store

business

Lucky Pai

Limited

eB Card Co., Ltd

and its

subsidiaries

NCF

Co., Ltd

Buy the

way Inc.

Total

consideration

transferred ￦ 520,843 826,543 135,695 96,671 18,876 274,000

The following summarizes the recognized amounts of assets acquired and liabilities assumed at the acquisition dates.


Accounts

GS Retail Co., Ltd

Department store

business

GS Retail Co.,

Ltd discount store

business

Lucky Pai

Limited

eB Card Co.,

Ltd and its

subsidiaries

NCF

Co., Ltd

Buy the

way Inc.

Cash and cash equivalents ￦ - - 12,714 35,502 3,066 10,287 Property, plant and equipment 367,924 428,401 10,935 4,429 1,428 45,131 Investment property - - 26 - - - Intangible assets 5,237 18 6,484 28,932 33 42,596 Inventories 2,118 18,434 10,817 653 8,060 15,229 Trade and other receivables 10,997 7,815 1,951 30,159 6,109 8,836 Other financial assets - - - - 7,500 - Tax assets - - - - 2,255 - Other assets (deposits, etc) 706 86,934 5,737 43,424 879 77,375

Total assets 386,982 541,602 48,664 143,099 29,330 199,454

Trade and other payables 77,641 44,450 21,846 - 12,311 78,697 Other financial liabilities - - 3,355 67,355 - - Tax liabilities - - - 10,004 - 8,687 Other liabilities 5,626 6,359 1,718 48,313 2,870 45,379

Total liabilities 83,267 50,809 26,919 125,672 15,181 132,763

Total identifiable net assets ￦ 303,715 490,793 21,745 17,427 14,149 66,691




41

4. Business Combination and Additional Acquisitions from Entities Under Common Control, Continued

(a) Business combination, continued

Goodwill recognized as a result of business combinations is as follows:


Accounts

GS Retail Co., Ltd

Department store

business

GS Retail Co., Ltd

discount store

business

Lucky Pai

Limited

eB Card Co.,

Ltd and its

subsidiaries

NCF

Co., Ltd.

Buy the

way Inc.

Total consideration

transferred ￦ 520,843 826,543 135,695 96,671 18,876 274,000 Non-controlling interests - - 6,866 871 778 - Subtotal 520,843 826,543 142,561 97,542 19,654 274,000 Less: Fair value of identifiable

net assets 303,715 490,793 21,745 17,426 14,149 66,691 Goodwill ￦ 217,128 335,750 120,816 80,116 5,505 207,309

For each of the business combinations above, non-controlling interests at the acquisition date were measured using their

proportionate share in the recognized amounts of the acquirees’ identifiable net assets.

(b) Additional acquisition of subsidiaries’ shares

During 2011, the Group acquired additional shares of its subsidiaries as follows:

Korean won

(millions)

Percentage of ownership (%)

Korean won

(millions)

Subsidiaries

Additional

acquisition

Before

additional

acquisition

After

additional

acquisition

Book Value of

the net assets


Co., Ltd. ￦ 14,250 95.00

95.00 ￦ 14,638


13,387 100.00

100.00

18,020


Co., Ltd.

21,578 100.00

100.00

22,257


21,652 100.00

100.00

76,349

Lotte Cinema Vietnam Co., Ltd

3,851 90.00

90.00

3,342

Lucky Pai Limited

19,699 63.22

73.80

12,586


Ltd

18,360 100.00

100.00

49,125


47,666 80.00

94.55

8,124

Total ￦ 160,443




42

5. Risk Management

(a) Management of financial risks

Objectives and Policies of the Group

Risk management activities of the Group identify credit risk, liquidity risk, market risk and any other potential risk that

may affect financial performance and by eliminating, avoiding and abating the possible risk level to an acceptable range

and to support to a stable and consistent business performance with the intention to contribute to strengthening the Group’s

competitiveness by reducing costs of finance through improving the financial structure and enhancing the efficiency of its

capital operations.

In order to install and implement the financial risk management system, the Group has established risk management

policies in an integrated perspective, and is complying with the risk management policies and procedures by strictly

performing control and review of internal managers.

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 in an ordinary transaction or investment activity.

Most of the Group’s profit is generated from individual clients and carries low credit risk. Also, the Group deposits its

cash and cash equivalents and short-term financial instruments with financial institutions. Credit risks from these

financial institutions are very limited due to their high solvency.

1) Exposure to credit risk

The book value of a financial asset represents the maximum exposure to credit risk. The maximum exposures to credit

risk as of December 31, 2011, 2010 and January 1, 2010 are as follows:


Account

December

31, 2011

December

31, 2010

January

1, 2010

Cash and cash equivalent(*1) ￦ 1,895,258

1,157,526 923,634


636,502

461,341 359,373

Current other financial assets(*2)

7,732,819

6,484,423 4,604,040

Non-current other financial assets(*2)

947,313

958,125 929,359

Total ￦ 11,211,892

9,061,415 6,816,406

(*1) Cash held by the Group are excluded as there is no exposure to credit risk.

(*2) Equity securities within available-for-sale financial assets are excluded as there is no exposure to credit risk.




43

5. Risk Management, Continued

(a) Management of financial risks, continued

2) Impairment loss

Trade and other receivables, other financial assets (current), and other financial assets (non-current), before deducting

the allowance for doubtful accounts as of December 31, 2011, 2010 and January 1, 2010, are summarized as follows:


December 31, 2011

Description

Receivables that are

neither past due

nor impaired

Receivables that are past due as

at the end of the reporting period

but not impaired

Receivables

impaired(*) Total

Trade and other receivables ￦ 618,088 18,414 11,928 648,430


(current)

7,661,463 64,511 17,569 7,743,543

Other financial assets (non-

current)

947,313 - - 947,313

Total ￦ 9,226,864 82,925 29,497 9,339,286

(*) The Group sets up an allowance for doubtful account when financial assets are individually determined to be impaired.




44




December 31, 2010

Description


neither past due nor

impaired



but not impaired

Receivables

impaired(*) Total



(current)

6,433,203 49,816 32,513 6,515,532


current)

958,125 - - 958,125

Total ￦ 7,830,712 64,376 48,555 7,943,643



January 1, 2010

Description



impaired



but not impaired

Receivables

impaired(*) Total



(current)

4,572,370 27,666 20,054 4,620,090


current)

929,359 - - 929,359

Total ￦ 5,849,273 39,253 26,005 5,914,531





45



3) Allowance for doubtful trade and other receivables

The movement in the allowance for doubtful trade and other receivables for the years ended December 31, 2011 and

2010 are summarized as follow:


2011

2010

Balance at beginning of period ￦ 8,645

5,709

Impairment loss

3,283

2,936

Balance at end of period ￦ 11,928

8,645

The movement in the allowance for doubtful other financial assets (current) for the years ended December 31, 2011 and



2011

2010


126,896

Recognition of impairment loss

32,844

63,563


190,459

4) Financial assets that are past due as at the end of the reporting period but not impaired

An analysis of the age of trade and other receivables, other financial assets (current), and other financial assets (non-

current) that are past due as at the end of the reporting period but not impaired are summarized as follows:


December 31, 2011

Description

Carrying

amount

3 months

or less

3 ~ 6

months

6 ~ 12

months

More than

1 year

Trade and other

receivables ￦ 18,414 6,104 2,284 2,200 7,826


(current) 64,511 64,511 - - -


(non-current) - - - - -

Total ￦ 82,925 70,615 2,284 2,200 7,826




46




December 31, 2010

Description

Carrying

amount

3 months

or less

3 ~ 6

months

6 ~ 12

months

More than

1 year

Trade and other

receivables ￦ 14,560 4,737 966 1,147 7,710


(current) 49,816 49,816 - - -



Total ￦ 64,376 54,553 966 1,147 7,710


January 1, 2010

Description

Carrying

amount

3 months

or less

3 ~ 6

months

6 ~ 12

months

More than

1 year

Trade and other

receivables ￦ 11,587 8,450 231 1,098 1,808


(current) 27,666 27,666 - - -



Total ￦ 39,253 36,116 231 1,098 1,808

5) Guarantees

The Group has provided guarantees to its related companies as discussed in note 38 to the consolidated financial

statements.




47



Liquidity Risks

Liquidity risk is the risk that the Group will encounter difficulty in meeting its obligations associated with its financial

liabilities that are settled by delivering cash or another financial asset due to an adverse managerial or external environment.

In order to systematically manage liquidity risk, the Group predicts and corresponds to potential risks through consistently

analyzing the schedule of cash flow and establishing short-term and long-term capital management plans.

Also, the Group currently deposits a considerable amount with financial institutions with high credit ratings to make proper

provisions for potential liquidity risks. The Group maintains a credit line for overdraft and general loans with various

financial institutions, and can raise funds through the domestic and foreign financial markets based on high credit ratings.

The management of the Group believes that it is possible to redeem liabilities using cash flows from operating activities

and cash in-flow from financial assets.

Aggregate maturities of non-derivative financial liabilities, including estimated interest, as of December 31, 2011 are as

follows:

(*) Derivative financial liabilities are excluded in the maturity analysis.

It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly

different amounts.


Account

Carrying

amount

Contractual cash

flows

Within 1 year

1~5 years

Current portion of borrowings and

debentures ￦ 3,447,284 3,481,363

3,481,363

-


4,724,017 4,724,017

4,724,017

-

Current other financial liabilities

(*)

456,433 473,618

473,618

-

Borrowings and debentures

6,738,647 6,986,730

-

6,986,730

Non-current other financial

liabilities (*) 152,587 161,731

-

161,731

Total ￦ 15,518,968 15,827,459

8,678,998

7,148,461




48



Market Risks

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will

affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management

is to manage and control market risk exposures within acceptable parameters, while optimizing the Group’s return.

The Group buys and sells derivatives, and also incurs financial liabilities, in order to manage market risks. All such

transactions are carried out under strict supervision of the internal risk management. Generally, the Group seeks to apply

hedge accounting in order to manage volatility in profit or loss.

1) Currency risk

The Group is exposed to currency risk on borrowings and debentures that are denominated in a currency other than the

respective functional currencies of the Group. Currencies that generate exchange positions include USD, JPY and

others. The objective of exchange risk management is to continue stable financial activities by minimizing uncertainty

and profit and loss fluctuations. Foreign currency trade for speculation is strictly prohibited.

The Group enters into currency swap transactions with financial institutions to hedge currency risks of foreign currency

denominated borrowings and debentures. When the Group needs foreign currencies, the Group enters into a forward

exchange contract with major financial institutions to avoid the risks of exchange rate fluctuations.

The closing rates as of December 31, 2011, 2010 and January 1, 2010 and the average rates for the years ended

December 31, 2011 and 2010 are as follows:

Average rate

Closing rate

2011

2010

December

31, 2011

December

31, 2010

January

1, 2010

USD ￦ 1,108.11

1,156.26

1,153.30

1,138.90 1,167.60

EUR

1,541.42

1,532.94

1,494.10

1,513.60 1,674.28

JPY

13.9131

13.2056

14.8516

13.9708 12.6282




49



The Group regularly measures exchange risks on Korean won against foreign currency fluctuations. The Group

assumes that foreign currency exchange rates fluctuate 10% at the end of reporting period, and others variables are not

changed. Sensitivity analysis of income before taxes from changes of foreign currency exchange rate as of December

31, 2011, 2010 and January 1, 2010 are summarized as follows:


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

10%

increase

10%

decrease

10%

increase

10%

decrease

10%

increase

10%

decrease

USD ￦ (45,944) 45,944 709 (709) 6,604 (6,604)

EUR (18) 18 (74) 74 (99) 99

JPY (44,576) 44,576 (41,891) 41,891 (37,870) 37,870

Total ￦ (90,538) 90,538 (41,256) 41,256 (31,365) 31,365

Borrowings and debentures with currency swaps and overseas convertible bonds designated as financial liabilities at fair

value through profit or loss are not included. The sensitivity analysis above is related to the monetary assets and

liabilities, denominated in a currency other than the Group’s functional currency, as of December 31, 2011, 2010 and

January 1, 2010 of the Group entities in Korea.

2) Interest rate risk

Interest rate risk is the risk of changes in interest income and expense from deposits and borrowings due to fluctuations

in the market interest rate. Interest rate risk of the Group arises on variable interest rate financial instruments and

borrowings. The purpose of interest rate risk management is to minimize value fluctuation of financial assets and

liabilities that occur from uncertainty caused by changes in interest rates.

The Group makes interest swap transactions with financial institutions for hedging interest rate risk of variable

borrowings and debentures.

At the reporting date the interest rate profile of the Group’s variable interest-bearing financial instruments was:


December 31,

2011

December

31, 2010

January

1, 2010


Financial assets ￦ 378,997

381,632 447,155

Financial liabilities

2,925,941

3,917,048 2,016,950




50



Sensitivity analysis of interest income and expenses from changes in interest rates as of December 31, 2011, 2010 and

January 1, 2010 are summarized as follows:



100bps

up

100bps

down

100bps

up

100bps

down

100bps

up

100bps

down

Interest income ￦ 4,116 (4,116) 3,981 (3,981) 4,472 (4,472)

Interest expense 7,865 (7,865) 7,237 (7,237) 2,316 (2,316)

Borrowings and debentures for which the Company has entered into interest rate swap transactions are not included.

(b) Capital Management

The objective of the Group’s capital management is maximizing shareholders’ profit through maintaining a sound capital

structure. The Group makes necessary improvements to the capital structure through monthly monitoring of financial

ratios such as liabilities to equity ratios and net borrowings to equity ratios in order to achieve an optimal capital structure.

The liabilities to equity ratios and net borrowings to equity ratios as of December 31, 2011, 2010 and January 1, 2010 are

as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Liabilities (a) ￦ 18,382,115

15,549,532 11,197,724

Equity (b)

14,679,005

13,641,998 12,549,025

Financial instruments (*) (c)

2,640,760

1,570,178 1,380,833

Borrowings (d)

10,185,931

8,395,425 5,336,618

Liabilities to equity ratio (a/b)

125.23%

113.98% 89.23%

Net borrowings to equity ratio ((d-c)/b)

51.40%

50.03% 31.52%

(*) Financial instruments mainly consist of ordinary deposits, checking accounts, short-term and long-term financial

instruments.




51

6. Trade and Other Receivables

Trade and other receivables as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Trade receivables ￦ 444,143 324,302 267,194

Other receivables 204,287 145,684 97,888

Allowance for doubtful accounts (11,928) (8,645) (5,709)

Trade and other receivables ￦ 636,502 461,341 359,373

7. Restricted Deposits

Restricted deposits included in short-term and long-term financial instruments as of December 31, 2011, 2010 and January

1, 2010 are summarized as follows:


Description Depositary December 31,

2011

December

31, 2010

January

1, 2010

Current:

Time deposits Woori Bank and others ￦ 23,320 27,891 20,375

Special deposits Industrial Bank of Korea 74,500 55,000 -

Non-current:

Time deposits Shinhan Bank 8 - 12,508

Special deposits Shinhan Bank and others 81 86 92

Available-for-sale

financial assets

Gyeongsangnam-do

Metropolitan

Government and others 32,211 49,033 37,099

Money Market Fund Citibank and others 22,415 15,285 10,164

Total ￦ 152,535 147,295 80,238




52

8. Fair Value of Financial Instruments

(a) Other financial assets as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


Account December

31, 2011

December

31, 2010

January

1, 2010

Current:

Short-term financial instruments ￦ 745,294 412,452 444,696

Short-term loans 7,702 2,118 5,898

Available-for-sale financial assets 9,762 7,698 10,917

Current derivative assets held for

the purpose of hedging 27,545 126,755 -

Other financial assets 20 - -

Accrued income 48,980 41,387 29,010

Short-term deposits 91,121 76,375 70,373

Card business financial assets 6,802,395 5,820,509 4,045,905

Subtotal 7,732,819 6,487,294 4,606,799

Non-current:

Long-term financial instruments 209 200 12,503

Guarantee deposits 81 86 92


Held-to-maturity investment 10 - 1,000

Long-term loans 76,399 77,936 50,604

Long-term deposits 923,433 811,776 617,269

Non-current derivative assets held

for the purpose of hedging 12,283 63,818 195,330


for the purpose of trading 1,697 34,879 31,817

Long-term trade receivables 6,080 5,993 -

Long-term other receivables - 257 53

Subtotal 1,651,237 1,609,875 1,413,512

Total ￦ 9,384,056 8,097,169 6,020,311




53

8. Fair Value of Financial Instruments, Continued

(b) The carrying amount and the fair value of financial instruments as of December 31, 2011, 2010 and January 1, 2010 are

summarized as follows:



Carrying

amount Fair value

Carrying

amount Fair value

Carrying

amount

Fair value

Cash and cash

equivalents Cash and cash equivalents ￦ 1,958,204 1,958,204 1,242,426 1,242,426 998,865 998,865

Financial assets at

fair value through

profit or loss

Non-current derivative

assets held for the

purpose of trading 1,697 1,697 34,879 34,879 31,817 31,817

Loans and

receivables(*1) Trade and other

receivables 636,502 636,502 461,341 461,341 359,373 359,373

Short-term financial

instruments 745,294 745,294 412,452 412,452 444,696 444,696

Short-term loans 7,702 7,702 2,118 2,118 5,898 5,898

Other financial assets 20 20 - - - -

Accrued income 48,980 48,980 41,387 41,387 29,010 29,010

Short-term deposits 91,121 91,121 76,375 76,375 70,373 70,373

Long-term financial

instruments 209 209 200 200 12,503 12,503

Guarantee deposits 81 81 86 86 92 92

Long-term loans 76,399 76,399 77,936 77,936 50,604 50,604

Long-term deposits 923,433 923,433 811,776 811,776 617,269 617,269

Long-term trade accounts

receivable 6,080 6,080 5,993 5,993 - -

Long-term other accounts

receivable - - 257 257 53 53

Card financial assets 6,802,395 6,802,395 5,820,509 5,820,509 4,045,905 4,045,905

Subtotal 9,338,216 9,338,216 7,710,430 7,710,430 5,635,776 5,635,776

Available-for-sale

financial assets Marketable available-for-

sale financial assets (*2) 316,070 316,070 301,096 301,096 260,297 260,297

Non-marketable available-

for-sale financial assets

(*3) 324,737 324,737 321,532 321,532 255,464 255,464

Subtotal 640,807 640,807 622,628 622,628 515,761 515,761

Held-to-maturity

investment Held-to-maturity

investment 10 10 - - 1,000 1,000

Derivative assets held

for the purpose of

hedging

Current derivative assets-

hedge 27,545 27,545 126,755 126,755 - -


assets-hedge 12,283 12,283 63,818 63,818 195,330 195,330

Subtotal 39,828 39,828 190,573 190,573 195,330 195,330

Total ￦ 11,978,762 11,978,762 9,800,936 9,800,936 7,378,549 7,378,549




54


(*1) Book value is considered as a fairly reasonable approximate value of fair value.

(*2) Marketable available-for-sale financial assets are measured at fair value based on the market prices which are traded

in the active market.

(*3) Some of non-marketable available-for-sale financial assets that do not have a quoted market price in an active market

are measured at fair value based on valuation of external valuation agencies as of the end of reporting period. Others

are recorded based on acquisition cost because fair value cannot be reliably measured and difference between fair

value and acquisition cost is immaterial.

(c) The carrying amount and the fair value of financial liabilities as of December 31, 2011, 2010 and January 1, 2010 are




Carrying

amount Fair value

Carrying

amount Fair value

Carrying

amount Fair value

Financial liabilities at

fair value through

profit or loss

Overseas convertible

bonds ￦ 1,007,219 1,007,219 - - - -


based on amortized

cost(*)

Trade and other

payables 4,724,017 4,724,017 4,036,750 4,036,750 3,269,020 3,269,020

Short-term borrowings 1,176,921 1,176,921 1,298,597 1,298,597 974,720 974,720

Current portion of

long-term

borrowings 762,793 762,793 98,184 98,184 70,532 70,532

Current portion of

debentures 1,507,570 1,507,570 1,940,098 1,940,098 833,525 833,525

Current finance lease

liabilities 7 7 - - 538 538

Accrued expenses 217,483 217,483 135,463 135,463 42,081 42,081

Current withholding

deposit 238,789 238,789 249,799 249,799 254,288 254,288

Long-term borrowings 348,619 348,619 765,346 765,346 434,308 434,308

Long-term debentures 5,382,809 5,382,809 4,293,200 4,293,200 3,023,533 3,023,533

Withholding deposit 152,342 152,342 106,216 106,216 34,825 34,825

Rental guarantee

deposits 118 118 - - 9 9

Other current

liabilities 153 153 829 829 321 321

Other non-current

liabilities 127 127 42 42 591 591

Subtotal 14,511,748 14,511,748 12,924,524 12,924,524 8,938,291 8,938,291

Derivative liabilities

held for the purpose

of hedging

Current derivative

liabilities-hedge

15,075 15,075 43,492 43,492 3,220 3,220


liabilities -hedge 12,689 12,689 13,227 13,227 - -

Subtotal 27,764 27,764 56,719 56,719 3,220 3,220

Total ￦ 15,546,731 15,546,731 12,981,243 12,981,243 8,941,511 8,941,511




55


(*) Book value is considered as a fairly reasonable approximate value of fair value.

(d) The fair value hierarchy

The Group classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used

in making the measurements.

The different levels have been defined 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).

The fair value measurements classified by fair value hierarchy as of December 31, 2011 are as follows:

Description


2011

Level Ⅰ Level Ⅱ Level Ⅲ Total

Available-for-sale financial

assets ￦

316,070

44,467

218,009

578,546

Derivative assets

-

41,525

-

41,525

Total financial assets ￦ 316,070 85,992 218,009 620,071

Financial liabilities at fair value

through profit or loss

-

1,007,219

-

1,007,219


-

27,763

-

27,763

Total financial liabilities ￦

-

1,034,982

-

1,034,982




56

9. Inventories

(a) Inventories as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Merchandise, net of allowance for

valuation losses ￦ 2,008,138 1,657,158 1,343,722

Finished goods 7,438 5,405 25

Goods in process 1,576 564 160

Raw materials 1,444 1,145 1,820

Subsidiary materials 353 188 165

Supplies 3,723 2,613 4,334

Materials-in-transit 158 115 559

Finished apartment units 879 2,610 1,757

Unfinished apartment units 18,576 - 7,584

Total ￦ 2,042,285 1,669,798 1,360,126

(b) During 2011 and 2010, loss from valuation of inventory and reversal of loss on valuation of inventories are recognized

as follows:


2011 2010

Cost of goods sold:

- Loss on valuation of inventories ￦ 12,001

12,987




57

10. Other Non-financial Assets

(a) Other current non-financial assets as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Description


December

31, 2011

December

31, 2010

January

1, 2010

Advance payments ￦ 115,199 70,528 42,512

Prepaid expenses 186,450 95,038 61,786

Prepaid value added tax 55,694 - 17,300

Other 24 2,329 1,920

Total ￦ 357,367 167,895 123,518

(b) Other non-current non-financial assets as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Description


December

31, 2011

December

31, 2010

January

1, 2010

Long-term advance payments ￦ 126,007 105,996 78,916

Long-term prepaid expenses (*) 1,051,315 960,073 820,483

Other 5,676 756 4,394

Total ￦ 1,182,998 1,066,825 903,793

(*) Long-term prepaid expenses mainly consist of lease prepayments.




58

11. Investments in Associates

(a) The details of associates as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Company

December 31, 2011

Korean won

(millions)

Location

Principal

business

Percentage of

Ownership (%)

Balance at

December 31,

2011

Lotte Station Building Co., Ltd. Korea Distribution 25.00 ￦ 192,645

Daehong Communications Co., Ltd. Korea Advertisement agency 30.00 93,806

Lotte.Com Inc. Korea Distribution 34.39 9,686

Lotte Capital Co., Ltd. Korea Capital 22.36 111,280

Lotteria Co., Ltd. Korea Restaurant chain 38.68 210,427

FRL Korea Co., Ltd. Korea Retail 49.00 71,433

Lakepark Co., Ltd. Korea Real estate development 23.90 4,564

Lotte Asset Development Co., Ltd. Korea Real estate development 39.14 50,492

Zara Retail Korea Co., Ltd. Korea Retail 20.00 16,617

Lotte Buyeo Resort Co., Ltd. Korea Real estate development 22.22 13,381

Lotte Giants Korea Baseball club 30.00 2,220

Lakepark AMC Korea Real estate development 23.90 73

Lotte Europe Holdings B.V. Netherlands Holding company 30.81 63,619

Intime Lotte Department Store Co., Ltd.

(*1) China Distribution 50.00 -

Coralis S.A. Luxembourg Holding company 45.00 49,178

Bliss Co., Ltd. Korea Food manufacturing 30.00 -

D-Cinema of Korea Co., Ltd. (*1) Korea Film equipment 50.00 -

M-Venture Culture Investment L.P. Korea Film producing company 25.00 2,667

Capital One Diversity Cinema Fund Korea Film producing company 20.00 905

Capital One Middle-Low Budget Cinema

Fund Korea Film producing company 25.00 2,912

Shenyang SL Cinema Investment

Management Co., Ltd. (*1) China Cinema 49.00 1,219

So Big 5 Contents Investment Union Korea Film producing company 26.67 3,985

Shandong Luckypai TV Shopping China Distribution 49.00 6,075

Hubei XL Cinema Co., Ltd. China Cinema 49.00 5,317

STL Co., Limited (*1) Korea Retail 50.00 577

Hemisphere Film Investors II LLC (*2) America Film producing company 100.00 21,633

CJ Venture Investment No.14 Culture

Contents Fund Korea Film producing company 30.00 6,009

Total ￦ 940,720

(*1) Intime Lotte Department Store Co., Ltd., D-Cinema of Korea Co., Ltd., Shenyang SL Cinema Investment Management Co.,

Ltd. and STL Co., Limited are jointly controlled entities.

(*2) The Group is a non-managing partner of Hemisphere Film Investors II LLC and doesn’t have power to govern the financial

and operation policies of it, but has significant influence on the entity.




59

11. Investments in Associates, Continued

(a) The details of associates as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows, continued:

Company

December 31, 2010

Korean won

(millions)

Location

Principal

business

Percentage of

Ownership (%)

Balance at

December

31, 2010


Daehong Communications Co., Ltd. Korea

Advertisement

agency 30.00 100,454





Lakepark Co., Ltd. Korea

Real estate

development 23.90 4,034

Lotte Asset Development Co., Ltd. Korea

Real estate



Lotte Buyeo Resort Co., Ltd. Korea

Real estate


Lotte Giants Korea Baseball club 30.00 1,130

Lakepark AMC Korea

Real estate

development 23.90 72


Intime Lotte Department Store Co.,

Ltd. China Distribution 50.00 -


Bliss Co., Ltd. Korea

Food

manufacturing 30.00 150

D-Cinema of Korea Co., Ltd. Korea Film equipment 50.00 -

M-Venture Culture Investment L.P. Korea

Film producing

company 25.00 2,524

Capital One Diversity Cinema Fund Korea

Film producing

company 20.00 966

Shenyang SL Cinema Investment

Management Co., Ltd. China Cinema 49.14 699

Isu Entertainment Investment Union Korea

Film producing

company 37.50 2,023

Shandong Luckypai TV Shopping China Distribution 49.00 2,443

Total ￦ 869,505




60



Company

January 1, 2010

Korean won

(millions)

Location

Principal

business

Percentage of

Ownership (%)

Balance at

January

1, 2010



Advertisement

agency 30.00 84,640






Real estate



Real estate




Real estate


Lotte Giants Korea Baseball club 30.00 774

Lakepark AMC Korea

Real estate



Intime Lotte Department Store Co.,





Film producing

company 25.00 2,500


Film producing

company 37.50 1,962

KTB Media Investment Union Korea

Film producing

company 30.00 977

Total ￦ 671,946




61


(b) Changes in investments in associates for the years ended December 31, 2011 and 2010 are as follows:

Company

2011


Adjustment to

Beginning

balance

Acquisiti

on Dividends

Net

income

(loss)

Capital

adjustment

Other

Balance at

December

31, 2011

Lotte Station Building Co., Ltd. ￦ 172,984 - (1,350) 18,907 2,103 1 192,645

Daehong Communications Co.,

Ltd. 100,454 - (6) 11,257 (19,438) 1,539 93,806

Lotte.Com Inc. 10,444 - - (900) 242 (100) 9,686

Lotte Capital Co., Ltd. 93,557 - (1,683) 18,777 678 (49) 111,280

Lotteria Co., Ltd. 218,042 - - 7,666 (14,812) (469) 210,427

FRL Korea Co., Ltd. 47,191 - (3,528) 27,770 - - 71,433

Lakepark Co., Ltd. 4,034 - - 530 - - 4,564

Lotte Asset Development Co.,

Ltd. 40,342 8,877 - (1,529) 2,922 (120) 50,492

Zara Retail Korea Co., Ltd. 17,759 - - (1,142) - - 16,617

Lotte Buyeo Resort Co.,Ltd. 15,155 - - (1,773) - (1) 13,381

Lotte Giants 1,130 - - 1,121 - (31) 2,220

Lakepark AMC 72 - - 1 - - 73

Lotte Europe Holdings B.V. 100,380 - - (16,155) (20,606) - 63,619

Intime Lotte Department Store

Co., Ltd. - - - - - - -

Coralis S.A. 39,157 11,323 - 654 (1,956) - 49,178

Bliss Co., Ltd. 150 - - (148) (2) - -

D-Cinema of Korea Co., Ltd. - - - - - - -

M-Venture Culture Investment

L.P. 2,524 - - 143 - - 2,667

Capital One Diversity Cinema

Fund 966 - - (61) - - 905

Capital One Middle-Low

Budget Cinema Fund - 3,000 - (88) - - 2,912

Shenyang SL Cinema

Investment Management Co.,

Ltd. 699 744 - (302) 78 - 1,219

Isu Entertainment Investment

Union 2,023 - - - - (2,023) -

So Big 5 Contents Investment

Union - 4,000 - (15) - - 3,985

Shandong Luckypai TV

Shopping 2,442 - - 499 174 2,960 6,075

Hubei XL Cinema Co., Ltd. - 5,530 - (469) 257 - 5,318

STL Co., Limited - 1,000 - (424) - - 576

Hemisphere Film Investors II

LLC - 23,261 - (2,595) 967 - 21,633

CJ Venture Investment No.14

Culture Contents Fund - 6,000 - 9 - - 6,009

￦ 869,505 63,735 (6,567) 61,733 (49,393) 1,707 940,720




62


(b) Changes in investments in associates for the years ended December 31, 2011 and 2010 are as follows, continued:

Company

2010


Adjustment to

Beginning

balance Acquisition Dividends

Net

income

(loss)

Capital

adjustment

Other

Balance at

December

31, 2010

Lotte Station Building Co.,

Ltd. ￦ 152,526 - (1,350) 21,625 183 - 172,984

Daehong Communications

Co., Ltd. 84,640 - (6) 3,317 12,211 292 100,454

Lotte.Com Inc. 11,169 - (400) 10 (192) (143) 10,444

Lotte Capital Co., Ltd. 78,419 - (1,683) 16,290 531 - 93,557

Lotteria Co., Ltd. 123,976 48,156 - 27,460 18,687 (237) 218,042

FRL Korea Co., Ltd. 26,215 - - 20,976 - - 47,191

Lakepark Co., Ltd. 5,636 - (1,669) 67 - - 4,034

Lotte Asset Development

Co., Ltd. 44,356 - - (4,508) 494 - 40,342

Zara Retail Korea Co., Ltd. 16,106 - - 1,655 (2) - 17,759

Lotte Buyeo Resort Co.,Ltd. 10,006 6,667 - (1,486) (32) - 15,155

Lotte Giants 774 - - 356 - - 1,130

Lakepark AMC 72 - - - - - 72

Lotte Europe Holdings B.V. 95,194 22,341 - (12,127) (5,028) - 100,380

Intime Lotte Department

Store Co., Ltd. - - - - - - -

Coralis S.A. 17,418 26,390 - (258) (4,393) - 39,157

Bliss Co., Ltd. - 150 - - - - 150

D-Cinema of Korea Co.,

Ltd. - - - - - - -

M-Venture Culture

Investment L.P. 2,500 - - 24 - - 2,524

Capital One Diversity

Cinema Fund - 1,000 - (34) - - 966

Shenyang SL Cinema

Investment Management

Co., Ltd. - 752 - (65) 12 - 699

Isu Entertainment

Investment Union 1,962 - - 61 - - 2,023

KTB Media Investment

Union 977 - - (207) - (770) -

Bongil Logis - - - (50) - 50 -

Shandong Luckypai TV

Shopping - - - 1,137 - 1,305 2,442

Total ￦ 671,946 105,456 (5,108) 74,243 22,471 497 869,505




63


(c) Financial information of associates as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Company

December 31, 2011


Total

assets

Total

liabilities Sales

Net income

(loss)

Lotte Station Building Co., Ltd. ￦ 1,007,921 237,340 713,653 75,615

Daehong Communications Co., Ltd. 541,317 228,709 235,353 7,539

Lotte.Com Inc. 147,376 119,216 176,523 (4,121)

Lotte Capital Co., Ltd. 4,157,778 3,660,292 501,505 84,923

Lotteria Co., Ltd. 911,058 391,061 810,112 23,879

FRL Korea Co., Ltd. 265,861 120,079 414,231 56,674

Lakepark Co., Ltd. 41,090 21,995 64,038 2,214

Lotte Asset Development Co., Ltd. 202,199 74,079 21,202 (4,389)

Zara Retail Korea Co., Ltd. 138,992 55,908 149,480 776

Lotte Buyeo Resort Co.,Ltd. 177,117 116,901 8,893 (8,061)

Lotte Giants 12,682 5,282 40,060 3,669

Lakepark AMC 1,593 1,288 1,744 4

Lotte Europe Holdings B.V. 641,643 461,546 128,607 (59,508)

Intime Lotte Department Store Co., Ltd. 36,820 129,842 91,119 (28,149)

Coralis S.A. 205,094 130,326 - 1,471

Bliss Co., Ltd. 2,726 4,491 5,042 (2,215)

D-Cinema of Korea Co., Ltd. 77,645 82,541 17,513 (2,071)

M-Venture Culture Investment L.P. 10,721 53 1,210 584

Capital One Diversity Cinema Fund 4,600 75 147 (305)

Capital One Middle-Low Budget Cinema Fund 11,828 180 161 (352)

Shenyang SL Cinema Investment Management

Co., Ltd. 2,807 324 903 (620)

So Big 5 Contents Investment Union 14,943 - 248 (57)

Shandong Luckypai TV Shopping 22,832 13,236 29,337 1,198

Hubei XL Cinema Co., Ltd. 12,173 1,322 651 (958)

STL Co., Limited 2,666 1,514 422 (848)

Hemisphere Film Investors II LLC 21,633 - - (2,595)

CJ Venture Investment No.14 Culture Contents

Fund 20,085 54 87 31




64


(c) Financial information of associates as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows,

continued:

Company


Total

assets

Total

liabilities

Sales

Net income

(loss)

Lotte Station Building Co., Ltd. ￦ 936,947 245,013 674,601 86,446

Daehong Communications Co., Ltd. 518,558 183,844 200,222 11,047

Lotte.Com Inc. 103,424 73,058 135,010 123

Lotte Capital Co., Ltd. 3,351,938 2,933,514 412,930 73,653

Lotteria Co., Ltd. 861,953 338,459 615,919 14,468

FRL Korea Co., Ltd. 159,070 62,761 267,796 42,810

Lakepark Co., Ltd. 35,939 19,059 13,354 (1,783)

Lotte Asset Development Co., Ltd. 172,426 67,220 12,735 (11,792)

Zara Retail Korea Co., Ltd. 114,237 25,444 129,242 8,272

Lotte Buyeo Resort Co.,Ltd. 162,620 94,422 1,964 (6,685)

Lotte Giants 6,806 3,041 33,128 1,186

Lakepark AMC 1,552 1,250 1,630 -

Lotte Europe Holdings B.V. 830,626 530,316 71,761 (40,532)

Intime Lotte Department Store Co., Ltd. 44,231 103,837 69,764 (33,626)

Coralis S.A. 88,113 35,614 - (710)

Bliss Co., Ltd. 500 - - -

D-Cinema of Korea Co., Ltd. 68,139 70,964 9,944 (2,530)

M-Venture Culture Investment L.P. 10,100 3 283 77

Capital One Diversity Cinema Fund 4,868 38 121 (169)

Shenyang SL Cinema Investment Management

Co., Ltd. 3,735 2,312 - (133)

Isu Entertainment Investment Union 5,395 - 166 162

Shandong Luckypai TV Shopping 23,064 14,365 51,951 2,113




65


(c) Financial information of associates as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows,

continued:

January 1, 2010


Company

Total

assets

Total

liabilities

Total

Capital

Lotte Station Building Co., Ltd. ￦ 826,719 216,614 610,105

Daehong Communications Co., Ltd. 437,682 155,680 282,002

Lotte.Com Inc. 102,684 70,304 32,380

Lotte Capital Co., Ltd. 2,960,415 2,609,694 350,721

Lotteria Co., Ltd. 610,673 231,974 378,699

FRL Korea Co., Ltd. 92,430 38,931 53,499

Lakepark Co., Ltd. 43,750 20,170 23,580

Lotte Asset Development Co., Ltd. 127,635 11,960 115,675

Zara Retail Korea Co., Ltd. 94,594 14,065 80,529

Lotte Buyeo Resort Co.,Ltd. 98,702 53,675 45,027

Lotte Giants 8,506 5,927 2,579

Lakepark AMC 1,538 1,237 301

Lotte Europe Holdings B.V. 701,604 416,865 284,739

Intime Lotte Department Store Co., Ltd. 55,409 80,847 (25,438)

Coralis S.A. 29,931 38 29,893

D-Cinema of Korea Co., Ltd. 33,699 33,994 (295)

M-Venture Culture Investment L.P. 10,014 45 9,969

Isu Entertainment Investment Union 5,233 - 5,233

KTB Media Investment Union 3,347 86 3,261




66

12. Property, Plant and Equipment

(a) Changes in acquisition cost of property, plant and equipment for the years ended December 31, 2011 and 2010 are as

follows:

2011


Acquisition cost

as of

January

1, 2011 Acquisition Disposals Others (*)

Acquisition cost

as of

December

31,2011

Land ￦ 6,783,903 128,627 (99,387) 153,565 6,966,708

Buildings 5,152,408 65,708 (47,848) 197,186 5,367,454

Structures 258,180 8,638 (3,291) 5,258 268,785

Machinery 232,507 28,029 (1,544) (15,994) 242,998

Vehicles 7,946 804 (386) 227 8,591

Display fixtures 353,139 54,107 (68,377) 29,636 368,505

Furniture and fixtures 2,009,631 174,669 (212,001) 151,355 2,123,654

Tools and equipment 140,390 31,357 (3,806) 25,809 193,750

Other PP&E 126,062 60,779 (2,962) 18,314 202,193

Construction-in-

progress 860,049 1,039,430 (346) (1,013,400) 885,733

Total ￦ 15,924,215 1,592,148 (439,948) (448,044) 16,628,371

(*) Others include reclassifications of construction-in-progress to intangible assets and others.

2010


Acquisition

cost as of

January

1, 2010 Acquisition

Increase

from

acquisition

of stores Disposals Others (*)

Acquisition

cost as of

December

31, 2010

Land ￦ 6,592,233 18,067 313,006 (320,988) 181,585 6,783,903

Buildings 4,523,325 76,127 322,979 (214,847) 444,824 5,152,408

Structures 266,139 684 17,976 (11,582) (15,037) 258,180

Machinery 132,328 12,621 59,078 (9,879) 38,359 232,507

Vehicles 5,960 1,425 686 (586) 461 7,946

Display fixtures 291,113 34,073 - (3,557) 31,510 353,139

Furniture and fixtures 1,538,526 165,093 128,254 (30,300) 208,058 2,009,631

Tools and equipment 98,046 6,482 9,461 (366) 26,767 140,390

Other PP&E 102,633 10,819 359 (686) 12,937 126,062

Construction-in-

progress 751,341 840,194 2,427 (372) (733,541) 860,049

Total ￦ 14,301,644 1,165,585 854,226 (593,163) 195,923 15,924,215

(*) Others include reclassifications of construction-in-progress to intangible assets and others.




67

12. Property, Plant and Equipment, Continued

(b) Changes in accumulated depreciation of property, plant and equipment for the years ended December 31, 2011 and 2010 are

as follows:

2011


Accumulated

depreciation

as of

January

1, 2011 Disposals Depreciation Others

Accumulated

depreciation

as of

December

31, 2011

Buildings ￦ 1,374,263 (12,465) 150,345 4,847 1,516,990

Structures 45,083 (441) 12,154 (463) 56,333

Machinery 106,249 (1,388) 25,733 (14,834) 115,760

Vehicles 4,466 (314) 965 346 5,463

Display fixtures 257,354 (66,690) 33,234 2,118 226,016

Furniture and fixtures 1,385,025 (202,832) 222,708 6,815 1,411,716

Tools and equipment 58,673 (902) 17,328 11,613 86,712

Other PP&E 41,488 - 10,010 4,270 55,768

Total ￦ 3,272,601 (285,032) 472,477 14,712 3,474,758

2010


Accumulated

depreciation

as of

January 1,

2010 Disposals Depreciation Others

Accumulated

depreciation as

of December

31, 2010

Buildings ￦ 1,292,481 (84,356) 156,569 9,569 1,374,263

Structures 37,293 (2,494) 12,809 (2,525) 45,083

Machinery 68,385 (9,441) 20,874 26,431 106,249

Vehicles 3,189 (428) 1,184 521 4,466

Display fixtures 234,604 (2,468) 20,399 4,819 257,354

Furniture and fixtures 1,202,622 (29,155) 175,420 36,138 1,385,025

Tools and equipment 38,515 (228) 3,307 17,079 58,673

Other PP&E 28,287 (239) 5,853 7,587 41,488

Total ￦ 2,905,376 (128,809) 396,415 99,619 3,272,601

(c) There are no impairment losses and reversals of impairment losses for the years ended December 31, 2011 and 2010.




68

12. Property, Plant and Equipment, Continued

(d) Pledged property, plant and equipment provided by the Group as of December 31, 2011 are as follows:


Book value

Guaranteed a

mount

Type of

borrowings

Amount of

borrowings

Guarantee

recipient

Land and

buildings ￦ 294,249 169,671

Secured Loan

and others 129,975

Kookmin Bank

and others

(e) During 2011 and 2010, capitalized borrowing costs and capitalization interest rates are as follows:


U.S. dollars

(thousands) (note 4)

2011 2010

2011

Capitalized borrowing costs ￦ 2,801

18 $ 2,429

Capitalization interest rates (%)

4.73%~5.98%

4.42%

4.73%~5.98%

13. Investment Property

(a) Changes in acquisition cost of investment property for the years ended December 31, 2011 and 2010 are as follows:

2011


Acquisition cost

as of January 1,

2011 Acquisition

Disposal

Others (*)

Acquisition cost

as of December 31,

2011

Land ￦ 426,252 665 (6) (22,816) 404,095

Buildings 288,800 2,685 - 37,896 329,381

Total ￦ 715,052 3,350 (6) 15,080 733,476

(*) Others include reclassification between property, plant and equipment and investment property.

2010


Acquisition cost

as of January 1,

2010 Acquisition

Increase from

acquisition of

stores

Others

Acquisition cost

as of December 31,

2010

Land ￦ 515,350 11,938 17 (101,053) 426,252

Buildings 317,466 24,471 - (53,137) 288,800

Total ￦ 832,816 36,409 17 (154,190) 715,052

(*) Others include reclassification between property, plant and equipment and investment property.




69

13. Investment Property, Continued

(b) Changes in accumulated depreciation of investment property for the years ended December 31, 2011 and 2010 are as

follows:

2011


Accumulated

depreciation as of

January 1, 2011 Depreciation Others

Accumulated

depreciation as of December

31, 2011

Buildings ￦ 82,254 9,525 801 92,580

2010


Accumulated

depreciation as of


Accumulated


31, 2010

Buildings ￦ 89,244 11,834 (18,824) 82,254

(c) Income and expense from investment property

The details of income and expense from investment property during 2011 and 2010 are as follows:


Description

2011 2010

Rent income ￦ 97,078

83,948

Direct operating expense (including

maintenance and repair expenses)

24,532

19,704

(d) Fair value of investment property as of December 31, 2011 was follows:


Description

Book value Fair value (*)

Land and buildings ￦ 640,896

1,223,319

(*) The Group measured fair value by using direct capitalization method and cost method.

(e) During 2011, the Group recognized impairment loss of ￦549 million on investment property.




70

14. Intangible Assets

(a) Changes in intangible assets for the year ended December 31, 2011 are as follows:

2011


Book value

as of January

1, 2011 Acquisition Amortization Disposals Impairment

Others (*)

Book value

as of

December

31, 2011

Goodwill ￦ 2,050,139 765 - - (609) 16,910 2,067,205 Industrial property

rights 1,039 662 (476) (153) - 1,056 2,128 Rights to use

facility 83,942 - (8,395) (199) - 415,621 490,969 Membership 18,912 1,296 - - (719) - 19,489 Other intangible

assets 113,111 79,303 (69,031) (214) (8) 4,065 127,226

Total ￦ 2,267,143 82,026 (77,902) (566) (1,336) 437,652 2,707,017

(*) Others include reclassification of construction-in-progress to intangible assets and foreign exchange effects.

(b) Changes in intangible assets for the year ended December 31, 2010 are as follows:

2010


Book value

as of

January 1,

2010 Acquisition

Increase from

acquisition of

stores Amortization Disposals Others

Book value

as of

December 31,

2010

Goodwill ￦ 999,009 95,139 966,624 - (9) (10,624) 2,050,139 Industrial property

rights 752 608 - (322) - 1 1,039 Rights to use

facility 89,220 1 5,206 (6,644) (437) (3,404) 83,942 Membership 9,204 7,321 958 - - 1,429 18,912 Other intangible

assets 20,607 34,411 95,406 (32,377) - (4,936) 113,111

Total ￦ 1,118,792 137,480 1,068,194 (39,343) (446) (17,534)) 2,267,143




71

14. Intangible Assets, Continued

(c) Impairment testing for cash-generating units containing goodwill

For the purpose of impairment testing, goodwill is allocated to the units at the lowest level at which the goodwill may be

monitored in terms of internal management of the Group and cannot be higher than any of the Group’s operating segments,

as defined by note 36.

Details of the goodwill allocated to the groups of cash-generating units as of December 31, 2011, 2010 and January 1, 2010

are as follows:


Cash-generating units December

31, 2011

December

31, 2010

January

1, 2010

Department stores ￦ 237,284 237,284 20,156

Discount store 1,059,150 1,053,430 630,631

Finance business 118,733 118,733 38,617

Others 652,038 640,692 309,605

Total ￦ 2,067,205 2,050,139 999,009

As of December 31, 2010, recoverable amount of the cash-generating units in others was less than its book value, including

goodwill, therefore an impairment loss of ￦609 million was recognized.

The value in use of each cash-generating unit was determined by discounting its estimated future cash flows. The

approach used to determine value in use as of December 31, 2011 was consistent with those used in 2010. The calculation

of value in use was based on the following key assumptions:

- Cash flows were estimated based on past experience, actual historical results of operations and the five-year business plan.

- The annual revenue growth rate for the five-year period in the future was estimated based on an analysis of past revenue

growth rates. The revenues after the five-year period were assumed to grow constantly at zero to three percent.

- The Group’s weighted average cost of capital was applied as the discount rate in determining recoverable amount of cash-

generating units.

Value in use is based on the above assumptions representing management’s estimation of future cash flows, and is

calculated using external and internal sources of the Group. As a result of impairment testing, value in use is higher than

the carrying amount as of December 31, 2011 and 2010, except for the other cash-generating unit as of December 31, 2010.




72


(d) Impairment testing of other intangible assets with indefinite estimated useful lives

The details of intangible assets with indefinite estimated useful lives as of December 31, 2011, 2010 and January 1, 2010

are as follows:



31, 2011

December

31, 2010

January

1, 2010


Discount store 1,531 1,525 613

Finance business 3,765 3,456 3,367

Others 7,413 7,169 828

Total ￦ 19,489 18,912 9,204

As a result of the Group’s impairment test on indefinite intangible assets, discounted future cash flows of memberships

declined to an amount less than the book value of memberships, therefore an impairment loss of ￦719 million was

recognized in 2011.

15. Trade and Other Payables

Trade and other payables as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Trade payables ￦ 3,188,569

2,730,302 2,175,955

Other payables

1,535,448

1,306,448 1,093,065

Total ￦ 4,724,017

4,036,750 3,269,020




73

16. Other Financial Liabilities

Other financial liabilities as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Current:

Current derivative liabilities held for

the purpose of hedging ￦ 15,075

43,492 3,220

Current finance lease liabilities

7

- 538

Financial guarantee liabilities

153

829 321

Accrued expenses

217,483

135,463 42,081

Current deposit received

238,789

249,799 254,288

Subtotal

471,507

429,583 300,448

Non-current:


12,689

13,227 -

Non-current finance lease liabilities

118

- 9

Deposit received

152,342

106,216 34,825

Other non-current financial liabilities

127

42 591

Subtotal

165,276

119,485 35,425

Total ￦ 636,783

549,068 335,873




74

17. Borrowings and Debentures

(a) Borrowings and debentures as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Current:

Short-term borrowings ￦ 1,176,921

1,298,597 974,720

Current portion of long-term

borrowings 762,793

98,184 70,532


debentures 1,508,055

1,944,215 833,859

Discount on debentures

(485)

(4,117) (334)

Subtotal

3,447,284

3,336,879 1,878,777

Non-current:


348,619

765,346 434,308

Long-term debentures

6,406,009

4,300,280 3,031,740


(15,981)

(7,080) (8,207)

Subtotal

6,738,647

5,058,546 3,457,841

Total ￦ 10,185,931

8,395,425 5,336,618

(b) Short-term borrowings as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Lender

Details

Annual

interest

rate (%)


December

31, 2011

December

31, 2010

January

1, 2010

Kookmin Bank and

others

General

1.69~7.44 ￦ 627,557

338,597 563,420

Korea Exchange

Bank and others

Financial

notes

3.51~6.20

544,500

960,000 411,300

Others

Other

4.99

4,864

- -

Total

￦ 1,176,921

1,298,597 974,720




75

17. Borrowings and Debentures, Continued

(c) Long-term borrowings as of December 31, 2011, and January 1, 2010 are summarized as follows:

Lender

Details

Annual

interest

rate (%)

Korean won

(millions)

December

31, 2011

December

31, 2010

January

1, 2010

Korea Development

Bank and others

Local

currency

3.51~7.12 ￦ 414,301

261,050 414,570

Lotte Co., Ltd. (Japan)

and others

Foreign

currency

3.40~6.98

697,111

602,480 90,270

Subtotal 1,111,412

863,530 504,840

Less current portion

(762,793)

(98,184) (70,532)

Total ￦ 348,619

765,346 434,308




76


(d) Debentures as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Description

Maturity

Interest

rate (%)


December

31, 2011

December

31, 2010

January

1, 2010

52nd placed (foreign

currency) Sep. 30, 2010

3M Euro Yen

Libor+1.60 ￦ -

- 126,282

46th placed (foreign

currency) Apr. 29, 2011

6M USD

Libor+1.00

-

113,890 116,760


currency)

May 29, 2011

6M Euro Yen

Tibor+1.20

-

251,474 227,308


currency)

Sep. 29, 2011

3M Euro Yen

Libor+1.60

-

153,679 138,910


currency)

Oct. 17, 2011

3M USD

Libor+1.75

-

341,670 350,280

50th placed

Feb. 05, 2012

5.10

200,000

200,000 200,000

51st placed (foreign

currency)

Jun. 26, 2012

3M Euro Yen

Libor+1.50

148,516

139,709 126,282

53rd placed

Dec. 03, 2014

5.30

250,000

250,000 250,000

54-1st placed

Mar. 12, 2013

4.44

200,000

200,000 -

54-2nd placed

Mar. 12, 2015

4.82

400,000

400,000 -


currency)

May 20, 2013

3M USD

Libor+0.80

115,330

113,890 -


currency)

Sep. 30, 2011

3M USD

Libor+1.05

-

113,890 -


currency)

Mar. 17, 2014

3M USD

Libor+0.80

230,660

- -

1st placed (Global bond)

Apr. 07. 2016

3.88

461,320

- -

58-1st placed (foreign

currency)

Dec. 05, 2014

3M JPY

Libor+0.60

222,774

- -

58-2nd placed (foreign

currency)

Nov. 28, 2014

3M USD

Libor+1.50

115,330

- -

USD convertible bonds(*)

Jul . 05, 2016

-

539,613

- -

JPY convertible bonds (*)

Jul . 05, 2016

-

467,605

- -


Mar. 19, 2013

5.35

100,000

100,000 -


Mar. 05, 2011

5.75

-

10,000 -


Jul . 07, 2012

5.80

5,000

- -


Multiple

2.13~8.59

4,457,915

3,856,293 2,329,777

Subtotal

7,914,063

6,244,495 3,865,599

Less: Discount on debentures

(16,465)

(11,197) (8,541)

Total book value

7,897,598

6,233,298 3,857,058

Less: Current portion of debentures, net of

discount

(1,507,570)

(1,940,098) (833,525)

Total

￦ 6,390,028

4,293,200 3,023,533

(*) USD convertible bonds and JPY convertible bonds have been designated as financial liabilities at fair value through pr

ofit of loss as of December 31, 2011. The terms and conditions are summarized as follows:




77


(a) Type of bonds: Registered overseas unsecured convertible bonds

(b) Total face value of bonds:

USD Bonds: 500,000,000

JPY Bonds: 32,500,000,000

Total(in won): 978,969,250,000

(c) Exchange Rate

USD Fixed Exchange Rate: exchange rate of KRW 1,083.50/USD 1.00

JPY Fixed Exchange Rate: exchange rate of KRW 13.4529/JPY 1.00

(d) Bond interest rate

Coupon rate(%): -

Yield to maturity(%): 0 (overseas convertible bonds without guarantee in U.S. dollars)

(0.25) (overseas convertible bonds without guarantee in Japanese yen)

(e) Date of bond maturity: July 5, 2016

(f) Principal redemption method:

i. Redemption on the maturity date: Redemption in lump sum on the maturity date for the principal amount of bonds for

which a condition for early redemption has not occurred and the conversion right has not been exercised.

ii. Early redemption: The Group has a call option, whereas bond holders have a put option

(g) Put option by bondholders:

the put option can be exercised if any of the following conditions occurs:

On the third anniversary of the date of payment (July 5, 2014);

i. If any change of control occurs in the company; or

ii. The issued stocks of the company is unlisted from the stock exchange or their transaction is suspended for 30

consecutive transaction days or longer.

(h) Call option by the company:

the call option can be exercised if any of the following conditions occurs:

i. If the closing price for 20 transactional days in 30 consecutive transaction days reaches 130% or more of the conversion

price between 3 years from the issuance date and 30 business days to the maturity date;

ii. If the balance of bonds that has not been redeemed reaches less than 10% of the sum of the total issued amount (clean up

call); or

iii. Any additional tax burden arises due to the amendments of the related laws and regulations.

(i) Matters relating to conversion:

i. Conversion ratio (%): 100

ii. Conversion price (KRW per share): 650,000

iii. Method to decide conversion price:

While following Article 5-22 of the Regulations on Issuance, Public Disclosure, etc. of Securities, 23.8% conversion

premium was applied to the closing price of the shares listed on the Korea Exchange on the day of conversion price

determination

iv. Type of shares to be issued following conversion: Registered common shares

v. Period to apply for conversion:

Start date: July 5, 2012

End date: 7 business days prior to the maturity date

vi. Matters for the adjustment of conversion price:

In the case where a condition for re-adjustment of the conversion price has occurred, such as share dilution, the

conversion price will be adjusted in accordance with the provisions in the relevant bonds purchase agreement.




78


(e) Maturities of long-term borrowings and debentures as of December 31, 2011 are scheduled as follows:


Borrowings

Debentures Total

Within 1 year ￦ 762,793

1,490,539 2,253,332

1 ~ 2 years

89,319

1,884,624 1,973,943

2 ~ 3 years

259,300

2,400,890 2,660,190

3 ~ 4 years

-

641,462 641,462

More than 4 years

-

1,394,203 1,394,203

Total ￦ 1,111,412

7,811,718 8,923,130

18. Unearned Revenues

The details of unearned revenues as of December 31, 2011, 2010, and January 1, 2010 are as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Current:

Membership point ￦ 34,999

33,228 32,080

Other points

115,016

102,951 88,828

Current unearned rental income

7,760

6,990 7,979

Others

26,590

20,735 18,025

Subtotal

184,365

163,904 146,912

Non-current:

Non-current unearned rental

income 21,411

21,906 19,587

Total ￦ 205,776

185,810 166,499




79

19. Provisions

Changes in provisions for the years ended December 31, 2011 and 2010 are as follows:

2011


Book value as of

January 1, 2011

Increase (decrease),

net

Book value as of

December 31, 2011

Current:

Provision for bonus points reward

program ￦ 11,492 3,104 14,596

Provision for bonus payable 6,413 (307) 6,106

Provision for sales return 6,901 27 6,928

Other provisions 8,524 1,862 10,386

Subtotal 33,330 4,686 38,016

Non-current:

Provision for unused credit card

limits 32,991 1,720 34,711

Other provisions 4,166 (3,485) 681

Subtotal 37,157 (1,765) 35,392

Total ￦ 70,487 2,921 73,408

2010


Book value as of

January 1, 2010

Increase (decrease),

net

Book value as of

December 31, 2010

Current:

Provision for bonus points reward

program ￦ 8,313 3,179 11,492

Provision for bonus payable 5,146 1,267 6,413

Provision for sales return 4,344 2,557 6,901

Other provisions 6,619 1,905 8,524

Subtotal 24,422 8,908 33,330

Non-current:

Provision for unused credit card

limits 21,524 11,467 32,991

Other provisions 8,721 (4,555) 4,166

Subtotal 30,245 6,912 37,157

Total ￦ 54,667 15,820 70,487




80

20. Other Non-financial Liabilities

Other non-financial liabilities as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Current:

Withholdings ￦ 78,150

55,638 94,851

Withholdings of value added tax

52,346

39,070 30,617

Advances received

730,129

621,421 522,089

Other current liabilities

1,041

573 3,858

Subtotal

861,666

716,702 651,415

Non-current:

Other non-current liabilities

16,518

62 1,471

Total ￦ 878,184

716,764 652,886

21. Employee Benefits

(a) Details of defined benefit liabilities as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Present value of defined benefit

obligations ￦ 291,927

237,555

198,259

Fair value of plan assets

(181,411)

(133,189) (122,543)

Total ￦ 110,516

104,366 75,716

(b) Details of present value of other long-term employee benefits as of December 31, 2011, 2010 and January 1, 2010 are



December

31, 2011

December

31, 2010

January

1, 2010

Present value of other long-term

employee benefits ￦ 46,751

39,156 25,545




81

21. Employee Benefits, Continued

(c) Changes in employee benefits for the years ended December 31, 2011 and 2010 are as follows:


2011 2010

Beginning of the year ￦ 237,555

198,259

Current service costs

68,068

49,833

Interest costs

15,754

13,956


10,093

37,194

Payments

(48,194)

(90,563)

Others

8,651

28,876

End of the year ￦ 291,927

237,555

(d) During 2011 and 2010, the changes on plan assets of an employee benefit plan are as follows:


2011 2010

Beginning of period ￦ 133,189

122,543

Expected return on plan assets

6,549

5,522

Actuarial gain (loss)

(900)

9,429

Employer contribution

63,764

36,443

Payments

(21,568)

(44,087)

Others

377

3,339

End of period ￦ 181,411

133,189

(e) The components of plan assets as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Short-term funds ￦ 17,872 23,026

56,103

Fixed time deposits

52,177 88,509

11,044

CP, ABCP

12,605 19,698

7,774

Bonds

98,662 1,863

47,547

National Pension Fund

95 93

75

Total ￦ 181,411 133,189

122,543




82


(f) Expenses recognized for the years ended December 31, 2011 and 2010 are as follows:

(g) The principal actuarial assumptions used as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

December 31,

2011

December 31,

2010

January

1, 2010

Discount rate

4.62% ~ 7.00%

5.18% ~ 8.00% 5.95% ~10.00%

Expected rate of return on plan assets

4.50% ~ 7.00%

4.51% ~ 7.00% 4.51% ~ 7.00%

Expected rate of promotion

1.89% ~ 2.96%

0.86% ~ 3.86% 0.96% ~ 3.42%

Expected rate of increase in salaries

3.50% ~ 7.00%

3.47% ~ 7.00% 3.00% ~ 6.00%

22. Derivative Instruments and Hedge Accounting

(a) Details of derivatives outstanding as of December 31, 2011 are as follows:

Type

Description

Description

Trade Put option Right to exercise selling common stock in KIBNET at a specified price

Cash flow hedge Currency swap At the maturity of the swap, the principal amounts of the

debentures in USD and JPY and borrowings in USD are

exchanged back

(b) Fair value of derivatives outstanding As of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Type

Description


December 31, 2011

December 31, 2010 January 1, 2010

Assets

Liabilities

Assets

Liabilities Assets Liabilities

Trade

Put option ￦ 1,697

-

34,879

- 31,817 -

Cash flow

hedge

Currency

swap

47,814

23,164

203,248

48,042 195,330 3,220

Interest swap

312

12,898

-

21,354 - -

Total

￦ 49,823

36,062

238,127

69,396 227,147 3,220


2011 2010

Current service costs ￦ 68,068

49,833

Interest costs

15,754

13,956


(6,549)

(5,522)


7,587

17,700

Total ￦ 84,860

75,967




83

22. Derivative Instruments and Hedge Accounting, Continued

(c) Changes in the fair value of derivative instruments for the year ended December 31, 2011 are as follows:

Type of

derivatives

Description

Related accounts

Korean won

(millions)

Trade

Put option

Loss on valuation of derivative

instruments ￦ (34,879)

Gain on valuation of derivatives

instruments (card business)

201

Cash flow

hedge

Currency swap Gain on valuation of derivative

instruments

18,978


instruments

(426)

Gain on valuation of derivatives

instruments (card business)

20,661

Interest swap Unrealized gain on valuation of

derivative instruments, net of tax effect

25,460

23. Capital Stock and Capital Surplus

(a) Pursuant to its amended Articles of Incorporation, the Company’s authorized capital stock is 60,000,000 shares, which

consist of common shares and preferred shares each with a par value of ￦5,000 per share. The Company is authorized to

issue non-voting preferred shares of up to one-fourth of the Company’s total issued and outstanding capital stock. Holders

of preferred shares may, upon a resolution of the board of directors at the time of the issuance of the preferred shares, be

entitled to receive dividends prior to the holders of common shares. The preferred shares will be automatically converted

to common shares within ten years of issuance as determined by the Company’s board of directors. However, if the

holders of preferred shares do not receive the minimum dividends as prescribed, the prescribed conversion date will be

extended to the time when all such minimum dividend amount is paid to the holders of preferred shares. As of December

31, 2011, the Company has not issued any preferred stock and 29,043,374 shares of common stock were issued and

outstanding as of December 31, 2011.

(b) Capital surplus as of December 31, 2011, 2010 and January 1, 2010 consists of the following:


December

31, 2011

December

31, 2010

January

1, 2010

Additional paid-in capital ￦ 3,605,117

3,605,117 3,605,117

Gain on capital reduction

1,793

1,793 1,793

Gain on merger

15,273

15,273 15,273

￦ 3,622,183

3,622,183 3,622,183




84

23. Capital Stock and Capital Surplus, Continued

Gain on capital reduction

The Company retired 745,470 shares of treasury stock (￦1,934 million) in 1995, which were acquired in connection with

the merger with Lotte Foods Co., Ltd. and ChungBon Industry Co., Ltd. on December 31, 1994. As a result, capital stock

decreased by ￦3,727 million and a gain on capital reduction amounting to ￦1,793 million was recorded as a capital

surplus.

Gain on merger

In 1997, SongGok Trading Co., Ltd. was merged into the Company resulting in a gain on merger of ￦15,273 million

which was recorded as a component of other capital surplus.

24. Retained Earnings

(a) Details of retained earnings as of December 31, 2011, 2010 and January 1, 2010 are as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Legal reserve ￦ 170,950

166,594 162,963

Voluntary reserve

5,420,052

4,460,052 3,790,052

Unappropriated retained earnings

4,500,894

4,584,880 4,282,300

￦ 10,091,896

9,211,526 8,235,315

(b) Changes in retained earnings for the years ended December 31, 2011 and 2010 were as follows:


2011

2010

Beginning of the year ￦ 9,211,526

8,235,315

Profit for the year

931,815

1,034,705

Dividends

(43,565)

(36,304)

Actuarial losses on defined benefit pension

plans

(6,724)

(20,881)

Adjustment on retained earnings of associates

(1,156)

(1,309)

End of the year ￦ 10,091,896

9,211,526




85

25. Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2011 and 2010 were as

follows:

2011


Beginning

balance

Changes for

the period

Tax effects for

the period

Balance as of

December

31, 2011

Change in fair value of available-

for-sale financial assets ￦ 102,685

(4,454)

(15,869)

82,362


foreign operations

(7,310)

37,540

(146)

30,084

Effective portion of changes in fair

value of cash flow hedges

(28,870)

24,327

(7,597)

(12,140)


investments

80,076

(51,156)

8,580

37,500

Total ￦ 146,581

6,257

(15,032)

137,806

2010


Beginning

balance

Changes for

the period

Tax effects for

the period

Balance as of

December 31,

2010



68,693

(18,705)

102,685


foreign operations

-

(7,310)

-

(7,310)



(16,075)

(19,488)

6,693

(28,870)


investments

65,030

21,562

(6,516)

80,076

Total ￦ 101,652

63,457

(18,528)

146,581




86

26. Earnings per Share

(a) Basic earnings per share for the years ended December 31, 2011 and 2010 are as follows:

Korean won (millions,

except per share amount)

2011 2010

Profit for the period

Profit from continuing operations 931,815 1,067,106

Loss from discontinued operations, net of tax - (32,401)

￦ 931,815 1,034,705

Weighted-average number of common shares outstanding 29,043,374 29,043,374

Earnings per share

Basic and diluted earnings per share

– Continuing operations in won and U.S. dollars (*) 32,084 36,742

Basic and diluted loss per share

– Discontinued operations in won and U.S. dollars (*) ￦ - (1,116)

32,084 35,626

(*) Diluted earnings per share are not calculated as there is no dilution effect.

(b) Potential ordinary shares from conversion of convertible bonds as of December 31, 2011 are as follows:


except for conversion price)

USD Bonds

JPY Bonds

Principal amount(*) ￦ 541,750

437,219

Conversion price (in won)

650,000 650,000

Number of potential ordinary shares ￦ 833,462

672,645

(*) Principal amount of convertible bonds are the amount of USD 500 million and JPY 32,500 million multiplied by fixed

exchange rate of 1,083.50/USD and 13.4529/JPY, respectively.




87

27. Sales and Cost of Sales

(a) Details of sales for the years ended December 31, 2011 and 2010 are as follows:


2011 2010

Sales of merchandise ￦ 18,948,555

16,194,017

Sales of products

82,452

71,575

Other operating revenue

1,978,499

1,628,005

Revenue of card business

1,243,582

1,124,147

Total ￦ 22,253,088

19,017,744

(b) Details of cost of sales for the years ended December 31, 2011 and 2010 are as follows:


2011 2010

Cost of merchandise sold ￦ 14,505,515

12,387,636

Cost of products sold

76,820

51,777

Cost of other operating revenue

109,506

110,985

Cost of card business

559,553

538,240

Total ￦ 15,251,394

13,088,638




88

28. Profit from Operations

(a) Details of selling, general and administrative expenses for the years ended December 31, 2011 and 2010 are as follows:


2011

2010

Selling, general and administrative expenses:

Salaries ￦ 937,830

818,185

Retirement and termination benefits

76,267

57,571

Other employee benefits

7,584

17,700

Employee welfare

194,411

160,540

Education and training

17,826

14,812

Travel

32,555

25,191

Maintenance fee for car

3,887

1,969

Insurance premium

10,078

8,793

Taxes and dues

121,555

107,102

Entertainment expense

8,885

7,395

Supplies and stationery

74,248

68,202

Communications

43,115

38,988

Utilities

252,644

221,642

Maintenance

63,289

59,082

Rent

512,097

367,646

Depreciation

470,752

392,792

Amortization of intangible assets

22,553

13,082

Commissions and fees

797,369

598,119

Service commission expenses

689,433

549,995

Advertising

296,569

267,758

Sales promotion expenses

434,911

341,895

Decoration

16,570

18,510

Bad debt expenses

1,041

589

Transportation

78,574

55,858

Provisions

1,727

37,078

Others

17,082

20,601

Total ￦ 5,182,852

4,271,095




89

28. Profit from Operations, Continued

(b) Details of other operating income and expenses for the years ended December 31, 2011 and 2010 are as follows:


2011

2010

Other operating income:

Gain on foreign currency transactions ￦ 484

326


205

2

Reversal of allowance for bad debt

308

-

Gain on disposal of property, plant and

equipment

10,303

55,792

Gain on disposal of intangible assets

478

92

Reversal of provisions

- 858

Others

47,442

40,290

Total ￦ 59,220

97,360

Other operating expense:

Loss on foreign currency transactions ￦ 1,606

600


109

3,877

Loss on disposal of investment property

2

-

Loss on disposal of property, plant and

equipment

24,148

36,501

Loss on disposal of intangible assets

3

2

Impairment of investment property

549

-

Impairment of intangible assets

1,336

-

Impairment of other non-current assets

204

784

Donation

20,022

19,620

Other bad debt expenses

127,466

70,215

Others

39,717

26,038

Total ￦ 215,162

157,637




90

29. Nature of Expenses

Details of nature of expenses for the years ended December 31, 2011 and 2010 are as follows:

30. Changes in Classification for Operating Income

The effect of the differences in classification for operating income between K-GAAP and K-IFRS are as follows:


2011

2010

Purchase of inventories ￦ 14,801,836

12,663,303

Changes in inventories

(347,558)

(303,099)

Employee benefits expense

1,218,825

1,053,996

Rent

512,340

375,906

Depreciation and amortization and impairment

550,887

437,208

Commissions

290,546

193,462


434,911

341,895

Decoration

16,570

18,510

Transportation

78,593

55,858

Others

2,877,296

2,522,694

Total ￦ 20,434,246

17,359,733


2011

2010

Operating income under K-GAAP ￦ 1,818,842

1,658,011

Included items:

Gain on foreign currency transactions

484

326


205

2


308

-

Gain on disposal of property, plant and equipment

10,303

55,792


478

92

Reversal of provisions

-

858

Loss on foreign currency transactions

(1,606)

(600)


(109)

(3,877)

Loss on disposal of investment property

(2)

-


(24,148)

(36,501)


(3)

(2)

Impairment of investment property

(549)

-


(1,336)

-

Impairment loss on other non-current asset

(204)

(784)

Donation

(20,022)

(19,620)


(127,466)

(70,215)

Others

7,725

14,252

Excluded items:

-

-

Total difference

(155,942)

(60,277)

Operating income under K-IFRS ￦ 1,662,900

1,597,734




91

31. Finance Income and Finance Expenses

(a) Details of finance income and finance expenses for the years ended December 31, 2011 and 2010 are as follows:


2011

2010

Finance income:

Interest income ￦ 105,673 79,222

Dividend income

6,448 3,318


34,096 1,163


803 24,617

Gain on disposal of available-for-sale financial assets

64,572 3,096

Gain on valuation of derivative instruments held for the

purpose of hedging

18,978 54,594

Gain on valuation of derivative instruments held for the

purpose of trading

- 3,062

Gain on transaction of derivative instruments held for the

purpose of hedging

25,917 10,052

Gain on transaction of derivative instruments held for the

purpose of trading

575 -

Reversal of other bad debt expenses

- 52

Gain on disposal of investments in associates

203 1,105

Total ￦ 257,265 180,281

Finance expenses:

Interest expense ￦ 191,325 178,794


29,760 13,933


84,084 95,944

Loss on valuation of financial liabilities at fair value


54,544 -

Loss on disposal of short-term financial assets

6 242

Impairment loss of available-for-sale financial assets

9,506 -

Loss on disposal of available-for-sale financial assets

913 -

Loss on valuation of derivative instruments held for the

purpose of hedging

426 22,600

Loss on valuation of derivative instruments held for the

purpose of trading

34,879 -

Loss on transaction of derivative instruments held for the

purpose of hedging

16,504 -

Loss on transaction of derivative instruments held for the

purpose of trading

3,400 27

Other bad debt losses

1,310 102

Loss on disposal of investments in associates

- 393

Total ￦

426,657

312,035




92

31. Finance Income and Finance Expenses, Continued

(b) Details of finance income and finance expenses by financial instruments category for the years ended December 31,

2011 and 2010 are as follows:


Category Details

2011

2010

Cash and cash equivalents: Cash and cash equivalents:

Interest income ￦ 53,884

44,527

Loans and receivables: Short-term financial instruments:

Interest income

12,395

2,688

Loans:

Interest income

2,385

2,980

Guarantee deposits:

Interest income

35,590

27,622


assets:

Available-for-sale financial assets:

Interest income

1,419

1,405

Dividend income

6,448

3,318

Gain on valuation of available-for-sale

financial assets

11,929

75,095

Gain on disposal of available-for-sale

financial assets

63,653

2,854

Impairment loss

9,506

-

Financial liabilities based on

amortized cost:

Borrowings:

Interest expense

60,301

61,953

Debentures:

Interest expense

120,829

106,543

Rental guarantee deposits:

Interest expense

10,195

10,298

Financial assets and liabilities at

fair value through profit or

loss:

Derivatives:

Gain (loss) on valuation

(34,879)

57,614

Gain (loss) on transaction

(2,825)

10,025

Overseas convertible bonds:


(54,544)

-

Derivative assets and liabilities

held for the purpose of

hedging:

Derivatives:


18,552

(22,557)

Gain (loss) on transaction 9,413 -




93

32. Income Taxes

(a) The components of income tax expense for the years ended December 31, 2011 and 2010 are as follows:

(b) During 2011 and 2010, the details of income tax expense recognized directly to equity are as follows:

Income tax related to actuarial losses (gains) was recognized directly in equity and income tax related to losses (gains) on

valuation of available-for-sale financial assets, cumulative effect of foreign currency translation, losses(gains) on valuation

of derivatives, and changes in equity using equity method of accounting are recognized in other comprehensive income.


2011 2010

Current tax ￦ 380,326

393,746

Deferred tax

178,484

24,114

Income taxes directly charged to equity

(16,169)

(13,687)

Income tax expense ￦ 542,641

404,173


2011 2010


financial assets ￦ (19,915)

(20,117)

Exchange differences on translating foreign

operations

(146)

-

Effective portion of changes in fair value of

cash flow hedges

(7,834)

6,913


3,155

6,033


investments

8,571

(6,516)

Income tax directly charged to equity ￦ (16,169)

(13,687)




94

32. Income Taxes, Continued

(c) During 2011 and 2010, statutory to actual effective tax rates are reconciled as follows:

In December 2011, the Korean government changed the corporate income tax rate for taxable income exceeding ￦20

billion from 22.0% to 24.2% prospectively from 2012.

(d) Deferred tax assets and liabilities are measured using the tax rate to be applied for the year in which temporary differences

are expected to be realized.


2011 2010

Profit before income tax ￦ 1,555,241

1,540,223

Tax rates (%)

25.68%

23.41%

Income tax using statutory tax rates

399,365

360,567

Adjustment:

Tax effects on non-taxable income

(3,668)

(3,302)

Tax effects on non-deductible income

6,170

3,169

Tax credit

(2,889)

(5,310)

Adjustments for prior periods

(936)

672

Effect of change in tax rate

112,605

4,913

Tax effects on share of net income of

subsidiaries

33,257

30,836

Others

(1,263)

12,628

Income tax expenses ￦ 542,641

404,173

Effective tax rate (%)

34.89%

26.24%




95


(e) During 2011 and 2010, the changes on deferred tax assets (liabilities) are as follows:

2011


Beginning

balance

Profit or loss

Other

comprehensive

income

Balance as of

December

31, 2011

Impairment loss on available-for-sale

financial assets ￦ 460

46

-

506

Investments in subsidiaries and

associates

(188,297)

(56,567)

8,571

(236,293)

Buildings

(10,979)

314

-

(10,665)

Depreciation expense

42,813

(1,971)

-

40,842

Allowance for doubtful accounts

17,464

(13,825)

-

3,639

Accrued revenues

(3,335)

(1,141)

-

(4,476)

Unearned revenue

-

2,646

-

2,646

Non-current prepaid expenses

(10,137)

253

-

(9,884)

Losses on valuation of inventories

3,304

(939)

-

2,365

Provision for sales return

1,653

(277)

-

1,376

Property, plant and equipment

(capitalization of borrowing costs)

(12,976)

(331)

-

(13,307)

Land (asset revaluation)

(953,020)

(78,186)

-

(1,031,206)

Unearned revenues

16,596

3,736

-

20,332

Provision for mileage program

13,000

(1,562)

-

11,438

Accrued expense

12,765

65

-

12,830

Losses (gains) on valuation of

available-for-sale financial assets

(33,212)

120

(19,915)

(53,007)


derivatives

(19,485)

31,001

(7,834)

3,682

Foreign currency translation gains

(losses)

37,840

(33,801)

-

4,039

Losses on valuation of convertible

bonds

-

(11,502)

-

(11,502)

Construction-in-progress

403

40

-

443

Other intangible assets

(4,538)

3,414

-

(1,124)

Rental guarantee deposits

7,097

1,543

-

8,640

Salaries and retirement benefits

24,270

174

3,154

27,598

Goodwill

(9,462)

(12,366)

-

(21,828)

Translation difference of foreign

subsidiaries

546

-

(146)

400

Others

(34,403)

6,802

-

(27,601)

Total ￦ (1,101,633)

(162,314)

(16,170)

(1,280,117)




96


(e) During 2011 and 2010, the changes on deferred tax assets (liabilities) are as follows, continued

2010


Beginning

balance

Business

Combination

Profit or

loss

Other

comprehensive

income

Balance as of

December

31, 2011

Impairment loss on available-for-

sale financial assets ￦ 460 -

-

-

460


associates

(161,610) -

(20,170)

(6,517)

(188,297)

Buildings

(11,307) -

328

-

(10,979)


49,377 (93)

(6,471)

-

42,813


8,742 (13)

8,735

-

17,464

Accrued revenues

(2,293) (4)

(1,038)

-

(3,335)

Non-current prepaid expenses

(10,401) -

264

-

(10,137)

Losses on valuation of inventories

2,479 488

337

-

3,304


1,026 -

627

-

1,653

Property, plant and equipment

(capitalization of borrowing

costs)

(13,177) -

201

-

(12,976)


(997,069) -

44,049

-

(953,020)

Unearned revenues

14,029 -

2,567

-

16,596


11,986 -

1,014

-

13,000

Accrued expense

9,064 8

3,693

-

12,765



(13,094) -

(1)

(20,117)

(33,212)


derivatives

(29,824) -

3,426

6,913

(19,485)


(losses)

33,870 -

3,970

-

37,840

Construction-in-progress

403 -

-

-

403


3,579 (8,187)

70

-

(4,538)


6,310 -

787

-

7,097


14,340 166

3,730

6,034

24,270

Goodwill

1,241 -

(10,703)

-

(9,462)

Translation difference of foreign

subsidiaries

546 -

-

-

546

Others

11,617 (178)

(45,842)

-

(34,403)

Total ￦ (1,069,706) (7,813)

(10,427)

(13,687)

(1,101,633)




97


(f) As of December 31, 2011, 2010 and January 1, 2010, the amounts of total temporary differences related to investments of

subsidiaries and associates which deferred tax assets were not recognized are as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Investments in associates ￦ 114,549

133,339 47,776

Investments in subsidiaries

187,498

74,144 141,446

Total ￦ 302,047

207,483 189,222

33. Consolidated statements of cash flows

(a) As of December 31, 2011, 2010 and January 1 2010, the details of cash and cash equivalents are as follows:


December 31, 2011

December

31, 2010

January

1, 2010

Cash ￦ 62,946

84,900 75,231

Deposits

206,972

229,437 340,431

Other cash equivalents

1,688,286

928,089 583,203

Total ￦ 1,958,204

1,242,426 998,865

(b) During 2011 and 2010, the details of the significant transactions without cash inflows and outflows in investing activities

and financing activities are as follows:


2011 2010


financial assets ￦ 11,929

75,095

Reclassification of construction-in-process

1,013,400

733,541




98

34. Operating Leases

(a) Lessee

The Group has entered into the operating leases for buildings, furniture and fixtures and vehicles. Future lease payments

under operation leases as of December 31, 2011 and 2010 are as follows:

In lieu of rent, certain agreements require the Group to advance a non-interest bearing refundable security deposit to the

landlord for the Group’s use during the lease term. The amount of the advance is determined by the prevailing market rate.

The Group has recorded rent expense and interest income related to these leases of ￦30,761 million and ￦35,590 million

during 2011 and ￦26,928 million and ￦27,622 million during 2010, respectively. The related deposit balances amount

to ￦1,375,955 million, 1,207,036 million and 1,092,758 million as of December 31, 2011, 2010 and January 1, 2010,

respectively. Such amounts were calculated on the fixed interest rate for time deposits with similar maturities.

(b) Leasor

1) The Group has entered into operating leases of certain of its properties and equipments. Future lease payments receivable

under operating leases as of December 31, 2011 and 2010 are as follows:


2011 2010


91,847

1 ~ 5 years

34,286

14,827

Thereafter

29,775

450

Total ￦ 174,509

107,124


2011 2010


276,639

1 ~ 5 years

1,018,329

1,081,627

Thereafter

1,674,593

1,885,210

Total ￦ 2,966,311

3,243,476




99

35. Operating Segments and Geographic Information

(a) The Group’s major reportable segments consist of department stores (retail), discount store (retail), card business and others

(convenience stores, television home shopping, supermarkets, movie theaters, clothing retail) as follows:

Department stores Discount Stores

Card business Others

Main business Retail stores for

middle and higher-

end merchandise

Retail and whole-sale

stores for middle and

discounted price

merchandise

Credit

financial

services

Others

Major products or

services

Sales of merchandise

and leasing

Sales of merchandise

and leasing

Credit card

and loan

services

Sales of

merchandise,

leasing and

others

(b) Information about reportable segments as December 31, 2011, 2010 and January 1, 2010 are as follows:


December 31, 2011

Department

stores

Discount stores

Card

business

Others

Total

External sales

7,891,573

8,473,862

1,289,463

4,598,190

22,253,088

Internal sales

29,432 882 195,531

132,417

358,262

Total sales

7,921,005

8,474,744 1,484,994

4,730,607

22,611,350

Interest income

56,937

8,500

1,098

40,342

106,877

Interest expenses

99,837

63,466

2,117

27,110

192,530

Depreciation and

amorization 166,940

177,423

25,775

119,387

489,525

Other bad debt

expenses -

38

124,082

4,658

128,778

Equity method

income (loss) of

investments in

associates

(273)

-

-

(711)

(984)

Income tax expense

273,596

112,790

57,820

65,744

509,950

Segment profit

604,863

86,656

182,189

152,767

1,026,475

Segment assets

15,848,109

9,315,146

7,655,660

4,092,747

36,911,662

Acquisition of non-

current assets 756,045

406,155

27,671

497,682

1,687,553

Segment liabilities

8,968,413

1,983,088

6,148,110

1,481,021

18,580,632




100

35. Operating Segments and Geographic Information, Continued

(b) Information about reportable segments as December 31, 2011, 2010 and January 1, 2010 are as follows, continued:


December 31, 2010

Department

stores

Discount stores

Card

business

Others

Total

External sales

7,146,411

7,354,540

1,132,163

3,384,630

19,017,744

Internal sales

28,741 388 182,615

85,914

297,658

Total sales

7,175,152

7,354,928 1,314,778

3,470,544

19,315,402

Interest income

43,129

8,225

94

28,948

80,396

Interest expenses

97,181

60,862

1,167

20,757

179,967

Depreciation and

amorization 143,654

157,041

25,645

78,024

404,364

Other bad debt

expenses (11)

11,805

69,676

652

82,122

Equity method

income (loss) of

investments in

associates

-

(1,547)

-

(50)

(1,597)

Income tax expense

190,871

79,846

59,650

42,970

373,337

Segment profit

678,086

107,042

162,483

117,049

1,064,660

Segment assets

14,227,127

8,647,977

6,670,129

3,250,176

32,795,409

Acquisition of non-

current assets 715,189

1,696,790

115,202

225,120

2,752,301

Segment liabilities

7,618,151

1,682,878

5,367,154

1,178,274

15,846,457


January 1, 2010

Department

stores

Discount stores

Card

business

Others

Total

Segment assets

12,844,768

6,802,262 4,588,796

2,267,620

26,503,446

Segment liabilities

5,870,327

1,467,180 3,441,539

687,648

11,466,694




101


(c) Reconciliations of total segment sales and profit to their respective consolidated financial statements line items for the years

ended December 31, 2011 and 2010 are summarized as follows:


2011

Sales

Profit for the year

Department stores ￦ 7,921,005

604,863

Discount store

8,474,744

86,656

Card business

1,484,994

182,189

Others

4,730,607

152,767

Segment totals

22,611,350

1,026,475

Elimination of inter-segment amounts

(358,262)

(13,875)

After consolidated adjustments ￦ 22,253,088

1,012,600


2010

Sales

Profit for the year


678,086

Discount store 7,354,928

107,042

Card business 1,314,778

162,483

Others 3,470,544

117,049

Segment totals 19,315,402

1,064,660

Elimination of inter-segment amounts (297,658)

38,989


1,103,649




102


(d) Reconciliation of segment assets and liabilities to their respective consolidated financial statement line items as of

December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December 31, 2011

Assets

Liabilities


8,968,413


1,983,088


6,148,110

Others 4,092,747

1,481,021


18,580,632

Elimination of inter-segment assets and

liabilities (198,517)

(198,517)

Adjustments of business combinations

1,089,021

-

Investments in subsidiaries and associates

(4,741,046)

-

Subtotal

(3,850,542)

(198,517)


18,382,115


December 31, 2010

Assets

Liabilities


7,618,151


1,682,878


5,367,154

Others 3,250,176

1,178,274


15,846,457


liabilities

(296,925)

(296,925)


932,030

-

Investments in subsidiaries and associates (4,238,984)

-

Subtotal

(3,603,879)

(296,925)


15,549,532




103


(d) Reconciliation of segment assets and liabilities to their respective consolidated financial statements line items as of

December 31, 2011, 2010 and January 1, 2010 are summarized as follows, continued:

(e) Sales by geographical areas for the years ended December 31, 2011 and 2010 are summarized as follows:


Region

2011 2010

Domestic ￦ 19,937,519

16,977,209

China 1,370,842

1,216,544

Vietnam 64,216

49,161

Indonesia 880,511

774,830

Total ￦ 22,253,088

19,017,744

In presenting information on the basis of geographical areas, geographic sales is based on the physical location of

customers.


January 1, 2010

Assets

Liabilities


5,870,327


1,467,180


3,441,539

Others 2,267,620

687,648


11,466,694


liabilities (268,970)

(268,970)


922,321

-

Investments in subsidiaries and associates

(3,410,048)

-

Subtotal

(2,756,697)

(268,970)

After consolidated adjustments

23,746,749

11,197,724




104


(f) Sales by types of products and services for each operating segment for the years ended December 31, 2011 and 2010 are



December 31, 2011

Department

stores

Discount stores

Card

business

Others (*)

Total


8,034,281

4,950

3,530,392

18,976,788

Sales of products

- - -

131,701

131,701

Financial income

-

-

1,438,316

-

1,438,316

Commissions

-

-

-

757,926

757,926

Rental income

459,998

120,650

-

17,111

597,759

Others

53,842

319,813

41,728

293,477

708,860

Total segment sales ￦ 7,921,005

8,474,744

1,484,994

4,730,607

22,611,350


December 31, 2010

Department

stores

Discount stores

Card

business

Others (*)

Total


6,980,307

2,055

2,533,230

16,239,620

Sales of products

- - -

77,020

77,020

Financial income

-

-

1,299,101

-

1,299,101

Commissions

-

-

-

590,018

590,018

Rental income

401,311

103,731

-

14,853

519,895

Others

49,813

270,890

13,622

255,423

589,748

Total segment sales ￦ 7,175,152

7,354,928

1,314,778

3,470,544

19,315,402

(*) Others represent convenience stores, television home shopping, supermarkets and etc.

(g) Non-current assets by geographical areas as of December 31, 2011, 2010 and January 1, 2010 are as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Domestic ￦ 14,821,655

14,064,481 12,089,207

China

1,188,688

1,082,616 840,836

Vietnam

92,399

92,224 91,669

Indonesia

398,656

312,234 236,920

India

128

- -

Total ￦ 16,501,526

15,551,555 13,258,632

Non-current assets by geographical area include investment property, property, plant and equipment, goodwill and other

intangible assets.

(h) There are no customers whose sales represent 10% or more or total consolidated sales.




105

36. Contingent Liabilities and Financial Commitments

(a) As of December 31, 2011, the Group has the following credit facility commitments with financial institutions:

Credit line

Korean won (millions),

Foreign currency

(thousands)

Amount used

under credit facility


Foreign currency (thousands)

General loan KRW 609,803 KRW 240,959

CNY 709,471 CNY 567,980

IDR 618,423,783 IDR 598,423,783

HKD 166,000 HKD 166,000

Discount of bill KRW 220,000 KRW 110,364

Buyer’s credit KRW 312,000 KRW 47,458

Bank overdraft KRW 84,000 KRW 1

Letter of credit USD 13,500 USD 2,962

(b) Material contracts of the Group are as follows:

Company

Contractor

Description of contract

Lotte Shopping Co., Ltd. Lotte Midopa Co., Ltd., Lotte Station

Building Co., Ltd. and Lotte Square Co.,

Ltd.

Providing management

services

Lotte Card Co., Ltd. American Express Company, MasterCard

International, Visa International and JCB

International

Commissions based on credit

card transaction amount

Woori Home Shopping &

Television Co., Ltd.

BC card and Shinhan card Business tie-up and issuing

credit cards

Korea Express Co., Ltd. Logistics services

Cable TV operators Providing broadcast programs

Korea Seven Co., Ltd. 7-Eleven, Inc. Using the registered trademark

and operating know-how

Lotte Boulangerie Co., Ltd. Shikishima Baking Co., Ltd. Bread baking skills and

techniques

NCF Co., Ltd. Nice Claup Co., Ltd. Royalty payments based on net

revenue of selling and

manufacturing amounts

(c) As of December 31, 2011, the Group are the plaintiff in various lawsuits claiming damages totaling ￦15,093 million and

the Group are the defendant in various lawsuits with damage claims totaling ￦22,032 million.

(d) Lotte Card Co., Ltd. has sold certain card assets to SPCs pursuant to the Assets-Backed Securitization Law of the Republic

of Korea and assumed the liability to pay the outstanding card assets when the transferred card assets cannot meet the

prescribed qualifications in the contract or fall into arrears in accordance with the terms of assets transfer agreement and

other contracts. Accordingly, as prescribed in the assets transfer agreement and other contracts, the SPCs have obligations

of early redemption of the asset-backed securities when average portfolio earning ratio during three consecutive settlement

periods is lower than the average primary cost ratio or when outstanding balance of adjusted securitized assets is less than

the minimum principal balance as of closing date of each settlement period and others.




106

36. Contingent Liabilities and Financial Commitments, Continued

(e) As of December 31, 2011, the Group has provided one blank note as collateral for borrowings from the Koryo Central

Educational Institution.

(f) Lotte Midopa Co., Ltd. did not recover 93 blank checks and 653 blank notes from related customers, which had been

pledged as collateral for debt. Management believes that the possibilities of payment are extremely low.

37. Inter-company Transactions and Balances with Consolidated Companies

The Group has provided guarantees for consolidated companies as of December 31, 2011 as follows:

2011

Consolidated

company

Provided by

Guarantee recipient

Type of

borrowings

Guaranteed amount

(thousands)

Lotte Vietnam

Shopping Co., Ltd.

Lotte Shopping

Co., Ltd.

Citibank N.A.

Hochiminh

Working capital

USD 60,000 and

interest thereon

Shinhan Bank Working capital USD 15,000

Liaoning Lotte Mart

Co., Ltd.

Lotte Shopping

Co., Ltd.

Australia and New

Zealand Bank

Working capital RMB 10,000

Lotte Cinema

Vietnam Co., Ltd.

Lotte Shopping

Co., Ltd.

The Export-Import

Bank of Korea

Working capital

USD 6,000 and

interest thereon

38. Transactions and Balances with Related Companies

(a) Details of investor and subsidiary relationships with the Company as of December 31, 2011 are as follows:

Related company

Ownership (%)

Control relationship (*)

Hotel Lotte Co., Ltd. 9.58 Affiliate of Lotte Group

Korea Fuji Film Co., Ltd. 8.52 Affiliate of Lotte Group

Lotte Confectionery Co., Ltd. 8.52 Affiliate of Lotte Group

Lotte Data Communication Company 5.22 Affiliate of Lotte Group

Lotte Chilsung Beverage Co., Ltd. 4.26 Affiliate of Lotte Group

Lotte Engineering & Construction Co., Ltd. 1.03 Affiliate of Lotte Group

Hotel Lotte Pusan Co., Ltd. 0.85 Affiliate of Lotte Group

(*) Lotte Group represents a group of entities as defined and restricted by the Monopoly Regulation and Fair Trade Act in

Korea.




107

38. Transactions and Balances with Related Companies, Continued

(b) Significant transactions which occurred in the normal course of business with related companies for the years ended

December 31, 2011 and 2010 are summarized as follows:


2011 2010

Related company

Revenues Expenses

Revenues Expenses

Hotel Lotte Co., Ltd. ￦ 37,527

78,538

35,694

71,865

Lotte Confectionery Co., Ltd. 14,437

138,601

23,809

118,797

Lotte Chilsung Beverage Co., Ltd. 11,045

72,785

10,288

60,831

Lotte Engineering & Construction Co.,

Ltd. 10,689

603,916

6,771

467,311


14,689

7,984

19,633

Lotte Station Building Co., Ltd. 25,643

6,452

27,826

6,330

Lotte Samkang Co., Ltd. 3,594

29,295

3,600

24,041

Lotte Ham Co., Ltd. 6,378

62,452

7,563

61,535

Lotte Fresh Delica Co., Ltd. 9,925

70,377

8,274

52,884

Lotte Trading Co., Ltd. 9,347

239,348

8,658

182,257

Lotte Aluminium Co., Ltd. 1,860

84,522

1,843

80,188

Lotte Logistics Co., Ltd. 21,718

1,093,039

8,882

445,320

Others 138,055

672,258

96,078

424,595

Total ￦ 297,979

3,166,272

247,270

2,015,587

(c) Account balances with related companies as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December 31, 2011

December 31, 2011 January 1, 2010

Related company

Receivables

Payables

Receivables

Payables Receivables Payables


14,339

23,984

11,446 24,964

8,105


17,375

12,026

15,837 8,505

11,205

Lotte Chilsung Beverage Co.,

Ltd. 3,638

4,178

1,722

4,842 10,059

3,181

Lotte Engineering &

Construction Co., Ltd. 115,366

232,209

48,427

236,209 57,435

275,099

Hotel Lotte Pusan Co., Ltd. 526

2,301

2,777

1,879 2,556

1,924


Ltd. 28,245

11,318

27,828

8,633 25,848

6,590

Lotte Aluminium Co., Ltd. 16,367

27,300

15,254

23,635 12,666

22,114

Lotte Samkang Co., Ltd. 998

11,549

342

10,565 1,478

10,944


8,376

5,460

2,307 5,684

3,293

Lotte Fresh Delica Co., Ltd. 280

5,848

455

4,645 279

3,317


17,391

4,275

11,541 4,809

12,522

Lotte Logistics Co., Ltd. 1,678

170,740

369

72,874 415

59,304

Others 527,825

172,657

159,170

97,530 63,288

113,590

Total ￦ 748,816

695,581

302,089

501,943 217,986

531,188




108


(d) The Group has provided guarantees for related companies as of December 31, 2011 as follows:

Related company

Guarantee recipient

Type of

borrowings

Guaranteed amount

(thousand)

Lotte Shopping Rus LLC Korea Development Bank Working capital USD 10,000

Intime Lotte Department Store

Co., Ltd.

Woori Bank Working capital KRW 12,000,000

Standard Chartered Bank Working capital RMB 70,000

Shinhan Bank Working capital

USD 8,125

(e) The fulfillment of the VPF contract between D-Cinema of Korea Co., Ltd. and Twentieth Century Fox Film Corporation

was equally guaranteed by CGV and the Group in October 2008.

(f) The fulfillment of the loyalty contract between Burger King Japan Co., Ltd. and BK Asiapac, Pte. Ltd. was guaranteed by

the Group.

39. Subsequent Events

The Group obtained control of CS Mart Co., Ltd. by acquiring 97.37% of stocks at ￦244,880 million in cash on January

19, 2012. CS Mart Co., Ltd. will be accounted for as a subsidiary in the consolidated financial statements in subsequent to

the acquisition.




109

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

As stated in note 2 to the consolidated financial statements, these are the Group’s first consolidated financial statements

prepared for the part of the period covered by the first K-IFRS annual financial statements in accordance with K-IFRS

No.1101 First-time Adoption of K-IFRS.

The accounting policies in note 3 to the consolidated financial statements have been applied in preparing the consolidated

financial statements for the year ended December 31, 2011, the comparative information for the year ended December 31,

2010, for the year ended December 31, 2010 and the preparation of an opening statement of financial position under K-

IFRS as of January 1, 2010.

(a) The exemptions the Group adopted in accordance with K-IFRS No.1101 First-time Adoption of K-IFRS

K-IFRS No.1101 permits those companies adopting K-IFRS for the first time certain exemptions from the full requirements

of K-IFRS in the transition period. The Group has taken the following key exemptions.

Business combination

Business combinations prior to the date of transition are not restated.

Cumulative translation differences

The Group regards the accumulated translation difference of overseas operations as zero (“0”).

Deemed cost to fair value or the revaluation amount

The Group measures some property, plant and equipment except for buildings at deemed cost which is fair value at the date

of transition.

Borrowing costs

The Group capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of a

qualifying asset as part of the cost of that asset after the date of transition to K-IFRS.




110

40. Transition to Korean International Financial Reporting Standards (“K-IFRS”), Continued

(b) The effects of the adoption of K-IFRSs on the Group’s financial position as of January 1, 2010 are as follows:


Total assets Total liabilities Total equity

K-GAAP ￦ 24,423,378

11,258,111

13,165,267

Adjustment for:

Change in gains and losses on disposal of property,

plant and equipment ①

29,511

-

29,511

Change in depreciation method of property, plant and

equipment ②

(11,760)

(11,888)

128

Component accounting of property, plant and

equipment ③

(269,667)

127

(269,794)


1,556

(3,008)

Impairment of financial assets ⑤ (12,901)

(167,039)

154,138

Changes in scope of associates ⑥ (345,733)

(159,740)

(185,993)


51,007

(49,537)


(2,818)

(26,353)

Customer loyalty programs ⑨ -

8,754

(8,754)

Impairment of assets ⑩ (6,291)

(1,236)

(5,055)

Depreciation of annual fee for credit card on straight-

line basis ⑪

-

15,747

(15,747)

Deferred loan income from card assets ⑫ 1,650

321

1,329

Deferred tax assets ⑬ (32,286)

204,821

(237,107)

Others 1

1

-

Total adjustment (676,629)

(60,387)

(616,242)

K-IFRS ￦ 23,746,749

11,197,724

12,549,025




111


(c) The effects of the adoption of K-IFRSs on the Group’s financial position as of December 31, 2010 and comprehensive

income for the year ended December 31, 2010 are as follows:



Total

comprehensive

income

K-GAAP ￦ 30,249,887

16,101,370

14,148,517

1,043,834

991,962

Adjustment for:

Change in gains and losses

on disposal of property,

plant and equipment ①

26

-

26

(156,174)

(1,191)

Change in depreciation

method of property, plant

and equipment ②

116,372

-

116,372

86,504

86,504

Component accounting of

property, plant and

equipment ③

(311,915)

127

(312,042)

(46,061)

(46,061)


1,689

(4,578)

(1,570)

(1,570)

Impairment of financial

assets ⑤

(16,121)

(192,651)

176,530

25,888

25,888

Changes in scope of

associates ⑥

(989,884)

(730,408)

(259,476)

15,920

(31,718)


93,058

(86,293)

(12,039)

(33,772)


(2,891)

(30,374)

(4,028)

(4,028)

Customer loyalty programs

⑨

-

9,551

(9,551)

(797)

(797)

Impairment of assets ⑩ 158,280

(1,235)

159,515

164,571

164,571

Depreciation of annual fee

for credit card on straight-

line basis ⑪

-

17,998

(17,998)

(2,251)

(2,251)

Deferred loan income from

card assets ⑫

2,873

-

2,873

2,237

2,237

Deferred tax assets ⑬ 1,048

250,577

(249,529)

(19,594)

(19,594)

Others ⑭ 10,353

2,347

8,006

7,209

2,405

Total adjustment (1,058,357)

(551,838)

(506,519)

59,815

140,623

K-IFRS ￦ 29,191,530

15,549,532

13,641,998

1,103,649

1,132,585




112


① Change in gains and losses on disposal of property, plant and equipment

The Group measures some property, plant and equipment except for buildings at deemed cost which is fair value at the date

of transition in accordance with K-IFRS No.1101. When the Group disposed of property, plant and equipment which are

measured at deemed cost, gains and losses on disposal of property, plant and equipment were changed.

② Change in depreciation method of property, plant and equipment

In accordance with K-IFRS, property, plant and equipment which are depreciated with the declining-balance method under

K-GAAP, are depreciated on a straight-line basis that reflects the appropriate pattern in which the asset’s future economic

benefits are expected to be consumed.

③ Component accounting of property, plant and equipment

In accordance with K-IFRS, a component that is significant compared to the total cost of property, plant and equipment is

depreciated over separate useful lives.

④ Provision for sales return

In accordance with K-IFRS, the Group estimates the possibility of returns and recognizes as provision for sales return.

⑤ Impairment of financial assets

In accordance with K-IFRS, the Group first assesses whether objective evidence of impairments exists individually for

financial assets and then, assesses whether objective evidence of impairment exists collectively for other financial assets by

group of financial assets with similar credit risk characteristics.

⑥ Changes in scope of associates

In accordance with K-IFRS, the Group reclassified investment securities as available-for-sale financial assets and

investments in associate. Available-for-sale financial assets are measured at fair value, and investments in associate are

recognized under the equity method. While under K-GAAP, the scope for associates is different due to the prescribed

entities.

⑦ Employee benefits

Post-employment benefit: In accordance with K-GAAP, the Group records the liabilities for its retirement and

severance benefit obligations which would be payable if all employees left the Group at the end of the reporting

period. In accordance with K-IFRS, the measurement of the retirement and severance benefit obligations are

calculated actuarially using the projected unit credit method based on certain assumptions to calculate the present

value.

Short-term employee benefit: According to K-IFRS, the Group recognizes the expected cost of short-term employee

benefits in the form of compensated absence as a liability, when employees render service that increases their

entitlement to future compensated absences.

Long-term employee benefit: Other long-term employee benefits include employee benefits that do not settle within

twelve months after the end of the period in which the employees renders the related service, and 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, less the fair value of any related assets.

⑧ Present value of leasehold deposits and leasehold deposits received

In accordance with K-GAAP, the Group recognizes leasehold deposits and leasehold deposits received as nominal amount

of deposits. In accordance with K-IFRS, leasehold deposits and leasehold deposits received are measured at amortized

cost using the effective interest method.




113


⑨ Customer Loyalty Programs

In accordance with K-GAAP, the Group recognized a provision for the costs of the product to be provided in the future

from using the points. However, in accordance with K-IFRS, the revenue to be incurred in the future from using the

points is deferred at first and the Group recognizes the unearned revenues as sales when the points are redeemed.

⑩ Impairment of assets

In accordance with K-IFRS, the Group does not amortize goodwill and perform the impairment test. The carrying

amounts of the Group’s non-financial 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. While under

K-GAAP goodwill is amortized on a straight line basis over the estimated useful lives.

⑪ Depreciation of annual fee for credit card on straight-line basis

In accordance with K-IFRS, annual fees for credit cards are depreciated on a straight-line basis over the duration of the

related service to be rendered. While under K-GAAP, the revenue is recognized fully upon receipt.

⑫ Deferred loan income from card assets

In accordance with K-IFRS, deferred loan income from card assets is recognized as revenue over the loan period using the

effective interest method. While under K-GAAP, such income is recognized in full upon occurrence.

⑬ Deferred tax effects

The Group reflected the tax effects in relation to the adjustments in transition to K-IFRS. Also, in accordance with K-

IFRS, the current deferred tax assets (liabilities) are reclassified to the non-current deferred tax assets (liabilities).

⑭ Others

Investment in properties: In accordance with K-GAAP, properties held to earn rentals or for capital appreciation were

classified and accounted for as property, plant and equipment. However, in accordance with K-IFRS, it is classified

as investment property.

Guarantee deposits for membership: In accordance with K-GAAP, guarantee deposits for membership recognized as

other non-current assets are recorded as intangible assets with indefinite useful lives.

Website costs: The Group recognizes development costs of its website, not directly related to operating activity, as

expenses in the incurred period.

Bank overdraft: Bank overdraft, which must be repaid upon request from financial institutions and which constitutes a

part of cash management, has been reclassified from cash flows from financing activities to cash and cash equivalents

under K-IFRS.




114


(d) Explanation of material adjustments to the consolidated statement of cash flows

In accordance with K-GAAP, interest expense, interest income, dividends income and income tax expenses were presented

as non-cash items in operating activities. While in accordance with K-IFRS, interest paid are recognized as cash flows

from financing activities, and interest received and dividends received are recognized as cash flows from investing

activities. Income tax paid is recognized as cash flows from operating activities.

Bank overdraft, which must be repaid upon request from financial institutions and which constitutes a part of cash

management, has been reclassified from cash flows from financing activities to cash and cash equivalence under K-IFRS.

Except for the explanation above, there are not other significant differences on cash flow statement between K-IFRS and

K-GAAP.

EXHIBIT 99-2 : SEPARATE FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2011 AND 2010 AND INDEPENDENT AUDITORS’ REPORT

LOTTE SHOPPING CO., LTD.

Separate Financial Statements


(With Independent Auditors’ Report Thereon)

Contents

Page

Independent Auditors’ Report 1

Separate Statements of Financial Position 2

Separate Statements of Comprehensive Income 4

Separate Statements of Changes in Equity 5

Separate Statements of Cash Flows 7

Notes to the Separate Financial Statements 10

Independent Auditors’ Report

Based on a report originally issued in Korean

The Board of Directors and Shareholders

Lotte Shopping Co., Ltd.:

We have audited the accompanying separate statements of financial position of Lotte Shopping Co., Ltd. (the “Company”)

as of December 31, 2011, 2010 and January 1, 2010, and the related separate statements of comprehensive income, changes

in equity and cash flows for the years ended December 31, 2011 and 2010. Management is responsible for the preparation

and fair presentation of these separate financial statements in accordance with Korean International Financial Reporting

Standards. Our responsibility is to express an opinion on these separate financial statements based on our audits.

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

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

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

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

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

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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

position of the Company as of December 31, 2011, 2010 and January 1, 2010 and its financial performance and its cash

flows for the years ended December 31, 2011 and 2010, in accordance with Korean International Financial Reporting

Standards.

Without qualifying our opinion, we draw attention to the following:

The procedures and practices utilized in the Republic of Korea to audit such separate financial statements may differ from

those generally accepted and applied in other countries. Accordingly, this report and the accompanying separate financial

statements are for use by those knowledgeable about Korean auditing standards and their application in practice.

KPMG Samjong Accounting Corp.

Seoul, Korea

March 14, 2012

This report is effective as of March 14, 2012, the audit report date. Certain subsequent events or circumstances, which

may occur between the audit report date and the time of reading this report, could have a material impact on the

accompanying separate financial statements and notes thereto. Accordingly, the readers of the audit report should

understand that the above audit report has not been updated to reflect the impact of such subsequent events or

circumstances, if any.

2


Separate Statements of Financial Position



Notes

December

31, 2011

December

31, 2010

January

1, 2010

Assets

Cash and cash equivalents

4,7,31,33 ￦ 1,336,911

625,347 422,787


4,5,7,36

512,422

427,729 327,360


4,6,7,36

279,087

280,445 178,165

Inventories

8

1,484,170

1,241,239 1,099,857

Other current non-financial

assets

9,36

120,156

80,941 51,869


3,732,746

2,655,701 2,080,038

Investments in associates and

subsidiaries

10,11

4,972,343

4,640,059 3,859,467


4,6,7,36

939,114

945,333 780,856

Property and equipment, net

12

11,115,381

11,022,546 10,353,399

Investment property

13

413,844

441,312 568,001

Goodwill

14

384,913

380,285 36,444


14

506,155

98,070 98,590


9

777,834

703,993 569,163


19,109,584

18,231,598 16,265,920

Total assets

￦ 22,842,330

20,887,299 18,345,958

See accompanying notes to the separate financial statements.

3


Separate Statements of Financial Position, Continued



Notes

December

31, 2011

December

31, 2010

January

1, 2010

Liabilities


net of issuance costs

4,7,17,36 ￦ 1,209,011

1,482,305 136,187


4,7,15,36

3,048,650

2,706,802 2,505,457


4,7,16

288,226

283,694 284,246

Income taxes payable

114,758

209,863 112,306

Unearned revenues

18

81,608

77,383 76,953

Provisions

19

3,443

3,758 2,979


20

528,291

509,910 424,710

Total current liabilities

5,273,987

5,273,715 3,542,838


net of issuance costs

4,7,17,36

2,993,314

1,831,952 1,781,073


6,7,16, 36

39,535

28,192 11,255

Employee benefit liabilities

21

128,026

107,324 68,146


32

1,190,343

1,079,898 1,126,946

Long-term unearned revenues

18

2,017

1,983 1,017


4,353,235

3,049,349 2,988,437

Total liabilities

9,627,222

8,323,064 6,531,275

Equity

Common stock of ￦5,000 par value

Authorized - 60,000,000 shares

Issued and outstanding - 29,043,374

shares

1,23

145,217

145,217 145,217

Capital surplus

23

3,622,183

3,622,183 3,622,183

Retained earnings

24

9,405,868

8,713,656 7,992,553

Accumulated other comprehensive

income

25

41,840

83,179 54,730

Total equity

13,215,108

12,564,235 11,814,683

Total liabilities and equity

￦ 22,842,330

20,887,299 18,345,958



Separate Statements of Comprehensive Income

4


Korean won

(millions, except for earnings per share)

Notes

2011 2010

Sales

27,36 ￦ 15,181,722

13,344,682

Cost of sales

27,29,36

(10,647,566)

(9,373,055)

Gross profit

4,534,156

3,971,627


28,29,36

(3,281,135)

(2,798,504)

Other operating income

28

42,318

81,844


28

(65,827)

(67,701)

Operating income

30

1,229,512

1,187,266

Finance income

31

250,400

162,753

Finance expense

31

(357,932)

(317,972)


1,121,980

1,032,047

Income tax expense

32

(379,043)

(253,754)

Profit for the year

742,937

778,293

Other comprehensive income (loss), net of tax:

25


(59,817)

43,065


8,768

(6,985)


(10,221)

(26,778)

Tax effects

12,772

(1,739)

Other comprehensive income (loss) for the year, net of tax

(48,498)

7,563


￦ 694,439

785,856

Earnings per share in won

26

Basic and diluted earnings per share

￦ 25,580

26,798


5


Separate Statements of Changes in Equity



Capital

stock

Capital

surplus

Retained

earnings

Accumulated other

comprehensive income Total equity


3,622,183

7,992,553

54,730

11,814,683


year

Profit for the year

-

-

778,293

-

778,293


Change in fair value of available-for-

sale financial assets

-

-

-

33,591

33,591



-

-

-

(5,142)

(5,142)


-

-

(20,886)

-

(20,886)

Subtotal

-

-

(20,886)

28,449

7,563 Total comprehensive income for the

year

-

-

757,407

28,449

785,856



equity:

Dividends

-

-

(36,304)

-

(36,304)



6


Separate Statements of Changes in Equity, Continued



Capital

stock

Capital

surplus

Retained

earnings

Accumulated other

comprehensive income Total stockholders’ equity


3,622,183

8,713,656

83,179

12,564,235


year

Profit for the year

-

-

742,937

-

742,937


Change in fair value of available-for-

sale financial assets

-

-

-

(48,148)

(48,148)



-

-

-

6,809

6,809


-

-

(7,159)

-

(7,159)

Subtotal

-

-

(7,159)

(41,339)

(48,498)


year

-

-

735,778

(41,339)

694,439



equity:

Dividends

-

-

(43,566)

-

(43,566)



7


Separate Statements of Cash Flows



2011 2010

Cash flows from operating activities

Profit for the period ￦ 742,937

778,293

Income tax expense

379,043

253,754

Post-employment benefits expense

59,649

42,688

Long-term employee benefits expense

6,221

14,896

Depreciation

308,541

269,616

Amortization

65,528

36,041

Loss on valuation of inventory

-

1,144

Loss due to inventory shrinkage

23,115

17,125

Loss on foreign exchange translation

72,524

95,409

Loss on disposal of property and equipment

17,179

32,967


35,305

22,600

Loss on disposition of derivative instruments

19,904

-

Rental expenses

27,194

23,946

Loss on disposal of investments in associates and subsidiaries

-

32,788

Loss on valuation of financial liabilities at fair value through

profit or loss

54,544

-


400

11,853


(562)

(23,368)


(16,894)

-


(9,095)

(55,719)

Reversal of loss on valuation of inventories

(2,878)

-

Rental income

(2,741)

(5,395)


(62,777)

-


(18,978)

(57,657)

Gain on transaction of derivative instruments

(26,492)

(10,052)

Other,net

618 962

Interest expense

149,757

141,846

Interest income

(69,942)

(53,232)

Dividends income

(21,474)

(18,227)

Increase in trade receivables

(72,565)

(58,046)

Increase in other receivables

(4,106)

(28,465)

Increase in other financial assets

(86,316)

(27,654)

Increase in inventories

(269,617)

(141,216)

Increase in other non-financial assets

(88,869)

(215,959)

Increase in trade payables

272,075

295,503

Increase (decrease) in other payables

87,946

(61,381)

Increase in other financial liabilities

25,345

56,171

Increase (decrease) unearned revenues

3,013

(1,570)

Increase (decrease) in provisions

(315)

779

Increase in other non-financial liabilities

18,060

84,729


(28,913)

(29,567)

Decrease in plan assets

(32,685)

(29,179)

Income tax paid

(350,931)

(206,413)

Net cash provided by operating activities ￦ 1,202,748

1,190,010


8


Separate Statements of Cash Flows, Continued



2011 2010


Proceeds from sale of short-term financial assets ￦ 612,825

157,032

Proceeds from repayments of loans

36,445

29,190

Proceeds from sale of available-for-sale financial assets

74,747

8,943

Proceeds from sale of held-to-maturity investments

-

1,000

Proceeds from sale of investments in associates and subsidiaries

2,166

591

Proceeds from disposal of property and equipment

134,176

485,168

Proceeds from disposal of intangible assets

235

528

Purchase of short-term financial assets

(724,982)

(126,936)

Purchase of loans

(2,200)

(62,625)


(10,743)

(19,177)

Acquisition of investments in associates and subsidiaries

(334,246)

(813,971)

Acquisition of property and equipment

(993,715)

(865,751)

Purchase of investment properties

(1,665)

(38,661)


(58,313)

(43,488)

Business combination, net of cash acquired

-

(826,543)

Increase of other assets

(3,421)

-

Decrease of other assets

575

11

Interest received

41,968

36,724

Dividends received

21,474

18,227


(2,059,738)


9


Separate Statements of Cash Flows, Continued



2011 2010


Proceeds from borrowings ￦ 1,884,500 9,740,239

Proceeds from issuance of debentures 1,940,774 825,056

Repayment of short-term borrowings (2,094,500) (9,130,361)

Redemption of debentures and long-term

borrowings (831,681) (131,500)

Interest paid (142,038) (194,859)

Dividends paid (43,565) (36,304)

Net cash provided by financing activities ￦ 713,490 1,072,271

Net increase in cash and cash equivalents 711,564 202,543

Cash and cash equivalents at beginning of year 625,347 422,787

Impact of foreign currency exchange rates on

cash and cash equivalents - 17

Cash and cash equivalents at end of year ￦ 1,336,911 625,347



Notes to the Separate Financial Statements


10

1. General Description of Reporting Entity

(a) Organization and Description of the Company

Lotte Shopping Co., Ltd. (the “Company”) was established on July 2, 1970 in the Republic of Korea to engage in retail

operations through department stores, discount stores and supermarkets. In addition to the retail operations, the

Company’s business includes, a chain of multiplex movie theaters under the brand name of Lotte Cinema and a clothing

retail division. The Company was listed on the Korea Exchange and the London Stock Exchange through an initial public

offering in February 2006.

The stockholders of the Company as of December 31, 2011 are as follows:

2. Basis of Preparation

(a) Statement of Compliance

The separate financial statements have been prepared in accordance with Korean International Financial Reporting

Standards (“K-IFRS”), as prescribed in the Act on External Audits of Corporations in the Republic of Korea.

These are the Company’s first separate financial statements prepared in accordance with K-IFRS and K-IFRS No. 1101

First-time Adoption of Korean International Financial Reporting Standards (“K-IFRS No. 1101”) has been applied. The

Company’s date of transition to K-IFRS is January 1, 2010, and the effect of the transition from Korean Generally

Accepted Accounting Principles (“K-GAAP”) to K-IFRS on the Company’s reported financial position and financial

performance is explained in note 39.

The separate financial statements were authorized for issuance by the Board of Directors on February 28, 2012.

Stockholder

Number

of shares

Ownership (%)

Shin, Dong Bin 4,237,627

14.6

Shin, Dong Ju 4,235,883

14.6

Shin, Kyuk Ho 293,877

1.0

Shin, Young Ja 232,818

0.8

Hotel Lotte Co., Ltd. 2,781,947

9.6

Korea Fuji Film Co., Ltd. 2,474,543

8.5

Lotte Confectionery Co., Ltd. 2,474,543

8.5

Lotte Data Communication Company 1,515,653

5.2

Lotte Chilsung Beverage Co., Ltd. 1,237,272

4.3

Lotte Engineering & Construction Co., Ltd. 300,019

1.0


0.9

Others 9,012,472

31.0

Total 29,043,374

100.0




11

2. Basis of Preparation, Continued

(b) Basis of Measurement

The separate financial statements have been prepared on the historical cost basis except for the following material items in

the statement 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

available-for-sale financial assets are measured at fair value

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 and unrecognized past service costs

(c) Functional and Presentation Currency

These separate financial statements are presented in Korean won, which is the Company’s functional currency and the

currency of the primary economic environment in which the Company operates.

(d) Use of Estimates and Judgments

The preparation of the separate financial statements in conformity with K-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 in which the estimates are revised and in any future periods affected.

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts

recognized in the separate financial statements is included in the following notes:

Note 13 – Classification of investment property

Note 34 – Lease classification

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:

Note 5 – Allowance for financial assets

Note 7 – Financial instruments

Note 14 – Intangible assets

Note 19 – Provisions

Note 21 – Employee benefits

Note 32 – Income taxes

Note 35 – Contingent liabilities and financial commitments




12

3. Significant Accounting Policies

The significant accounting policies applied by the Company in preparation of its separate financial statements are included

below. The accounting policies set out below have been applied consistently to all periods presented in these separate

financial statements and in preparing the opening K-IFRS statement of financial position at January 1, 2010 for the purpose

of the transition to K-IFRS, unless otherwise indicated.

(a) Operating Segment

The Company has disclosed information related to operating segments and geographic information in consolidated

financial statements in accordance with K-IFRS No. 1108 Operating Segments.

(b) Investments in Associates and Subsidiaries

These separate financial statements are prepared and presented in accordance with K-IFRS No. 1027 Consolidated and

Separate Financial Statements. The Company applied the cost method to investments in subsidiaries and associates in

accordance with K-IFRS No. 1027. The carrying amount under previous GAAP on the date of transition to K-IFRS is

considered to be the deemed cost of investments in subsidiaries and associates on the date of transition. Dividends from

subsidiaries or associates are recognized in profit or loss when the right to receive the dividend is established.


(i) Business combinations

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or

businesses under common control.

Each identifiable asset and liability is measured at its acquisition-date fair value except for below:

- Leases and insurance contracts are required to be classified on the basis of their contractual terms and other factors

- Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured

reliably are recognized

- Deferred tax assets or liabilities are recognized and measured in accordance with K-IFRS No.1012 Income Taxes

- Employee benefit arrangements are recognized and measured in accordance with K-IFRS No.1019 Employee Benefits

- Reacquired rights are measured in accordance with special provisions

As of the acquisition date, non-controlling interests in the acquiree are measured as the non-controlling interests'

proportionate share of the acquiree's identifiable net assets.

The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the

sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to

former owners of the acquiree and the equity interests issued by the acquirer. However, any portion of the acquirer's

share-based payment awards exchanged for awards held by the acquiree's employees that is included in consideration

transferred in the business combination shall be measured in accordance with the method described above rather than at fair

value.




13


(c) Business Combinations, Continued

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees;

advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the

costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities.

Acquisition-related costs, other than those associated with the issuance of debt or equity securities, are expensed in the

periods in which the costs are incurred and the services are received. The costs to issue debt or equity securities are

recognized in accordance with K-IFRS No.1032 Financial Instruments: Presentation and K-IFRS No.1039 Financial

Instruments: Recognition and Measurement.

(ii) Goodwill

The Company measures goodwill at the acquisition date as:

- the fair value of the consideration transferred; plus

- the recognized amount of any non-controlling interests in the acquiree; plus

- if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less

- the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

As part of its transition to K-IFRS, the Company elected to restate only those business combinations which occurred on or

after January 1, 2010 in accordance with K-IFRS. In respect of acquisitions prior to January 1, 2010, goodwill is included

on the basis of its deemed cost, which represents the amount recorded under previous GAAP, K-GAAP.

(d) Cash and Cash Equivalents

Cash and cash equivalents comprise cash on hand, demand deposits, and short-term, highly liquid investments that are

readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and are

used by the Company in management of its short-term commitments. Generally equity investments are excluded from

cash and cash equivalents. However, redeemable preference shares, for which the period from the acquisition to

redemption is short, are classified as cash and cash equivalents.

(e) Inventories

The cost of inventories is based on the first-in first-out principle, and includes expenditures for acquiring the inventories,

production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the

case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based

on normal operating 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 are 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, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the

reversal occurs.




14


(f) Non-derivative Financial Assets

The Company recognizes and measures non-derivative financial assets by the following four categories: financial assets at

fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets.

The Company recognizes financial assets in the separate statement of financial position when the Company becomes a

party to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset

not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

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

A financial asset is classified as financial assets are classified at fair value through profit or loss if it is held for trading or is

designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss

when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are

recognized in profit or loss.

(ii) Held-to-maturity investments

A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Company has the

positive intention and ability to hold to maturity, are classified as held-to-maturity investments. Subsequent to initial

recognition, held-to-maturity investments are measured at amortized cost using the effective interest method.

(iii) Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market.

Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method

except for loans and receivables of which the effect of discounting is immaterial.

(iv) Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are

not classified as financial assets at fair value through profit or loss, held-to-maturity investments or loans and receivables.

Subsequent to initial recognition, they are measured at fair value, which changes in fair value, net of any tax effect,

recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market

price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be

settled by delivery of such unquoted equity instruments are measured at cost. When a financial asset is derecognized or

impairment losses are recognized, the cumulative gain or loss previously recognized in other comprehensive income is

reclassified from equity to profit or loss. Dividends on an available-for-sale equity instrument are recognized in profit or

loss when the Company’s right to receive payment is established.

(v) De-recognition of financial assets

The Company 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 on the financial asset in a transaction in which substantially all the

risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is

created or retained by the Company is recognized as a separate asset or liability.

If the Company retains substantially all the risks and rewards of ownership of the transferred financial assets, the Company

continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.




15


(g) Derivative Financial Instruments, including hedge accounting

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value,

and changes therein are either recognized in profit or loss or, when the derivatives are designated in a hedging relationship

and the hedge is determined to be an effective hedge, other comprehensive income.

(i) Hedge accounting

The Company holds forward exchange contracts, interest rate swaps, currency swaps and other derivative contracts to

manage interest rate risk and foreign exchange risk. The Company designated derivatives as hedging instruments to

hedge the risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge) and foreign

currency risk of highly probable forecasted transactions or firm commitments (a cash flow hedge).

On initial designation of the hedge, the Company 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. The Company makes an

assessment, both at the inception of the hedge relationship as well as on a quarterly basis, whether the hedging instruments

are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items

during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of

80%-125%. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and

should present an exposure to variations in cash flows that could ultimately affect reported net income.

Fair value hedge

Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognized in profit or loss.

The gain or loss from remeasuring the hedging instrument at fair value for a derivative hedging instrument and the gain or

loss on the hedged item attributable to the hedged risk are recognized in profit or loss in the same line item of the separate

statement of comprehensive income.

The Company discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised,

or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged

item attributable to the hedged risk is amortized to profit or loss from the date the hedge accounting 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.

(ii) Other derivative financial instruments

Changes in the fair value of other derivative financial instrument not designated as a hedging instrument are recognized

immediately in profit or loss.




16


(h) Impairment of Financial Assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there

is objective evidence that it is impaired. A financial asset 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. However, losses expected as a result of future events, regardless of

likelihood, are not recognized.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is

objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses should be measured and recognized.

(i) Financial assets measured at amortized cost

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its

carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest

rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured

by using prices from any observable current market transactions. The Company can recognize impairment losses directly or

establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases

and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an

improvement in the debtor's credit rating), the previously recognized impairment loss shall be reversed either directly or by

adjusting an allowance account.

(ii) Financial assets carried at cost

If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at

fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled

by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference

between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the

current market rate of return for a similar financial asset. Such impairment losses shall not be reversed.

(iii) Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive

income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other

comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the

financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity

instrument classified as available-for-sale shall not be reversed through profit or loss. If, in a subsequent period, the fair

value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event

occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the

amount of the reversal recognized in profit or loss.




17


(i) Property and Equipment

Property and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated

depreciation and accumulated impairment losses. 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. In addition, in the preparation

of the opening K-IFRS separate statement of financial position on the date of transition to K-IFRS, the Company measures

certain property and equipment except for buildings at fair value at the date of transition, which is deemed cost, in

accordance with K-IFRS No. 1101.

Subsequent to initial recognition, an item of property and equipment shall be carried at its cost less any accumulated

depreciation and any accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of property and equipment at cost or, if appropriate, as separate

items if it is probable that future economic benefits associated with the item will flow to the Company and the cost of the

item can be measured reliably. 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 in profit or loss.

The estimated useful lives of the Company’s assets are as follows:


Buildings 10 ~ 50

Structures 10 ~ 40

Machinery 4 ~ 30

Vehicles 5

Display fixtures 5

Other property and equipment (“Other PP&E”) 5

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.




18


(j) Intangible Assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and

accumulated impairment losses.

Amortization of intangible assets except for goodwill 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,

as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this

intangible asset is determined as having indefinite useful lives and not amortized.


Industrial property rights 5

Rights to use facility 10 ~ 20

Other intangible assets 10

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 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.

Goodwill recognized on business combination is included in intangible assets. The Company retroactively restated

amounts related to business combinations that occurred after January 1, 2010, in accordance with K-IFRS. Goodwill

related to business combinations that occurred before January 1, 2010 is included on the basis of its deemed cost, which

represents the amount recognized under K-GAAP. Goodwill acquired after January 1, 2010 is recognized as the fair value

of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the

net recognized amount of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date.

When the Company’s interest in the fair value of the acquiree’s net identifiable assets acquired and liabilities assumed

exceeds consideration, the difference is immediately recognized in the statement of income for the period.

Goodwill is measured at cost less accumulated impairment losses. The acquisition of additional non-controlling interest

while retaining control is accounted for as shareholder transaction and as a result no goodwill is recognized.




19


(k) Investment Property

Property held for the purpose of earning rentals or benefiting from capital appreciation is classified as investment property.

Investment property is measured initially at its cost. Transaction costs are included in the initial measurement.

Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses

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 item will flow to the Company and the cost of the item

can be measured reliably. 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.

Investment properties, except for land, are depreciated on a straight-line basis over 10 to 50 years, the estimated useful lives.

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

The change is accounted for as a change in an accounting estimate.

(l) Impairment of Non-financial Assets

The carrying amounts of the Company’s non-financial assets, other than assets arising from 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 amount to their

carrying amount.

The Company estimates the recoverable amount of an individual asset, if it is impossible to measure the individual

recoverable amount of an asset, then the Company 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 reflect 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. Impairment

losses are recognized in profit or loss.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising

from the goodwill acquired. 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.




20


(m) Leases

The Company classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases

where the Company assumes substantially all of the risks and rewards of ownership are classified as finance leases. All

other leases are classified as operating leases.

(i) Finance leases

At the commencement of the lease term, the Company recognizes as finance assets and finance liabilities in its separate

statements 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 charge and the reduction of the outstanding liability. The

finance charge 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 lessee adopts for depreciable assets that are owned. If there is

no reasonable certainty that the lessee 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 Company reviews to determine whether the leased asset may be

impaired.

(ii) 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 period of the lease.

(n) Borrowing Costs

The Company 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 Company borrows funds specifically for the purpose of obtaining a qualifying asset, the Company

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. The Company

immediately recognizes other borrowing costs as an expense. To the extent that the Company borrows funds generally

and uses them for the purpose of obtaining a qualifying asset, the Company shall determine the amount of borrowing costs

eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall

be the weighted average of the borrowing costs applicable to the borrowings of the Company 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 Company capitalizes during a period shall not exceed the amount of borrowing costs incurred

during that period.




21


(o) Non-derivative Financial Liabilities

The Company 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 Company recognizes financial liabilities in the separate statement of financial position when the Company

becomes a party to the contractual provisions of the financial liability.

(i) 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, transaction costs that

are directly attributable to the acquisition are recognized in profit or loss as incurred.

(ii) 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 acquisition. Subsequent to initial recognition, other financial

liabilities are measured at amortized cost using the effective interest method.

The Company derecognizes a financial liability from the separate statement of financial position when it is extinguished (i.e.

when the obligation specified in the contract is discharged, cancelled or expires).

(p) Employee Benefits

(i) 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 the related service. When an employee has rendered service to the Company during an

accounting period, the Company recognizes the undiscounted amount of short-term employee benefits expected to be paid

in exchange for that service.

(ii) 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 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, less the fair value of any related

assets. The present value is determined by discounting the expected future cash flows using the interest rate of corporate

bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same

currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in

the period in which they arise.

(iii) Retirement benefits: defined contribution plans

When an employee has rendered service to the Company during a period, the Company 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 Company 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.




22


(p) Employee Benefits, Continued

(iv) Retirement benefits: defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net

obligation in respect of defined benefit plans is calculated by estimating 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.

The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the

projected unit credit method.

The discount rate is the yield at the reporting date on corporate bonds that have maturity dates approximating the terms of

the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid.

The Company recognizes all actuarial gains and losses arising from actuarial assumption changes and experiential

adjustments in other comprehensive income when incurred.

When the fair value of plan assets exceeds the present value of the defined benefit obligation, the Company recognizes an

asset, to the extent of the total of cumulative unrecognized past service cost and 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.

Past service costs which are the change in the present value of the defined benefits obligation for employee service in prior

periods, resulting in the current period from the introduction of, or change to post-employment benefits, is recognized as an

expense on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits

are already vested immediately following the introduction of, or changes to, a defined benefit plan, the Company

recognizes the past service cost immediately.

(q) Provisions

Provisions are recognized when the Company 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 shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the

entity settles the obligation. The reimbursement shall be treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. 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.




23


(r) Foreign Currencies

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Company entities at exchange

rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to

the functional currency using the reporting date’s exchange rate. 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, a financial liability designated as a hedge of the net investment in a

foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income. Non-monetary

items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of

the transaction.

(ii) Foreign operations

If the presentation currency of the Company 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.

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.

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the

settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to

form part of the net investment in the foreign operation, are recognized in other comprehensive income in the translation

reserve.




24


(s) Equity 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.

Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any

dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the

Company’s shareholders.

Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders,

or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in profit or loss as

accrued.

When the Company 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 Company acquires and retains treasury shares, the

consideration paid or received is directly recognized in equity.

(t) Revenue

Revenue from sale of goods, rendering of services or use of the Company assets is measured at the fair value of the

consideration received or receivable, net of returns, trade discounts and volume rebates and are recognized as a reduction of

revenue.

Goods sold

Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the

significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the

associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement

with the goods, and the amount of revenue can be measured reliably.

The Company recognizes sales on a gross basis for merchandise of which the Company bears the overall inventory risk in

connection with purchase contracts with vendors where the merchandise may only be returned for a full refund prior to the

end of the relevant season (for seasonal merchandise) or within 90 days from delivery (for non-seasonal merchandise).

The Company recognizes sales on a net basis for merchandise that may be returned to vendors at any time.

Customer Loyalty Programs

For customer loyalty programs, the fair value of the consideration received or receivable from the initial sale is allocated

between the award credits (“points”) and the other components of the sale. The Company supplies all of the awards with

its products. The amount allocated to the points is estimated by reference to the fair value of its products for which they

could be redeemed, since the fair value of the points themselves is not directly measurable. The fair value of its products

is estimated taking into account the expected redemption rate and the timing of such expected redemptions. Such amount

is deferred and revenue is recognized only when the points are redeemed and the Company has fulfilled its obligations to

supply its products.




25


(t) Revenue, Continued

Commissions

When the Company acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is

the net amount of commission made by the Company.

Rental income

Rental income, net of lease incentives granted, from investment property is recognized in profit or loss on a straight-line

basis over the term of the lease.

(u) Finance Income and Finance Costs

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend

income, gains on the disposal of available-for-sale financial assets, changes in the fair value of financial assets at fair value

through profit or loss, 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 method. Dividend income is recognized in profit or loss

on the date that the Company’s right to receive payment is established, which in the case of quoted securities is the ex-

dividend date.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, dividends on preference

shares classified as liabilities, changes in the fair value of financial assets at fair value through profit or loss, impairment

losses recognized on financial assets, and losses on hedging instruments that are recognized in profit or loss. Borrowing

costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in

profit or loss using the effective interest method.

(v) Income Taxes

Income tax expense comprises current and deferred tax. Pursuant to the income tax laws and regulations in Korea, the

Company and its subsidiaries file separate tax returns therefore the Company’s income tax is determined on a separate

standalone basis. 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 other comprehensive income.

(i) 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 any adjustment to tax payable in respect of previous years.

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.




26


(v) Income Taxes, Continued

(ii) 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. A deferred

tax liability is recognized for all taxable temporary differences. A deferred tax asset is recognized for all deductible

temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilized.

However, deferred tax is not recognized for the following temporary differences: taxable temporary differences arising on

the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business

combination and that affects neither accounting profit or loss nor taxable income.

The Company 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 Company is able to control the timing of

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

future. The Company recognizes a deferred tax asset for all deductible temporary differences arising from investments in

subsidiaries and associates, 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 Company 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 settle current tax

liabilities and assets on a net basis.




27


(w) Earnings per Share

The Company 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 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 convertible notes.

(x) New Standards and Interpretations Not Yet Adopted

The following new standards, interpretations and amendments to existing standards have been published and are mandatory

for the Company for annual periods beginning after January 1, 2011, and the Company has not early adopted them.

Management believes the impacts of these new pronouncements on the Company’s separate financial statements are not

significant.


The amendments require disclosing the nature of the transferred assets, their carrying amount, and the description of risks

and rewards for each class of transferred financial assets that are not derecognized in their entirety. If the Company

derecognizes transferred financial assets but still has their specific risks and rewards, the amendments require additional

disclosures on their effect of risks. The amendments will be applied prospectively for the Company’s annual periods

beginning on or after July 1, 2011.


The standard requires recognition of actuarial gains and losses immediately in other comprehensive income and to calculate

expected return on plan assets based on the rate used to discount the defined benefit obligation. The standard will be

applied retrospectively for the Company’s annual periods beginning on or after January 1, 2013.

(iii) K-IFRS No. 1113 Fair Value Measurement

The standard defines fair value and a single framework for fair value, and requires disclosures about fair value

measurements. The standard will be applied prospectively for the Company’s annual periods beginning on or after

January 1, 2013.




28

4. Risk Management

(a) Management of financial risks

Objectives and Policies of the Company

Risk management activities of the Company identify credit risk, liquidity risk, market risk and any other potential risk that

may affect financial performance and by eliminating, avoiding and abating the possible risk level to an acceptable range

and to support to a stable and consistent business performance with the intention to contribute to strengthening the

Company’s competitiveness by reducing cost of finance through improving the financial structure and enhancing efficiency

of capital operations.

In order to install and implement the financial risk management system, the Company has established risk management

policies in an integrated perspective, and is complying with the risk management policies and procedures by strictly

performing control and review of internal managers.

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet

its contractual obligations in ordinary transaction and investment activity.

Most of the Company’s profit is generated from individual clients and carries low credit risk. Also, the Company deposits

its cash and cash equivalents and short-term financial instruments to financial institutions. Credit risks from these

financial institutions are very limited due to their high solvency.

i) Exposure to credit risk

The book value of a financial asset represents its maximum exposure to credit risk. The maximum exposures to credit

risk as of December 31, 2011, 2010 and January 1, 2010 are as follows:


Account

December

31, 2011

December

31, 2010

January

1, 2010

Cash and cash equivalents(*1) ￦ 1,311,329

607,664 407,885


512,422 427,729 327,360

Current other financial assets

279,087 280,445 178,165

Non-current other financial assets(*2)

711,523 656,541 541,657

Total ￦ 2,814,361 1,972,379 1,455,067

(*1) Cash held by the Company is excluded as there is no exposure to credit risk.

(*2) Equity securities within available-for-sale financial assets are excluded as there is no exposure to credit risk.




29



ii) Impairment loss

Trade and other receivables, other financial assets (current), and other financial assets (non-current) before deducting

allowance for doubtful accounts as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December 31, 2011

Description


neither past due

nor impaired



but not impaired

Receivables

impaired(*) Total



(current)

279,087 - 9,682 288,769


current)

711,523 - - 711,523

Total ￦ 1,496,195 6,837 12,181 1,515,213

(*) The Company sets up an allowance for doubtful accounts when financial assets are individually determined to be

impaired.


December 31, 2010

Description



impaired



but not impaired

Receivables

impaired(*) Total



(current)

280,445 - 26,576 307,021


current)

656,541 - - 656,541

Total ￦ 1,361,003 3,712 29,035 1,393,750


impaired.




30




January 1, 2010

Description



impaired



but not impaired

Receivables

impaired(*) Total



(current)

178,165 - 14,982 193,147


current)

541,657 - - 541,657

Total ￦ 1,043,520 3,662 17,261 1,064,443


impaired.

iii) Allowance for doubtful trade and other receivables

The movement in the allowance for doubtful trade and other receivables for the years ended December 31, 2011 and



2011

2010


2,279

Impairment loss

40

180


2,459

The movement in the allowance for doubtful other financial assets (current) for the years ended December 31, 2011 and



2011

2010


14,982

Recognition of impairment loss

(reversal of impairment loss)

(16,894)

11,594


26,576

The Company also reviewed the collectability of other financial assets (non-current), which include primarily available-

for-sale financial assets, long-term loans and rental deposits, and determined that allowance for doubtful accounts is not

necessary.




31



iv) Financial assets that are past due as at the end of the reporting period but not impaired

An analysis of the age of trade and other receivables that are past due as at the end of the reporting period but not

impaired are summarized as follows:


December 31, 2011

Description

Carrying

amount

3 months

or less

3 ~ 6

months

6 ~ 12

months

More than

1 year

Trade and other

receivables ￦ 6,837 1,728 2,104 1,941 1,064


December 31, 2010

Description

Carrying

amount

3 months

or less

3 ~ 6

months

6 ~ 12

months

More than

1 year

Trade and other

receivables ￦ 3,712 403 966 757 1,586


January 1, 2010

Description

Carrying

amount

3 months

or less

3 ~ 6

months

6 ~ 12

months

More than

1 year

Trade and other

receivables ￦ 3,662 828 7 1,020 1,807




32



Liquidity Risks

Liquidity risk is the risk that the Company will encounter difficulty in meeting its obligations associated with its financial

liabilities that are settled by delivering cash or another financial asset due to an adverse managerial or external environment.

In order to systematically manage liquidity risk, the Company predicts and corresponds to potential risks through

consistently analyzing the schedule of cash flow and establishing short-term and long-term capital management plans.

The Company has historically been able to satisfy its cash requirements from cash flows from operations and debt

financing. To the extent that the Company does not generate sufficient cash flows from operations to meet its capital

requirements, the Company may rely on other financing activities, such as renewal of short-term borrowings, external long-

term borrowings and offerings of debt securities, and other debt securities.

Also, the Company currently deposits a considerable amount with financial institutions with high credit ratings to make

proper provisions for potential liquidity risks. The Company maintains a credit line for overdraft and general loans with

various financial institutions, and can raise funds through the domestic and foreign financial markets based on high credit

ratings. The management of the Company believes that it is possible to redeem liabilities using cash flows from operating

activities and cash in-flow from financial assets.

Aggregate maturities of non-derivative financial liabilities, including estimated interest, as of December 31, 2011 are as

follows:

(*) Derivative financial liabilities are excluded in the maturity analysis.

It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly

different amounts.

Risks from guarantees provided for associates and subsidiaries are as follows:


Account

Carrying

amount

Contractual

cash flows

Within 1

year

1~5 years

Current portion of borrowings and

debentures ￦ 1,209,011 1,229,477

1,229,477

-


3,048,650 3,048,650

3,048,650

-

Current other financial liabilities (*)

281,130 282,246

282,246

-

Borrowings and debentures

2,993,314 3,241,397

-

3,241,397

Non-current other financial liabilities (*)

34,436 38,145

-

38,145

Total ￦ 7,566,541 7,839,915

4,560,373

3,279,542


Expected guarantee

amounts, if occurred Within 1 year

1~5 years

Guaranteed amount ￦ 140,922 129,389

11,533




33



Market Risks

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will

affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk

management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.

The Company buys and sells derivatives, and also incurs financial liabilities, in order to manage market risks. All such

transactions are carried out under strict supervision of the internal risk management. Generally, the Company seeks to

apply hedge accounting in order to manage volatility in profit or loss.

i) Currency risk

The Company is exposed to currency risk on borrowings and debentures that are denominated in a currency other than

the respective functional currencies of the Company. Currencies that generate exchange positions include USD, JPY

and others. The objective of exchange risk management is to continue stable financial activities by minimizing

uncertainty and profit and loss fluctuations. Foreign currency trade for speculation is strictly prohibited.

The Company enters into currency swap transactions with financial institutions to hedge currency risks of foreign

currency denominated borrowings and debentures. When the Company needs foreign currencies, the Company enters

into a forward exchange contract with major financial institutions to avoid the risks of exchange rate fluctuations.

Assets and liabilities denominated in foreign currencies other than the Company’s functional currencies as of December

31, 2011, December 31, 2010 and January 1, 2010 are as follows:



Assets Liabilities Assets Liabilities Assets Liabilities

USD ￦ 10,333 1,577,584 46,789 797,515 75,224 467,612

EUR - 178 - 740 - 990

JPY - 1,284,650 210 963,985 189 997,674

Total ￦ 10,333 2,862,412 46,999 1,762,240 75,413 1,466,276

The closing rates as of December 31, 2011, 2010 and January 1, 2010 and the average rates for the years ended

December 31, 2011 and 2010 are as follows:

Average rate

Closing rate

2011

2010

December

31, 2011

December

31, 2010

January

1, 2010

USD ￦ 1,108.11

1,156.26

1,153.30

1,138.90 1,167.60

EUR

1,541.42

1,532.94

1,494.10

1,513.60 1,674.28

JPY

13.9131

13.2056

14.8516

13.9708 12.6282




34



The Company regularly measures exchange risks on Korean won against foreign currency fluctuations. The Company

assumes that foreign currency exchange rates fluctuate 10% at the end of reporting period, and others variables are not

changed. Sensitivity analysis of income before taxes from changes of foreign currency exchange rate as of December

31, 2011, 2010 and January 1, 2010 are summarized as follows:



10%

increase

10%

decrease

10%

increase

10%

decrease

10%

increase

10%

decrease

USD ￦ (45,943) 45,943 856 (856) 6,610 (6,610)

EUR (18) 18 (74) 74 (99) 99

JPY (44,576) 44,576 (41,891) 41,891 (37,870) 37,870

Total ￦ (90,537) 90,537 (41,109) 41,109 (31,359) 31,359

Borrowings and debentures with currency swaps and overseas convertible bonds designated as financial liabilities at fair

value through profit or loss are not included. The sensitivity analysis above is related to the monetary assets and

liabilities, denominated in a currency other than functional currency, as of December 31, 2011, 2010 and January 1,

2010 of the Company entities in Korea.

ii) Interest rate risk

Interest rate risk is the risk of changes in interest income and expense from deposits and borrowings due to fluctuations

in the market interest rate. Interest rate risk of the Company arises on variable interest rate financial instruments and

borrowings. The purpose of interest rate risk management is to minimize value fluctuation of financial assets and

liabilities that occur from uncertainty caused by changes in interest rates.

The Company makes interest swap transactions with financial institutions for hedging interest rate risk of variable

borrowings and debentures.

At the reporting date the interest rate profile of the Company’s variable interest-bearing financial instruments was:


December

31, 2011

December

31, 2010

January

1, 2010


Financial assets ￦ 65,000

65,000 38,400


1,245,069

1,838,353 1,090,095




35



Sensitivity analysis of interest income and expenses from changes of interest rates as of December 31, 2011, 2010 and

January 1, 2010 are as summarized as follows:



100bps

up

100bps

down

100bps

up

100bps

down

100bps

up

100bps

down

Interest income ￦ 650 (650) 650 (650) 384 (384)

Interest expense 3,000 (3,000) 5,000 (5,000) 1,000 (1,000)

Borrowings and debentures for which the Company has entered into interest rate swap transactions are not included.

(b) Capital Management

The objective of the Company’s capital management is maximizing shareholders’ profit through maintaining a sound

capital structure. The Company makes necessary improvements to the capital structure through monthly monitoring of

financial ratios such as liabilities to equity ratios and net borrowings to equity ratios in order to achieve an optimal capital

structure.

The liabilities to equity ratios and net borrowings to equity ratios as of December 31, 2011, 2010 and January 1, 2010 are

as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Liabilities (a) ￦ 9,627,222

8,323,064 6,531,275

Equity (b)

13,215,108

12,564,235 11,814,683

Financial instruments (*) (c)

1,492,922

677,100 494,917

Borrowings (d)

4,202,325

3,314,257 1,917,260

Liabilities to equity ratio (a/b)

72.85%

66.24% 55.28%

Net borrowings to equity ratio ((d-

c)/b)

20.50%

20.99% 12.04%

(*) Financial instruments mainly consist of ordinary deposits, checking accounts, short-term and long-term financial

instruments.




36

5. Trade and Other Receivables

Trade and other receivables as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Trade receivables ￦ 395,432 322,872 257,731

Other receivables 119,489 107,316 71,908

Allowance for doubtful accounts (2,499) (2,459) (2,279)

Trade and other receivables ￦ 512,422 427,729 327,360

6. Restricted Deposits

Restricted deposits included in current and non-current other financial assets as of December 31, 2011, 2010 and January 1,

2010 are summarized as follows:


Description Depositary December

31, 2011

December

31, 2010

January

1, 2010

Current:

Time deposits Woori Bank and others ￦ 17,093 27,891 20,375

Special deposits Industrial Bank of Korea 64,500 40,000 -

Non-current:

Special deposits Shinhan Bank and others 16 16 28

Time deposits Shinhan Bank - - 12,500

Available-for-sale

financial assets

Gyeongsangnam-do

Metropolitan

Government and others 32,211 49,033 37,099

Total ￦ 113,820 116,940 70,002




37

7. Fair Value of Financial Instruments

(a) Other financial assets as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


Account December

31, 2011

December

31, 2010

January

1, 2010

Current:

Short-term financial instruments ￦ 181,593 69,436 87,032

Short-term loans - 18,239 22,789


Current derivative assets held for

the purpose of hedging 17,622 126,755 -

Other financial assets 20 - -

Accrued income 10,297 8,309 6,654

Short-term deposits 59,793 52,895 53,546

Subtotal 279,087 280,445 178,165

Non-current:

Long-term financial instruments - - 12,500

Guarantee deposits 16 16 28


Held-to-maturity investment - - 1,000

Long-term loans 70,880 68,658 42,101

Long-term deposits 610,334 512,946 344,237


for the purpose of hedging 2,828 8,121 84,850


for the purpose of trading - 34,879 31,817

Subtotal 939,114 945,333 780,856

Total ￦ 1,218,201 1,225,778 959,021




38


(b) The carrying amount and the fair value of financial instruments as of December 31, 2011, 2010 and January 1, 2010 are




Carrying

amount Fair value

Carrying

amount Fair value

Carrying

amount

Fair value

Cash and cash

equivalents Cash and cash equivalents ￦ 1,336,911 1,336,911 625,347 625,347 422,787 422,787

Financial assets at

fair value through

profit or loss


assets held for the

purpose of trading - - 34,879 34,879 31,817 31,817

Loans and

receivables(*1) Trade and other

receivables 512,422 512,422 427,729 427,729 327,360 327,360

Short-term financial

instruments 181,593 181,593 69,436 69,436 87,032 87,032

Long-term financial

instruments - - - - 12,500 12,500

Short-term loans - - 18,239 18,239 22,789 22,789

Other financial assets 20 20 - - - -

Accrued income 10,297 10,297 8,309 8,309 6,654 6,654

Short-term deposits 59,793 59,793 52,895 52,895 53,546 53,546

Guarantee deposits 16 16 16 16 28 28

Long-term loans 70,880 70,880 68,658 68,658 42,101 42,101

Long-term deposits 610,334 610,334 512,946 512,946 344,237 344,237

Subtotal 1,445,355 1,445,355 1,158,228 1,158,228 896,247 896,247

Available-for-sale

financial assets Marketable available-for-

sale equity securities(*2) 70,523 70,523 123,240 123,240 105,674 105,674

Non-marketable available-

for-sale equity securities

(*3) 93,420 93,420 107,557 107,557 79,830 79,830

Equity securities valued

by acquisition cost (*4) 63,648 63,648 57,994 57,994 53,694 53,694

Non-marketable debt

securities(*5) 37,227 37,227 36,733 36,733 33,269 33,269

Subtotal 264,818 264,818 325,524 325,524 272,467 272,467

Held-to-maturity

investment Held-to-maturity

investment - - - - 1,000 1,000

Derivative assets held

for the purpose of

hedging

Current derivative assets-

hedge 17,622 17,622 126,755 126,755 - -


assets-hedge 2,828 2,828 8,121 8,121 84,850 84,850

Subtotal 20,450 20,450 134,876 134,876 84,850 84,850

Total ￦ 3,067,534 3,067,534 2,278,854 2,278,854 1,709,168 1,709,168




39

7. Fair Value of Financial Instruments, Continued (*1) Book value is considered as a fairly reasonable approximate value of fair value.

(*2) Marketable available-for-sale financial assets are measured at fair value based on the market prices which are traded

in the active market.

(*3) Some of non-marketable available-for-sale equity securities that do not have a quoted market price in an active

market are measured at fair value based on valuation of external valuation agencies.

(*4) Others are recorded based on acquisition cost because fair value cannot be reliably measured and difference between

fair value and acquisition cost is immaterial.

(*5) Non-marketable available-for-sale debt securities that do not have a quoted market price in an active market are

measured at fair value based on valuation of external valuation agencies.

(c) The carrying amount and the fair value of financial liabilities as of December 31, 2011, 2010 and January 1, 2010 are


(*) Book value is considered as a fairly reasonable approximate value of fair value.



Carrying

amount Fair value

Carrying

amount Fair value

Carrying

amount Fair value

Financial liabilities at

fair value through

profit or loss

Overseas convertible

bonds ￦ 1,007,219 1,007,219 - - - -


based on amortized

cost(*)

Trade and other

payables 3,048,650 3,048,650 2,706,802 2,706,802 2,505,457 2,505,457

Short-term borrowings 300,000 300,000 510,000 510,000 10,000 10,000

Current portion of

long-term

borrowings 560,571 560,571 - - - -

Current portion of

debentures 348,440 348,441 972,305 972,305 126,187 126,187

Financial guarantee

liabilities 437 437 829 829 321 321

Accrued expenses 78,243 78,243 58,630 58,630 45,258 45,258

Current withholding

deposits 202,449 202,449 217,663 217,663 238,668 238,668

Long-term borrowings - - 532,089 532,089 378,846 378,846

Long-term debentures 1,986,095 1,986,095 1,299,863 1,299,863 1,402,227 1,402,227

Withholding deposits 34,436 34,436 14,965 14,965 11,255 11,255

Subtotal 6,559,321 6,559,322 6,313,146 6,313,146 4,718,219 4,718,219


held for the purpose

of hedging

Current derivative

liabilities-hedge

7,097 7,097 6,572 6,572 - -


liabilities -hedge 5,100 5,100 13,227 13,227 - -

Subtotal 12,197 12,197 19,799 19,799 - -

Total ￦ 7,578,737 7,578,738 6,332,945 6,332,945 4,718,219 4,718,219




40


(d) The fair value hierarchy

The Company classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs

used in making the measurements.

The different levels have been defined 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).

The fair value measurements classified by fair value hierarchy as of December 31, 2011 are as follows:

Description


December 31, 2011

Level Ⅰ Level Ⅱ Level Ⅲ Total


assets ￦

70,522

37,227

93,420

201,169

Derivative assets

-

20,450

-

20,450

Total financial assets ￦ 70,522 57,677 93,420 221,619

Financial liabilities at fair value


-

1,007,219

-

1,007,219


-

12,196

-

12,196

Total financial liabilities ￦

-

1,019,415

-

1,019,415




41

8. Inventories

(a) Inventories as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010 Merchandise, net of allowance for

valuation losses ￦ 1,478,568 1,237,774 1,096,647

Finished goods 2,933 - -

Goods in process 249 - -

Raw materials 166 - -

Subsidiary materials 29 - -

Supplies 1,188 772 896

Materials-in-transit 158 115 557

Finished apartment units 879 2,578 1,757

Total ￦ 1,484,170 1,241,239 1,099,857

(b) During 2011 and 2010, loss from valuation of inventory and reversal of loss on valuation of inventories are recognized as

follows:


2011 2010

Cost of goods sold:

- Loss on valuation of inventories ￦ 5,668

8,546

9. Other Non-financial Assets

Other non-financial assets as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

(*) Long-term prepaid expenses mainly consist of lease prepayments.

Description


December

31, 2011

December

31, 2010

January

1, 2010

Current

Advance payments ￦ 61,904 33,795 20,742

Prepaid expenses 58,252 47,146 31,127

Subtotal 120,156 80,941 51,869

Non-current

Long-term advance payments 126,007 105,996 79,938

Long-term prepaid expenses (*) 651,827 597,997 489,225

Subtotal 777,834 703,993 569,163

Total ￦ 897,990 784,934 621,032




42

10. Investments in Associates

(a) The details of associates as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Company

December 31, 2011

Korean won

(millions)

Location

Principal

business

Percentage of

Ownership (%)

Balance at

December

31, 2011


Daehong Communications Co., Ltd. Korea Advertisement agency 30.00 27,285











Lotte Europe Holdings B.V. Netherlands Holding company 30.81 110,908 Intime Lotte Department Store Co., Ltd.

(*1) China Distribution 50.00 -


Bliss Co., Ltd. Korea Food manufacturing 30.00 150

D-Cinema of Korea Co., Ltd. (*1) Korea Film equipment 50.00 -

M-Venture Culture Investment L.P. Korea Film producing company 25.00 2,500

Capital One Diversity Cinema Fund Korea Film producing company 20.00 1,000 Shenyang SL Cinema Investment

Management Co., Ltd. (*1) China Cinema 49.00 1,496

So Big 5 Contents Investment Union Korea Film producing company 26.67 4,000 Capital One Middle-Low Budget Cinema

Fund Korea Film producing company 25.00 3,000

Hubei XL Cinema Co., Ltd. China Cinema 49.00 5,530

STL Co., Limited (*1) Korea Retail 50.00 1,000

Hemisphere Film Investors II LLC (*2) America Film producing company 100.00 23,260 CJ Venture Investment No.14 Culture

Contents Fund Korea Film producing company 30.00 6,000

Total ￦ 671,414

(*1) Intime Lotte Department Store Co., Ltd., D-Cinema of Korea Co., Ltd., Shenyang SL Cinema Investment Management Co.,

Ltd. and STL Co., Limited are jointly controlled entities.

(*2) The Company is a non-managing partner of Hemisphere Film Investors II LLC and doesn’t have power to govern the

financial and operation policies of it, but has significant influence on the entity.




43



Company

December 31, 2010

Korean won

(millions)

Location

Principal

business

Percentage of

Ownership (%)

Balance at

December

31, 2010



Advertisement

agency 30.00 27,285






Real estate



Real estate




Real estate



Lakepark AMC Korea

Real estate


Lotte Europe Holdings B.V. Netherlands Holding company 30.81 110,908 Intime Lotte Department Store Co.,



Bliss Co., Ltd. Korea

Food

manufacturing 30.00 150



Film producing

company 25.00 2,500

Capital One Diversity Cinema Fund Korea

Film producing

company 20.00 1,000 Shenyang SL Cinema Investment

Management Co., Ltd. China Cinema 49.14 752


Film producing

company 37.50 1,961

Total ￦ 611,271




44



Company

January 1, 2010

Korean won

(millions)

Location

Principal

business

Percentage of

Ownership (%)

Balance at

January

1, 2010

Lotte Station Building Co., Ltd. Korea Distribution 25.00 ￦ 157,380 Daehong Communications Co.,

Ltd. Korea Advertisement agency

30.00 27,285











Lotte Europe Holdings B.V. Netherlands Holding company 30.81 88,567 Intime Lotte Department Store Co.,

Ltd. China Distribution

50.00 -


D-Cinema of Korea Co., Ltd. Korea Film equipment 50.00

KTB Media Investment Union Korea Film producing company 30.00 977 M-Venture Culture Investment

L.P. Korea Film producing company

25.00 2,500 Isu Entertainment Investment

Union Korea Film producing company

37.50 1,962

Total ￦

506,794




45

11. Investments in Subsidiaries

(a) A summary of the subsidiaries of the Company as of December 31, 2011, 2010 and January 1, 2010 is as follows:

(*) Percentage of ownership represents an ownership of the Company. Percentage of ownership described in note 36

represents an ownership of the Company and its subsidiaries.

December 31, 2011

Korean won

(millions)

Subsidiaries

Location

Products or

services

Fiscal

year

Percentage of

ownership (%)

Balance at

December

31, 2011


Korea

Bakery

Dec. 31

90.54 9,530


Korea

Distribution

Dec. 31

79.01 582,875


Korea

Credit card,

capital

Dec. 31

92.54 982,950



Korea

Distribution

Dec. 31

53.03 393,213


Korea

Distribution

Dec. 31

51.14 82,471

Lotte Square Co., Ltd. Korea Distribution Dec. 31 100.00 520,042


Co., Ltd. Korea Service company Dec. 31 100.00 300

Lotte Suwon Station

Shopping Town Co., Ltd. Korea

Real estate

development Dec. 31 95.00 14,298

Lotte Songdo Shopping

Town Co., Ltd. Korea

Real estate

development Dec. 31 39.22 40,000

NCF Co., Ltd. Korea

Apparel

manufacturing Dec. 31 94.50 18,876


(Hong Kong), Ltd. Hong Kong Holding company Dec. 31 100.00 945,999


(Singapore), Ltd. Singapore Holding company Dec. 31 100.00 232,705


Ltd. Vietnam Distribution Dec. 31 94.55 47,666

Qingdao Lotte Mart

Commercial Co., Ltd. China Distribution Dec. 31 53.84 39,864

Lotte Mart Co., Ltd. China Distribution Dec. 31 100.00 158,134

Liaoning Lotte Mart Co.,

Ltd. China Distribution Dec. 31 40.00 10,841

PT. Lotte Shopping

Indonesia Indonesia Distribution Dec. 31 55.00 214,068

Lotte Cinema Vietnam Co.,

Ltd. Vietnam Cinema Dec. 31 90.00 7,097

4,300,929




46

11. Investments in Subsidiaries, Continued

(a) A summary of the subsidiaries of the Company as of December 31, 2011, 2010 and January 1, 2010 is as follows, continued:

December 31, 2010

Korean won

(millions)

Subsidiaries

Location

Balance at

December 31, 2011

Fiscal

year

Percentage of

ownership (%)

Balance at

December 31,

2010


Korea

Bakery

Dec. 31

90.54 9,530


Korea

Distribution

Dec. 31

79.01 582,875


Korea

Credit card,

capital

Dec. 31

92.54 982,950



Korea

Distribution

Dec. 31

53.03 393,213


Korea

Distribution

Dec. 31

51.14 82,471

Lotte Square Co., Ltd. Korea Distribution Dec. 31 100.00 520,042

Lotte Gimhae Development Co.,

Ltd. Korea Service company Dec. 31 100.00 300

Lotte Suwon Station Shopping

Town Co., Ltd. Korea

Real estate

development Dec. 31 95.00 48

NCF Co., Ltd. Korea

Apparel

manufacturing Dec. 31 94.50 18,876


(Hong Kong), Ltd.

Hong

Kong Holding company Dec. 31 100.00 874,318


(Singapore), Ltd. Singapore Holding company Dec. 31 100.00 147,826


Ltd. Vietnam Distribution Dec. 31 80.00 -

Qingdao Lotte Mart

Commercial Co., Ltd. China Distribution Dec. 31 53.85 30,048


Liaoning Lotte Mart Co., Ltd. China Distribution Dec. 31 76.92 10,841

PT. Lotte Shopping Indonesia Indonesia Distribution Dec. 31 55.00 214,068

Lotte Cinema Vietnam Co., Ltd. Vietnam Cinema Dec. 31 90.00 3,248

4,028,788




47

11. Investments in Subsidiaries, Continued

(a) A summary of the subsidiaries of the Company as of December 31, 2011, 2010 and January 1, 2010 is as follows, continued:

January 1, 2010

Korean won

(millions)

Subsidiaries

Location

Products or

services

Fiscal

year

Percentage of

ownership (%)

Balance at

January

1, 2010


Korea

Bakery

Dec. 31

95.71 9,530 Lotte Midopa Co., Ltd.

Korea

Distribution

Dec. 31

79.01 582,875


Korea


Dec. 31

92.54 982,950 Woori Home Shopping &


Korea

Distribution

Dec. 31

53.03

393,213 Korea Seven Co., Ltd.

Korea

Distribution

Dec. 31

50.12 29,840 Lotte Krispy Kreme Doughnuts

co., Ltd.

Korea

Food manufacturing

Dec. 31

100.00

80,556 Lotte Shopping Holdings

(Hong Kong), Ltd. Hong Kong Holding company Dec. 31 100.00

743,870 Lotte Shopping Holdings

(Singapore), Ltd. Singapore Holding company Dec. 31 100.00

114,529


Ltd. Vietnam Distribution Dec. 31 80.00 - Qingdao Lotte Mart Commercial

Co., Ltd. China Distribution Dec. 31 100.00

30,048


Liaoning Lotte Mart Co., Ltd. China Distribution Dec. 31 100.00 10,841

PT. Lotte Shopping Indonesia Indonesia Distribution Dec. 31 55.00 214,068

Lotte Cinema Vietnam Co., Ltd. Vietnam Cinema Dec. 31 90.00 2,219

3,352,673

(b) The fair value of investments in subsidiaries for which a quoted price in active market is available as of December 31, 2011,

2010 and January 1, 2010 are summarized as follows:

Description


December

31, 2011

December

31, 2010

January

1, 2010 Lotte Midopa Co., Ltd. ￦ 823,613 761,842 607,415




48

12. Property and Equipment

(a) Changes in acquisition cost of property and equipment for the years ended December 31, 2011 and 2010 are as follows:

2011


Acquisition cost

as of

January

1, 2011 Acquisitions Disposals Others (*)

Acquisition cost

as of

December

31,2011

Land ￦ 6,429,415 12,082 (99,387) 151,709 6,493,819

Buildings 4,334,479 22,328 (47,551) 189,507 4,498,763

Structures 243,968 1,685 (3,291) 16,008 258,370

Machinery 54,486 1,583 (621) 13,145 68,593

Vehicles 2,805 332 (79) 52 3,110

Display fixtures 208,545 2,501 (64,038) 5,219 152,227

Furniture and fixtures 1,530,773 92,169 (187,344) 128,937 1,564,535

Construction-in-

progress 797,021 861,035 (284) (956,065) 701,707

Total ￦ 13,601,492 993,715 (402,595) (451,488) 13,741,124

(*) Others include reclassifications of construction-in-progress to intangible assets and investment property.

2010


Acquisition

cost as of

January

1, 2010 Acquisitions

Increase

from

acquisition

of stores Disposals Others (*)

Acquisition cost

as of

December

31, 2010

Land ￦ 6,391,292 11,267 227,119 (320,988) 120,725 6,429,415

Buildings 3,992,951 7,809 174,150 (214,847) 374,416 4,334,479

Structures 223,306 649 780 (11,582) 30,815 243,968

Machinery 41,185 962 - (928) 13,267 54,486

Vehicles 2,691 498 71 (394) (61) 2,805

Display fixtures 189,383 3,187 - (173) 16,148 208,545

Furniture and fixtures 1,256,363 103,400 24,103 (18,671) 165,578 1,530,773

Construction-in-

progress 658,546 737,979 2,178 (82) (601,600) 797,021

Total ￦ 12,755,717 865,751 428,401 (567,665) 119,288 13,601,492

(*) Others include reclassifications of construction-in-progress to intangible assets and investment property.




49

12. Property and Equipment, Continued

(b) Changes in accumulated depreciation of property and equipment for the years ended December 31, 2011 and 2010 are as

follows:

2011


Accumulated

depreciation

as of January


Accumulated

depreciation

as of December

31, 2011

Buildings ￦ 1,249,471 (12,377) 124,802 3,621 1,365,517

Structures 43,322 (441) 11,567 33 54,481

Machinery 17,604 (621) 4,801 - 21,784

Vehicles 1,575 (78) 499 14 2,010

Display fixtures 179,029 (64,009) 9,439 - 124,459

Furniture and fixtures 1,087,945 (182,808) 152,612 (257) 1,057,492

Total ￦ 2,578,946 (260,334) 303,720 3,411 2,625,743

2010


Accumulated

depreciation

as of January


Accumulated

depreciation

as of December

31, 2010

Buildings ￦ 1,188,600 (84,356) 125,871 19,356 1,249,471

Structures 33,495 (2,494) 12,356 (35) 43,322

Machinery 13,073 (677) 5,008 200 17,604

Vehicles 1,172 (317) 716 4 1,575

Display fixtures 171,733 (93) 7,389 - 179,029

Furniture and fixtures 994,245 (17,312) 111,235 (223) 1,087,945

Total ￦ 2,402,318 (105,249) 262,575 19,302 2,578,946

(c) There are no impairment losses and reversals of impairment losses for the years ended December 31, 2011 and 2010.




50

12. Property and Equipment, Continued

(d) Pledged property and equipment provided by the Company as of December 31, 2011 are as follows:


Book value

Guaranteed a

mount

Type of

borrowings

Amount of

borrowings

Guarantee

recipient

Land and

buildings ￦

118,876 62,420

security deposit

48,217

Shinhan Bank

(e) During 2011 and 2010, capitalized borrowing costs and capitalization interest rates are as follows:


2011 2010

Capitalized borrowing costs ￦ 673

18

Capitalization interest rates (%)

4.73%

4.42%

13. Investment Property

(a) Changes in acquisition cost of investment property for the years ended December 31, 2011 and 2010 are as follows:

2011


Acquisition cost

as of January 1,

2011 Acquisitions

Others (*)

Acquisition cost

as of December 31, 2011 Land ￦ 315,771 665 (22,816) 293,620

Buildings 185,318 1,000 (4,530) 181,788

Total ￦ 501,089 1,665 (27,346) 475,408

(*) Others include reclassification between property and equipment and investment property.

2010


Acquisition cost

as of January 1,

2010 Acquisitions

Others (*)

Acquisition cost

as of December 31, 2010 Land ￦ 405,149 11,938 (101,316) 315,771

Buildings 234,697 26,723 (76,102) 185,318

Total ￦ 639,846 38,661 (177,418) 501,089

(*) Others include reclassification between property and equipment and investment property.




51

13. Investment Property, Continued

(b) Changes in accumulated depreciation of investment property for the years ended December 31, 2011 and 2010 are as

follows:

2011


Accumulated

depreciation as of


Accumulated


31, 2011

Buildings ￦ 59,777 4,821 (3,034) 61,564

2010


Accumulated

depreciation as of


Accumulated


31, 2010

Buildings ￦ 71,845 7,041 (19,109) 59,777

(c) Income and expense from investment property

The details of income and expense from investment property during 2011 and 2010 are as follows:


Description

2011 2010

Rent income ￦ 38,875

38,235

Direct operating expense (including

maintenance and repair expenses)

(10,432) (9,932)

(d) Fair value of investment property as of December 31, 2011 was follows:


Description

Book value Fair value (*)

Buildings ￦ 413,844 664,050

(*) The Company measured fair value by using the direct capitalization method and cost method.

(e) During 2011 and 2010, there was no recognition of impairment loss or reversal of impairment loss.




52

14. Intangible Assets

(a) Changes in intangible assets for the year ended December 31, 2011 are as follows:

2011


Book value

as of

January 1,

2011 Acquisitions Amortization Impairment Disposals Others (*1)

Book value

as of December

31, 2011

Goodwill ￦ 380,285 - - (609) - 5,237 384,913 Industrial property

rights 991 618 (450) - - - 1,159 Rights to use

facility 78,945 - (7,975) (199) 415,625 486,396 Membership 9,900 25 - - - - 9,925 Other intangible

assets (*2) 8,234 57,670 (57,103) - - (126) 8,675

-

Total ￦ 478,355 58,313 (65,528) (609) (199) 420,736 891,068

(*1) Others include reclassification of construction-in-progress to intangible assets and foreign exchange effects.

(*2) Other intangible assets are primarily related to movie distribution rights.

(b) Changes in intangible assets for the year ended December 31, 2010 are as follows:

2010


Book value

as of

January

1, 2010 Acquisitions

Increase from

acquisition of

stores Amortization Disposals Others

Book value

as of December

31, 2010

Goodwill ￦ 36,444 9,538 335,750 - - (1,447) 380,285 Industrial property

rights 723 574 - (306) - - 991 Rights to use facility 83,740 1 - (6,362) (437) 2,003 78,945 Membership 6,143 3,757 - - - - 9,900 Other intangible

assets 7,984 29,618 18 (29,373) - (13) 8,234

-

Total ￦ 135,034 43,488 335,768 (36,041) (437) 543 478,355




53


(c) Impairment testing for cash-generating units containing goodwill

For the purpose of impairment testing, goodwill is allocated to the units of the lowest level at which the goodwill may be

monitored in terms of internal management of the Company and cannot be higher than any of the operating segments of the

Company.

Details of the goodwill allocated to the Company’s cash-generating units as of December 31, 2011, 2010 and January 1,

2010 are as follows:



31, 2011

December

31, 2010

January

1, 2010

Department stores ￦ - - -

Discount store 338,043 338,043 2,293

Supermarket 46,870 42,242 34,151

Others - - -

Total ￦ 384,913 380,285 36,444

As of December 31, 2011, the recoverable amount of the cash-generating units in others was less than the book value of the

cash-generating units, including goodwill, therefore an impairment loss of ￦609 million was recognized. Total

impairment loss was distributed to goodwill and recognized as intangible asset impairment loss.

The value in use of the Company’s cash-generating units was determined by discounting the estimated future cash flows

from the continuing use of the cash-generating units. The approach used to determine value in use as of December 31,

2011 was consistent used in 2010. The calculation of value in use was based on the following key assumptions:

- Cash flows were estimated based on past experience, actual results of operations and the Company’s five-year business

plan.

- The annual revenue growth rate included in the estimated future cash flows was estimated based on analysis of past

revenue growth rates. The revenues after the five-year period were assumed to grow constantly at zero to three percent.

- The Company’s weighted average capital cost was applied as the discount rate in determining the recoverable amount of

cash-generating units.

As a result of the Company’s impairment testing, value in use exceeded the carrying amount for the discount store and

supermarket cash-generating units.




54


(d) Impairment testing of other intangible assets with indefinite estimated useful lives

The details of intangible assets with indefinite estimated useful lives as of December 31, 2011, 2010 and January 1, 2010

are as follows:



31, 2011

December

31, 2010

January

1, 2010


Discount store 1,531 1,525 613

Supermarket 894 894 608

Others 1,121 1,121 927

Total ￦ 9,925 9,900 6,143

As a result of the impairment test on indefinite intangible assets, value in use exceeded the carrying amounts for all cash-

generating units.

15. Trade and Other Payables

Trade and other payables as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Trade payables ￦ 2,311,167

2,039,095 1,778,877

Other payables

737,483

667,707 726,580

Total ￦ 3,048,650

2,706,802 2,505,457




55

16. Other Financial Liabilities

Other financial liabilities as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Current:

Current derivative liabilities held for

the purpose of hedging ￦ 7,096

6,572 -

Financial guarantee liabilities

437

829 321

Accrued expenses

78,243

58,630 45,258

Deposits received

202,450

217,663 238,667

Subtotal

288,226

283,694 284,246

Non-current:


5,100

13,227 -

Deposit received

34,435

14,965 11,255

Subtotal

39,535

28,192 11,255

Total ￦ 327,761

311,886 295,501




56

17. Borrowings and Debentures

(a) Borrowings and debentures as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010 Current:

Short-term borrowings ￦ 300,000

510,000 10,000


borrowings 560,878

- -

Discount on long-term

borrowings (307)

- -


debentures 348,516

974,603 126,282


(76)

(2,298) (95)

Subtotal

1,209,011

1,482,305 136,187

Non-current:


-

533,014 378,846

Discount on long-term

borrowings -

(925) -

Long-term debentures

3,002,633

1,303,598 1,409,540


(9,319)

(3,735) (7,313)

Subtotal

2,993,314

1,831,952 1,781,073

Total ￦ 4,202,325

3,314,257 1,917,260

(b) Short-term borrowings as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Lender

Annual interest rate (%)


December

31, 2011 December

31, 2010 January

1, 2010

December

31, 2011

December

31, 2010

January

1, 2010

Korea agro-Fisheries

& Food Trade Corp.

-

4.00

4.00 ￦ -

10,000 10,000 Bank of America -

2.95

-

-

100,000 - Shinhan Bank -

3.31

-

-

100,000 - Samsung securities

Co.,Ltd

3.60

3.36

-

100,000

100,000 - Korea exchange Bank 4.34

3.41

-

100,000

100,000 -

ING Bank 4.08

3.28

-

100,000

100,000 -

Total

￦ 300,000

510,000 10,000




57


(c) Long-term borrowings as of December 31, 2011, and January 1, 2010 are summarized as follows:

Lender

Annual

interest

rate (%)


December

31, 2011

December

31, 2010

January

1, 2010 Lotte Co., Ltd.

(Japan)

3.40 ￦ 445,548

419,124 378,846

BNP Paribas Bank 3M USD

Libor+1.20

115,330

113,890 -

Present value

discount (307)

(925) -

Subtotal

560,571

532,089 378,846

Current portion of

long-term

borrowings

560,878

- -

Present value

discount

(307)

- -

Total ￦ -

532,089 378,846




58


(d) Debentures as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

Description

Maturity

Interest

rate (%)


December

31, 2011

December

31, 2010

January

1, 2010

52nd placed

(foreign currency) Sep. 30, 2010

3M Euro Yen

Libor+1.60 ￦ -

- 126,282 46th placed

(foreign currency) Apr. 29, 2011

6M USD

Libor+1.00

-

113,890 116,760 47th placed

(foreign currency)

May 29, 2011

6M Euro Yen

Tibor+1.20

-

251,474 227,308 48th placed

(foreign currency)

Sep. 29, 2011

3M Euro Yen

Libor+1.60

-

153,679 138,910 49th placed

(foreign currency)

Oct. 17, 2011

3M USD

Libor+1.75

-

341,670 350,280 50th placed

Feb. 05, 2012

5.10

200,000

200,000 200,000 51st placed

(foreign currency)

Jun. 26, 2012

3M Euro Yen

Libor+1.50

148,516

139,708 126,282 53rd placed

Dec. 03, 2014

5.30

250,000

250,000 250,000 54-1st placed

Mar. 12, 2013

4.44

200,000

200,000 - 54-2nd placed

Mar. 12, 2015

4.82

400,000

400,000 - 55th placed

(foreign currency)

May 20, 2013

3M USD

Libor+0.80

115,330

113,890 - 56th placed

(foreign currency)

Sep. 30, 2011

3M USD

Libor+1.05

-

113,890 - 57th placed

(foreign currency)

Mar. 17, 2014

3M USD

Libor+0.80

230,660

- - 1st placed (Global bond)

Apr. 07. 2016

3.88

461,320

- - 58-1st placed

(foreign currency)

Dec. 05, 2014

3M JPY

Libor+0.60

222,774

- - 58-2nd placed

(foreign currency)

Nov. 28, 2014

3M USD

Libor+1.50

115,330

- - USD convertible bonds(*)

Jul . 05, 2016

-

539,614

- - JPY convertible bonds (*)

Jul . 05, 2016

-

467,605

- -

Subtotal

3,351,149

2,278,201 1,535,822

Less: Discount on debentures

(9,395)

(6,033) (7,408)

Total book value

3,341,754

2,272,168 1,528,414

Less: Current portion of debentures,

net of discount

348,440

972,305 126,187

Total

￦ 2,993,314

1,299,863 1,402,227

(*) USD convertible bonds and JPY convertible bonds have been designated as financial liabilities at fair value through pr

ofit of loss as of December 31, 2011. The terms and conditions are summarized as follows:




59


(a) Type of bonds: Registered overseas unsecured convertible bonds

(b) Total face value of bonds:

USD Bonds: 500,000,000

JPY Bonds: 32,500,000,000

Total(in won): 978,969,250,000

(c) Exchange Rate

USD Fixed Exchange Rate: exchange rate of KRW 1,083.50/USD 1.00

JPY Fixed Exchange Rate: exchange rate of KRW 13.4529/JPY 1.00

(d) Bond interest rate

Coupon rate(%): -

Yield to maturity(%): 0 (overseas convertible bonds without guarantee in U.S. dollars)

(0.25) (overseas convertible bonds without guarantee in Japanese yen)

(e) Date of bond maturity: July 5, 2016

(f) Principal redemption method:

i. Redemption on the maturity date: Redemption in lump sum on the maturity date for the principal amount of bonds for

which a condition for early redemption has not occurred and the conversion right has not been exercised.

ii. Early redemption: The Company has a call option, whereas bond holders have a put option.

(g) Put option by bondholders:

The put option can be exercised if any of the following conditions occurs:

On the third anniversary of the date of payment (July 5, 2014);

i. If any change of control occurs in the Company; or

ii. The issued stocks of the Company is unlisted from the stock exchange or their transaction is suspended for 30

consecutive transaction days or longer.

(h) Call option by the Company:

The call option can be exercised if any of the following conditions occurs:

i. If the closing price for 20 transactional days in 30 consecutive transaction days reaches 130% or more of the conversion

price between 3 years from the issuance date and 30 business days to the maturity date;

ii. If the balance of bonds that has not been redeemed reaches less than 10% of the sum of the total issued amount (clean up

call); or

iii. Any additional tax burden arises due to the amendments of the related laws and regulations.

(i) Matters relating to conversion:

i. Conversion ratio (%): 100

ii. Conversion price (KRW per share): 650,000

iii. Method to decide conversion price:

While following Article 5-22 of the Regulations on Issuance, Public Disclosure, etc. of Securities, 23.8% conversion

premium was applied to the closing price of the shares listed on the Korea Exchange on the day of conversion price

determination.

iv. Type of shares to be issued following conversion: Registered common shares

v. Period to apply for conversion:

Start date: July 5, 2012

End date: 7 business days prior to the maturity date

vi. Matters for the adjustment of conversion price:

In the case where a condition for re-adjustment of the conversion price has occurred, such as share dilution, the

conversion price will be adjusted in accordance with the provisions in the relevant bonds purchase agreement.




60


(e) Maturities of long-term borrowings and debentures as of December 31, 2011 are scheduled as follows:


Borrowings

Debentures Total


331,000 899,048

1 ~ 2 years

-

311,700 311,700

2 ~ 3 years

-

811,900 811,900

3 ~ 4 years

-

400,000 400,000

More than 4 years

-

1,394,203 1,394,203

Total ￦ 568,048

3,248,803 3,816,851

18. Unearned Revenues

The details of unearned revenues as of December 31, 2011, 2010, and January 1, 2010 are as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Current:

Membership points ￦ 28,137

28,167 28,799

Other points (*)

50,585

47,133 43,464

Current unearned rental income

2,550

1,669 4,640

Others

336

414 50

Subtotal

81,608

77,383 76,953

Non-current:

Non-current unearned rental

income 2,017

1,983 1,017

Total ￦ 83,625

79,366 77,970

(*) Other points are primarily related to promotional gift certificates issued upon sales.




61

19. Provisions

Changes in provisions for the years ended December 31, 2011 and 2010 are as follows:

2011


Book value

as of

January 1,

2011 Increase

Utilization

Book value

as of

December 31,

2011

Current:

Provision for bonus points

reward program ￦ 2,145 1,625 (2,127) 1,643

Provision for sales return 1,613 1,800 (1,613) 1,800

Total ￦ 3,758 3,425 (3,740) 3,443

2010


Book value

as of

January 1,

2011 Increase Utilization

Book value

as of

December 31,

2011

Current:

Provision for bonus points

reward program ￦ 1,512 3,865 (3,232) 2,145

Provision for sales return 1,467 1,613 (1,467) 1,613

Total ￦ 2,979 5,478 (4,699) 3,758

20. Other Non-financial Liabilities

Other non-financial liabilities as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Current:

Withholdings ￦ 48,307

32,261 11,081

Withholdings of value added tax

43,421

68,496 40,646

Advances received

436,563

409,153 372,636

Advance receipt -construction

-

- 347

Total ￦ 528,291

509,910 424,710

Advances received primarily related to amount received for purchased gift certificates.




62

21. Employee Benefits

(a) Details of defined benefit liabilities as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Present value of defined benefit

obligations ￦ 237,301

182,073 149,473

Fair value of plan assets

(150,114)

(112,084) (104,332)

Total ￦ 87,187

69,989 45,141

(b) Details of present value of other long-term employee benefits as of December 31, 2011, 2010 and January 1, 2010 are



December

31, 2011

December

31, 2010

January

1, 2010

Present value of other long-term

employee benefits ￦ 40,839

37,335 23,005

(c) Changes in the present value of defined benefit obligations for the years ended December 31, 2011 and 2010 are as follows:


2011 2010

Beginning of year ￦ 182,073

149,473

Current service costs

52,570

36,830

Interest costs

12,739

10,319


9,529

32,198

Payments

(25,209)

(60,594)

Others

5,599

13,847

End of year ￦ 237,301

182,073




63


(d) During 2011 and 2010, the changes on plan assets of an employee benefit plan are as follows:


2011 2010

Beginning of year ￦ 112,084 104,332


5,660 4,461

Actuarial gain (loss)

(692) 5,421

Employer contribution

45,171 29,179

Payments

(12,486) (34,089)

Others

377 2,780

End of year ￦ 150,114 112,084

(e) The components of plan assets as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Short-term funds ￦ 16,807 19,380 56,103

Fixed time deposits

42,917 74,497 10,621

CP, ABCP

12,605 16,580 7,774

Bonds

77,730 1,568 29,788

National Pension Fund

55 59 46

Total ￦ 150,114 112,084 104,332

(f) Expenses recognized for the years ended December 31, 2011 and 2010 are as follows:

(g) The principal actuarial assumptions used as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:

December 31,

2011

December 31,

2010

January

1, 2010

Discount rate

5.09% ~ 5.37%

5.97% ~ 6.23% 6.86% ~ 6.96%

Expected rate of return on plan assets

4.51% ~ 4.80%

4.51% ~ 4.80% 4.51% ~ 4.51%

Expected rate of promotion

1.89% ~ 3.36%

2.04% ~ 4.79% 1.93% ~ 4.21%

Expected rate of increase in salaries

3.50% ~ 5.00%

3.47% ~ 5.00% 3.03% ~ 5.00%


2011 2010

Current service costs ￦ 52,570

36,830

Interest costs

12,739

10,319


(5,660)

(4,461)


6,221

14,896

Total ￦ 65,870

57,584




64

22. Derivative Instruments and Hedge Accounting

(a) Details of derivatives outstanding as of December 31, 2011 are as follows:

Type

Description

Description

Cash flow hedge Interest rate

swap

At the maturity of the swap, the interest payments for debentures in

USD and JPY based on floating rates are exchanged back with fixed

interest rate payments.

(b) Details of currency swaps, as of December 31, 2011 are as follows:

Principal amount

(thousands)

Fixed

exchange

rate (won)

Variable rate

Swap

rate

Maturity

51th non-guaranteed bond

JPY 10,000,000 13.100

3M Euro Yen

Tibor+1.50 3.92%

June 26,.

2012


USD 100,000 1,117.0

3M USD

Libor+0.80 3.98%

May 20,.

2013


USD 200,000 1,125.0

3M USD

Libor+0.80 4.05%

March 17,.

2014

58-1st non-guaranteed bond

JPY 15,000,000 14.880

3M JPY

Libor+0.60 3.42%

December

5,. 2014

58-2nd non-guaranteed bond

USD 100,000 1,137.0

3M USD

Libor+1.50 3.03%

November

28,. 2014

Long-term debt

USD 100,000 1,225.0

3M USD

Libor+1.20 3.36%

June 29,.

2012

(c) Changes in the fair value of derivative instruments for the year ended December 31, 2011 are as follows:

Type of

derivatives

Description

Related accounts

Korean won

(millions)

Trade

Put option


instruments ￦ (34,879)

Cash flow

hedge

Currency swap Gain on valuation of derivative

instruments

18,978


instruments

(426)

Unrealized gain on valuation of

derivative instruments, net of tax effect

6,809




65

23. Capital Stock and Capital Surplus

(a) Pursuant to its amended Articles of Incorporation, the Company’s authorized capital stock is 60,000,000 shares, which

consist of common shares and preferred shares each with a par value of ￦5,000 per share. The Company is authorized to

issue non-voting preferred shares of up to one-fourth of the Company’s total issued and outstanding capital stock. Holders

of preferred shares may, upon a resolution of the board of directors at the time of the issuance of the preferred shares, be

entitled to receive dividends prior to the holders of common shares. The preferred shares will be automatically converted

to common shares within ten years of issuance as determined by the Company’s board of directors. However, if the

holders of preferred shares do not receive the minimum dividends as prescribed, the prescribed conversion date will be

extended to the time when all such minimum dividend amounts are paid to the holders of preferred shares. As of

December 31, 2011, the Company has not issued any preferred stock and 29,043,374 shares of common stock were issued

and outstanding.

(b) Capital surplus as of December 31, 2011, 2010 and January 1, 2010 consists of the following:


December

31, 2011

December

31, 2010

January

1, 2010

Additional paid-in capital ￦ 3,605,117

3,605,117 3,605,117

Other

17,066

17,066 17,066

￦ 3,622,183

3,622,183 3,622,183




66

24. Retained Earnings

(a) Details of retained earnings as of December 31, 2011, 2010 and January 1, 2010 are as follows:


December

31, 2011

December

31, 2010

January

1, 2010 Legal reserve ￦ 170,950

166,594 162,963

Voluntary reserve

5,420,052

4,460,052 3,790,052

Unappropriated retained earnings

3,814,866

4,087,010 4,039,538

￦ 9,405,868

8,713,656 7,992,553

(b) Changes in retained earnings for the years ended December 31, 2011 and 2010 were as follows:


2011

2010

Beginning of period ￦ 8,713,656

7,992,553

Profit for the period

742,937

778,293

Dividends

(43,566)

(36,304)

Actuarial losses on defined benefit pension

plans

(7,159)

(20,886)

End of period ￦ 9,405,868

8,713,656

(c) Details of appropriation of retained earnings for the years ended December 31, 2011 and 2010 are as follows:


2011 2010(*)

I. Unappropriated retained earnings: ￦ 3,814,866 4,087,010

Balance at beginning of year 3,079,088 3,329,603

Actuarial gains and losses on defined benefit

pension plans (7,159) (20,886)

Profit for the year 742,937 778,293

II. Appropriation of retained earnings: 3,787,922 1,007,922

Regal reserve 4,357 4,357

Voluntary reserve 3,740,000 960,000

Cash dividends 43,565 43,565

III.Unappropriated retained earnings to be

carried over to subsequent year 26,944 3,079,088




67

25. Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2011 and 2010 were as

follows:

2011


Beginning

balance

Changes for

the period

Tax effects for

the period

Balance as of

December

31, 2011 Change in fair value of available-


(59,817)

11,669

51,380



(16,349)

8,768

(1,959)

(9,540)

Total ￦ 83,179

(51,049) 9,710 41,840

2010


Beginning

balance

Changes for

the period

Tax effects for

the period

Balance as of

December 31,

2010



43,065

(9,474)

99,528



(11,207)

(6,985)

1,843

(16,349)

Total ￦ 54,730

36,080

(7,631)

83,179




68

26. Earnings per Share

(a) Basic earnings per share for the years ended December 31, 2011 and 2010 are as follows:


except per share amount)

2011 2010

Profit for the period 742,937 778,293

Weighted-average number of common shares outstanding 29,043,374 29,043,374

Earnings per share ￦ 25,580 26,798

(*) Diluted earnings per share are not calculated as there is no dilution effect.

(b) Potential ordinary shares from conversion of convertible bonds as of December 31, 2011 are as follows:

USD Bonds

JPY Bonds

Principal amount(*) (in millions of won) ￦ 541,750

437,219

Conversion price (in won)

650,000 650,000

Number of potential ordinary shares

833,462

672,645

(*) Principal amount of convertible bonds are the amount of USD 500 million and JPY 32,500 million multiplied by the

fixed exchange rate of 1,083.50/USD and 13.4529/JPY, respectively.




69

27. Sales and Cost of Sales

(a) Details of sales for the years ended December 31, 2011 and 2010 are as follows:


2011 2010

Sales-merchandise ￦ 15,221,094

13,428,067

Sales-merchandise in direct

management

14,444,987

12,699,151

Specific sales-merchandise

776,107

728,916

Discount store sales - merchandise

(1,090,532)

(984,060)

Sales allowance and discount

(268,619)

(220,489)

Reserve for returned goods unsold and

deferred sales

(199,786)

(184,313)

Cost of specific merchandise sold

(622,127)

(579,258)

Sales-finished goods

3,890

-

Others

1,047,270

900,675

Total ￦ 15,181,722

13,344,682

(b) Details of cost of sales for the years ended December 31, 2011 and 2010 are as follows:


2011 2010

Cost of merchandise sold ￦ 10,567,834

9,292,015

Cost of products sold

1,401

-

Cost of other operating revenue

78,331

81,040

Total ￦ 10,647,566

9,373,055




70

28. Profit from Operations

(a) Details of selling, general and administrative expenses for the years ended December 31, 2011 and 2010 are as follows:


2011

2010

Selling, general and administrative expenses:

Salaries ￦ 662,937

584,286

Retirement and termination benefits

59,601

42,688

Other employee benefits

6,217

14,896

Employee welfare

133,257

110,967

Education and training

12,211

9,866

Travel

18,861

16,498

Insurance premium

6,799

6,123

Taxes and dues

82,542

77,079

Supplies and stationery

55,117

51,318

Publication expense

1,887

1,917

Communications

11,188

10,386

Utilities

169,720

153,681

Maintenance

20,928

18,832

Rent

298,556

208,512

Depreciation

308,540

269,616

Amortization of intangible assets

10,194

8,614

Commissions and fees

364,876

318,841

Service commission expenses

546,913

454,382

Advertising

192,873

175,947

Sales commission

152,591

112,937


131,438

121,152

Decoration

12,755

15,938

Transportation

12,850

7,428

Others

8,284 6,600

Total ￦ 3,281,135

2,798,504




71

28. Profit from Operations, Continued

(b) Details of other operating income and expenses for the years ended December 31, 2011 and 2010 are as follows:


2011

2010

Other operating income:

Gain on foreign currency transactions ￦ 314

325


7

2

Gain on disposal of property and

equipment

9,095

55,719


35

92

Others (*1)

32,867

25,706

Total ￦ 42,318

81,844

Other operating expense:

Loss on foreign currency transactions ￦ 808

346


2

-

Loss on disposal of property and

equipment

17,179

32,967


-

1


609

-

Impairment of other non-current assets

204

784

Donation

13,525

10,969


400

-

Others (*2)

33,100

22,634

Total ￦ 65,827

67,701

(*1) Others primarily relates to income from unused gift certificates after expiration date and penalty from suppliers on

delayed delivery of merchandise.

(*2) Others primarily relates to non-deductible value added tax.




72

29. Nature of Expenses Details of nature of expenses for the years ended December 31, 2011 and 2010 are as follows:

30. Changes in Classification for Operating Income

The effect of the differences in classification for operating income between K-GAAP and K-IFRS are as follows:


2011

2010

Purchase of inventories ￦ 10,756,100

9,405,714

Changes in inventories

(242,931)

(141,382)

Employee benefits expense

862,672

752,836

Rent

298,556

208,512

Depreciation and amortization

374,069

305,658

Commissions

152,591

112,937


131,438

121,152

Commission expenses

364,902 318,841

Service contract expenses

546,913 454,382

Advertising expenses

192,873 175,947

Decoration

12,755

15,938

Transportation

12,850

7,428

Others

465,913

433,596

Total ￦ 13,928,701

12,171,559


2011

2010

Operating income under K-GAAP ￦ 1,253,022

1,173,122

Included items:


9,095

55,719

Loss on disposal of property and equipment

(17,179)

(32,967)

Donation

(13,525)

(10,969)

Others

(1,901)

2,361

Excluded items:

-

-

Total difference

(23,510)

14,144

Operating income under K-IFRS ￦ 1,229,512

1,187,266




73

31. Finance Income and Finance Expenses

(a) Details of finance income and finance expenses for the years ended December 31, 2011 and 2010 are as follows:


2011

2010

Finance income:


53,232

Dividend income

21,474

18,227


33,084

219


555

23,366


62,777

-

Gain on valuation of derivative instruments held for

the purpose of hedging

18,978

54,594

Gain on valuation of derivative instruments held for

the purpose of trading

-

3,063

Gain on transaction of derivative instruments held for


25,917

10,052

Gain on transaction of derivative instruments held for


575

-

Reversal of other bad debt expenses

16,894

-

Gain on disposal of investments in associates

204

-

Total ￦ 250,400 162,753

Finance expenses:

Interest expense ￦ 149,757

141,846


25,895

13,235


72,522

95,409

Loss on valuation of financial liabilities at fair value


54,544

-

Loss on disposal of available-for-sale financial assets

6

242

Loss on valuation of derivative instruments held for


426

22,600

Loss on valuation of derivative instruments held for


34,878

-

Loss on transaction of derivative instruments held for


16,504

-

Loss on transaction of derivative instruments held for


3,400

-

Other bad debt losses

-

11,852

Loss on disposal of investments in associates

-

32,788

Total ￦ 357,932

317,972




74

31. Finance Income and Finance Expenses, Continued

(b) Details of finance income and finance expenses by financial instruments category for the years ended December 31, 2011

and 2010 are as follows:


Category Details

2011

2010

Cash and cash equivalents: Cash and cash equivalents:


25,504

Loans and receivables: Short-term financial instruments:

Interest income

9,915

2,506

Loans:

Interest income

3,409

4,116

Guarantee deposits:

Interest income

25,994

19,844


assets:

Available-for-sale financial assets:

Interest income

1,199

1,264

Dividend income

21,474

18,227

Gain (loss) on valuation of available-

for-sale financial assets

(59,816)

43,065

Gain on disposal of available-for-sale

financial assets

62,771

(242)

Financial liabilities based on

amortized cost:

Borrowings:

Interest expense

32,196

35,076

Debentures:

Interest expense

114,638

101,193

Rental guarantee deposits:

Interest expense

2,924

5,578

Financial assets and liabilities at

fair value through profit or loss:

Derivatives:


(34,879)

3,062

(Loss) on transaction

(2,825)

-

Overseas convertible bonds:

(Loss) on valuation

(54,544)

-

Derivative assets and liabilities

held for the purpose of hedging:

Derivatives:

Gain on valuation

18,552

31,994

Gain on transaction 9,413 10,052




75

32. Income Taxes

(a) The components of income tax expense for the years ended December 31, 2011 and 2010 are as follows:

(b) During 2011 and 2010, the details of income tax expense recognized directly to equity are as follows:

Income tax related to actuarial losses (gains) was recognized directly in equity and income tax related to losses (gains) on

valuation of available-for-sale financial assets and losses (gains) on valuation of derivatives are recognized in other

comprehensive income.


2011 2010

Current tax expense ￦ 255,827

302,542

Deferred tax expense (benefit)

110,444

(47,048)

Income taxes directly charged to equity

12,772

(1,740)

Income tax expense ￦ 379,043

253,754


2011 2010


financial assets ￦ 11,669

(9,474)

Effective portion of changes in fair value of

cash flow hedges

(1,959)

1,843


3,062

5,891

Income tax directly charged to equity ￦ 12,772

(1,740)




76


(c) During 2011 and 2010, effective tax rates are reconciled as follows:

In December 2011, the Korean government changed the corporate income tax rate for taxable income exceeding ￦ 20

billion from 22.0% to 24.2% prospectively from 2012.

(d) Deferred tax assets and liabilities are measured using the tax rate to be applied for the year in which temporary differences

are expected to be realized.


2011 2010

Profit before income tax ￦ 1,121,980

1,032,047

Tax rates (%)

24.20%

24.20%

Income tax using statutory tax rates

271,493

249,729

Adjustment:

107,550

4,025

Tax effects on non-taxable income

(1,614)

(1,320)

Tax effects on non-deductible income

1,573

241

Tax credit

(1,925)

(4,410)

Adjustments for prior periods

(451)

(2,433)

Effect of change in tax rate

109,388

4,193

Others

579

7,754

Income tax expenses ￦ 379,043

253,754

Effective tax rate (%)

33.78%

24.59%




77


(e) During 2011 and 2010, the changes on deferred tax assets (liabilities) are as follows:

2011


Beginning

balance

Profit or loss

Other

comprehensive

income

Balance as of

December

31, 2011


associates ￦ (236,317)

(23,632)

-

(259,949)


34,431

(3,748)

-

30,683


6,056

(4,190)

-

1,866

Property and equipment


(12,976)

(312)

-

(13,288)


(902,185)

(73,212)

-

(975,397)


9,647

(2,440)

-

7,207

Accrued expense

10,634

709

-

11,343



(28,072)

-

11,668

(16,404)


derivatives

(24,615)

29,066

(1,959)

2,492


(losses)

38,081 (31,837)

-

6,244

Losses on valuation of convertible

bonds

-

(11,502)

-

(11,502)


3,409

3,405

-

6,814


7,293

1,732

-

9,025


17,632

360

3,063

21,055

Goodwill

(4,514)

(9,448)

-

(13,962)

Others

1,598

1,832

-

3,430

Total ￦ (1,079,898)

(123,217)

12,772

(1,190,343)




78


(e) During 2011 and 2010, the changes on deferred tax assets (liabilities) are as follows, continued

2010


Beginning

balance

Profit or loss

Other

comprehensive

income

Balance as of

December

31, 2010


associates ￦ (236,317) -

-

(236,317)


42,745 (8,314)

-

34,431


3,534 2,522

-

6,056

Property and equipment


(13,177) 201

-

(12,976)


(946,234) 44,049

-

(902,185)


9,454 193

-

9,647

Accrued expense

7,739 2,895

-

10,634

Gains on valuation of available-for-sale

financial assets

(18,598) -

(9,474)

(28,072)


derivatives

(14,647) (11,812)

1,844

(24,615)


18,783 19,298

-

38,081


3,398 11

-

3,409


6,350 943

-

7,293


8,005 3,736 5,891 17,632

Goodwill

1,235 (5,749)

-

(4,514)

Others

784 814

-

1,598

Total ￦ (1,126,946) 48,787

(1,739)

(1,079,898)




79


(f) Temporary differences not recognized as deferred tax assets related to investments in associates and subsidiaries as of

December 31, 2011, 2010 and January 1, 2010 are as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Investments in associates and

subsidiaries ￦ 281,865

282,902 251,023

33. Separate Statements of Cash Flows

(a) As of December 31, 2011, 2010 and January 1 2010, the details of cash and cash equivalents are as follows:


December

31, 2011

December

31, 2010

January

1, 2010

Cash ￦ 25,582

17,682 14,903

Deposits

12,330

17,027 8,477

Other cash equivalents

1,298,999

590,638 399,407

Total ￦ 1,336,911

625,347 422,787

(b) During 2011 and 2010, the details of the significant transactions without cash inflows and outflows in investing activities

and financing activities are as follows:


2011 2010


financial assets ￦ (59,816)

43,065

Reclassification of construction-in-process

959,605

574,625




80

34. Operating Leases

(a) Lessee

1) The Company has entered into the operating leases for buildings, furniture and fixtures and vehicles. Future lease

payments under operating leases as of December 31, 2011 and 2010 are as follows:

2) Lease payments for fixed rental and contingent rental recognized as expenses for the year ended December 31, 2011

were ￦174,573 million and ￦123,982 million, respectively.

(b) Lessor

1) The Company has entered into the operating leases of its certain of properties and equipment. Future lease payments

receivable under operating leases as of December 31, 2011 and 2010 are as follows:

2) Lease collection from fixed rental and contingent rental recognized as income for the year ended December 31, 2011

were ￦39,486 million and ￦457,563 million, respectively.


2011 2010


174,573

1 ~ 5 years

613,726

675,462

Thereafter

649,237

758,520

Total ￦ 1,433,982

1,608,555


2011 2010


39,486

1 ~ 5 years

17,126

14,827

Thereafter

310

450

Total ￦ 62,334

54,763




81

35. Contingent Liabilities and Financial Commitments

(a) As of December 31, 2011, the Company has various forms of credit facility commitments with financial institutions as

follows:

Credit line


Foreign currency

(thousands)

Amount used

under credit facility


Foreign currency (thousands)

General loan KRW 200,000 KRW 100,000

Discount of bill KRW 200,000 KRW 100,000

Buyer’s credit KRW 200,000 KRW 14,897

Bank overdraft KRW 65,000 KRW 1

Letter of credit USD 13,500 USD 2,962

(b) Material contracts of the Company are as follows:

Contractor

Description of contract

Lotte Midopa Co., Ltd., Lotte Station Building Co.,

Ltd. and Lotte Square Co., Ltd.

Providing management services

(c) As of December 31, 2011, the Company is the plaintiff in various lawsuits claiming damages totaling ￦11,363 million and

the Company is the defendant in various lawsuits with damage claims totaling ￦7,492 million.




82

36. Transactions and Balances with Related Companies

(a) Details of investor and subsidiary relationships with the Company as of December 31, 2011 are as follows:

Related company

Ownership (%)

Control relationship (*)

Hotel Lotte Co., Ltd. 9.58 Affiliate of Lotte Company

Korea Fuji Film Co., Ltd. 8.52 Affiliate of Lotte Company

Lotte Confectionery Co., Ltd. 8.52 Affiliate of Lotte Company

Lotte Data Communication Company 5.22 Affiliate of Lotte Company

Lotte Chilsung Beverage Co., Ltd. 4.26 Affiliate of Lotte Company

Lotte Engineering & Construction Co., Ltd. 1.03 Affiliate of Lotte Company

Hotel Lotte Pusan Co., Ltd. 0.85 Affiliate of Lotte Company

(*) Lotte Company represents a Company of entities as defined and restricted by the Monopoly Regulation and Fair

Trade Act in Korea.

December 31, 2011

Subsidiaries


Fiscal

year

Percentage of

ownership (%)


Korea

Distribution

Dec. 31

79.01


Korea


Dec. 31

92.54

eB Card Co., Ltd.

Korea

Electronic banking

business

Dec. 31

95.00


Korea

Electronic banking

business

Dec. 31

100.00


Korea

Electronic banking

business

Dec. 31

100.00


Korea

Electronic banking

business

Dec. 31

100.00


Co., Ltd.

Korea

Distribution

Dec. 31

53.03


Korea

Distribution

Dec. 31

51.14

Buy the way Inc. Korea Distribution Dec. 31 100.00

Lotte Boulangerie Co., Ltd. Korea Bakery Dec. 31 90.54

Lotte Square Co., Ltd. Korea Distribution Dec. 31 100.00

NCF Co., Ltd. Korea

Apparel

manufacturing Dec. 31 94.50

Lotte Gimhae Development Co., Ltd. Korea Service company Dec. 31 100.00


Co., Ltd. Korea

Real estate

development Dec. 31 95.00

Lotte Songdo Shopping Town Co.,

Ltd. Korea

Real estate

development Dec. 31 58.82




83


December 31, 2011

Subsidiaries


Fiscal

year

Percentage of

ownership (%)


Vietnam

Distribution

Dec. 31

94.55


Ltd.

China

Distribution

Dec. 31

100.00


China

Distribution

Dec. 31

100.00


Ltd.

Singapore

Holding company

Dec. 31

100.00


Indonesia

Distribution

Dec. 31

80.00


Indonesia

Distribution

Dec. 31

100.00


India

Distribution

Dec. 31

100.00

Lotte Hotel & Retail Vietnam Pte.

Ltd.

Singapore

Holding company

Dec. 31

60.00


(Hong Kong), Ltd.

Hong

Kong

Holding company

Dec. 31

100.00


subsidiaries

China

Distribution

Dec. 31

100.00


Limited

Cayman

Holding company

Dec. 31

88.98


China

Distribution

Dec. 31

73.80


Co., Ltd.

China

Distribution

Dec. 31

100.00


Co., Ltd.

China

Trading company

Dec. 31

100.00


China

Distribution

Dec. 31

100.00


Vietnam

Cinema

Dec. 31

90.00

Jilin Lotte Mart Co., Ltd.

China

Distribution

Dec. 31

100.00


Indonesia

Distribution

Dec. 31

100.00

Lotte Department Store(Shenyang)

Co., Ltd. China Distribution Dec. 31 100.00

Lotte International Department

Store(Weihai) Co., Ltd.

China Distribution Dec. 31 100.00

Lotte DatViet Homeshopping Co.,

Ltd. Vietnam Distribution Dec. 31 63.03

Lottemart Danang Co., Ltd. Vietnam Distribution Dec. 31 100.00

Lottemart C&C India Pvt. Ltd. India Distribution Dec. 31 100.00

The 4th Sprint Korea SPC Dec. 31 0.90

The 2nd Supreme Korea SPC Dec. 31 0.90

The 3rd Supreme Korea SPC Dec. 31 0.90

The 4th Supreme Korea SPC Dec. 31 0.90




84


(b) Significant transactions which occurred in the normal course of business with related companies for the years ended

December 31, 2011 and 2010 are summarized as follows:


2011 2010

Related company

Revenues Expenses

Revenues Expenses


72,830

21,154

67,534

Lotte Confectionery Co.,

Ltd. 11,519

116,821

16,204

96,458

Lotte Chilsung Beverage

Co., Ltd. 9,347

60,730

7,821

47,658

Lotte Engineering &

Construction Co., Ltd. 3,093

529,275

3,105

464,430


14,603

5,663

19,600


Ltd. 15,809

5,959

16,331

5,829

Lotte Samkang Co., Ltd. 2,563

-

2,549

-


55,721

6,830

56,545


237,340

8,521

180,626

Lotte Aluminium Co., Ltd. -

52,069

-

56,417

Others 108,323

728,160

90,924

583,170

Total ￦ 197,033

1,873,508

179,102

1,578,267




85


(c) Account balances with related companies as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows:


December 31, 2011

Receivables

Payables

Related company

Trade and other

receivables

Other assets

Trade and other

payables

Other

liabilities


25,236

11,234

752


-

808

14,988

Lotte Chilsung Beverage Co., Ltd. 559

-

2,948

- Lotte Engineering & Construction Co., Ltd. 298

4,003

159,484

-


-

1,954

-


10,019

9,837

-

Lotte Ham Co., Ltd. 46

-

3,612

-

Lotte Trading Co., Ltd. 193

-

12,858

- Others 139,533

59,252

105,906

18,741

Total ￦ 161,010

98,510

308,641

34,481


December 31, 2010

Receivables

Payables

Related company

Trade and other

receivables

Other assets

Trade and other

payables

Other

liabilities


20,733

2,513

5,839


-

11,533

908


-

2,003

11 Lotte Engineering & Construction Co., Ltd. -

4,000

185,845

106


2,300

596

795


10,407

6,627

255


-

1,195

-


1,451

11,115

- Others 109,147

92,972

60,396

118,701

Total ￦ 130,989

131,863

281,823

126,615




86


(c) Account balances with related companies as of December 31, 2011, 2010 and January 1, 2010 are summarized as follows,

continued:


January 1, 2010

Receivables

Payables

Related company

Trade and other

receivables

Other assets

Trade and other

payables

Other

liabilities Hotel Lotte Co., Ltd. ￦ 1,670

20,971

1,870

5,952


-

9,727

595


-

2,597

7 Lotte Engineering & Construction Co., Ltd. 414

4,690

130,460

270


2,300

679

898


10,407

5,586

304


-

2,555

-


-

7,470

77 Others 102,106

80,705

44,808

69,754

Total ￦ 125,861

119,073

205,752

77,857

(d) Key management personnel compensation for the year ended December 31, 2011 and 2010 are as follows:

(e) The Company has provided guarantees for related companies as of December 31, 2011 as follows:

Related company

Guarantee recipient

Type of

borrowings

Guaranteed amount

(thousand) Lotte Vietnam Shopping Co., Ltd. Citibank N.A. Hochiminh Working capital

USD 60,000 and

interest thereon Shinhan Bank Working capital USD 15,000

Liaoning Lotte Mart Co., Ltd. Australia and New Zealand Bank Working capital RMB 10,000 Lotte Cinema Vietnam Co., Ltd. The Export-Import Bank of Korea Working capital

USD 6,000 and

interest thereon Lotte Shopping Rus LLC Korea Development Bank Working capital USD 10,000 Intime Lotte Department Store Co.,

Ltd.

Woori Bank Working capital KRW 12,000,000 Standard Chartered Bank Working capital RMB 70,000 Shinhan Bank Working capital

USD 8,125

(f) The fulfillment of the VPF contract between D-Cinema of Korea Co., Ltd. and Twentieth Century Fox Film Corporation

was equally guaranteed by CGV and the Company in October 2008.

(g) The fulfillment of the loyalty contract between Burger King Japan Co., Ltd. and BK Asiapac, Pte. Ltd. was guaranteed by

the Company.


2011 2010

Short-term benefits ￦ 18,489

18,797

Retirement benefits

8,905

9,219

Other long-term benefits

5

4

Total ￦ 27,399

28,020




87

37. Business Combination

Significant business combinations of the Company are as follows:

The Company entered into an agreement to acquire department stores and discount stores business from GS Retail Co., Ltd

on February 9, 2010. On May 31, 2010, the related department stores business was acquired by a subsidiary of the

Company, Lotte Square., Ltd, established in 2010, and the related discount stores business was acquired by the Company.

The following summarizes major classes of consideration transferred, and the recognized amounts of assets acquired and

liabilities assumed at the acquisition dates.


Description GS Retail Co., Ltd discount store business

Total consideration transferred ￦ 826,543


Accounts GS Retail Co., Ltd discount store business

Property and equipment ￦ 428,401 Intangible assets 18 Inventories 18,434 Trade and other receivables 7,815 Other assets (deposits, etc) 86,934

Total assets 541,602

Trade and other payables 44,450 Other liabilities 6,359

Total liabilities 50,809

Total identifiable net assets ￦ 490,793

Goodwill recognized as a result of business combinations is as follows:


Accounts GS Retail Co., Ltd discount store business

Total consideration transferred ￦ 826,543 Less: Fair value of identifiable net assets 490,793 Goodwill ￦ 335,750




88

37. Business Combination, Continued

Expenses for business combinations are as follows:


Description GS Retail Co., Ltd discount store business

Financial advisory services ￦ 3,609

Cost for legal advice 72 Cost for due diligence 48

Total ￦ 3,729

38. Subsequent Events

The Company obtained control of CS Mart Co., Ltd. by acquiring 97.37% of stocks at ￦244,880 million in cash on

January 19, 2012. CS Mart Co., Ltd. will be accounted for as a subsidiary in subsequent to the acquisition.

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

As stated in note 2 to the separate financial statements, these are the Company’s first separate financial statements prepared

for the part of the period covered by the first K-IFRS annual financial statements in accordance with K-IFRS No.1101

First-time Adoption of K-IFRS.

The accounting policies in note 3 to the separate financial statements have been applied in preparing the separate financial

statements for the year ended December 31, 2011, the comparative information for the year ended December 31, 2010, for

the year ended December 31, 2010 and the preparation of an opening statement of financial position under K-IFRS as of

January 1, 2010.

(a) The exemptions the Company adopted in accordance with K-IFRS No.1101 First-time Adoption of K-IFRS

K-IFRS No.1101 permits those companies adopting K-IFRS for the first time certain exemptions from the full requirements

of K-IFRS in the transition period. The Company has taken the following key exemptions.

Business combination

Business combinations prior to the date of transition are not restated.

Deemed cost to investment in associates and subsidiaries

The Company measures investments in associates and subsidiaries at deemed cost which is the book value under K-GAAP

as of date of transition.

Deemed cost to fair value or the revaluation amount

The Company measures some property and equipment except for buildings at deemed cost which is fair value at the date of

transition.

Borrowing costs

The Company capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of a

qualifying asset as part of the cost of that asset after the date of transition to K-IFRS.




89


(b) The effects of the adoption of K-IFRSs on the Company’s financial position as of January 1, 2010 are as follows:


Total assets Total liabilities Total equity

K-GAAP ￦ 18,658,356

6,326,800

12,331,556

Adjustment for:

Change in depreciation method of property and

equipment ②

29,442

-

29,442

Component accounting of property and equipment ④ (237,419)

127

(237,546)

Provision for sales return ⑤ (1,452)

1,467

(2,919)

Impairment of financial assets ⑥ 3,884

-

3,884

Changes in scope of associates ⑦ (42,738)

(6,527)

(36,211)

Employee benefits ⑧ 1,470

36,850

(35,380)

Present value of deposit ⑨ (29,157)

(307)

(28,850)

Customer loyalty programs ⑩ -

8,754

(8,754)

Impairment of assets ⑪ (5,612)

(1,235)

(4,377)

Financial guarantee ⑫ 321

321

-


165,025

(196,162)


204,475

(516,873)

K-IFRS ￦ 18,345,958

6,531,275

11,814,683




90


(c) The effects of the adoption of K-IFRSs on the Company’s financial position as of December 31, 2010 and comprehensive

income for the year ended December 31, 2010 are as follows:



Total

comprehensive

income

K-GAAP ￦ 21,222,171

8,096,211

13,125,960

1,010,145

846,938

Adjustment for:

Changes in gains and losses

on disposal of property and

equipment ①

-

-

-

(156,174)

-

Change in depreciation

method of property and

equipment ②

115,947

-

115,947

86,504

86,504

Capitalization of borrowing

costs③

18

-

18

18

18

Component accounting of

property and equipment ④

(281,767)

127

(281,894)

(44,347)

(44,347)


⑤

(2,889)

1,613

(4,502)

(1,583)

(1,583)

Impairment of financial

assets ⑥

5,326

-

5,326

1,441

1,441

Changes in scope of

associates ⑦

(132,229)

(33,061)

(99,168)

(114,669)

(79,187)

Employee benefits ⑧ 5,084

76,752

(71,668)

(9,511)

(30,397)

Present value of deposit ⑨ (33,258)

(124)

(33,134)

(4,285)

(4,285)

Customer loyalty programs

⑩

-

9,551

(9,551)

(796)

(796)

Impairment of assets ⑪ 16,789

(1,234)

18,023

22,401

22,401

Financial guarantee ⑫ 829

829

-

-

-


172,400

(201,122)

(10,851)

(10,851)


226,853

(561,725)

(231,852)

(61,082)

K-IFRS ￦ 20,887,299

8,323,064

12,564,235

778,293

785,856




91


① Change in gains and losses on disposal of property and equipment

The Company measures some property and equipment except for buildings at deemed cost which is fair value at the date of

transition in accordance with K-IFRS No.1101. When the Company disposed of property and equipment which are

measured at deemed cost, gains and losses on disposal of property and equipment were changed.

② Change in depreciation method of property and equipment

In accordance with K-IFRS, property and equipment which are depreciated with the declining-balance method under K-

GAAP, are depreciated on a straight-line basis that reflects the appropriate pattern in which the asset’s future economic

benefits are expected to be consumed.

③ Borrowing costs

In accordance with K-IFRS, the company capitalized borrowing costs directly attributable to the acquisition, construction

or production of a qualifying asset as part of the cost of that asset.

④ Component accounting of property and equipment

In accordance with K-IFRS, a component that is significant compared to the total cost of property and equipment is

depreciated over separate useful lives.

⑤ Provision for sales return

In accordance with K-IFRS, the Company estimates the possibility of returns and recognizes as provision for sales return.

⑥ Impairment of financial assets

In accordance with K-IFRS, the Company first assesses whether objective evidence of impairments exists individually for

financial assets and then, assesses whether objective evidence of impairment exists collectively for other financial assets by

Company of financial assets with similar credit risk characteristics.

⑦ Reclassification of associate

In accordance with K-IFRS, the Company reclassified investment securities as available-for-sale financial assets and

investments in associate. Available-for-sale financial assets are measured at fair value, and investments in associate are

recognized under the cost method. While under K-GAAP, the scope for associates is different due to the prescribed

entities.

⑧ Employee benefits

Post-employment benefit: In accordance with K-GAAP, the Company records the liabilities for its retirement and

severance benefit obligations which would be payable if all employees left the Company at the end of the reporting

period. In accordance with K-IFRS, the measurement of the retirement and severance benefit obligations are

calculated actuarially using the projected unit credit method based on certain assumptions to calculate the present

value.

Short-term employee benefit: According to K-IFRS, the Company recognizes the expected cost of short-term

employee benefits in the form of compensated absence as a liability, when employees render service that increases

their entitlement to future compensated absences.

Long-term employee benefit: Other long-term employee benefits include employee benefits that do not settle within

twelve months after the end of the period in which the employees renders the related service, and 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, less the fair value of any related assets.




92


⑨ Present value of leasehold deposits and leasehold deposits received

In accordance with K-GAAP, the Company recognizes leasehold deposits and leasehold deposits received as nominal

amount of deposits. In accordance with K-IFRS, leasehold deposits and leasehold deposits received are measured at

amortized cost using the effective interest method.

⑩ Customer Loyalty Programs

In accordance with K-GAAP, the Company recognized a provision for the costs of the product to be provided in the future

from using the points. However, in accordance with K-IFRS, the revenue to be incurred in the future from using the

points is deferred at first and the Company recognizes the unearned revenues as sales when the points are redeemed.

⑪ Impairment of assets

In accordance with K-IFRS, the Company does not amortize goodwill and perform the impairment test. The carrying

amounts of the Company’s non-financial 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. While

under K-GAAP goodwill is amortized on a straight line basis over the estimated useful lives.

⑫ Financial guarantee

The Company recognized the fair value of the financial guarantee contracts as financial liabilities.

⑬ Deferred tax effects

The Company reflected the tax effects in relation to the adjustments in transition to K-IFRS. Also, in accordance with K-

IFRS, the current deferred tax assets (liabilities) are reclassified to the non-current deferred tax assets (liabilities).

(d) Explanation of material adjustments to the separate statement of cash flows

In accordance with K-GAAP, interest expense, interest income, dividends income and income tax expenses were presented

as non-cash items in operating activities. While in accordance with K-IFRS, interest paid are recognized as cash flows

from financing activities, and interest received and dividends received are recognized as cash flows from investing

activities. Income tax paid is recognized as cash flows from operating activities.

Bank overdraft, which must be repaid upon request from financial institutions and which constitutes a part of cash

management, has been reclassified from cash flows from financing activities to cash and cash equivalence under K-IFRS.

Except for the explanation above, there are not other significant differences on cash flow statement between K-IFRS and

K-GAAP.

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