lotte shopping 연결영문보고서 2009 final Statement_FY09... · Notes to Consolidated...

LOTTE SHOPPING CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2009 and 2008 (With Independent Auditors’ Report Thereon)

Table of Contents

Page Independent Auditors’ Report 1 Consolidated Statements of Financial Position 3 Consolidated Statements of Income 6 Consolidated Statements of Changes in Stockholders’ Equity 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements 12

Independent Auditors’ Report

Based on a report originally issued in Korean

To the Stockholders and Board of Directors Lotte Shopping Co., Ltd.; We have audited the accompanying consolidated statements of financial position of Lotte Shopping Co., Ltd. (the “Company”) and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 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 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 our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lotte Shopping Co., Ltd. and its subsidiaries as of December 31, 2009 and 2008, and the results of their operations, the changes in their equity, and their cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea. The accompanying consolidated financial statements as of and for the year ended December 31, 2009 have been translated into United States dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in Korean Won have been translated into dollars on the basis set forth in note 3 to the consolidated financial statements. Without qualifying our opinion, we draw attention to the following: As discussed in note 2(a) to the consolidated financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such 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 accounting principles and auditing standards and their application in practice.

As discussed in notes 2(i) and 12 to the consolidated financial statements, the Company adopted the revaluation model for land in accordance with Statement of Korea Accounting Standard No. 5, Property, Plant and Equipment, revised January 1, 2009. The book value of land was accounted at fair value as of the date of the revaluation, December 31, 2009. According to the transitional provision to this Standard, the Company applied the accounting change prospectively and did not restate the prior period’s consolidated financial statements presented for comparative purposes.

KPMG Samjong Accounting Corp. Seoul, Korea March 25, 2010 This report is effective as of March 25, 2010, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

LOTTE SHOPPING CO., LTD.

Consolidated Statements of Financial Position

As of December 31, 2009 and 2008

U.S. dollars (thousands) Korean Won (millions) (note 3) Assets 2009 2008 2009 Current assets: Cash and cash equivalents (notes 12 and 16) W 843,449 758,739 $ 722,378 Short-term deposits (notes 4, 15 and 16) 520,200 286,901 445,529 Short-term held-to-maturity securities (note 8) 124 179,350 106 Trade accounts receivable, net of allowance for doubtful accounts of W10,359 million in 2009 and W4,457 million in 2008 (notes 11 and 16) 382,057 194,628 327,216 Loans, net of allowance for doubtful accounts of W8,877 million in 2009 and W591 million in 2008 39,913 52,034 34,185 Other accounts receivable, net of allowance for doubtful accounts of W6,035 million in 2009 and W8,726 million in 2008 (note 16) 135,803 78,917 116,309 Accrued income, net of allowance for doubtful for doubtful accounts of W304 million in 2009 and W204 million in 2008 (note 16) 26,967 23,952 23,096 Advance payments, net of allowance for doubtful accounts of W2,265 million in 2009 and W696 million in 2008 100,236 24,968 85,847 Inventories (notes 5 and12) 1,251,349 1,130,334 1,071,727 Deferred income tax assets, net (note 31) 90,388 74,041 77,414 Other current assets (note 9) 72,694 41,049 62,260 Total current assets 3,463,180 2,844,913 2,966,067 Card assets: Card assets, net of allowance for doubtful accounts of W94,675 million in 2009 and W103,159 million in 2008, and deferred loan income of W13,012 million in 2009 and W10,411 million in 2008 (notes 7 and 16) 3,570,305 3,004,654 3,057,815 Non-current assets: Available-for-sale securities (notes 8 and 15) 365,010 314,949 312,616 Equity method investment securities (note 8) 1,635,787 611,688 1,400,982 Non-current derivative assets (note 23) 177,137 296,634 151,710 Other investment assets 5,554 3,399 4,757 Property, plant and equipment, net of accumulated depreciation of W2,794,735 million in 2009 and W2,201,840 million in 2008 (notes 12 and 15) 12,896,552 7,848,064 11,045,352 Intangible assets, net of amortization (note 13) 856,147 1,009,314 733,253 Long-term prepaid expenses 271,618 201,010 232,630 Long-term advance payments 76,960 52,030 65,913 Guarantee deposits (notes 20 and 34) 1,041,859 677,859 892,308 Other assets (note 14) 63,269 43,730 54,187 Total non-current assets 17,389,893 11,058,677 14,893,708 Total assets W 24,423,378 16,908,244 $ 20,917,590

See accompanying notes to consolidated financial statements.


Consolidated Statements of Financial Position, Continued


U.S. dollars (thousands) Korean Won (millions) (note 3) Liabilities 2009 2008 2009 Current liabilities: Trade accounts payable (notes 11 and 16) W 2,283,837 1,836,400 $ 1,956,010 Short-term borrowings (notes 18 and 34) 955,222 1,060,708 818,108 Other accounts payable (note 16) 841,205 705,509 720,456 Accrued expenses (note 16) 309,857 198,031 265,380 Accrual for gift certificates 378,780 340,165 324,409 Short-term debentures, net of discount of W149 million in 2009 of W80 million in 2008 (notes 16 and 19) 321,389 127,645 275,256 Current portion of long-term borrowings (note 18) 70,532 2,500 60,408 Current portion of debentures, net of discount of W239 million in 2009 and W127 million in 2008 (notes 16 and 19) 707,338 419,873 605,804 Income tax payable (note 31) 164,271 283,599 140,691 Accrual for bonus points reward program (note 22) 89,573 80,263 76,716 Other provisions (note 34) 192,536 147,107 164,899 Other current liabilities (note 17) 303,698 168,587 260,104 Total current liabilities 6,618,238 5,370,387 5,668,241 Long-term liabilities: Long-term borrowings (notes 16 and 18) 472,533 80,656 404,704 Long-term debentures, net of discount of W8,364 million in 2009 and W9,200 million in 2008 (notes 16 and 19) 2,514,812 1,838,388 2,153,831 Rental guarantee deposits (notes 12 and 20) 335,085 245,591 286,986 Accrual for retirement and severance benefits, net (note 21) 78,521 62,705 67,250 Deferred income tax liabilities (note 31) 1,227,063 148,454 1,050,928 Other non-current liabilities 11,859 5,433 10,156 Total long-term liabilities 4,639,873 2,381,227 3,973,855 Total liabilities W 11,258,111 7,751,614 $ 9,642,096



Consolidated Statements of Financial Position, Continued


U.S. dollars (thousands) Korean Won (millions) (note 3) Stockholders' Equity 2009 2008 2009 Stockholders' equity: Common stock of W5,000 par value Authorized - 60,000,000 shares Issued and outstanding - 29,043,374 shares (notes 1 and 24) W 145,217 145,217 $ 124,372 Capital surplus (note 24) 4,652,244 4,652,244 3,984,450 Capital adjustments (note 25) (124,533) - (106,657) Accumulated other comprehensive income (note 26) 2,973,632 28,400 2,546,790 Retained earnings (note 27) 4,684,995 4,005,563 4,012,500 Minority interests in consolidated subsidiaries 833,712 325,206 714,039 Total stockholders' equity 13,165,267 9,156,630 11,275,494 Total liabilities and stockholders' equity W 24,423,378 16,908,244 $ 20,917,590



Consolidated Statements of Income

For the years ended December 31, 2009 and 2008

U.S. dollars

Korean Won (millions, except for earnings per

share)

(thousands, except for

earnings per share)(note 3)

2009 2008 2009 Continuing operations Sales (notes 11, 20, 28, 29 and 39) W 16,010,345 12,794,775 $ 13,712,182 Cost of sales (notes 11, 29 and 38) 10,788,271 8,740,299 9,239,697 Gross profit 5,222,074 4,054,476 4,472,485 Selling and administrative expenses 4,073,757 3,043,336 3,489,000 (notes 12, 13, 20, 30, 34 and 38) Operating income (note 39) 1,148,317 1,011,140 983,485 Non-operating income: Interest income 60,244 65,193 51,597 Dividend income 2,364 2,909 2,024 Gain on foreign currency transactions 9,412 819 8,061 Gain on foreign currency translation 111,557 5,907 95,544

Equity in earnings of equity method accounted

investments (note 8) 142,095 51,136 121,698

Gain on disposition of equity method accounted

investments 5,630 20,395 4,822 Gain on valuation of derivative instruments (note 23) 1 184,663 1 Gain on disposition of derivative instruments 2,861 - 2,451 Gain on disposition of property, plant and equipment 3,937 48,887 3,372 Gains from assets contributed - 8,378 - Others 92,550 18,594 79,264 430,651 406,881 368,834Non-operating expenses: Interest expense 100,241 35,701 85,852 Loss on foreign currency transactions 18,180 849 15,570 Loss on foreign currency transaction 29,929 190,382 25,633

Equity in loss of equity method accounted investments

(note 8) 32,548 68,902 27,876 Loss on valuation of derivative instruments (note 23) 103,717 59 88,830 Loss on disposition of property, plant and equipment 7,591 14,006 6,502 Loss on revaluation of land (note 12) 8,268 - 7,081 Others 85,931 31,405 73,595 386,405 341,304 330,939 Income before income taxes W 1,192,563 1,076,717 $ 1,021,380 See accompanying notes to consolidated financial statements.


Consolidated Statements of Income, Continued


U.S. dollars

Korean Won (millions, except for earnings per

share)

(thousands, except for

earnings per share)(note 3)

2009 2008 2009 Income taxes (note 31) W 360,371 288,793 $ 308,643 Net income from subsidiaries before acquisition 70,777 3,146 60,618 Income from continuing operations 761,415 784,778 652,119 Discontinued operation Income from discontinued operation, net of income tax of

W1,416 million in 2009 and W531 million in 2008 (note 38) 4,435 1,399 3,799

Net income (note 40) 765,850 786,177 655,918 Net Income in minority interest (note 40) 50,158 42,720 42,958 Consolidated net income W 715,692 743,457 $ 612,960 Earnings per share (notes 32 and 37) Basic earnings per share from continuing operations in

Won and U.S. dollars 24,489 25,550 20.97Basic earnings per share in Won and U.S. dollars W 24,642 25,598 $ 21.10 See accompanying notes to consolidated financial statements.


Consolidated Statements of Changes in Stockholders’ Equity


Korean Won (millions)

U.S. dollars(thousands)

(note 3)

Capital stock

Capital surplus

Capital adjustments

Accumulated other

comprehensiveincome

Retainedearnings

Minority interests

Total equity

Total equity

Balance at January 1, 2008 W 145,217 4,668,374 - 61,434 3,299,590

259,251

8,433,866 $ 7,223,250

Net income - - - - 743,457

42,720

786,177 673,327

Payment of cash

dividends (note 33) - - - - (36,304)

-

(36,304) (31,093)

Change in equity of equity method investments, net of tax - - - 7,443 -

(333)

7,110 6,089

Change in fair value of available-for-sale securities, net of tax - - - (32,587) -

(2,351)

(34,938) (29,923)

Effective portion of changes in fair value of cash flow hedges, net of tax - - - (29,002) -

(711)

(29,713) (25,448)

Foreign operation currency translation gain(loss), net of tax - - - 21,112 -

(684)

20,428 17,496

Initial consolidation of

subsidiary - (16,271) - - -

32,414

16,143 13,825 Others - 141 - - (1,180)

(5,100)

(6,139) (5,257)

Balance at December 31, 2008 W 145,217 4,652,244 - 28,400 4,005,563

325,206

9,156,630 $ 7,842,266

Balance at January 1, 2009 W 145,217 4,652,244 - 28,400 4,005,563

325,206

9,156,630 $ 7,842,266

Net income - - - - 715,692

50,158

765,850 655,918

Payment of cash

dividends (note 33) - - - - (36,304)

-

(36,304) (31,093)

Change in equity of equity method investments, net of tax - - - 29,783 -

(479)

29,304 25,098

Change in fair value of available-for-sale securities, net of tax - - - 33,365 -

(48)

33,317 28,535

Effective portion of changes in fair value of cash flow hedges, net of tax - - - 14,648 -

457

15,105 12,936

Change in fair value of

land, net of tax - - 2,879,199 -

23,558

2,902,757 2,486,088

Foreign operation currency translation gain(loss), net of tax - - - (11,763) -

2,243

(9,520) (8,153)

Initial consolidation of

subsidiary - - (124,533) - -

440,711

316,178 270,793 Others - - - - 44

(8,094)

(8,050) (6,894)

Balance at December 31, 2009 W 145,217 4,652,244 (124,533) 2,973,632 4,684,995

833,712

13,165,267 $ 11,275,494



Consolidated Statements of Cash Flows





(note 3) 2009 2008 2009 Cash flows from operating activities: Net income W 765,850 786,177 $ 655,918 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 431,307 383,573 369,396 Amortization of intangible assets 122,991 97,115 105,336 Bad dept expenses 10,969 2,241 9,395 Accrual for retirement and severance benefits 61,538 66,632 52,704 Loss on inventory shrinkage 12,822 10,423 10,981 Loss on valuation of inventory 555 1,076 475 Amortization of discount on debentures 4,916 2,252 4,210 Cost of card business 77,856 121,946 66,681 Loss on foreign currency translation 9,015 190,379 7,721 Gain on foreign currency translation (102,175) (5,907) (87,508)

Equity in loss (gain) of equity method accounted investments, net (51,045) 17,766 (43,717)

Loss (gain) on disposition of property, plant and equipment, net 1,402 (35,034) 1,201

Gain on disposition of equity method accounted investments (1,730) (20,395) (1,482)

Loss (gain) on valuation of derivative instruments, net 103,717 (184,604) 88,830 Loss on revaluation of land 8,268 - 7,081 Accrual for other provisions 45,429 - 38,908 Others 14,522 (6,442) 12,437 Changes in operating assets and liabilities: Trade accounts receivable (36,600) 9,943 (31,347) Other accounts receivable (14,525) (15,648) (12,440) Accrued interest income (1,632) 6,081 (1,397) Advance payments (20,880) (59,272) (17,883) Inventories (101,069) (40,940) (86,561) Other current assets 31,651 (14,953) 27,106 Card assets (722,540) 2,085 (618,826) Long-term prepaid expenses (76,398) (34,626) (65,431) Deferred income tax assets (12,945) (6,521) (11,087) Trade accounts payable 185,150 58,771 158,573 Other accounts payable 108,141 (46,852) 92,618 Advances from customers 22,329 8,328 19,124 Accrued expenses 14,438 (11,880) 12,365 Income taxes payable (123,366) 22,571 (105,658) Accrual for gift certificates 38,616 17,408 33,073 Accrual for mileage 7,723 (34,308) 6,614 Deferred income tax liabilities 15,863 (37,797) 13,586 Payment of retirement and severance benefits (47,948) (57,906) (41,065) Increase in severance benefit deposit (17,994) (7,712) (15,411) Others 190,062 (1,777) 162,783 Net cash provided by operating activities W 954,283 1,182,193 $ 817,303


Consolidated Statements of Cash Flows, Continued


U.S. dollars (thousands) Korean Won (millions) (note 3) 2009 2008 2009 Cash flows from investing activities: Cash inflows from investing activities: Maturity of short-term deposits W 584,113 1,046,747 $ 500,268 Sale of available-for-sale securities 43,699 202 37,426 Sale of short-term held-to-maturity securities 179,350 - 153,606 Collection of short-term loans 38,965 - 33,372 Sale of equity method accounted investments 60 502 51

Proceeds from disposition of property, plant and equipment 41,919 228,576 35,902

Proceeds from disposition of intangible assets 674 1,332 577 Collection of long-term loans 692 6,916 593 Refund of guarantee deposits 42,158 20,210 36,106

Sale of assets and liabilities on the discontinued operation 24,339 - 20,845

Others 24,336 6,814 20,843 980,305 1,311,299 839,589 Cash outflows for investing activities: Purchase of short-term deposits (781,744) (805,601) (669,531) Increase in short-term loans (16,255) (29,948) (13,922) Purchase of available-for-sale securities (108,039) (97,072) (92,531) Purchase of equity method investment securities (820,920) (106,004) (703,083) Purchase of held-to-maturity securities - (180,108) - Purchase of derivative assets - (50,090) - Purchase of property, plant and equipment (1,041,131) (1,020,788) (891,685) Additions to intangible assets (19,444) (18,401) (16,653) Payment of guarantee deposits (116,486) (88,440) (99,765) Payment of long-term advance payments (44,768) (89,940) (38,342) Others (23,080) (42,377) (19,766) (2,971,867) (2,528,769) (2,545,278) Net cash used in investing activities W (1,991,562) (1,217,470) $ (1,705,689)



Consolidated Statements of Cash Flows, Continued


U.S. dollars (thousands) Korean Won (millions) (note 3) 2009 2008 2009 Cash flows from financing activities: Cash inflows from financing activities: Proceeds from short-term borrowings W 4,857,331 5,431,901 $ 4,160,098 Proceeds from long-term borrowings 442,699 35,002 379,153 Proceeds from issuance of debentures 1,741,465 1,580,234 1,491,491 Receipt of leasehold deposits 64,449 48,504 55,198 Other non-current liabilities 947 750 811 7,106,891 7,096,391 6,086,751 Cash outflows for financing activities: Repayment of short-term borrowings (5,380,306) (5,019,077) (4,608,004) Repayment of current portion of long-term debt (2,500) (2,500) (2,141) Redemption of debentures (547,725) (1,390,460) (469,103) Refund of leasehold deposits received (55,059) (30,298) (47,156) Dividends for minority shareholders paid (7,940) (4,697) (6,800) Cash outflow regarding consolidated equity transaction (95,413) (474,299) (81,717) Dividends paid (36,304) (36,304) (31,093) Other non-current liabilities (4,138) - (3,545) (6,129,385) (6,957,635) (5,249,559) Net cash provided by financing activities 977,506 138,756 837,192 Increase in cash and cash equivalents due to change in consolidating subsidiary 148,151 24,773 126,885 Change in foreign operation currency translation gain (3,668) (3,566) (3,141) Net increase in cash and cash equivalents 84,710 124,686 72,550 Cash and cash equivalents at beginning of year 758,739 634,053 649,828 Cash and cash equivalents at end of year W 843,449 758,739 $ 722,378 See accompanying notes to consolidated financial statements


Notes to Consolidated Financial Statements

December 31, 2009 and 2008 (1) Consolidated Companies (a) Description of Controlling 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, a clothing retail division and construction. The Company was listed on the stock market run by 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, 2009 are as follows:

Stockholder Number of shares

Ownership (%)

Shin Dong Bin 4,237,627 14.6Shin Dong Ju 4,235,883 14.6Shin Kyuk Ho 293,877 1.0Shin Young Ja 228,962 0.8Hotel Lotte Co., Ltd. 2,781,947 9.6Korea Fuji Film Co., Ltd. 2,474,543 8.5Lotte Confectionery Co., Ltd. 2,474,543 8.5Lotte Data Communication Company 1,515,653 5.2Lotte Chilsung Beverage Co., Ltd. 1,237,272 4.3Lotte Engineering & Construction Co., Ltd. 300,019 1.0Hotel Lotte Pusan Co., Ltd. 246,720 0.9Others 9,016,328 31.0

Total 29,043,374 100.0


Notes to Consolidated Financial Statements, Continued

December 31, 2009 and 2008 (1) Consolidated Companies, Continued (b) Description of Subsidiaries

(i) A summary of the subsidiaries of the Company as of December 31, 2009 and 2008 is as follows:

2009

Subsidiaries Location Products or services Fiscal year

Percentage of ownership in

parent interest (%)

Lotte Midopa Co., Ltd Korea Distribution Dec. 31 79.01

Lotte Card Co., Ltd. Korea Card, capital Dec. 31 92.54Woori Home Shopping &

Television Co., Ltd. Korea Distribution Dec. 31 53.03

Korea Seven Co., Ltd. Korea Distribution Dec. 31 50.12

Lotte.Com Inc. Korea Distribution Dec. 31 40.53

Lotte Boulangerie Co., Ltd. Korea Bakery Dec. 31 95.71Lotte Krispy Kreme

Doughnuts Co., Ltd. Korea Food manufacturing Dec. 31 100.00

Lotteria Co., Ltd. Korea Restaurant chain Dec. 31 28.75Daehong Communications

Co., Ltd. Korea Advertisement agency Dec. 31 33.59

Lotte Data Communication Company Korea Computer programming,

consultancy Dec. 31 19.36

KIBANK Korea Electronic financial transaction service Dec. 31 16.54

Mybi Co., Ltd. Korea Electronic banking business Dec. 31 13.35Busan HanaroCard Co., Ltd. Korea Electronic banking business Dec. 31 8.01Lotte Europe Holdings B.V. Nederland Holding company Dec. 31 31.73ZAO Lotte Rus Russia Hotel Dec. 31 31.73Lotte KF Rus LLC Russia Distribution Dec. 31 31.73Lotte Shopping Rus LLC Russia Distribution Dec. 31 31.73Confectionary Rus Kaluga

LLC Russia Food manufacturing Dec. 31 31.73

Operator-Lotte-DutyFree LLC Russia Distribution Dec. 31 31.73Lotte Vietnam Shopping Co.,

Ltd. Vietnam Distribution Dec. 31 80.00

Qingdao Lottemart Commercial Co., Ltd. China Distribution Dec. 31 100.00

Lotte Mart Co., Ltd. China Distribution Dec. 31 100.00Lotte 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 Distribution Dec. 31 99.80

Vietnam Lotteria Co., Ltd. Vietnam Restaurant chain Dec. 31 25.33



December 31, 2009 and 2008 (1) Consolidated Companies, Continued (b) Description of Subsidiaries, Continued

2008

Subsidiaries Location Products or

services Fiscal year


parent interest (%)

Lotte Midopa Co., Ltd Korea Distribution Dec. 31 79.01Lotte Card Co., Ltd. Korea Card, capital Dec. 31 92.54Woori Home Shopping &

Television Co., Ltd. Korea Distribution Dec. 31 53.03

Lotte.Com Inc. Korea Distribution Dec. 31 34.39Lotte Boulangerie Co., Ltd. Korea Bakery Dec. 31 95.71Lotte Vietnam Shopping Co.,

Ltd. Vietnam Distribution Dec. 31 80.00

Qingdao Lotte Mart Commercial Co., Ltd. China Distribution Dec. 31 100.00

Lotte Mart Co., Ltd. China Distribution Dec. 31 100.00Lotte Shopping Holdings

(Singapore), Ltd. Singapore Holding company Dec. 31 100.00

PT Lotte Shopping Indonesia Indonesia Distribution Dec. 31 80.00

(ii) Description of change in the extent of subsidiaries for consolidation is as follows:

Description Subsidiaries Incorporated by split-off Lotte Krispy Kreme Doughnuts Co., Ltd. Acquired shares or established entities in 2009 PT Lotte Mart Korea Seven Co., Ltd. Lotteria Co., Ltd. Daehong Communications Co., Ltd. Lotte Data Communication Company KIBANK Mybi Co., Ltd. Busan HanaroCard Co., Ltd. Lotte Europe Holdings B.V. ZAO Lotte Rus Lotte KF Rus LLC Lotte Shopping Rus LLC Confectionary Rus Kaluga LLC Operator-Lotte-DutyFree LLC Vietnam Lotteria Co., Ltd.



December 31, 2009 and 2008 (2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements

The significant accounting policies followed by the Company and its subsidiaries in the preparation of the accompanying consolidated financial statements are summarized below.

(a) Basis of Presenting Financial Statements The Company maintains its accounting records in Korean Won and prepares statutory

consolidated financial statements in the Korean language in conformity with accounting principles generally accepted in the Republic of Korea (Korean GAAP). Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these consolidated financial statements are intended solely for use by only those who are informed about Korean accounting principles and practices. The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language consolidated financial statements. Certain information included in the Korean language consolidated financial statements, but not required for a fair presentation of the Company’s financial position, results of operations or cash flows or changes in stockholders’ equity is not presented in the accompanying consolidated financial statements.

The Company and its subsidiaries prepare the financial statements in accordance with

generally accepted accounting principles in the Republic of Korea. Except for the items related to the adoption of changes to Statements of Korean Accounting Standards (“SKAS”) No.5, Property, Plant and Equipment, the Company and its subsidiaries applied the same accounting policies that were adopted in the previous year’s consolidated financial statements.

Certain accounts of the prior period’s consolidated financial statements have been

reclassified to conform to the current period’s presentation. These reclassifications have not resulted in any change to reported net income or stockholders’ equity.

In addition, as explained in note 37, the prior period income statement, presented

comparatively, is reclassified to show the discontinued operation separately from continuing operations.



December 31, 2009 and 2008 (2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements,

Continued (b) Principles of Consolidation The investment accounts of the Company and the corresponding capital accounts of the

subsidiaries have been eliminated in consolidation. Differences between the investment accounts and the corresponding capital accounts are presented as goodwill. Goodwill is amortized over a period not exceeding 20 years using the straight-line method. Investments, except those in subsidiaries, in which the Company has an over 20 percent voting interest or exercise significant influence on the financial and operating policy decision of the investee, are accounted for using the equity method.

Inter-company receivables, payables, revenues and expenses arising from transactions between the Company and its subsidiaries or among subsidiaries are eliminated against each other in the consolidated financial statements.

Details of eliminated significant inter-company transactions for the years ended December

31, 2009 and 2008 are as follows:

Korean Won (millions) U.S. dollars

(thousands) (note 3) 2009 2008 2009

Consolidated company

Revenues

Expenses

Revenues

Expenses

Revenues

Expenses

Lottel Shopping Co.,

Ltd. W 16,168 240,084 13,624 199,686 $ 13,847 205,622Lotte Midopa Co.,

Ltd. 7,737 16,013 7,617 13,932 6,627 13,714Lotte Card Co., Ltd. 150,779 8,144 138,234 10,920 129,136 6,975Woori Home

Shopping & Television Co., Ltd. 23,372 14,587 10,879 9,659 20,017 12,493

Korea Seven Co., Ltd. 282 513 - - 241 439

Lotte.Com Inc. 50,353 689 41,988 4,835 43,125 590Lotte Boulangerie

Co., Ltd. 35,222 3,883 29,887 3,197 30,166 3,326

Total W 283,913 283,913 242,229 242,229 $ 243,159 243,159




Continued (b) Principles of Consolidation, Continued Details of eliminated significant account balances with consolidated companies as of

December 31, 2009 and 2008 are as follows:


(thousands) (note 3) 2009 2008 2009 Consolidated company Receivables Payables Receivables Payables Receivables Payables Lotte Shopping Co.,

Ltd. W 141,467 77,830 143,740 15,030 $ 121,161 66,658Lotte Midopa Co., Ltd. 3,830 49,881 4,107 47,280 3,281 42,721Lotte Card Co., Ltd. 54,491 63,754 12,338 56,768 46,669 54,603Woori Home Shopping

& Television Co., Ltd. 1,761 29,713 1,526 5,708 1,509 25,448Korea Seven Co., Ltd. 2,387 4,843 - - 2,044 4,148Lotte.Com Inc. 4,560 17,256 5,028 10,115 3,905 14,779Lotte Boulangerie Co.,

Ltd. 6,416 4,348 4,078 4,478 5,495 3,724Lotte Krispy Kreme

Doughnuts Co., Ltd. 3 3 - - 2 2Lotteria Co., Ltd. 15,977 4,154 - - 13,684 3,557Daehong

Communications Co., Ltd.

28,493 3,263 - - 24,403 2,794

Lotte Data Communication Company

37,062 10,011 - - 31,742 8,574

KIBANK 349 139 - - 299 119Mybi Co., Ltd. 9 604 - - 8 518Busan HanaroCard Co.,

Ltd. 532 13 - - 455 12Lotte Vietnam Shopping

Co., Ltd. - 29,190 - 31,438 - 25,000Vietnam Lotteria Co.,

Ltd. - 2,335 - - - 2,000

Total W 297,337 297,337 170,817 170,817 $ 254,657 254,657 The accounting methods adopted by the Company and its subsidiaries for similar

transactions and under similar circumstances are generally consistent. However, different accounting methods may be applied unless the methods result in a significant difference in amount.




Continued (b) Principles of Consolidation, Continued The Company and its subsidiaries have provided guarantees for consolidated companies

as of December 31, 2009 as follows:

2009

Consolidated company

Provided by Guarantee recipient Type of

borrowings

Guaranteed Amount (thousand)

Lotte Vietnam Shopping

Co., Ltd. Lotte Shopping

Co., Ltd. Citibank N.A.

Hochiminh Working capital

US$60,000 and interest thereon

Australia and New Zealand Bank

Working capital VND 260,000,000

Qingdao Lotte Mart Commercial Co., Ltd.

Lotte Shopping Co., Ltd.

Hana Bank (China) Co., Ltd.

Working capital RMB71,000

Mizuho Bank Working capital RMB100,000

Lotte Mart Co., Ltd. Lotte Shopping Co., Ltd.

Hongkong and Shanghai Banking Corporation

Working capital

RMB110,000

Lotte Europe Holdings B.V.


Korea Development Bank

Working capital US$10,000

PT Lotte Shopping Indonesia


Korea Exchange Bank

Working capital IDR 400,000,000

Vietnam Lotteria Co., Ltd. Lotteria Co., Ltd.

Korea Exchange Bank


Industrial Bank of Korea





Continued (c) Revenue Recognition The Company recognizes revenue from the sale of goods upon purchase by end-

customers or delivery. Revenues from sale of apartments in lots are recognized using the percentage-of-completion method, measured principally by the percentage of costs incurred to total estimated contract costs. Revenue other than the sale of goods and apartments in lots is recognized when the Company and its subsidiaries’ earnings process is either complete or nearly complete in substance, the amount of revenue can be reliably measured, and it is probable that the Company and its subsidiaries will receive the economic benefits associated with the transaction.

Pursuant to Statement of Korea Accounting Standard (“SKAS”) No. 4, Revenue Recognition, the Company and Lotte Midopa Co., Ltd. recognize sales on a gross basis for merchandise which the Company and Lotte Midopa 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 Company and its subsidiaries recognize sales on a net basis for merchandise that may be returned to vendors at any time. Interest, dividend and other income from card assets are recognized on an accrual basis when it can be measured reliably and it is highly probable that economic benefits will flow into the Company and its subsidiaries. Also, deferred loan income from card assets is presented as a deduction from card assets and recognized as revenue over the loan period using the effective interest method. Income is recognized on a cash basis when collectability of card assets is doubtful.

When the Company and its subsidiaries act 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 and its subsidiaries.

(d) Allowance for Doubtful Accounts Allowance for doubtful accounts is estimated based on an analysis of individual accounts

and past experience of collection. However, when the principal of trade accounts and notes receivable, interest rate or repayment period are changed unfavorably for the Company by a court, such as on commencement of reorganization, or by mutual agreement and the difference between nominal value and present value is material, the difference is recognized as bad debt expense.

Lotte Card Co., Ltd., one of the Company’s subsidiaries, provides an allowance for doubtful

accounts determined by the experience loss method or the guidelines established by the Financial Supervisory Service (FSS), whichever is greater, as described below:

(i) Experience Loss Method Lotte Card Co., Ltd. estimates allowance for doubtful accounts through loss ratio

migration analysis based on historical charges-off and recoveries for loans previously charged off.




Continued (d) Allowance for Doubtful Accounts, Continued (ii) Financial Supervisory Service (FSS) Guideline Lotte Card Co., Ltd. classifies its credit card assets and other accounts receivable into

five categories; normal, precautionary, substandard, doubtful and estimated loss. Effective December 31, 2007, Lotte Card Co., Ltd. applies the prescribed minimum levels of reserve % per the FSS guidelines under the Specialized Credit Financial Business Act, as revised on February 11, 2008, to each classification of credit card assets. (note 8) The prescribed minimum levels of reserve for each asset classification are as follows:

Normal

Precautionary

Substandard

Doubtful

Estimated loss

Credit card assets 1.5% 15% 20% 60% 100%

Other accountsreceivable 0.5% 1% 20% 75% 100%

(e) Inventories Inventories are stated at the lower of cost or net realizable value. Net realizable value is

the estimated selling price in the ordinary course of business, less the estimated selling costs. The cost of inventories is determined by the weighted average method and retail method except for goods-in-transit and unfinished apartment units. The cost of goods-in-transit and unfinished apartment units is determined by the specific identification method. The amounts of any write-down of inventories to net realizable value due to obsolescence or excess inventory or other losses occurring in the normal course of business are recognized as cost of sales and such valuation losses are deducted from inventories as allowance for valuation losses.

The Company and its subsidiaries recognize interest costs and other financial charges on

borrowings associated with inventories that require a long period in the acquisition, construction or production as an expense in the period in which they are incurred.




Continued (f) Investments in Securities (excluding investments in associates and joint ventures) (i) Classification Upon acquisition, the Company and its subsidiaries classify debt and equity securities

into the following categories: held-to-maturity, available-for-sale or trading securities. This classification is reassessed at the end of each reporting period.

Investments in debt securities where the Company and its subsidiaries have the positive intent and ability to hold to maturity are classified as held-to-maturity. Securities that are acquired principally for the purpose of selling in the short term are classified as trading securities. Investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities.

(ii) Initial recognition Investments in securities are initially recognized at cost. (iii) Subsequent measurement and income recognition Trading securities are subsequently carried at fair value. Gains and losses arising from

changes in the fair value of trading securities are included in the consolidated income statement in the period in which they arise. Available-for-sale securities are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available-for-sale securities are recognized as other comprehensive income, net of tax, directly in equity. Investments in available-for-sale securities that do not have readily determinable fair values are recognized at cost less impairment, if any. Held-to-maturity investments are carried at amortized cost with interest income recognized in the consolidated income statement using the effective interest method.

(iv) Fair value information

The fair value of marketable securities is determined using quoted market prices as of the period end. Non-marketable debt securities are fair valued by discounting cash flows using the prevailing market rates for debt with a similar credit risk and remaining maturity. Credit risk is determined using issuer’s credit rating as announced by accredited credit rating agencies in Korea. The fair value of investments in money market funds is determined by investment management companies.

(v) Presentation

Trading securities are presented as current assets. Available-for-sale securities, which mature within one year from the end of reporting period or where the likelihood of disposal is within one year from the end of reporting period is probable, are presented as current assets. Held-to-maturity securities, which mature within one year from the end of reporting period, are presented as current assets. All other available-for-sale securities and held-to-maturity securities are presented as non-current assets.




Continued (f) Investments in Securities (excluding investments in associates and joint ventures),

Continued (vi) Impairment The Company and its subsidiaries review investments in securities whenever events or

changes in circumstances indicate that the carrying amount of the investments may not be recoverable. Impairment losses are recognized when reasonably estimated recoverable amounts are less than the carrying amount and it is not obviously evident that impairment is unnecessary.

An impairment loss is reversed if the reversal is objectively related to an event

occurring after the impairment loss was recognized and a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized in the asset in prior years. For held-to-maturity securities measured at amortized cost and available-for-sale securities that are debt securities, the reversal is recognized in profit or loss. For available-for-sale securities that are equity securities, the reversal is recognized directly in equity.

(g) Investments in Associates Associates are entities where the Company and its subsidiaries have the ability to

significantly influence its financial and operating policies. It is presumed to have significant influence if the Company holds directly or indirectly 20 percent or more of the voting power unless it can be clearly demonstrated that this is not the case. Subsidiaries are entities controlled by the Company and its subsidiaries.

Investments in associates are accounted for using the equity method of accounting and are

initially recognized at cost.

The Company and its subsidiaries’ investments in associates include goodwill identified on the acquisition date (net of any accumulated impairment loss). Goodwill is calculated as the excess of the acquisition cost of an investment in an associate over the Company and its subsidiaries’ share of the fair value of the identifiable net assets acquired. Goodwill is amortized using the straight-line method over 10 years. Amortization of goodwill is recorded together with equity in earnings (losses). When events or circumstances indicate that the carrying value of goodwill may not be recoverable, the Company and its subsidiaries reviews goodwill for impairment and records any impairment loss immediately in the consolidated statement of income.




Continued (g) Investments in Associates, Continued The Company and its subsidiaries’ share of its post-acquisition profits or losses in

investments in associates is recognized in the consolidated income statement, and its share of post-acquisition movements in equity is recognized in equity. The cumulative post-acquisition movements are adjusted against the carrying amount of each investment. Changes in the carrying amount of an investment resulting from dividends by an associate are recognized when the associate declares the dividend. When the Company and its subsidiaries’ share of losses in an associate equals or exceeds its interest in the associate, including preferred stock or other long term loans and receivables issued by the associate, the Company and its subsidiaries do not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Company, its subsidiaries and its associates are eliminated to the extent of the Company and its subsidiaries’ interest in each associate.

Foreign currency assets and liabilities of foreign-based operations and companies accounted for using the equity method are translated at the rate of exchange at the end of reporting period. Foreign currency amounts in the statement of income are translated using an average rate and foreign currency balances in the capital account are translated using the historical rate. Translation gains and losses arising from collective translation of the foreign currency financial statements of foreign-based operations are recorded net as accumulated other comprehensive income. These gains and losses are subsequently recognized as income in the year the foreign operations or the companies are liquidated or sold. Amount of gain or loss from the inter-company transactions multiplied by the interest of parent company, which is recognized in the assets held as of December 31, 2008 is regarded as unrealized gain or loss and reflected in the equity method accounted investment.

(h) Joint Venture Investments

Joint ventures are those entities or assets over whose activities the Company and its

subsidiaries have joint control.

In respect to jointly controlled operations, the Company and its subsidiaries include in its consolidated financial statements, the assets that it controls and the liabilities and expenses it has incurred, plus its share of the income (loss) from the joint operation. For its interest in jointly controlled assets, the Company and its subsidiaries recognize in the consolidated financial statements, its share of the assets it jointly controls, the liabilities jointly incurred and net income (loss), plus the liabilities and expenses it has solely incurred, if any. In addition, the Company and its subsidiaries account for its interest in a jointly controlled entity using the equity method of accounting.




Continued (i) Property, Plant and Equipment

Property, plant and equipment are stated at cost net of accumulated depreciation, except

for revaluations made in accordance with the Asset Revaluation Law prior to the Law being revoked on December 2000 and revaluation for land in accordance with the revised SKAS No.5, Property, Plant and Equipment (the “Standard”) as of January 1, 2009.

Under the newly adopted Standard, SKAS No.5, the book value of land is accounted at fair

value as of the date of the revaluation less accumulated impairment loss. If an asset’s book value increases as a result of the revaluation, the amount of the increase is recognized in other comprehensive income, of which, the amount of the increase that reverses a revaluation decrease of the same asset previously recognized in profit and loss is recognized in profit and loss in the current period. On the other hand, if an asset’s book value decreases as a result of the revaluation, that decrease is recognized as a loss for the current period, and the portion of the amount of decrease included in the credit balance in the revaluation surplus recorded in other comprehensive income is deducted from other comprehensive income. According to the transitional provision to this Standard, the accounting change will be applied prospectively and the prior period consolidated financial statements presented for comparative purposes have not been restated.

Additions or improvements extending useful lives of assets are capitalized. However,

normal maintenance and repairs are charged to expense as incurred. Depreciation is computed by the straight-line method over their respective estimated useful

lives for buildings, structures and by the declining-balance method for vehicles, display fixtures and other furniture and fixtures. Estimated useful lives are as follows:

Useful lives (years) Buildings

10 – 60

Structures 10 – 30 Machinery 4 – 30 Vehicles 4 – 5 Display fixtures 4 – 10 Other furniture and fixtures 4 – 10

The Company and its subsidiaries recognize interest costs and other financial charges on

borrowings associated with the production, acquisition, construction of property, plant and equipment as an expense in the period in which they are incurred.

The Company and its subsidiaries review property, plant and equipment for impairment

whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the estimated undiscounted future net cash flows from the use of the asset including proceeds from ultimate disposal are less than its carrying amount.




Continued (j) Intangible Assets

Intangible assets are stated at cost, net of accumulated amortization. Subsequent expenditures, which enable the assets to generate future economic benefits that can be measured and reliably attributed to the assets, are treated as additions to intangible assets. The copyright on film is stated at cost and amortized over the estimated period the related revenue will be recognized. Estimated realization period is evaluated on a periodic basis. In addition, impairment loss on intangible assets is recognized when the realization of revenue is uncertain. The Company and its subsidiaries account for acquisition of a business assuming the transaction occurred as of the most recent quarter end (the deemed acquisition date). Goodwill, which represents the excess of the acquisition cost over the fair value of net identifiable assets acquired, is amortized on a straight-line basis over the estimated useful life not to exceed 20 years. Impairment loss on goodwill is recognized when the recoverable amount declines below its carrying amount and its amount is material.

Amortization is computed using the straight-line method over the estimated useful lives as

follows:

Useful lives (years) Goodwill 10 Industrial property rights 5 – 10 Rights to use facility 10 – 20

Film copyrights Duration of related revenue to be realized

Others 5 – 10 When the recoverable amount of the intangible assets is substantially below the carrying

amount of the assets due to obsolescence or a sharp decline in their market value, the Company and its subsidiaries reduce the carrying amount to the recoverable amount and the amount impaired is recognized as an impairment loss.




Continued (k) Bond and stock issuance cost Stock issuance cost is adjusted in the outstanding capital and deducted from paid in capital

in excess of par value. Bond issuance cost is adjusted in the issued price with deducting discount or adding premium of the bond.

(l) Leases

The Company and its subsidiaries account for and classify its lease transactions as either an operating or capital lease, depending on the terms of the lease.

If a lease meets one or more of the criteria listed below, the present value of future

minimum lease payments is capitalized with a corresponding obligation under capital lease. Otherwise, it is classified as an operating lease.

- Ownership of the leased property transfers to the lessee at the end of the lease term. - The lease has a bargain purchase option which is reasonably certain to be exercised,

at the inception of the lease. - The lease term is equal to 75% or more of the estimated economic useful life of the

leased property. - The present value at the beginning of the lease term of the minimum lease payments

equals or exceeds 90% of the fair value of the leased property. In addition, if the leased property is specialized to the extent that only the lessee can use it

without any major modification, it would be considered a capital lease. Payments made under operating leases are charged to the income statement on a straight-

line basis over the period of the lease.

(m) Discount on Debentures Discount on debentures issued, which represents the difference between the face value

and issuance price of debentures, is amortized using the effective interest method over the life of the debentures. The amount amortized is included in interest expense.




Continued (n) Retirement and Severance Benefits Employees who have been with the Company and its subsidiaries for more than one year

are entitled to lump-sum payments based on salary rates and length of service at the time they leave the Company and its subsidiaries. The Company and its subsidiaries' estimated liability under the plan, which would be payable if all employees left on the end of reporting period, is accrued in the accompanying consolidated statements of financial position. A portion of the liability is covered by an employees’ severance benefits trust where the employees have a vested interest in the deposit with the insurance company in trust. The deposit for severance benefits held in trust is, therefore, reflected in the accompanying consolidated statements of financial position as a reduction of the liability for retirement and severance benefits.

(o) Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated into Korean

Won at the end of reporting period, with the resulting gains or losses recognized in the current operations. Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at W1,167.6 to US$1, the rate of exchange on December 31, 2009. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean Won at the foreign exchange rate on the date of the transaction.

Foreign currency assets and liabilities of foreign-based operations and companies

accounted for using the equity method are translated at the rate of exchange at the end of reporting period. Foreign currency amounts in the statement of income are translated using an average rate and foreign currency balances in the capital account are translated using the historical rate. Translation gains and losses arising from collective translation of the foreign currency financial statements of foreign-based operations are recorded net as a component of accumulated other comprehensive income. These gains and losses are subsequently recognized as income (loss) in the period the foreign operations or companies are liquidated or sold.

(p) Derivatives and Hedge Accounting The Company and its subsidiaries hold derivative financial instruments to hedge its foreign

currency and interest rate risk exposures.

Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Attributable transaction costs are recognized in profit or loss when incurred.




Continued (p) Derivatives and Hedge Accounting, Continued

(i) Hedge accounting

Where a derivative, which meets certain criteria, is used for hedging the exposure to changes in the fair value of a recognized asset, liability or firm commitment, it is designated as a fair value hedge. Where a derivative, which meets certain criteria, is used for hedging the exposure to the variability of the future cash flows of a forecasted transaction it is designated as a cash flow hedge.

The Company and its subsidiaries document, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company and its subsidiaries also document its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in fair values or cash flows of hedged items.

(ii) Fair value hedge

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the statement of income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

(iii) Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. The gain or loss relating to any ineffective portion is recognized immediately in the statement of income. Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at the time remains in equity and is recognized when the forecast transaction is ultimately recognized in the statement of income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated statement of income.

(iv) Derivatives that do not qualify for hedge accounting

Changes in the fair value of derivative instruments that are not designated as fair value or cash flow hedges are recognized immediately in current operations.



December 31, 2009 and 2008

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements,

Continued (q) Provisions and Contingent Liabilities Provisions are recognized when all of the following are met: (1) an entity has a present

obligation as a result of a past event, (2) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (3) a reliable estimate can be made of the amount of the obligation. Where the effect of the time value of money is material, a provision is recorded at the present value of the expenditures expected to be required to settle the obligation.

Where the expenditure required to settle a provision is expected to be reimbursed by

another party, the reimbursement is recognized as a separate asset only when it is virtually certain that the Company and its subsidiaries will receive reimbursement upon settlement of the obligation. The expense relating to a provision is presented net of the reimbursement.

(r) Allowance for Unused Credit Commitments

The Company and its subsidiaries provides an allowance for unused credit commitments to credit card assets by applying the credit conversion factor and the minimum provision rate prescribed by Supervisory Regulation of Credit-Specialized Finance Business for each loan classification (1.5% or more for normal, 15% or more for precautionary, 20% or more for substandard, 60% or more for doubtful and 100% for estimated loss).

(s) Liability for Gift Certificates

Gift certificates are recognized as liabilities when they are sold and subsequently recognized

as sales when redeemed. When the exercise period (5 years after sale) of gift certificates expires, the Company and its subsidiaries recognize the income as other non-operating income.

(t) Income Taxes Income tax on the income or loss for the period comprises of current and deferred tax.

Income tax is recognized in the consolidated statement of income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.

Current tax is the expected tax payable on the taxable income for the year, using enacted

tax rates. Deferred tax is provided using the asset and liability method, providing for temporary

differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the end of reporting period.

A deferred tax asset is recognized only to the extent that it is probable that future taxable

income will be available against which the unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.




Continued (t) Income Taxes, Continued Deferred tax assets and liabilities are classified as current or non-current based on the

classification of the related asset or liability for financial reporting or the expected reversal date of the temporary difference for those with no related asset or liability such as loss carryforwards and tax credit carryforwards. The deferred tax amounts are presented as a net current asset or liability and a net non-current asset or liability.

(u) Use of Estimates The preparation of consolidated financial statements in accordance with Korean GAAP

requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to consolidated financial statements. Actual results could differ from those estimates.

(v) Income from Discontinued Operations Operating and non-operating income, net of income tax effect are reported as income from

discontinued operations in the consolidated income statements for the period in which an initial disclosure for discontinued operations occurred. The prior period consolidated financial statements, presented comparatively, are reclassified to show the discontinued operations separately from continuing operations.

(w) Offsetting of equity method accounted investments and subsidiaries’ equity Equity method accounted investment was offset against subsidiaries’ equity when the

Company can exercise significant influence over the investee. Minority interest’s share of subsidiaries’ is shown separately in stockholders’ equity. The Company and its subsidiaries account for acquisition of a business assuming the transaction occurred as of the most recent year end (the deemed acquisition date). When offsetting equity method accounted investments of the parent company and subsidiaries’ equity, purchase method or pooling method was used based on the substances of transaction. Applying purchase method, the differential is recognized either goodwill or negative goodwill.

(3) Basis of Translating the Consolidated Financial Statements

The consolidated financial statements are expressed in Korean Won and, solely for the convenience of the reader, have been translated into U.S. dollars at the rate of W1,167.6 to US$1, the basic exchange rate on December 31, 2009 posted by Seoul Money Brokerage Services. This translation should not be constructed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.



December 31, 2009 and 2008 (4) Restricted Deposits Restricted deposits included in short-term and long-term financial instruments as of December 31,

2009 and 2008 are as follows:



(note 3) Account Depositary 2009 2008 2009

Short-term: Guarantee deposits for

performance of contracts

Busan Bank and others W 22,873 12,408 $ 19,590

Long-term: Guarantee deposits for

performance of contracts and checking accounts

Shinhan Bank and others

27,007 12,598 23,130

Total W 49,880 25,006 $ 42,720 (5) Inventories (a) Inventories as of December 31, 2009 and 2008 are as follows:



(note 3) Description 2009 2008 2009

Merchandise, net of allowance for valuation losses of W5,951 million in 2009 and W5,396 million in 2008 W 1,235,422 1,096,370 $ 1,058,087

Finished goods 25 3,662 22Goods in process 160 220 137Raw materials 7,145 4,119 6,119Subsidiary materials 1,654 221 1,416Supplies 4,552 840 3,899Materials-in-transit 634 1,423 543Plots of land - 9,749 -Finished apartment units 1,757 - 1,504Unfinished apartment units - 13,730 -

Total W 1,251,349 1,130,334 $ 1,071,727 (b) Loss on inventory shrinkage for the years ended December 31, 2009 and 2008 are W12,822

million and W10,423 million, respectively.



December 31, 2009 and 2008 (6) Assets-backed Securitization (a) Lotte Card Co., Ltd. transferred certain card assets to a Special Purpose Company (“SPC”)

pursuant to the Assets-Backed Securitization Law of the Republic of Korea, and outstanding balance of transferred card assets, excluding trust assets, is W496,400 million as of December 31, 2009.

(b) Lotte Card Co., Ltd. has transferred some of its receivables to special purpose companies

(“SPC”) pursuant to the Asset Securitization Law. Details of transferred trust assets as of December 31, 2009 are as follows:


SPC Underlying

asset Cut-off dateTransfer

date Principal amounts

Transfer amounts

The 1st Supreme

Credit card asset 2008.02.29 2008.05.14 W 553,874 504,620

The 4th Sprint

Credit card asset 2009.04.30 2009.06.02 337,853 370,812

W 891,727 875,432

(c) Lotte Card Co., Ltd. will assume the liability to pay the outstanding card assets when the

transferred card assets cannot meet the prescribed qualification in the contract or fall into arrears. As for asset-backed securitization through the trust, transferees can demand Lotte Card Co., Ltd. to additionally transfer its card assets more than the minimum required when the transferred assets cannot meet a certain qualification.

(d) As prescribed by the assets transfer agreement, the SPC has an obligation of early

redemption of the asset-backed securities when the average portfolio earning ratio during 3 consecutive settlement periods is lower than the average primary cost ratio or when the outstanding balance of the adjusted securitized assets is less than the minimum principals balance as of the closing date of each settlement period and others.

(e) Lotte Card Co., Ltd. has entered into an agreement with a SPC and a trust company to

provide asset management services for the transferred assets. Under the agreement, Lotte Card Co., Ltd. provides various services, such as billing for payment, collecting and dealing with delinquencies, and Lotte Card Co., Ltd. receives a certain management fee from each of the SPC and trust company.



December 31, 2009 and 2008 (7) Card Assets

Card assets as of December 31, 2009 and 2008 consist of the following:


U.S. dollars (thousands)

(note 3) Description 2009 2008 2009

Card members’ receivables W 2,570,166 2,138,894 $ 2,201,238Card loans 746,291 601,345 639,167Trust assets 361,534 377,985 309,639 3,677,991 3,118,224 3,150,044 Less: Allowance for doubtful accounts (94,674) (103,159) (81,085)Deferred loan income (13,012) (10,411) (11,144) (107,686) (113,570) (92,229)

Total W 3,570,305 3,004,654 $ 3,057,815

Card members’ receivables represent cash advance lent to card members, lump-sum payment and installment payment due from card members after pre-payment to membership stores. The full amounts paid in a lump sum to membership stores are collected at the contracted payment date from card members. Installment payment is equally collected from card members per month over certain periods (2~18 months) and charges interests on remaining installment payment from card members. The Company and its subsidiaries charge certain commission upon pre-payment to membership store. The full amount of cash advance is collected from card members with certain interests on the contracted payment date. Card loans represent the balance of amounts lent to card members over certain terms (6 months~3 years) and are subject to certain commission and interest, which are billed to card members.



December 31, 2009 and 2008 (8) Investment in Securities

Investments in securities as of December 31, 2009 and 2008 are as follows: (a) Available-for-sale securities

(i) Equity securities



(note 3) 2009 2008 2009

Description

Cost

Fair value/net

asset value

Book value

Book value Book value

Marketable securities (*1): Busan Bank (*2) W 26,788 74,208 74,208 22,653 $ 63,556Shinhan Financial Group 2,247 13,440 13,440 8,068 11,511Eyesvision Corporation 491 25 25 27 22Korea Investment Corp. 100 10 10 21 8Korea Express Co., Ltd. (*3) 6,690 18,827 18,827 52,047 16,125Lotte Confectionery Co., Ltd. - - - 34,500 - Lotte Chilsung Beverage Co.,

Ltd.(Common stock) 99,180 85,163 85,163 74,629 72,939Lotte Chilsung Beverage Co.,

Ltd.(Preferred stock) 179 135 135 131 115Lotte Samkang Co., Ltd. 10,167 11,701 11,701 7,030 10,021Tbroad Hanvit Broadcasting

Co., Ltd. (*4) 5,179 4,873 4,873 - 4,173SamkwangGlass Co., Ltd. 335 6,411 6,411 - 5,491Hyundai Department Store

Co., Ltd. 320 6,021 6,021 - 5,157Hyundai H&S Co., Ltd. 80 1,089 1,089 - 933Lotte Non-Life Insurance Co.,

Ltd. 28,725 15,289 15,289 - 13,095

Subtotal W 180,481 237,192 237,192 199,106 $ 203,146



December 31, 2009 and 2008 (8) Investment in Securities, Continued (a) Available-for-sale securities, Continued

(i) Equity securities, Continued



(note 3) 2009 2008 2009

Description

Cost Book value

Book value

Book value

Non-marketable securities (*5): Lotte Giants (*6) W 31 30 30 $ 26Korea Foods Industry Association - - 5 -The Korea Economic Daily 32 32 32 27Agentrics 346 346 346 296I Venture Media Investment Union 700 700 700 600So Big 5 Contents Investment Union 1,800 1,800 1,800 1,542M-cieta Development Co., Ltd. 2,499 2,499 2,499 2,140M-cieta Co., Ltd. 15 15 15 13Corona Development (formerly Incheon PF) 860 860 860 737Lakepark AMC (*6) 72 72 72 61STX Construction Industrial Co., Ltd 1 1 1 1Union Ark Development Co., Ltd. 1,815 1,815 1,815 1,554Union Ark Co., Ltd. 15 15 15 13Biche-Nuri Development Co., Ltd. 858 858 150 735Biche-Nuri Co., Ltd. 15 15 15 13Daol Union Ark Private equity real estate 1 investment Co. 1,320 1,320 1,320 1,130

Lotte Jeju Resort Co. (*7) - - 2,500 -Lotte Buyeo Resort Co. (*7) - - 6,667 -Lotte Properties (Shenyang) Limited 41,919 41,919 28,726 35,900Cosmo Investment Management Co., Ltd. (*8) 36,754 29,781 - 25,506CJ Venture Investment No. 12 Global Contents Fund 1,500 1,500 - 1,285V Bank Consulting 13 - - -Incheon United Football Club 2 - - -Herald Media Inc. 60 - - -Lotte Engineering & Construction Co., Ltd. (*7) - - 9,943 -Hundai F&G Co. Ltd. (*8) 349 836 780 716Daenong Corporation (*9) - - - -Korea Credit-card Electronic-settlement Service Co., Ltd. 214 214 214 183Korea Smart Card Co., Ltd. 298 298 27 255Master Card Co., Ltd. - - 37 -Visa Inc. (*8) - - 22,121 -KIBNET INC. 2,500 1,679 1,202 1,438HAYO TECHNOLOGY CO.,LTD. 315 315 257 270Auto Cube Co., Ltd. 700 - - -Tbroad ABC Broadcasting Co., Ltd. (*4) - - 2,553 -CJ Hellovision Yeongnam Broadcasting Co., Ltd. (*4) - - 219 -CJ Hellovision Broadcasting Co., Ltd. (*4) 299 285 - 244Youngdong Broadcasting System, Inc. (*8) 3,500 555 2,185 475TU Media Co., Ltd 1,990 142 142 122

Subtotal W 100,792 87,902 87,248 $ 75,282







(note 3) 2009 2008 2009

Description

Cost Book value

Book value

Book value

FUBON Multimedia Technology Co., Ltd. W 1,728 372 1,129 $ 319W- media 174 - 67 -Korea Association of Convenience Stores 10 10 - 9Korea Fuji Film Co., Ltd. 1,098 11,439 - 9,797LEE & DDB INC 20 20 - 17ATEVO INC 1,110 - - -Korea Specialty Contractor Financial

Cooperative 41 41 - 36Kiwoom investment Co., Ltd. 2,000 966 - 827Wonju Enterprise City Co., Ltd. 1,800 1,800 - 1,542

Subtotal 7,981 14,648 1,196 12,547

Total W 289,254 339,742 287,550 $ 290,975 (*1) The equity securities above are stated at fair value and the difference between

acquisition cost and market value are recorded as unrealized gains on valuation of available-for-sale securities in other comprehensive income.

(*2) As of December 31, 2009, the Company and its subsidiaries has pledged 1,345,607

shares of Busan Bank to Gyeongsangnam-do Province as a performance guarantee for the construction of a large retail complex. The Company and its subsidiaries has also pledged 1,313,827 shares of Busan Bank to Busan Metropolitan City as a construction performance guarantee.

(*3) The Company and its subsidiaries participated in the Kumho Asiana Consortium

(“KAC”) which acquired Korea Express Co., Ltd.'s stocks in March 2008. According to the shareholders' agreement with Asiana Airlines Inc., a participant of KAC, the Company and its subsidiaries are prohibited to sell, assign or pledge the stocks as collateral to any 3rd party without prior permission of Asiana Airlines Inc. for 2 years after acquisition, and after 2 years, Asiana Airlines Inc. has the right of first refusal to purchase the stocks. If Asiana Airlines Inc. is no longer the majority stockholder by assigning stocks to 3rd parties, it will provide the Company and its subsidiaries with right of first refusal with the same terms and conditions. Also, according to the agreement with Kumho RAC Co., Ltd. (formerly known as Kumho rent-a-car Co., Ltd.), another participant of KAC, as the Company and its subsidiaries hold a put option to sell its stock at acquisition cost plus interest after 3 years of acquisition, the Company and its subsidiaries have recorded the fair value of the put option of W31,817 million as a non-current derivative asset. (see note 23)

(*4) As results from mergers of Tbroad Hanvit Broadcasting Co., Ltd. with Tbroad ABC

Broadcasting Co., Ltd. and of CJ Hellovision Broadcasting Co., Ltd. with CJ Hellovision Yeongnam Broadcasting Co., Ltd., the Company and its subsidiaries acquired the shares of Tbroad Hanvit Broadcasting Co., Ltd and CJ Hellovision Broadcasting Co., Ltd., respectively.





(*5) As of December 31, 2009 and 2008, unmarketable securities were recorded at cost

less impairment as invested companies which are not subject to a statutory audit because they have total assets of less than W10,000 million and established after 2003 and the fair value of invested companies is not available or readily determinable because they do not have other comparable securities with similarity. The Company and its subsidiaries accounted for its investment in unlisted Companies by using equity method of accounting based on the unaudited financial statements as it was unable to obtain the audited financial statements and performed procedures to verify the unaudited financial statements.

(*6) As described in note 2(g), investments in affiliates in which the Company owns 20% or

more of the voting stock are stated at amounts as determined using the equity method. However, investments in small affiliates and subsidiaries with total assets amounting to less than W10,000 million as of the prior fiscal year-end are recorded at cost within available-for-sale securities in accordance with SKAS No. 15, Equity Method of Accounting, except where the effect of applying the equity method of accounting is material.

(*7) The Company and its subsidiaries acquired Lotte Jeju Resort Co., Ltd.’s stocks, Lotte

Buyeo Resort Co., Ltd.’s stocks and Lotte Engineering & Construction Co., Ltd.’s stocks in 2009. Therefore, the effect of applying the equity method of accounting became material. The Company and its subsidiaries applied the equity method prospectively.

(*8) Details of fair value of unlisted securities estimated based on Korea Accounting

Institute Opinion 06-5 are summarized as follows:

Korean Won

Company Fair value per common stock Estimate model

Investment management

company

Cosmo Investment Management Co., Ltd. 286,838

Hundai F&G Co. Ltd. 14,126 Youngdong Broadcasting

System, Inc. 18,281

Discounted Cash Flow Model,

IMV model

Korea Bond Pricing & Korea Management Consulting Credit Co., Ltd.

(*9) The Company and its subsidiaries acquired the investment in Daenong Corporation

with transfer of receivables to securities. Fair value at the acquisition date was zero and recorded at the acquisition cost cause the uncertainty of projection of future value was high.



December 31, 2009 and 2008 (8) Investment in Securities, Continued (a) Available-for-sale securities, Continued (ii) Debt securities



(note 3) 2009 2008 2009 Current assets (note 9):

Government and public bonds W 8,161 2 $ 6,990Convertible bond(*) - 200 -

Subtotal 8,161 202 6,990

Non-current assets: Government and public bonds 25,268 27,399 21,641

Subtotal 25,268 27,399 21,641

Total W 33,429 27,601 $ 28,631

(*) The debt securities are stated at acquisition cost since their fair values are not available

or readily determinable.

(iii) Changes in unrealized holding gains

Changes in unrealized gains for the years ended December 31, 2009 and 2008 are summarized as follows:



(note 3) 2009 2008 2009 Balance at beginning of year W 7,832 40,420 $ 6,708Realized gains (losses) on disposition

of securities (11,463) 22 (9,817)Unrealized gains (losses) on valuation

of securities, net of tax 44,780 (34,976) 38,352Other increase 47 2,366 40 Balance at end of year W 41,196 7,832 $ 35,283



December 31, 2009 and 2008 (8) Investment in Securities, Continued (b) Held-to-maturity Securities

Held-to-maturity securities as of December 31, 2009 and 2008 are summarized as follows:



(note 3) 2009 2008 2009 Current assets:

Government and public bonds W 124 - $ 106Corporate debt securities - 179,350 -

Subtotal 124 179,350 106Non-current assets (note 14):

Government and public bonds 75 - 64Corporate debt securities 1,000 1,000 856Asset-backed securities - 300 - Investment in capital 95 - 82

Subtotal 1,170 1,300 1,002

Total W 1,294 180,650 $ 1,108



December 31, 2009 and 2008 (8) Investment in Securities, Continued

(c) Equity method accounted investments (i) Investments in associates accounted for using the equity method as of December 31, 2009

and 2008 are as follows: 2009 Korean Won (millions)

Affiliate

Owned shares

Percentage of

ownership

Cost

Net asset

value

Balance at December 31, 2009

Lotte Station Building Co., Ltd. 1,012,800 28.13% W 23,366 176,908 176,246Lotte Capital Co., Ltd. 11,062,586 33.23% 110,897 115,405 110,940FRL Korea Co., Ltd. 2,352,000 49.00% 11,760 24,827 24,827Lotte Asset Development Co., Ltd. 10,085,693 38.35% 52,015 44,380 44,442Lotte Trading Co., Ltd. (*1) 154,439 17.24% 45,656 73,267 89,439Lotte Aluminium Co., Ltd. (*1) 177,560 17.11% 76,394 140,272 121,012Lotte Logistics Co., Ltd. 313,677 21.95% 8,446 36,815 25,067Lotte Jeju Resort Co., Ltd. 2,000,000 25.00% 10,000 10,157 10,000Lotte Buyeo Resort Co., Ltd. 2,000,000 22.22% 10,000 10,006 10,006Lakepark Co., Ltd. 860,400 23.90% 4,302 5,636 5,636KTB Media Investment Union 15 30.00% 1,500 978 978Isu Entertainment Investment

Union 30 37.50% 3,000 1,962 1,962D-Cinema of Korea Co., Ltd. (*2) 300,000 50.00% 1,500 - - Zara Retail Korea Co., Ltd. 302,600 20.00% 15,130 16,106 16,106M-Venture Culture Investment

L.P. 250 25.00% 2,500 2,492 2,500Shenyang Lotte Mart Commercial

Co., Ltd. - 100.00% 12,161 10,841 10,841Lotte Shopping Holdings

(Hongkong), Ltd. - 100.00% 740,569 743,870 743,870Lotte Cinema Vietnam Co., Ltd. - 90.00% 4,459 63 2,219Intime Lotte Department Store

Co., Ltd. (*2) - 50.00% 10,339 - - Coralis S.A. 99,960 24.99% 17,418 8,788 17,418KKD Lotte Holdings Co., Ltd. 3,007,312 100.00% 3,231 3,231 2,314Lotte Confectionery Co., Ltd. (*1) 52,962 3.73% 70,367 83,049 68,268Prototype Ltd. 20,000 20.00% 600 110 400Lotte JTB Co., Ltd. 1,000,000 50.00% 5,000 679 454Lotte Engineering & Construction

Co., Ltd. (*1) 1,820,963 6.81% 99,412 141,494 139,668Lotte (Beijing) Restaurants Co.,

Ltd. - 70.00% 4,466 2,879 2,879Canon Korea Business Solution

Inc. (*1) 100,000 5.60% 4,263 7,839 7,831Lotte Data Communication

Company(China) - 100.00% 464 464 464

Total W 1,349,215 1,662,518 1,635,787




(c) Equity method accounted investments, Continued 2008 Korean Won (millions)

Affiliate

Owned shares

Percentage of

ownership

Cost

Net asset

value


Lotte Station Building Co., Ltd. 900,000 25.00% W 4,500 143,441 143,441Daehong Communications

Co.,Ltd. 12,000 30.00% 6,277 60,920 60,921Foodstar Inc. (*2) 5,582,896 39.76% 33,994 - - Lotte Capital Co., Ltd. 7,445,072 22.36% 76,185 62,815 62,964FRL Korea Co., Ltd. 2,352,000 49.00% 11,760 17,127 17,127Lakepark Co., Ltd. 860,400 23.90% 4,302 3,727 3,727KTB Media Investment Union 15 30.00% 1,500 932 932Isu Entertainment Investment

Union 30 37.50% 3,000 1,882 1,882Lotte Engineering & Machinery

Manufacturing Co., Ltd. (*1) 393,283 13.71% 2,069 3,179 3,179Lotte Trading Co., Ltd. (*1) 93,767 11.81% 12,083 30,542 47,073Lotte Aluminium Co., Ltd. (*1) 110,798 11.63% 49,943 64,475 61,547Lotteria Co., Ltd. 104,450 28.14% 52,477 72,419 75,316Lotte Asset Development Co., Ltd. 7,422,686 36.56% 38,700 37,337 37,337Lotte Logistics Co., Ltd. (*1) 66,308 4.64% 4,000 5,026 4,110D-Cinema of Korea Co., Ltd. 300,000 50.00% 1,500 798 798Lotte Europe Holdings B.V. 97,584 29.93% 78,766 71,487 68,707Intime Lotte Department Store

Co., Ltd. - 50.00% 10,339 3,980 3,980Lotte Cinema Vietnam Co., Ltd. - 90.00% 3,629 1,210 3,620Zara Retail Korea Co., Ltd. 162,600 20.00% 8,130 8,133 8,133Shenyang Lotte Mart Commercial

Co., Ltd. - 100.00% 2,107 2,495 2,495Lotte Shopping

Holdings(Hongkong), Ltd. 180,000 100.00% 259 259 259Prototype Ltd. 20,000 20.00% 600 91 477Lotte JTB Co., Ltd. 1,000,000 50.00% 5,000 2,728 2,413KI Bank Co., Ltd. 2,500,000 25.00% 1,250 711 1,250

Total W 412,370 595,714 611,688

(*1) The ownership percentage of company is under 20 percent; however, since the Company and its subsidiaries are able to exercise significant influence over their operations, the Company and its subsidiaries apply the equity method of accounting to these investments.

(*2) The Company and its subsidiaries discontinued the application of the equity method due

to its investment being reduced zero.




(c) Equity method accounted investments, Continued

(ii) Changes in the differentials between the acquisition cost and the Company’s share of the

investee’s identifiable net assets for the years ended December 31, 2009 and 2008 are as follows:

2009 Korean Won (millions)

Affiliate

Beginning balance

Increase

Amortization


Lotteria Co., Ltd. W 2,896 - (2,896) -Lotte Station Building Co.,

Ltd. - (662) - (662)Lotte Capital Co., Ltd. 149 (4,222) (392) (4,465)Lotte Asset Development

Co., Ltd. - 62 - 62Lotte Trading Co., Ltd. 16,531 608 (966) 16,173Lotte Aluminium Co., Ltd. (2,927) (12,567) (3,766) (19,260)Lotte Logistics Co., Ltd. (916) (10,832) - (11,748)Lotte Jeju Resort Co., Ltd. - (157) - (157)M-Venture Culture

Investment L.P. - 8 - 8Lotte Cinema Vietnam Co.,

Ltd. 2,410 - (254) 2,156Coralis S.A. - 8,630 - 8,630KKD Lotte Holdings Co.,

Ltd. - (917) - (917)Lotte Confectionery Co.,

Ltd. - (14,781) - (14,781)Prototype Ltd. 386 - (96) 290KI Bank Co., Ltd. 539 - (539) -Lotte Engineering &

Construction Co., Ltd. - (1,724) - (1,724)

Total W 19,068 (36,554) (8,909) (26,395)






Affiliate

Beginning balance

Increase

Amortization


Lotte RUS Ltd. W 912 (830) (82) - Lotte Capital Co., Ltd. (292) 429 12 149Lotte Trading Co., Ltd. 16,623 (734) 642 16,531Lotte Aluminium Co., Ltd. (4,141) 401 813 (2,927)Lotteria Co., Ltd. 3,027 1,269 (1,400) 2,896Lotte Logistics Co., Ltd. (916) - - (916)Lotte Cinema Vietnam Co.,

Ltd. - 2,537 (127) 2,410Lotte Asset Development

Co., Ltd. - 4 (4) - Prototype Ltd. - 483 (97) 386KI Bank Co., Ltd. - 539 - 539

Total W 15,213 4,098 (243) 19,068

(iii) Eliminated net unrealized losses (gains) from inter-company transactions as of December 31, 2009 and 2008 are as follows:


Affiliate

Allowance for doubtful accounts

Good will

Total

Lotte JTB Co., Ltd. W - (225) (225)Canon Korea Business

Solution INC. (1) (7) (8)Lotte Engineering &

Construction Co., Ltd. - (102) (102)Lotte Trading Co., Ltd. - (1) (1)

Total W (1) (335) (336)


Affiliate

Allowance for doubtful accounts

Investment

assets

Good will

Total

Daehong Communications Co., Ltd. W 2 - - 2

Lotte Europe Holdings B.V. - (2,781) - (2,781)Lotte JTB Co., Ltd. - - (315) (315)

Total W 2 (2,781) (315) (3,094)



December 31, 2009 and 2008 (8) Investment in Securities, Continued (c) Equity method accounted investments, Continued

(iv) Details of changes in investments in associates accounted for using the equity method for the years ended December 31, 2009 and 2008 are as follows:

2009 Korean Won (millions) Adjustment to

Affiliate

Percentage of

ownership

Beginning balance

Net income (loss)

Capital

adjustment

Other(*1)


Lotteria Co., Ltd. (*2,3) - W 75,316 12,459 (30,959) (56,816) -Daehong Communications Co., Ltd.

(*2) - 60,921 8,876 (42,507) (27,290) -Lotte Station Building Co., Ltd. 28.13% 143,441 15,925 2,290 14,590 176,246Foodstar Inc. (*3) - - 5,844 (135) (5,709) -Lotte Capital Co., Ltd. 33.23% 62,964 14,024 424 33,528 110,940FRL Korea Co., Ltd. 49.00% 17,127 7,700 - - 24,827Lotte Asset Development Co., Ltd. 38.35% 37,337 (1,631) (4,579) 13,315 44,442Lotte Engineering & Machinery

Manufacturing Co., Ltd. (*4) - 3,179 2,785 (1,699) (4,265) -Lotte Trading Co., Ltd. 17.24% 47,073 1,725 5,649 34,992 89,439Lotte Aluminium Co., Ltd. (*4) 17.11% 61,547 2,108 24,054 33,303 121,012Lotte Logistics Co., Ltd. 21.95% 4,110 520 1,279 19,158 25,067Lotte Jeju Resort Co., Ltd. 25.00% - - - 10,000 10,000Lotte Buyeo Resort Co., Ltd. 22.22% - 46 (39) 9,999 10,006Lakepark Co., Ltd. 23.90% 3,727 1,909 - - 5,636KTB Media Investment Union 30.00% 932 46 - - 978Isu Entertainment Investment Union 37.50% 1,882 80 - - 1,962D-Cinema of Korea Co., Ltd. 50.00% 798 (798) - - -Zara Retail Korea Co., Ltd. 20.00% 8,133 1,073 (101) 7,001 16,106M-Venture Culture Investment L.P. 25.00% - - - 2,500 2,500Lotte Europe Holdings B.V.(*2) - 68,707 (8,057) (21,541) (39,109) -Shenyang Lotte Mart Commercial

Co., Ltd. 100.00% 2,495 (780) (928) 10,054 10,841Lotte Shopping Holdings

(Hongkong), Ltd. 100.00% 259 (1,470) 4,770 740,311 743,870Lotte Cinema Vietnam Co., Ltd. 90.00% 3,620 (2,148) (82) 829 2,219Intime Lotte Department Store Co.,

Ltd. 50.00% 3,980 (5,033) 1,053 - -Coralis S.A. 24.99% - - - 17,418 17,418Lotte Shopping India Pvt., Ltd. - - - - - -KKD Lotte Holdings Co., Ltd. 100.00% - (1,461) - 3,775 2,314Lotte Confectionery Co., Ltd. 3.73% - - - 68,268 68,268Prototype Ltd. 20.00% 477 (77) - - 400Lotte JTB Co., Ltd. 50.00% 2,413 (1,959) - - 454KI Bank Co., Ltd. (*2) - 1,250 (661) 22 (611) -Lotte Engineering & Construction

Co., Ltd. 6.81% - - - 139,668 139,668Lotte (Beijing) Restaurants Co., Ltd. 70.00% - - - 2,879 2,879Canon Korea Business Solution Inc. 5.60% - - - 7,831 7,831Lotte Data Communication

Company(China) 100.00% - - - 464 464

Total W 611,688 51,045 (63,029) 1,036,083 1,635,787



December 31, 2009 and 2008 (8) Investment in Securities, Continued (c) Equity method accounted investments, Continued

2008 Korean Won (millions) Adjustment to

Affiliate

Percentage of

ownership

Beginning balance

Net income (loss)

Capital

adjustment

Other(*1)


Lotte Station Building Co., Ltd. 25.00% W 126,488 17,094 1,209 (1,350) 143,441Daehong Communications Co.,

Ltd. 30.00% 58,390 6,265 (3,706) (28) 60,921Foodstar Inc. 39.76% 4,523 (4,646) 123 - -Lotte Capital Co., Ltd. 22.36% 47,538 11,374 (538) 4,590 62,964FRL Korea Co., Ltd. 49.00% 13,165 3,914 48 - 17,127Lakepark Co., Ltd. 23.90% 2,715 (177) (6) 1,195 3,727Nexus Media Contents

Investment Union 20.00% 948 (448) - (500) - KTB Media Investment Union 30.00% 960 (28) - - 932Isu Entertainment Investment

Union 37.50% 2,028 (146) - - 1,882Lotte RUS Ltd. (*5) - 13,497 1,608 491 (15,596) - Lotte Engineering & Machinery

Manufacturing Co., Ltd. 13.71% 13,745 (10,450) (116) - 3,179Lotte Trading Co., Ltd. 11.81% 45,228 (5,131) (201) 7,177 47,073Lotte Aluminium Co., Ltd. 11.63% 61,123 3,081 (2,657) - 61,547Lotteria Co., Ltd. 28.14% 69,206 7,751 (1,641) - 75,316Lotteshopping RUS (*5) - 14,818 (7,107) (882) (6,829) - Lotte Asset Development Co.,

Ltd. 36.56% 17,856 (925) 28 20,378 37,337Lotte Logistics Co., Ltd. 4.64% 4,070 129 (56) (33) 4,110D-Cinema of Korea Co., Ltd. 50.00% - (702) - 1,500 798Lotte Europe Holdings B.V.(*5) 29.93% - (28,732) 7,569 89,870 68,707Intime Lotte Department Store

Co., Ltd. 50.00% - (8,616) 2,257 10,339 3,980Lotte Cinema Vietnam Co., Ltd. 90.00% - (240) 231 3,629 3,620Zara Retail Korea Co., Ltd. 20.00% - 118 (115) 8,130 8,133Shenyang Lotte Mart

Commercial Co., Ltd. 100.00% - (147) 535 2,107 2,495Lotte Shopping

Holdings(Hongkong), Ltd. 100.00% - - - 259 259Prototype Ltd. 20.00% 600 (123) - - 477Lotte JTB Co., Ltd. 50.00% 1,469 (1,482) (74) 2,500 2,413KI Bank Co., Ltd. 25.00% - - - 1,250 1,250

Total W 498,367 (17,766) 2,499 128,588 611,688

(*1) Include dividends from equity method accounted investments, changes in the scope of consolidation, acquisitions, reclassification from available-for-sale securities to equity method investments, and reclassification from other investment assets.

(*2) These companies were consolidated from the year ended December 31, 2009. (*3) Lotteria Co., Ltd. merged Foodstar, Inc. at May 26, 2009.

(*4) Lotte Aluminium Co., Ltd. merged Lotte Engineering & Machinery Manufacturing Co.,

Ltd. at April 15, 2009.





(*5) As of May 30, 2008, the Company and its subsidiaries received Lotte Europe Holdings

B.V. stocks through an in-kind exchange of Lotte RUS Ltd. and Lotteshopping RUS stocks. As a result, the Company and its subsidiaries recorded gain on disposition of equity method investment securities of W9,292 million.

(v) Summarized financial information of equity-accounted investments as of and for the year

ended December 31, 2009 is as follows:


Affiliate

Total assets

Total

liabilities

Sales

Net income (loss)

Lotte Station Building Co., Ltd. W 845,083 215,563 668,979 63,698Lotte Capital Co., Ltd. 2,956,468 2,609,158 380,442 64,678FRL Korea Co., Ltd. 88,440 37,773 165,179 15,714Lotte Asset Development Co., Ltd. 127,500 11,762 6,845 (3,718)Lotte Trading Co., Ltd. 1,489,959 1,030,788 746,716 9,168Lotte Aluminium Co., Ltd. 1,360,493 575,501 784,048 (1,647)Lotte Logistics Co., Ltd. 269,029 109,882 718,355 10,219Lotte Jeju Resort Co., Ltd. 41,679 1,052 - 90Lotte Buyeo Resort Co., Ltd. 98,698 53,670 - 59Lakepark Co., Ltd. 43,750 20,170 66,441 7,987KTB Media Investment Union 3,347 86 247 230Isu Entertainment Investment Union 5,233 - 219 215D-Cinema of Korea Co., Ltd. 33,887 34,187 1,411 (1,896)Zara Retail Korea Co., Ltd. 94,594 14,065 74,584 5,366M-Venture Culture Investment L.P. 10,014 45 14 (31)Shenyang Lotte Mart Commercial

Co., Ltd. 10,845 4 - (780)Lotte Shopping Holdings

(Hongkong), Ltd. 791,623 47,753 - (1,470)Lotte Cinema Vietnam Co., Ltd. 5,675 5,605 2,206 (2,105)Intime Lotte Department Store Co.,

Ltd. 55,409 80,847 68,461 (34,578)Coralis S.A. 35,181 15 - (172)KKD Lotte Holdings Co., Ltd. 3,734 502 81 (1,461)Lotte Confectionery Co., Ltd. 2,867,146 898,506 1,412,781 132,524Prototype Ltd. 1,231 680 3,006 98Lotte JTB Co., Ltd. 10,624 9,262 7,176 (4,099)Lotte Engineering & Construction

Co., Ltd. 5,329,232 3,001,423 3,922,299 109,807Lotte (Beijing) Restaurants Co., Ltd. 8,533 4,420 1,872 (1,504)Canon Korea Business Solution

Inc. 227,685 87,755 413,886 14,162Lotte Data Communication

Company(China) 705 292 159 (42)

Total W 16,815,797 8,850,766 9,445,407 380,512

The Company and its subsidiaries used unaudited financial statements as of December 31, 2009 of the companies when applying the equity method of accounting.



December 31, 2009 and 2008 (9) Other Current Assets

Other current assets as of December 31, 2009 and 2008 are as follows:



(note 3) 2009 2008 2009 Available-for-sale securities (note 8) W 8,161 202 $ 6,990Prepaid expenses 34,283 40,847 29,362Prepaid income taxes 25,248 - 21,624Current derivative assets (note 23) 1 - 1Others 5,001 - 4,283

Total W 72,694 41,049 $ 62,260 (10) Joint Venture Investments Details of joint venture investments as of December 31, 2009 are as follows:

Joint venture investment Ownership Equity holder Principal business

Intime Lotte Department Store Co., Ltd. 50.00%

Zhejiang Intime Department Store Co., Ltd.

Department stores

D-Cinema of Korea Co., Ltd. 50.00% CJ CGV Co., Ltd. Cineprojector

rental service

Kookge Building 6.00% Honam Petro Chemical and others Building leasing

services Busan Underground

Shopping Center 45.00% Hotel Lotte Co., Ltd. Building leasing services



December 31, 2009 and 2008 (11) Transactions and Balances with Related Companies

(a) Details of investor and subsidiary relationships with the Company as of December 31, 2009 are as follows:

Related company Ownership

(%)

Control relationship (*1) Hotel Lotte Co., Ltd. 9.3 Affiliate of Lotte group Korea Fuji Film Co., Ltd. 8.5 Affiliate of Lotte group Lotte Confectionery Co., Ltd. 8.5 Affiliate of Lotte group Lotte Chilsung Beverage Co., Ltd. 4.3 Affiliate of Lotte group Lotte Engineering & Construction Co., Ltd. 1.0 Affiliate of Lotte group Hotel Lotte Pusan Co., Ltd. 0.9 Affiliate of Lotte group

Controlled subsidiary (*2)

Ownership (%)

Principal business

Lotte Cinema Vietnam Co. Ltd. 90.0 Cinema Shenyang Lotte Mart Commercial Co. Ltd. 100.0 Discount stores Lotte Shopping Holdings(Hongkong), Ltd. 100.0 Holding company KKD Lotte Holdings Co., Ltd. 100.0 Holding company Lotte (Beijing) Restaurants Co., Ltd. 70.0 Restaurant chain Lotte Data Communication Company

(China) 100.0Computer programming,

consultancy

(*1) Lotte Group represents a group of entities as defined and restricted by the Monopoly Regulation and Fair Trade Act in Korea.

(*2) Controlled subsidiaries are not consolidated because total assets of those companies

as of December 31, 2008 were less than W10,000 million.



December 31, 2009 and 2008 (11) 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, 2009 and 2008 are summarized as follows:

Korean Won

(millions) U.S. dollars (thousands) (note 3)

2009 2008 2009

Related company Revenue Expenses Revenue Expenses Revenue Expenses Hotel Lotte Co., Ltd. W 69,537 62,385 40,090 67,993 $ 59,555 53,430Lotte Confectionery Co., Ltd. 45,852 82,678 22,854 65,404 39,270 70,810Lotte Chilsung Beverage Co.,

Ltd. 29,639 53,441 11,797 30,878 25,385 45,770Lotte Engineering &

Construction Co., Ltd. 31,882 496,142 1,956 495,341 27,306 424,925Hotel Lotte Pusan Co., Ltd. 8,689 13,135 7,259 37,575 7,442 11,250Lotte Station Building Co., Ltd. 29,967 8,580 26,783 329 25,665 7,349Lotte Trading Co., Ltd. 10,863 190,715 132 184,945 9,304 163,340Lotte Aluminium Co., Ltd. 8,810 91,858 335 62,773 7,546 78,672Lotte Samkang Co., Ltd. 37,208 55,065 5,833 2,395 31,867 47,161Lotte Ham Co., Ltd. 13,295 74,148 4,939 33,716 11,387 63,504Lotte Fresh Delica Co., Ltd. 5,878 41,953 1,327 834 5,034 35,931Others 112,354 503,472 58,717 204,012 96,226 431,202

Total W 403,974 1,673,572 182,022 1,186,195 $ 345,987 1,433,344

(c) Account balances with related companies as of December 31, 2009 and 2008 are

summarized as follows: Korean Won

(millions) U.S. dollars (thousands) (note 3)

2009 2008 2009

Related company Receivables Payables Receivables Payables Receivables Payables Hotel Lotte Co., Ltd. W 31,773 11,064 25,578 12,518 $ 27,213 9,475 Lotte Confectionery Co., Ltd. 18,293 11,336 15,786 12,117 15,667 9,709 Lotte Chilsung Beverage Co.,

Ltd. 17,710 4,665 7,206 2,680 15,168 3,995 Lotte Engineering &

Construction Co., Ltd. 67,111 170,343 67,741 90,259 57,478 145,892 Hotel Lotte Pusan Co., Ltd. 2,797 1,967 854 1,354 2,396 1,685 Lotte Station Building Co., Ltd. 31,126 7,300 26,208 5,804 26,658 6,252 Lotte Trading Co., Ltd. 5,625 14,111 8,783 9,416 4,818 12,085 Lotte Aluminium Co., Ltd. 13,550 28,605 67,200 4,042 11,605 24,499 Lotte Logistics Co., Ltd. 713 61,726 19,523 5,125 611 52,865 Lotte Samkang Co., Ltd. 5,472 16,638 334 2,840 4,686 14,250 Lotte Ham Co., Ltd. 6,438 7,757 5,264 2,948 5,514 6,643 Others 45,528 54,277 49,250 51,205 38,993 46,488

Total W 246,136 389,789 293,727 200,308 $ 210,807 333,838



December 31, 2009 and 2008 (11) Transactions and Balances with Related Companies, Continued

(d) The Company and its subsidiaries have provided guarantees for related companies as of

December 31, 2009 as follows:

2009

Related company

Guarantee recipient Type of

borrowings

Guaranteed Amount (thousand)

Intime Lotte Department

Store Co., Ltd. Woori Bank Working capital RMB 78,000

Lotte Cinema Vietnam Co., Ltd.

The Export-Import Bank of Korea Working capital

USD 4,000 and interest thereon

Lotte (Beijing) Restaurants Co., Ltd.

Korea Exchange Bank Working capital CNY 65,000

Woori Bank Working capital CNY 26,000

The fulfillment of the VPF contract between D-Cinema of Korea Co., Ltd. and Twentieth Century Fox Film Corporation is equally guaranteed by CGV and The Company and its subsidiaries at October 2008.

(e) Long-term loans to executives and employees for housing amount to W2,938 million and

W2,778 million as of December 31, 2009 and 2008, respectively.

(12) Property, Plant and Equipment

(a) The Company and its subsidiaries revalued its land and buildings in 1998 under the then Korean Assets Revaluation Law. As a result, the Company recorded a revaluation surplus of W1,028,713 million, net of asset revaluation tax, in other capital surplus.

(b) Land was stated at revalued amounts as of December 31, 2009. The fair value of the

assets was based on the results of an appraisal by the Korea Appraisal Board, an independent appraiser.

Before 2009, as mentioned above, the Company and its subsidiaries had adopted revaluation model for land and buildings in 1998 only one time. As the Company and its subsidiaries adopted the revaluation model in accordance with revised SKAS No.5, Property, Plant and Equipment in 2009, other comprehensive income of W2,902,757 million, net of tax effect of W818,726 million, and revaluation loss of W8,268 million were recognized. Revaluated land would have been recognized under the cost model at W3,529,396 million as of December 31, 2009.



December 31, 2009 and 2008 (12) Property, Plant and Equipment, Continued

(c) Changes in property, plant and equipment for the years ended December 31, 2009 and 2008 are as follows:


Book value as of January

1, 2009

Acquisitions

Disposals

Revaluation

Depreciation

Transfers

Book value as of December 31,

2009 Land W 3,199,473 53,571 (16,098) 3,713,215 - 292,450 7,242,611Buildings 3,149,471 17,640 (19,390) - (164,062) 883,996 3,867,655Structures 200,844 6,982 (2,136) - (9,602) 60,624 256,712Machinery 57,138 5,454 (887) - (13,031) 47,199 95,873Vehicles 1,405 574 (110) - (676) 492 1,685Furniture and

equipment 20,106 7,742 (1,059) - (16,034) 27,701 38,456Other 367,576 89,638 (3,641) - (227,759) 177,988 403,802Construction-in-

progress 852,051 859,530 - - (143) (721,680) 989,758

Total W 7,848,064 1,041,131 (43,321) 3,713,215 (431,307) 768,770 12,896,552


Book value

as of January 1, 2008

Acquisitions

Disposals

Depreciation

Transfers

Book value as ofDecember 31,

2008 Land W 3,096,860 17,961 (70,058) - 154,710 3,199,473Buildings 3,008,767 24,101 (117,283) (143,412) 377,298 3,149,471Structures 145,968 3,952 (3,765) (7,316) 62,005 200,844Machinery 42,666 2,631 (76) (9,348) 21,265 57,138Vehicles 792 516 (22) (545) 664 1,405Furniture and equipment 17,397 6,402 (391) (13,666) 10,364 20,106

Other 318,582 102,527 (1,947) (209,286) 157,700 367,576Construction-in-progress 650,990 862,698 - - (661,637) 852,051

Total W 7,282,022 1,020,788 (193,542) (383,573) 122,369 7,848,064



December 31, 2009 and 2008 (12) Property, Plant and Equipment, Continued

(d) The officially declared value and book value of land as of December 31, 2009 are as follows:

Korean Won (millions) 2009 Book value Declared value

Land W 7,242,611 4,720,287

The officially declared value, which is used for government purposes, is not intended to represent fair value.

(e) The Company and its subsidiaries have pledged certain property, plant and equipment as collateral for an amount equal to 130% of lease deposits, amounted to W67,245 million, received from Woori Bank, Shinhan Bank and other.

(f) The Company and its subsidiaries have insurance policies insured by Lotte Insurance Co.,

Ltd., LIG Insurance Co., Ltd. and Seoul Guarantee Insurance Co., Ltd. Details of coverage under major insurance policies carried by the Company and its subsidiaries as of December 31, 2009 and 2008 are as follows:



(note 3)

Amount covered Amount

covered Type of insurance Covered assets 2009 2008 2009

Burglary insurance Cash W 107,954 42,007 $ 92,458

Fire insurance Merchandise, buildings and tools 6,522,063 6,614,204

5,585,871

Engine and machinery insurance

Machinery and equipment 369,833 159,817

316,746

Business liability insurance Facilities and

products 492,882 480,833

422,133Directors & Officers liability insurance - 140,000 140,000 119,904

Others Other utilities 41,265 40,942 35,342

Total W 7,673,997 7,477,803 $ 6,572,454

In addition, as of December 31, 2009, the Company and its subsidiaries maintained a comprehensive insurance policy and insurance policies covering loss and liability arising from automobile accidents.



December 31, 2009 and 2008 (13) Intangible Assets

Changes in intangible assets for the years ended December 31, 2009 and 2008 are as follows:


Book value as of January 1, 2009

Acquisition

Amortization

Others


2009 Goodwill W 719,832 542 (93,383) 94,319 721,310Negative goodwill - - 631 (178,707) (178,076)Industrial property rights 543 419 (254) 159 867Rights to use facility 277,865 - (10,092) 21,619 289,392Copyrights 2,112 14,089 (16,103) - 98Others 8,962 4,394 (3,790) 12,990 22,556

Total W 1,009,314 19,444 (122,991) (49,620) 856,147


Book value as of January 1, 2008

Acquisition

Amortization

Others


2008 Goodwill W 474,542 2,037 (70,312) 313,565 719,832Industrial property rights 510 168 (193) 58 543Rights to use facility 69,019 - (5,849) 214,695 277,865Copyrights 3,800 16,076 (17,764) - 2,112Others 11,867 120 (2,997) (28) 8,962

Total W 559,738 18,401 (97,115) 528,290 1,009,314 (14) Other Assets

Other assets as of December 31, 2009 and 2008 are as follows:



(note 3) 2009 2008 2009 Long-term deposits (note 4) W 13,353 12,598 $ 11,437Held-to-maturity securities (note 8(b)) 1,170 1,300 1,002Long-term loans 47,325 29,728 40,532Others 1,421 104 1,216

Total W 63,269 42,430 $ 54,187



December 31, 2009 and 2008 (15) Pledged Assets and Guarantees (a) The following assets are pledged as collateral for the Company and its subsidiaries’ contract

performance as of December 31, 2009:

Assets

Korean Won

(millions)


(note 3) Guarantee for

Short-term deposits W 20,375 $ 17,450Guarantee deposits for

performance of contracts

Long-term deposits (note 14) 12,500 10,706

Guarantee deposits for performance of contracts

Available-for-sale securities (note 8) 37,099 31,774 Completion of construction

Land, Buildings, Machinery 172,198 147,481 Payment guarantees

Total W 242,172 $ 207,411 (b) Guarantees provided by the Company for third parties as of December 31, 2009 are as

follows:

Third party

Korean Won

(millions)


(note 3) Guarantor Guarantee for

Seoheung Co., Ltd. W 1,172 $ 1,004

Seoul Guarantee Insurance Company

Performance of contracts

(c) Guarantees provided by third parties for the Company and its subsidiaries as of December 31,

2009 are as follows:

Guarantor

Korean Won

(millions)


(note 3) Guarantee for

Seoul Guarantee Insurance Co., Ltd. W 156,915 $ 134,391

Guarantee deposits for performance of contracts

Kookmin Bank 4,400 3,768Guarantee deposits for

payment of goods sold

Hana Bank 1,636 1,401Guarantee deposits for


Lotte Capital Co., Ltd. 15,000 12,847Guarantee deposits for


Lotteria franchise stores 81,397 69,713Guarantee deposits for


Total W 259,348 $ 222,120



December 31, 2009 and 2008 (16) Assets and Liabilities Denominated in Foreign Currency Assets and liabilities denominated in foreign currency as of December 31, 2009 and 2008 are

summarized as follows:

2009 2008

Foreign currency

(thousands)

Won equivalent(millions)

Foreign currency

(thousands)

Won equivalent(millions)

Assets: Cash and cash USD 30,269 W 35,343 - -

equivalents JPY 15,000 189 - - RMB 963 164,669 - - RUB 2,728 105 - -Trade accounts

receivable RUB 1,418 55 - - Other accounts receivable USD 584 682 402 460Accrued interest

income USD - - 233 293Short-term loans USD 7,320 8,547 - -Long-term loans USD 1,500 1,751 1,500 1,886Card assets USD 2,143 2,502 9,905 12,970

Total USD 41,816 W 48,825 12,040 15,609

JPY 15,000 189 - - RMB 963 164,669 - - RUB 4,146 160 - -

Liabilities:

USD 242 W 2,016 23 29EUR 587 982 343 609

Trade accounts payable

JPY 3,726 1,372 - - RUB 6,211 240 - -

USD 2,788 3,255 2,777 3,588Other accounts payable EUR 4 7 6 10

RUB 90 3 - -Accrued expenses USD 366 428 - - Short-term

debentures JPY 12,000,000 151,538 - -USD 185,000 216,006 - -Current portion of

debentures JPY 2,500,000 31,571 - -Long-term

borrowings JPY 30,000,000 378,846 - -USD 450,000 525,420 664,711 835,868Long-term

debentures JPY 41,000,000 517,756 31,497,444 439,040

USD 638,396 W 747,125 667,511 839,485EUR 591 989 349 619

Total

JPY 85,503,726 1,081,083 31,497,444 439,040 RUB 6,301 243 - -



December 31, 2009 and 2008 (17) Other Current Liabilities Other current liabilities as of December 31, 2009 and 2008 are as follows:

Korean Won

(millions)


(note 3) 2009 2008 2009

Advance from customers W 147,886 45,688 $ 126,658Unearned income 1,025 1,489 878Withholdings 96,306 76,403 82,482Value-added tax withholdings 37,739 28,255 32,322Investment withholdings 1,509 11,101 1,293Guaranty money received 4,580 1,552 3,923Provision for sales returns 2,901 2,029 2,485Current derivative liabilities (note 23) 3,220 1,688 2,758Lease payable 7,729 - 6,619Others 803 382 686

Total W 303,698 168,587 $ 260,104



December 31, 2009 and 2008 (18) Borrowings

(a) Short-term borrowings as of December 31, 2009 and 2008 are summarized as follows:

Korean Won

(millions)


(note 3)

Lender

Purpose of borrowings

Annual interest rate (%) 2009 2008 2009

Shinhan Bank

and others Bank

overdrafts 6.63~7.89 W 17,559 1 $ 15,039Woori Bank and

others Working capital 2.60~7.50 438,000 737,610 375,128

Kookmin Bank and others

Working capital 3.78~12.00 499,663 323,097 427,941

Total W 955,222 1,060,708 $ 818,108

(b) Long-term borrowings as of December 31, 2009 and 2008 are summarized as follows:

Korean Won

(millions)


(note 3)

Lender

Purpose of borrowings

Annual interest rate (%) 2009 2008 2009

Korea

Development Bank and others

Working capital 4.01~5.56 W 23,750 6,250 $ 20,341

Lotte Co., Ltd. (Japan) and others

Working capital 3.40~5.72 519,315 76,906 444,771

Subtotal 543,065 83,156 465,112

Less current portion (70,532) (2,500) (60,408)

Total W 472,533 80,656 $ 404,704

(c) Aggregate maturities of long-term borrowings as of December 31, 2009 are as follows:

Period


U.S. dollars (thousands) (note 3)

2010.01.01~2010.12.31 W 70,532 $ 60,4082011.01.01~2011.12.31 48,028 41,1342012.01.01~2012.12.31 424,505 363,570

Total W 543,065 $ 465,112



December 31, 2009 and 2008 (19) Debentures

(a) Short-term debentures as of December 31, 2009 and 2008 are summarized as follows:

Korean Won

(millions)


(note 3)

Description

Maturity

Interest rate (%)

2009 2008

2009

52nd placed Sep. 30, 2010 3M Euro Yen Libor+1.60 W 126,282 - $ 108,154

116th placed Sep. 25, 2009 7.62 - 90,000 -109th placed Jan. 20, 2009 4.03 - 37,725 -118th placed Jan. 06, 2010 7.54 30,000 - 25,694119th placed Jan. 08, 2010 7.32 10,000 - 8,565122nd placed Jan. 18, 2010 5.48 40,000 - 34,258123rd placed Jan. 19, 2010 5.20 50,000 - 42,823129th placed May 29, 2010 3.82 10,000 - 8,565146th placed Nov. 05, 2010 3.79 25,256 - 21,631Lotteria Co.,

Ltd. Feb. 12, 2010 6.39 20,000 - 17,129Korea Seven

Co., Ltd. Mar. 05, 2010 6.54 10,000 - 8,565

Subtotal 321,538 127,725 275,384Less:

Discount on debentures issued (149) (80) (128) W 321,389 127,645 $ 275,256

(b) Long-term debentures as of December 31, 2009 and 2008 are summarized as follows:



(note 3)

Description

Maturity

Interest rate (%) 2009 2008 2009

Denominated in Won 50th placed Feb. 05, 2012 5.10 W 200,000 - $ 171,292

1-1st placed Aug. 29. 2011 5.30 20,000 - 17,1291-1st

placed Aug. 29. 2012 5.80 20,000 - 17,12953rd placed Dec. 03, 2014 5.30 250,000 - 214,114

Denominated in foreign currency 46th placed Apr. 29, 2011 6M Libor+1.00 116,760 125,750 100,000

47th placed May 29, 2011 6M Euro Yen Tibor+1.20 227,308 250,900 194,679

48th placed Sep. 29, 2011 3M Euro Yen Libor+1.60 138,910 153,328 118,971

49th placed Oct. 17, 2011 3M USD

Libor+1.75 350,280 377,250 300,000

51st placed Jun. 26, 2012 3M Euro Yen Libor+1.50

126,282 - 108,155



December 31, 2009 and 2008 (19) Debentures, Continued

Korean Won

(millions)


(note 3)

Description

Maturity

Interest rate (%)

2009 2008

2009 Card debentures 67th placed Mar. 21, 2009 5.40 W - 30,000 $ -68th placed Apr. 17, 2009 5.54 - 30,000 -70th placed May19, 2009 5.17 - 10,000 -71st placed Jun. 21, 2009 5.29 - 20,000 -73rd placed Jul. 03, 2009 5.24 - 50,000 -76th placed Aug. 03, 2009 5.09 - 30,000 -80th placed Sep. 11, 2009 5.00 - 50,000 -81st placed Sep. 21, 2009 4.93 - 30,000 -83rd placed Oct. 11, 2009 4.83 - 30,000 -87th placed Nov. 21, 2009 4.91 - 30,000 -89th placed May 21, 2009 4.84 - 30,000 -92nd placed Dec. 15, 2011 5.22 30,000 30,000 25,69493rd placed Apr. 10, 2010 5.25 20,000 20,000 17,12994th placed Jun. 05, 2010 5.47 50,000 50,000 42,82395th placed Jun. 13, 2010 5.59 40,000 40,000 34,25896th placed Jun. 21, 2010 5.58 10,000 10,000 8,56597th placed

(foreign currency) Aug. 31, 2010 5.73

140,112 150,900 120,000

98th placed (foreign

currency) Sep. 20, 2010 5.63

75,894 81,738 65,00099th placed Oct. 09, 2009 5.95 - 30,000 -100th placed Apr. 10, 2009 5.88 - 30,000 -101st placed Apr. 12, 2009 5.88 - 10,000 -103rd placed Oct. 25, 2011 6.04 20,000 20,000 17,129104th placed Oct. 25, 2010 5.96 50,000 50,000 42,823105th placed Nov. 01, 2010 6.11 40,000 40,000 34,258106th placed Nov. 08, 2010 6.10 50,000 50,000 42,823

107-1st placed Nov. 23, 2009 6.38 - 10,000 -

107-2nd placed Nov. 23, 2010 6.45 20,000 20,000 17,129

108th placed (foreign

currency) Dec. 26, 2010 1.86

31,571 34,847 27,039110th placed

(foreign currency) Feb. 20, 2011 5.69

58,380 62,875 50,000

111th placed Feb. 25, 2011 5.88 10,000 10,000 8,565112th placed Mar. 11, 2011 5.89 70,000 70,000 59,952113th placed Mar. 11, 2010 5.84 30,000 30,000 25,694114th placed Jul. 03, 2010 6.99 50,000 50,000 42,823



December 31, 2009 and 2008 (19) Debentures, Continued

Korean Won

(millions)


(note 3)

Description

Maturity

Interest rate (%)

2009 2008

2009 115th placed Jan. 03, 2010 6.81 W 50,000 50,000 $ 42,823117th placed Nov. 11, 2011 8.59 70,000 70,000 59,952120th placed Jul. 15, 2010 6.36 30,000 - 25,694121st placed Jan. 15, 2011 6.79 20,000 - 17,129124th placed Jan. 28, 2011 5.70 30,000 - 25,694125th placed Jan. 29, 2011 5.68 20,000 - 17,129126th placed Mar. 10, 2011 6.02 30,000 - 25,694127th placed Sep. 10, 2010 5.61 20,000 - 17,129128th placed Apr. 17, 2012 5.80 60,000 - 51,387130th placed Jun. 09, 2012 5.49 50,000 - 42,823131st placed Jun. 23, 2012 5.68 30,000 - 25,694132nd placed Jul. 01, 2012 5.76 30,000 - 25,694133rd placed Jul. 02, 2012 5.70 20,000 - 17,129134th placed Jul. 06, 2012 5.66 30,000 - 25,694135th placed Jul. 16, 2011 5.18 10,000 - 8,565136th placed Jul. 20, 2012 5.77 20,000 - 17,129137th placed Aug. 06, 2011 5.62 20,000 - 17,129138th placed Mar. 21, 2012 5.50 50,000 - 42,823139th placed Sep. 21, 2012 5.74 50,000 - 42,823140th placed

(foreign currency) Oct. 07, 2011 0.00

25,256 - 21,629

141st placed Apr. 16, 2012 5.53 10,000 - 8,565142nd placed Oct. 19, 2012 5.89 20,000 - 17,129143rd placed Oct. 20, 2012 5.88 20,000 - 17,129144th placed Oct. 22, 2012 5.86 20,000 - 17,129145th placed Oct. 26, 2012 5.94 10,000 - 8,565147th placed Nov. 05, 2012 5.84 50,000 - 42,823148th placed May 05, 2012 5.63 20,000 - 17,129149th placed Nov. 10, 2012 5.86 60,000 - 51,387150th placed May 20, 2012 5.40 50,000 - 42,823151st placed Nov. 20, 2011 5.11 10,000 - 8,565152nd placed Dec. 01, 2012 5.50 30,000 - 25,694153rd placed Dec. 01, 2011 5.03 20,000 - 17,129

Subtotal 3,230,753 2,267,588 2,767,003Less: Discount on debentures issued (8,603) (9,327) (7,368)

Total book value 3,222,150 2,258,261 2,759,635Less: Current portion of debentures,

net of discount (707,338) (419,873) (605,804) W 2,514,812 1,838,388 $ 2,153,831



December 31, 2009 and 2008 (19) Debentures, Continued (c) Aggregate maturities of debentures as of December 31, 2009 are as follows:

Period


(thousands) (note 3) 2010.01.01~2010.12.31 W 1,029,115 $ 881,3942011.01.01~2011.12.31 1,296,894 1,110,7352012.01.01~2012.12.31 976,282 836,1442013.01.01~2013.12.31 - -2014.01.01~2014.12.31 250,000 214,114

Total W 3,552,291 $ 3,042,387

(20) Leases (a) The Company and its subsidiaries lease facilities including stores and distribution centers

from third parties. Under the terms of the lease arrangements, the Company and its subsidiaries are required to make security deposits at the inception of the lease which are refundable at the end of the lease terms. Lease deposits made as of December 31, 2009 amounted to W669,447 million.

(b) Future minimum lease payments under operating leases as of December 31, 2009 are as

follows:

Period Korean Won (millions)


2010.1.1~2010.12.31 W 107,430 $ 92,0092011.1.1~2014.12.31 432,816 370,6892015 and thereafter 531,949 455,592

Total W 1,072,195 $ 918,290

(c) The Company and its subsidiaries lease some land and buildings of the Company and its

subsidiaries to third parties. The Company and its subsidiaries received advance rental deposits of W335,085 million as of December 31, 2009 and rental income of W413,075 million for the year ended December 31, 2009. The majority of the leases are renewed annually.



December 31, 2009 and 2008 (21) Retirement and Severance Benefits Changes in retirement and severance benefits for the years ended December 31, 2009 and 2008

are summarized as follows:



(note 3) 2009 2008 2009 Estimated retirement and severance

benefits at beginning of year W 169,769 154,473 $ 145,400 Provision for retirement and severance

benefits 61,538 66,632 52,704 Payments (47,948) (57,906) (41,065)Transfer of severance benefits

from affiliated companies and other 46,237 6,570 39,600 Estimated retirement and severance

benefits at end of year 229,596 169,769 196,639 Transfer to National Pension Fund (193) (73) (165)Deposit for severance benefit insurance (150,882) (106,991) (129,224)

Net balance at end of year W 78,521 62,705 $ 67,250 The Company and its subsidiaries maintain severance benefit insurance arrangements with Lotte

Insurance Co., Ltd., etc. Under the contracts, payments of The Company and its subsidiaries’ retirement and severance benefit liability to employees are guaranteed to the extent of the aggregate deposit held by the insurance companies in trust, amounting to 65.72% and 63.02% of the reserve balance of retirement and severance benefits, as of December 31, 2009 and 2008, respectively. The aggregate deposit at the insurance companies is presented as a reduction of the retirement and severance benefits liability.

(22) Accrual for Bonus Points Reward Program

The Company and its subsidiaries recognize an accrual for bonus points reward program which provides free services and mileage for customers registered with and who make purchases with various Lotte Membership Cards. The accrual is based on the historical redemption experience of the points compared to the customers’ purchases. Changes in the accrual for the reward program for the years ended December 31, 2009 and 2008 are summarized as follows:



(note 3) 2009 2008 2009 Beginning of year W 80,263 77,591 $ 68,741Provision 82,685 101,735 70,816Payment (75,065) (99,063) (64,290)Other 1,690 - 1,449 End of year W 89,573 80,263 $ 76,716



December 31, 2009 and 2008 (23) Derivative Instruments and Hedge Accounting

(a) Details of derivatives outstanding as of December 31, 2009 are as follows:

(b) Fair value of derivatives outstanding as of December 31, 2009 and 2008 are summarized as follows:

Korean Won (millions) 2009 2008

Type Assets Liabilities Assets Liabilities

Current: Interest rate swap W 1 905 - 1,688Currency swap - 2,315 - -

Subtotal 1 3,220 - 1,688 Non-current: Put option 31,817 - 51,628 - Currency swap 145,320 - 245,006 -

Subtotal 177,137 - 296,634 -

Total W 177,138 3,220 296,634 1,688

Type Description Description

Trade Put option Right to exercise selling common stock in Korea Express. Co., Ltd at a specified price

Interest rate swap

Exchanging a fixed amount per payment period for a payment that is floating

Cash flow hedge

Currency swap At the maturity of the swap, the principal amounts of the debentures in USD and JPY are exchanged back

Interest rate swap

Exchanging a fixed amount in KRW per payment period for a payment that is floating in USD and JPY



December 31, 2009 and 2008 (23) Derivative Instruments and Hedge Accounting, Continued

(c) Changes in the fair value of derivative instruments for the year ended December 31, 2009 are

as follows:

Type of

derivatives

Description

Related accounts

Korean Won

(millions)


(note 3)

Put option Gain on valuation of derivative instruments W (19,811) $ (16,967)

Trade

Interest swap Loss on valuation of derivative

instruments 1 1 Gain on valuation of derivative

instruments (83,907) (71,863)

Gain on valuation of derivatives

instrument (Revenue of card business) 28,601 24,496

Loss on valuation of derivatives instrument (Cost of card business) (54,872) (46,995)

Currency swap

Unrealized loss on valuation of

derivative instruments, net of tax effect 14,357 12,295

Cash flow hedge

Interest swap

Unrealized loss on valuation of derivative instruments, net of tax effect 748 641

(24) 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 W5,000 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, 2009, the Company has not issued any preferred stock and 29,043,374 shares of common stock were issued and outstanding as of December 31, 2009.



December 31, 2009 and 2008 (24) Capital Stock and Capital Surplus, Continued

(b) Capital surplus as of December 31, 2009 and 2008 consists of the following:



(note 3) 2009 2008 2009 Paid-in capital in excess of

par value W 3,605,117 3,605,117

$ 3,087,630Gain on capital reduction 1,793 1,793 1,536Other capital surplus 1,045,334 1,045,334 895,284 W 4,652,244 4,652,244 $ 3,984,450

(i) Gain on capital reduction

The Company retired 745,470 shares of treasury stock (W1,934 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 W3,727 million and a gain on capital reduction amounting to W1,793 million was recorded as a capital surplus.

(ii) Other capital surplus

Details of other capital surplus are summarized as follows:

① Gain on merger

In 1997, SongGok Trading Co., Ltd. was merged into the Company resulting in a gain on merger of W15,272 million which was recorded as a component of other capital surplus.

② Asset revaluation

The Company revalued its property, plant and equipment on July 1, 1998 in accordance with the then Assets Revaluation Law. Details of the asset revaluation surplus included in stockholders' equity are as follows:

Date of revaluation

Total revaluation

surplus Revaluation

tax Transfer to

capital

Others Net revaluation

surplus W 1,122,229 (19,030) (73,500) (986) 1,028,713July 1, 1998



December 31, 2009 and 2008 (25) Capital Adjustments Lotte Data Communication Company, one of the Company’s subsidiaries, has 1,515,653 shares

of the Company. Therefore, the Company and its subsidiaries recorded those shares (W124,533 million) as treasury stock (capital adjustments).

(26) Accumulated Other Comprehensive Income Details of accumulated other comprehensive income as of December 31, 2009 and 2008 are as

follows:



(note 3) Account 2009 2008 2009

Unrealized gain on valuation of available-for-

sale securities, net of tax effect W 41,196 7,832 $ 35,283Unrealized gain on investments under equity

method, net of tax effect 58,590 28,807 50,180Unrealized loss on valuation of derivative

instruments, net of tax effect (14,703) (29,351) (12,593)Cumulative effect of foreign currency

translation, net of tax effect 9,350 21,112 8,008Unrealized gain on revaluation of land, net of

tax effect 2,879,199 - 2,465,912 W 2,973,632 28,400 $ 2,546,790



December 31, 2009 and 2008 (27) Retained Earnings Retained earnings as of December 31, 2009 and 2008 are summarized as follows:



(note 3) Account 2009 2008 2009

Appropriated: Legal reserve (*) W 162,963 159,333 $ 139,571Discretionary reserve 3,790,052 3,080,052 3,246,019

3,953,015 3,239,385 3,385,590

Unappropriated 731,980 766,178 626,910

W 4,684,995 4,005,563 $ 4,012,500 (*) Legal reserve The Korean Commercial Code requires the Company to appropriate as legal reserve an

amount equal to at least 10% of cash dividends for each accounting period until the reserve equals 50% of stated capital. This reserve is not available for cash dividends but may be used to reduce any deficit or be transferred to capital stock.

(28) Sale of Apartments (a) Commitments for housing construction contracts with future home owners as of and for the

years ended December 31, 2009 and 2008 are as follows:



2009 2008 2009 Beginning of year W 35,169 80,778 $ 30,120Increase 16,565 2,141 14,188Revenue recognized in

current year (51,734) (47,750) (44,308) End of year W - 35,169 $ -

(b) Cumulative revenue and cost on lotting-out housing construction contracts as of December

31, 2009 are summarized as follows:


(thousands) (note 3)

Project Cumulative

revenue Cumulative

cost Cumulative revenue Cumulative

cost Beome-dong

project W 135,218 111,821 $ 115,809 95,770



December 31, 2009 and 2008 (29) Sales and Cost of Sales

Details of sales and cost of sales for the years ended December 31, 2009 and 2008 are as follows:



(note 3) 2009 2008 2009 Sales: Sales of merchandise W 12,985,182 11,445,234 $ 11,121,259Sales of products 936,302 81,174 801,903Revenue of card business 938,473 869,990 803,763Sales of apartments 51,734 47,750 44,308Other operating revenue 1,863,600 978,865 1,596,094Deduction:

Cost of specific sales (567,849) (461,113) (486,338)Sales allowance (197,097) (167,125) (168,807)

16,010,345 12,794,775 13,712,182 Cost of sales: Cost of merchandise sold 9,554,922 8,041,481 8,183,387Cost of products sold 119,018 51,321 101,934Cost of card business 619,094 544,749 530,228Cost of sales of apartments 44,846 38,308 38,408Cost of other operating revenue 450,391 64,440 385,740 10,788,271 8,740,299 9,239,697

Gross profit W 5,222,074 4,054,476 $ 4,472,485



December 31, 2009 and 2008 (30) Selling and Administrative Expenses

Details of selling and administrative for the years ended December 31, 2009 and 2008 are as follows:



(note 3) 2009 2008 2009 Salaries W 755,266 604,034 $ 646,853Accrual for retirement and severance

benefits 68,940 66,151 59,044Other employee benefits 129,892 92,945 111,247Education and training 9,930 6,996 8,505Travel 21,042 17,221 18,022Service contract expenses 4,984 3,023 4,269Advertising 217,631 169,141 186,391Sales promotion and commissions 516,708 336,470 442,539Supplies 54,403 35,998 46,594Communications 5,273 3,934 4,516Utilities 170,238 132,023 145,801Maintenance 30,265 20,816 25,921Commissions and fees 520,706 283,851 445,963Insurance 9,713 7,320 8,319Transportation 2,663 1,601 2,281Depreciation 459,580 386,849 393,611Amortization of intangible assets 112,188 78,668 96,085Taxes and dues 109,403 122,463 93,699Bad debts 3,019 268 2,585Rent 276,754 156,905 237,028Electronic data processing 34,207 27,245 29,297Decoration 13,471 13,084 11,537Others 547,481 476,330 468,893 W 4,073,757 3,043,336 $ 3,489,000



December 31, 2009 and 2008 (31) Income Taxes (a) The Company and its subsidiaries were subject to income taxes on taxable income at the

following normal tax rates:

Tax rate Taxable income 2008 2009 2010 2011 Thereafter

Up to W200 million 12.1% 12.1% 11.0% 11.0% 11.0% Over W200 million 27.5% 24.2% 24.2% 24.2% 22.0%

(b) The components of income tax expense for the years ended December 31, 2009 and 2008 are summarized as follows:



(note 3) 2009 2008 2009 Current income tax expense W 315,134 331,499 $ 269,899Deferred income tax expense 881,533 (65,168) 754,995Accumulated deficit (76) - (64)Income taxes directly charged

(credited) to equity (834,804) 22,993 (714,974)Discontinued operating income

taxes (1,416) (531) (1,213) Income tax expense W 360,371 288,793 $ 308,643

(c) Deferred tax assets and liabilities are measured using the tax rates to be applied for the

year in which temporary differences are expected to be realized.

(d) The income tax expense calculated by applying statutory tax rates to the Company and its subsidiaries’ taxable income for the year differs from the actual tax expense in the statement of income for the years ended December 31, 2009 and 2008 for the following reasons:



(note 3) 2009 2008 2009 Income before income taxes W 1,192,563 1,076,716 $ 1,021,379Expense for income taxes at normal tax

rates 345,533 348,911 295,935Adjustments 14,838 (60,118) 12,708

Non-taxable income (4,866) (1,106) (4,167)Non-deductible expense 19,568 3,593 16,759Tax credit (2,054) (5,185) (1,759)Other 2,190 (57,420) 1,875

Income tax expense W 360,371 288,793 $ 308,643 Effective tax rate 30.22% 26.82% 30.22%



December 31, 2009 and 2008 (31) Income Taxes, Continued

(e) The tax effects of temporary differences that result in significant portions of the deferred tax assets and liabilities as of December 31, 2009 and 2008 are presented below:



(note 3) 2009 2008 2009 Deferred tax assets: Allowance for doubtful accounts W 5,647 2,357 $ 4,836Impairment losses on available-for-sale

securities 1,773 950 1,519Inventory 1,463 1,306 1,253Accrued expenses 30,309 23,740 25,958Unrealized gain on valuation of available-

for-sale securities - 1,876 -Negative other comprehensive income due

to equity method of accounting 4,261 444 3,650Loss on foreign currency translation 35,580 60,906 30,473Loss on revaluation of land 1,819 - 1,558Others 16,491 32,531 14,124

Total deferred tax assets 97,343 124,110 83,371 Deferred tax liabilities: Depreciation (4,946) (4,282) (4,236)Accrued interest income (2,613) (2,574) (2,238)Disallowed financing costs capitalized (13,177) (13,594) (11,286)Available-for-sale securities (118,939) - (101,866)Equity method investment securities (187,016) (107,106) (160,171)Unrealized gain on valuation of available-

for-sale securities (14,021) - (12,008)Unrealized gain on valuation of derivative

instruments (28,529) (53,672) (24,434)Other comprehensive income due to equity

method of accounting (44,626) (9,678) (38,220)Unrealized gain on revaluation of land (818,726) - (701,204)Foreign operation currency translation gain - (6,701) -Others (1,425) (916) (1,221)

Total deferred tax liabilities (1,234,018) (198,523) (1,056,884)

Net deferred tax liability W (1,136,675) (74,413) $ (973,513) (f) A deferred tax asset is recognized since it is expected to be probable that future taxable

income will be available against which the deductible temporary differences can be utilized.



December 31, 2009 and 2008 (31) Income Taxes, Continued (g) As of December 31, 2009 and 2008, details of aggregate deferred tax assets (liabilities) are

as follows:

Korean Won (millions) 2009

Deferred tax assets (liabilities)

Temporary differences at December 31,

2009 Current Non-

current Deferred tax assets W 720,586 109,042 67,419Deferred tax liabilities (6,783,642) (18,654) (1,294,482)

Net deferred income tax asset (liability) W (6,063,056) 90,388 (1,227,063)


Deferred tax assets (liabilities)

Temporary differences at December 31,

2008 Current Non-

current Deferred tax assets W 662,529 76,615 57,256Deferred tax liabilities (1,945,188) (2,574) (205,710)

Net deferred income tax asset (liability) W (1,282,659) 74,041 (148,454)

(h) The deferred tax assets (liabilities) that were directly charged (credited) to other

comprehensive income for the year ended December 31, 2009 are as follows:


(thousands) (note 3)

Temporary difference

Deferred tax assets(liabilities)

Temporary difference

Deferred

tax assets (liabilities)

Unrealized gain on valuation of available-for-sale securities W 43,202 (9,885) $ 37,001 (8,466)

Unrealized gain on investments under equity method, net 38,078 (8,774) 32,612 (7,514)

Unrealized loss on valuation of derivative instruments 19,225 (4,120) 16,465 (3,529)

Foreign operation currency translation gain (16,221) 6,701 (13,892) 5,739

Unrealized gain on revaluation of land 3,721,483 (818,726) 3,187,292 (701,204)

W 3,805,767 (834,804) $ 3,259,478 (714,974)



December 31, 2009 and 2008 (32) Earnings Per Share (a) Earnings per share for the years ended December 31, 2009 and 2008 are as follows:

Korean Won (millions, except per share amount)

U.S. dollars (thousands,

except per share amount) (note 3)

2009 2008 2009 Net income W 715,692 743,457 $ 612,960Weighted-average number of

common shares outstanding 29,043,374 29,043,374 29,043,374 Earnings per share in Won and U.S.

dollars W 24,642 25,598 $ 21.10 (b) Earnings per share from continuing operations for the years ended December 31, 2009 and

2008 are as follows:

Korean Won (millions, except per share amount)


except per share amount) (note 3)

2009 2008 2009 Income from continuing operations W 711,257 742,058 $ 609,161Weighted-average number of

common shares outstanding 29,043,374 29,043,374 29,043,374 Earnings per share from continuing

operations in Won and U.S. dollars W 24,489 25,550 $ 20.97



December 31, 2009 and 2008 (33) Dividends

(a) Dividends as a percentage of net income and par value for the years ended December 31, 2009 and 2008 are as follows:

Korean Won (millions, except par

value per share)


except par value per share) (note3)

2009 2008 2009 Dividend amount (Cash dividends) W 36,304 36,304 $ 31,093 Net income W 715,692 743,457 $ 612,960Dividends as a percentage of net

income 5.07% 4.88% 4.89% Par value per share W 5,000 5,000 $ 4Dividends as a percentage of par

value 25.00% 25.00% 25.00%

(b) Dividend yield ratio for the years ended December 31, 2009 and 2008 are as follows:

Korean Won U.S. dollars (note3)

2009 2008 2009 Dividend per share W 1,250 1,250 $ 1Market price as of year end 346,000 210,000 296Dividend yield ratio 0.36% 0.60% 0.36%



December 31, 2009 and 2008 (34) Commitments and Contingencies (a) As of December 31, 2009, the Company and its subsidiaries have various forms of credit

facility commitments with financial institutions as follows:

Credit line

Korean Won (millions), U.S. dollars (thousands)

Amount used under credit facility

Korean Won (millions), U.S. dollars (thousands)

Overdraft W 220,800 W 17,559 IDR 50,000,000 IDR -General loan W 1,028,800 W 126,700 CNY 671,000 CNY 428,000 IDR 210,000,000 IDR -Buyer’s credit W 884,450 W 290,356Other W 107,000 W 21,158Letter of credit US$ 14,516 US$ 5,531Foreign note US$ 100 US$ - W 2,241,050 W 455,773 US$ 14,616 US$ 5,531 IDR 260,000,000 IDR - CNY 671,000 CNY 428,000

(b) The Company entered into operating lease contracts with Lotte Midopa Co., Ltd. and Lotte

Station Building Co., Ltd. Details of the lease as of December 31, 2009 are as follows:


Lessor Location Beginning

date

Expiration

date

Guarantee deposit amount

Monthly

rent

Lotte Midopa Co., Ltd. Namdaemun-ro,

Jung-gu, Seoul Nov. 18,

2003 Nov. 17,

2023 W 36,500 355

Lotte Station Building Co., Ltd.

Nammoon-ro, Sangdang-gu, Cheongju

Feb. 23, 2007

Feb. 22, 2027 5,800 275

W 42,300 630



December 31, 2009 and 2008 (34) Commitments and Contingencies, Continued

(c) Material contracts of the Company and its subsidiaries are as follows:

Company Contractor Description of contract Lotte Shopping Co., Ltd. International Business

Center Corporation (IBCC)

Providing management services

Lotte Card Co., Ltd. American Express Company, MasterCard International, Visa International and JCB International

Commissions based on the credit card transaction amount

Woori Home Shopping & Television Co., Ltd.

BC card and LG 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

Lotte Krispy Kreme Doughnuts Co., Ltd.

Krispy Kreme Doughnut Corporation

Right to develop and operate stores in Korea and using the registered trademark and system

Lotteria Co., Ltd. 870 franchise stores Supplying of goods Daehong Communications Co., Ltd.

Korean Broadcasting System

Providing the commercial services



December 31, 2009 and 2008 (34) Commitments and Contingencies, Continued

(d) Other provisions

Details of other provisions as of December 31, 2009 are summarized as follows:


Beginning balance Provision

Reversal/

Payment Ending balance

Allowance for unused

credit commitments W 146,107 42,456 - 188,563

Allowance for finance 1,000 - - 1,000Reserve for loss from

litigation - 2,973 - 2,973 W 147,107 45,429 - 192,536

(e) As of December 31, 2009, the Company and its subsidiaries are the plaintiff in various

lawsuits claiming damages totaling W16,697 million and the Company and its subsidiaries are the defendant in various lawsuits with damage claims totaling W5,024 million. In this regard, the Company and its subsidiaries reserved the anticipated loss of W2,973 million for the litigation which is related to severance benefit unpaid of a retired employee of Lotte Card Co., Ltd., and the management believes that the ultimate resolutions of other legal actions will not have a material effect on the financial position or operations of the Company and its subsidiaries.

(f) 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 can not 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 assets-backed securities when average portfolio earning ratio during 3 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. (see note 6)

(g) As of December 31, 2009, the Company and its subsidiaries have provided 8 notes totaling

W21,021 million and 21 blank notes as collateral for borrowings (from Korea Agro-Fisheries Trade Corporation and Lotte Capital Co., Ltd.) and other several performance guarantee.

Lotte Midopa Co., Ltd. did not recover 93 blank checks and 653 blank notes from related customers, which had been pledged as collateral for its debt. Management believes that the possibilities of payment are extremely low.



December 31, 2009 and 2008 (35) Consolidated Statements of Comprehensive Income Comprehensive income for the years ended December 31, 2009 and 2008 was as follows:



(note3) 2009 2008 2009 Net income W 765,850 786,177 $ 655,918Change in unrealized gain on valuation of

available-for-sale securities, net of tax effect of W(9,885) million in 2009 and W17,214 million in 2008 33,317 (34,938) 28,535

Change in unrealized gain on valuation of equity method investments, net of tax effect of W(8,774) million in 2009 and W4,164 million in 2008 29,304 7,110 25,098

Change in unrealized loss on valuation of derivative, net of tax effect of W(4,120) million in 2009 and W8,344 million in 2008 15,105 (29,713) 12,936

Change in foreign operation currency translation gain, net of tax effect of W6,701 million in 2009 and W(6,701) million in 2008 (9,520) 20,428 (8,153)

Change in unrealized gain on revaluation of land, net of tax effect of W(818,726) million in 2009 2,902,757 - 2,486,088

Consolidated comprehensive income 3,736,813 749,064 3,200,422 Minority interest in comprehensive income 75,889 38,641 64,996 Parent company interest in comprehensive

income W 3,660,924 710,423 $ 3,135,426 (36) Non-cash Investing Activities

Significant non-cash investing activities for the years ended December 31, 2009 and 2008 are summarized as follows:



(note3) 2009 2008 2009 Construction-in-progress transferred to

property, plant and equipment and intangible assets W 963,582 707,237 $ 825,267

Acquisition of equity method investment securities through in-kind exchange - 37,418 -

Other investment assets transferred to equity method investment securities 65,885 130 56,427



December 31, 2009 and 2008 (37) Discontinued Operations

The Board of Directors of the Company committed to a plan to sell the foods manufacturing division by September 30, 2009 and announced the plan on September 18, 2009. This decision was made due to a long-term business plan to focus more on retail business. In accordance with the approved plan, the Company made an agreement to sell the foods manufacturing division to Lotte Samkang Co., Ltd. on September 18, 2009, and sold the assets and liabilities of the foods manufacturing division for W24,339 million to Lotte Samkang Co., Ltd on September 30, 2009. The book value of assets and liabilities of the foods manufacturing division as of September 30, 2009 was W24,968 million and W3,984 million, respectively. The results of the discontinued operation were calculated as follows:

Korean Won (millions, except for earnings per share)

U.S. dollars (thousands, except for

earnings per share) (note 3)

2009 2008 2009 Sales W 38,001 44,541 $ 32,547Cost of sales 34,361 41,756 29,429Gross profit 3,640 2,785 3,118Selling and administrative expenses 1,759 1,903 1,507Operating income 1,881 882 1,611Non-operating income 638 1,056 547Non-operating expenses 23 9 20Income of foods manufacturing division 2,496 1,929 2,138

Gain on disposition of the discontinued operation 3,355 - 2,873

Income taxes 1,416 531 1,213 Results of discontinued operation 4,435 1,398 3,798 Basic earnings per share in Won and U.S. dollars W 153 48 $ 0.13

In relation to the discontinued operation, net cash from operating and investing activities was W1,310 million and W1,160 million, respectively, for the nine-month period ended September 30, 2009. The comparative consolidated income statement has been restated to show the discontinued operation separately from continuing operations.



December 31, 2009 and 2008 (38) Added Value The components of manufacturing costs and selling and administrative expenses which are

necessary in calculating added value for the years ended December 31, 2009 and 2008 are as follows:



(note 3) 2009 2008 2009 Salaries W 631,524 576,760 $ 540,874Retirement allowance and

severance benefits 61,538 66,632 52,704Other employee benefits 100,816 92,511 86,345Rent 182,638 153,920 156,422Depreciation 431,307 383,573 369,396Taxes and dues 103,825 121,368 88,922

(39) Segment Information

(a) The Company and its subsidiaries’ major business segments consist of department stores (retail), marts (retail) and others (supermarkets, movie theaters, construction and clothing retail).

(b) Financial information by business segment for the years ended December 31, 2009 and 2008

are summarized as follows:


Sales

Operating income

Total assets Department stores W 5,904,468 676,809 11,485,082Mart 4,327,792 167,872 6,362,152Others 1,303,021 31,794 811,122

Subtotal 11,535,281 876,475 18,658,356

Subsidiaries 4,758,871 353,859 9,010,932

Total 16,294,152 1,230,334 27,669,288

Consolidated adjustment (283,807) (82,017) (3,245,910) After consolidated adjustment W 16,010,345 1,148,317 24,423,378



December 31, 2009 and 2008 (39) Segment Information, Continued


Sales

Operating income

Total assets Department stores W 5,456,646 639,056 8,276,580Mart 4,060,041 110,567 4,222,390Others 992,564 18,484 804,713

Subtotal 10,509,251 768,107 13,303,683

Subsidiaries 2,525,461 299,780 5,339,778

Total 13,034,712 1,067,887 18,643,461

Consolidated adjustment (239,937) (56,747) (1,735,217) After consolidated adjustment W 12,794,775 1,011,140 16,908,244

(c) The consolidated statements of financial position as of December 31, 2009 and 2008, by industry of which the Company and its subsidiaries’ business are classified, are as follows:


(thousands) (note 3) 2009 2008 2009

Non-

financial industry

Financial industry

Non-financial industry

Financial industry


Financial industry

Assets

Current assets: W 3,243,637 219,543 2,424,596 420,317 $ 2,778,037 188,030Non-current assets:

Investment, net of unamortized present value discount 2,142,771 102,566 1,136,000 134,297 1,835,193 87,843

Property, plant and equipment, net of accumulated depreciation 12,837,365 59,187 7,775,837 72,227 10,994,661 50,691

Intangibles, net of amortization 822,345 33,802 969,170 40,144 704,303 28,950Others 1,343,494 48,363 883,937 47,065 1,150,646 41,421

Total non-current assets 17,145,975 243,918 10,764,944 293,733 14,684,803 208,905Other financial business assets: - 3,570,305 - 3,004,654 - 3,057,815Total assets W 20,389,612 4,033,766 13,189,540 3,718,704 $ 17,462,840 3,454,750 Liabilities and shareholders’ equity

Current liabilities 4,746,750 1,871,488 3,565,358 1,805,029 4,065,391 1,602,850Non-current liabilities 3,541,122 1,098,751 1,435,820 945,407 3,032,822 941,033Total liabilities W 8,287,872 2,970,239 5,001,178 2,750,436 $ 7,098,213 2,543,883



December 31, 2009 and 2008 (39) Segment Information, Continued

(d) The consolidated statements of income for the years then ended, by industry of which the Company and its subsidiaries’ business are classified, are as follows:



2009 2008 2009


Financial industry

Non-financial

industry

Financial industry


Financial industry

Sales W 15,071,872 938,473 11,933,139 861,636 $ 12,908,419 803,763Cost of sales 10,169,177 619,094 8,195,549 544,750 8,709,470 530,227Selling and administrative

expenses 3,788,811 284,946 2,794,717 248,619 3,244,956 244,044Operating income 1,113,884 34,433 942,873 68,267 953,993 29,492Other income 429,523 1,128 397,953 8,928 367,868 966Other expenses 385,563 842 340,487 817 330,218 721Income before income tax 1,157,844 34,719 1,000,339 76,378 991,643 29,737Income taxes 321,100 39,271 222,965 65,828 275,009 33,634Subsidiaries’ net income

before acquisition 70,777 - 3,146 - 60,618 -Income from continuing

operations 765,967 (4,552) 774,228 10,550 656,016 (3,897)Income from discontinued

operation 4,435 - 1,399 - 3,799 -Net income W 770,402 (4,552) 775,627 10,550 $ 659,815 (3,897)



December 31, 2009 and 2008 (40) Consolidated Net Income and Net Income in Minority Interest

Consolidated net income and net income in minority interest for the year ended December 31, 2009 is as follows:


Company


parent interest (%)


minority interest (%) Net income

Consolidated net income

Net Income in minority

interest

Lottel Shopping Co., Ltd. 100.00 - W 716,422 716,422 -Lotte Midopa Co., Ltd. 79.01 20.99 41,136 32,503 8,633Lotte Card Co., Ltd. 92.54 7.46 138,083 127,775 10,308Woori Home Shopping &

Television Co., Ltd. 53.03 46.97 60,992 32,347 28,645Korea Seven Co., Ltd. 50.12 49.88 2,178 1,092 1,086Lotte.Com Inc. 40.53 59.47 4,909 1,989 2,920Lotte Boulangerie Co., Ltd. 95.71 4.29 (1,772) (1,696) (76)Lotte Krispy Kreme

Doughnuts Co., Ltd. (*) 100.00 - - - -Lotteria Co., Ltd. (*) 28.75 71.25 - - -Daehong Communications

Co., Ltd. (*) 33.59 66.41 - - -Lotte Data Communication

Company (*) 19.36 80.64 - - -KIBANK (*) 16.54 83.46 - - -Mybi Co., Ltd. (*) 13.35 86.65 - - -Busan HanaroCard Co.,

Ltd. (*) 8.01 91.99 - - -Lotte Europe Holdings B.V.

(*) 31.73 68.27 - - -ZAO Lotte Rus (*) 31.73 68.27 - - -Lotte KF Rus LLC (*) 31.73 68.27 - - -Lotte Shopping Rus LLC (*) 31.73 68.27 - - -Confectionary Rus Kaluga

LLC (*) 31.73 68.27 - - -Operator-Lotte-DutyFree

LLC (*) 31.73 68.27 - - -Lotte Vietnam Shopping

Co., Ltd. 80.00 20.00 (14,080) (11,264) (2,816)Qingdao Lotte Mart

Commercial Co., Ltd. 100.00 - (12,673) (12,673) -Lotte Mart Co., Ltd. 100.00 - (8,488) (8,488) -Lotte Shopping Holdings

(Singapore), Ltd. 100.00 - (27) (27) -PT Lotte Shopping

Indonesia 80.00 20.00 10,021 8,017 2,004PT Lotte Mart 99.80 0.20 330 329 1Vietnam Lotteria Co., Ltd. 25.33 74.67 - - -Consolidated adjustment (171,181) (170,634) (547)

W 765,850 715,692 50,158 (*) These companies were included for consolidation at December 31, 2009.



December 31, 2009 and 2008 (41) Subsequent Events

On February 9, 2010, the Company made an agreement to acquire department and discount store division of GS Retail Co., Ltd., which included 3 department stores, 14 discount stores, employment, operation and landsite. The Company expects to obtain economies of scale and synergy effects through this acquisition. The aggregated amount for the acquisition was W1,340,000 million.

lotte shopping 연결영문보고서 2009 final Statement_FY09... · Notes to Consolidated...

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