LG ELECTRONICS INC. AUDIT REPORT 2002

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LG ELECTRONICS INC.AUDIT REPORT 2002As of December 31, 2002 andfor the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002

INDEPENDENT AUDITOR’S REPORTTo the Board of Directors and Shareholders ofLG Electronics Inc.We have audited the accompanying non-consolidated balance sheet of LG Electronics Inc. (the“Company”) as of December 31, 2002, and the related non-consolidated statements of income,appropriations of retained earnings (draft) and cash flows for the nine-month period from April 1,2002 (date of spin-off) to December 31, 2002, expressed in Korean Won. These financial statementsare the responsibility of the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.We conducted our audit in accordance with auditing standards generally accepted in the Republic ofKorea. Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believe that our audit provides areasonable basis for our opinion.In our opinion, the non-consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of LG Electronics Inc. as of December 31, 2002, and theresults of its operations, the changes in its retained earnings and its cash flows for the nine-monthperiod from April 1, 2002 (date of spin-off) to December 31, 2002, in conformity with financialaccounting standards generally accepted in the Republic of Korea.Without qualifying our opinion, we draw attention to the following matters.As discussed in Notes 1 and 24 to the accompanying non-consolidated financial statements, theCompany was spun off from LG Electronics Investment Ltd. (formerly LG Electronics Inc.) on April1, 2002. The electronics, and information and communications businesses were transferred from LGElectronics Investment Ltd. to the Company. As of April 1, 2002, the Company has outstandingcapital stock amounting to 783,961 million, including non-voting preferred stock, and theCompany’s stock was listed on the Korean Stock Exchange on April 22, 2002.Continued;

As discussed in Note 22 to the accompanying non-consolidated financial statements, for thenine-month period ended December 31, 2002, the Company entered into various transactions withaffiliated companies including sales amounting to 7,360,895 million and purchases amounting to 2,120,313 million. As of December 31, 2002, related receivables and payables approximate 990,556 million and 819,649 million, respectively.As discussed in Note 2 to the accompanying non-consolidated financial statements, the Companymade an early adoption of Statement of Korean Financial Accounting Standards (“SKFAS”) No. 6 onsubsequent events for the nine-month period from April 1, 2002 to December 31, 2002. Accordingly,the dividends included in the appropriations of retained earnings (draft) were not recognized asliabilities in the balance sheet as of December 31, 2002. The effect of this early adoption of SKFASNo. 6 was to decrease liabilities and increase retained earnings as of December 31, 2002 by 157,431 million.Accounting principles and auditing standards and their application in practice vary among countries.The accompanying non-consolidated financial statements are not intended to present the financialposition, results of operations and cash flows in conformity with accounting principles and practicesgenerally accepted in countries and jurisdictions other than the Republic of Korea. In addition, theprocedures and practices used in the Republic of Korea to audit such financial statements may differfrom those generally accepted and applied in other countries. Accordingly, this report and theaccompanying non-consolidated financial statements are for use by those who are knowledgeableabout Korean accounting principles or auditing standards and their application in practice.Seoul, KoreaJanuary 25, 2003This report is effective as of January 25, 2003, the audit report date. Certain subsequent events orcircumstances, which may occur between the audit report date and the time of reading this report,could have a material impact on the accompanying non-consolidated financial statements and notesthereto. Accordingly, the readers of the audit report should understand that there is a possibility thatthe above audit report may have to be revised to reflect the impact of such subsequent events orcircumstances, if any.

LG ELECTRONICS INC.NON-CONSOLIDATED BALANCE SHEETDecember 31, 2002(In millions of Korean Won)ASSETSCurrent assets:Cash and cash equivalents (Note 5)Short-term financial instrumentsTrade accounts and notes receivable, net (Notes 4, 5 and 22)Inventories (Notes 6 and 8) Other accounts receivable, net (Notes 4 and 5)Prepaid expensesAccrued income (Notes 4 and 5)Advances (Note 4)Derivatives transaction debit (Note 14)Other current assets (Note 66,9512,1102,174Total current assets2,962,609Property, plant and equipment, net of accumulateddepreciation (Notes 8 and 23)Long-term financial instruments (Note 3)Investment securities (Note 7)Refundable deposits (Note 5)Long-term trade accounts receivable (Note 4)Long-term prepaid expensesDeferred income tax assets, net (Note 19)Long-term loans (Notes 4 and 22)Intangible assets (Notes 9 and 23)Total 0542,246972,467 10,132,578The accompanying notes are an integral part of these non-consolidated financial statements.Continued;3

LG ELECTRONICS INC.NON-CONSOLIDATED BALANCE SHEET, ContinuedDecember 31, 2002(In millions of Korean Won)LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Short-term borrowings (Note 10)Current maturities of long-term debt (Note 10)Trade accounts and notes payable (Notes 5 and 22)Other accounts payable (Note 5)Income taxes payable (Note 19)Accrued expenses (Note 5)WithholdingsAdvances from customersDerivatives transaction credit (Note 14) Total current 85,43345,352197,4285344,736,639Debentures, net of current maturities and discountson debentures (Note 11)Long-term debt, net of current maturities (Note 11)Accrued severance benefits, net (Note 13)Product warranty provisionOther long-term liabilities2,143,8414,720162,96079,200166Total liabilities7,127,526Commitments and contingencies (Note 14)Shareholders' equity:Capital stock (Note 15)783,961Capital surplus:Additional paid-in capital (Note 16)1,876,153Retained earnings:Unappropriated retained earnings before appropriations (Note 17)277,716Capital adjustments (Note 18)67,222Total shareholders' equity3,005,052Total liabilities and shareholders' equity 10,132,578The accompanying notes are an integral part of these non-consolidated financial statements.4

LG ELECTRONICS INC.NON-CONSOLIDATED STATEMENT OF INCOMEFor the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002(In millions of Korean Won except for earnings per share amounts)Sales (Notes 22 and 23)Cost of sales (Note 22)Gross profitSelling and administrative expensesOperating income (Note 23) Non-operating income:Interest incomeRental incomeForeign exchange gainsGain on disposal of investmentsGain on disposal of property, plant and equipmentGain on disposal of intangible assetsEquity in earnings of affiliates, net (Note 7)Gain on business transferGain on derivatives transactions (Note 14)Gain on valuation of derivatives (Note 14)Refund of income taxesReversal of bad debt allowanceOthers 36,302122,695473,710The accompanying notes are an integral part of these non-consolidated financial statements.Continued;5

LG ELECTRONICS INC.NON-CONSOLIDATED STATEMENT OF INCOME, ContinuedFor the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002(In millions of Korean Won except for earnings per share amounts)Non-operating expenses:Interest expenseForeign exchange lossesLoss from transfer of trade accountsand notes receivableLoss from disposal of investmentsLoss from disposal of property, plant and equipmentLoss from disposal of intangible assetsLoss from redemption of debenturesDonationsOther bad debt expenseLoss on derivatives transactions (Note 14)Loss on valuation of derivatives (Note 14)Additional payment of income taxesOthers 11,5065346,388146,045736,270Ordinary income399,113Extraordinary gainsExtraordinary lossesIncome before income taxesIncome taxes (Note 19)Net incomeBasic earnings per share (Note 20) (in Korean Won)Basic ordinary income per share (Note 20) (in Korean Won)399,113121,397277,7161,7681,768 The accompanying notes are an integral part of these non-consolidated financial statements.6

LG ELECTRONICS INC.NON-CONSOLIDATED STATEMENT OFAPPROPRIATIONS OF RETAINED EARNINGS (DRAFT)For the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002Date to be appropriated: March 14, 2003(In millions of Korean Won)Unappropriated retained earnings before appropriations:Net income Appropriations of retained earnings (Note 17):Legal reserveReserve for improvement of financial structureReserve for research and manpower developmentLoss from disposal of treasury stockCash dividends (Note ropriated retained earnings to becarried forward to the subsequent year 15The accompanying notes are an integral part of these non-consolidated financial statements.7

LG ELECTRONICS INC.NON-CONSOLIDATED STATEMENT OF CASH FLOWSFor the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002(In millions of Korean Won)CASH FLOWS FROM OPERATING ACTIVITIES:Net income Adjustments to reconcile net income tonet cash provided by operating activities:DepreciationAmortization of discounts and premiums on on debenturesProvision for severance benefitsLoss from transfer of trade accounts and notes receivableBad debt expenseForeign currency translation gains, netGain on disposal of investments, netLoss on disposal of property, plant and equipment, netLoss on disposal of intangible assets, netLoss on redemption of debenturesEquity in earnings of affiliates, netGain on valuation of derivatives, netGain on derivatives transactions, netProduct warranty provisionOthersChanges in assets and liabilities:Increase in trade accounts and notes receivableIncrease in other accounts receivableIncrease in inventoriesIncrease in accrued incomeIncrease in prepaid expensesIncrease in advancesIncrease in other current assetsIncrease in deferred income tax assetsIncrease in trade accounts and notes payableIncrease in other accounts payableDecrease in accrued expensesIncrease in advances from customersIncrease in income taxes payableIncrease in withholdingsPayment of severance benefitsIncrease in severance insurance depositsDecrease in contributions to the National Pension FundOthersNet cash provided by operating 38,979(5,455) (86,363)(36,170)3,048(265)1,507,224The accompanying notes are an integral part of these non-consolidated financial statements.Continued;8

LG ELECTRONICS INC.NON-CONSOLIDATED STATEMENT OF CASH FLOWS, ContinuedFor the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002(In millions of Korean Won)CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of short-term financial instrumentsAcquisition of marketable securitiesDecrease in short-term and long-term loans, netDisposal of long-term financial instrumentsDisposal of refundable depositsProceeds from disposal of investmentsAcquisition of investmentsProceeds from disposal of property, plant and equipmentProceeds from disposal of intangible assetsAcquisition of property, plant and equipmentAcquisition of intangible assetsDisposal of derivativesOthersNet cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from short-term borrowings, netProceeds from issuance of debenturesPayment of current maturities of long-term debtPayment of debenturesPayment of long-term debtAcquisition of treasury stockNet cash used in financing 0,247)DECREASE IN CASH AND CASH EQUIVALENTS(91,799)CASH AT APRIL 1, 2002 (DATE OF SPIN-OFF) (Note 25)108,975CASH AT THE END OF THE PERIOD (Note 25) 17,176The accompanying notes are an integral part of these non-consolidated financial statements.9

LG ELECTRONICS INC.NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTSAs of December 31, 2002 and for the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002-------------1.The Company:LG Electronics Investment Ltd. (formerly LG Electronics Inc.) was incorporated in 1959 underthe Commercial Code of the Republic of Korea to manufacture and sell electronics products. In1970, LG Electronics Investment Ltd. offered its shares for public ownership.As discussed in Note 24 to the accompanying financial statements, the Company was spun offfrom LG Electronics Investment Ltd. (formerly LG Electronics Inc.) on April 1, 2002, to engagein the manufacture and sale of electronic, and information and communication products.As of December 31, 2002, the Company has its manufacturing facilities in Kuro, Pyeongtaek,Chougju, Gumi, Changwon, etc. The Company is a member of the LG Group, which comprisesaffiliated companies under common management direction.As of December 31, 2002, the Company has outstanding capital stock amounting to 783,961million, including non-voting preferred stock. The Company’s stock was listed on the KoreanStock Exchange on April 22, 2002, and its depositary receipts (“DRs”) were listed on the LondonStock Exchange in September 2002.As of December 31, 2002, affiliated companies comprised of the LG Group including LGElectronics Investment Ltd. own a total of 36.1% of the Company’s common stock, and financialinstitutions, foreign investors and others own the rest of the Company’s common stock.2.Summary of Significant Accounting Policies:The significant accounting policies followed by the Company in the preparation of itsnon-consolidated financial statements in accordance with Financial Accounting Standards of theRepublic of Korea are summarized below:Basis of Financial Statement Presentation The Company maintains its official accounting records in Korean Won and prepares statutorynon-consolidated financial statements in the Korean language in conformity with financialaccounting standards generally accepted in the Republic of Korea. The accompanyingnon-consolidated financial statements have been condensed, restructured and translated intoEnglish from the Korean language non-consolidated financial statements. Certain accountingprinciples applied by the Company that conform with financial accounting standards andaccounting principles in the Republic of Korea may not conform with generally acceptedaccounting principles in other countries. Accordingly, these non-consolidated financial statementsare intended for use by those who are informed about Korean accounting principles and practices.Certain information attached to the Korean language financial statements, but not required for afair presentation of the Company's financial position and results of operations, is not presented inthe accompanying non-consolidated financial statements.The preparation of non-consolidated financial statements requires management to make estimatesand assumptions that affect amounts reported therein. Due to the inherent uncertainty involvedin making estimates, actual results reported in future periods may differ from those estimates.Continued;10

LG ELECTRONICS INC.NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS, ContinuedAs of December 31, 2002 and for the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002-------------2.Summary of Significant Accounting Policies, Continued:Spin-Off Accounting Upon a resolution of the shareholders of LG Electronics Investment Ltd. (formerly LGElectronics Inc.) on December 28, 2001, the Company was spun off from LG ElectronicsInvestment Ltd. on April 1, 2002. The significant accounting policies followed by the Companyin the spin off are as follows:Assets and liabilities are transferred based on the book value.Capital adjustments including gain or loss on valuation of investment securities, which aredirectly related to assets and liabilities transferred to the Company, are also transferred to theCompany.The difference between the Company’s net assets transferred from LG ElectronicsInvestment Ltd. and capital, after adjustments arising from capital adjustments, is credited topaid-in capital in excess of par value.Revenue Recognition Sales of finished products and merchandise are recognized when delivered. Revenue frominstallation service contracts is recognized using the percentage-of-completion method.Marketable Securities and Investments in Debt and Equity Securities All marketable securities and investments in equity and debt securities are initially carried at costdetermined by the weighted average method, including incidental expenses. In the case of debtsecurities, cost includes the premium paid or discount received at the time of purchase. Thefollowing paragraphs describe the subsequent accounting for securities by type of security.Marketable securities and investments in marketable equity securities of non-controlled investeesare carried at fair value. Temporary changes in fair value are recorded in current operations formarketable securities and accounted for in the capital adjustments account, a component ofshareholders’ equity, for investments in marketable equity securities.Investments in non-marketable equity securities of non-controlled investees are carried at cost,except for declines in the Company’s proportionate ownership of the underlying book value of theinvestee which are anticipated to be permanent, which are recorded in current operations.Subsequent recoveries are also recorded in current operations up to the original cost of theinvestment.Continued;11

LG ELECTRONICS INC.NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS, ContinuedAs of December 31, 2002 and for the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002-------------2.Summary of Significant Accounting Policies, Continued:Marketable Securities and Investments in Debt and Equity Securities, Continued Investments in equity securities of companies over which the Company exerts a significantcontrol or influence (controlled investees) are recorded using the equity method of accounting.Differences between the initial purchase price and the Company’s initial proportionate ownershipof the net book value of the investee are amortized over five years using the straight-line method.Under the equity method, the Company records changes in its proportionate ownership of thebook value of the investee in current operations, as capital adjustments or as adjustments toretained earnings, depending on the nature of the underlying change in book value of the investee.Unrealized profit arising from sales by the Company to the equity-method investees is fullyeliminated. Unrealized profit arising from sales by the equity-method investees to the Companyor sales between equity

AUDIT REPORT 2002 As of December 31, 2002 and for the nine-month period from April 1, 2002 (date of spin-off) to December 31, 2002. . Property, plant and equipment, net of accumulated depreciation (Notes 8 and 23)

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