Hanwha Aerospace : 2021 Hanwha Aerospace Audit Report

Hanwha Aerospace Co., Ltd. and Subsidiaries

Consolidated Financial Statements

December 31, 2021 and 2020

Hanwha Aerospace Co., Ltd. and Subsidiaries

Index

December 31, 2021 and 2020

	Page(s)
Independent Auditor's Report ..................................................................................................	1 - 5
Consolidated Financial Statements
Consolidated Statements of Financial Position ............................................................................	6
Consolidated Statements of Comprehensive Income ..................................................................	7
Consolidated Statements of Changes in Equity ...........................................................................	8
Consolidated Statements of Cash Flows .....................................................................................	9
Notes to the Consolidated Financial Statements .........................................................................	10 - 104

Independent Auditor's Report

(English Translation of a Report Originally Issued in Korean)

To the Shareholders and Board of Directors of

Hanwha Aerospace Co., Ltd.

Opinion

We have audited the accompanying consolidated financial statements of Hanwha Aerospace Co., Ltd. and its subsidiaries (collectively referred to as the "Group"), which comprise the consolidated statements of financial position as at December 31,2021 and 2020, and the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31,2021 and 2020, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).

Basis for Opinion

We conducted our audits in accordance with Korean Standards on Auditing. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements of the Republic of Korea that are relevant to our audit of the consolidated financial statements and we have fulfilled our other ethical responsibilities in accordance with the ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Emphasis of Matter

Without modifying our opinion, we draw attention to Note 3 to the consolidated financial statements of the Group. Note 3 to the consolidated financial statements describes uncertainty relating to the impact of Coronavirus disease 2019 (COVID-19) on the Group's financial position and financial performance and management's judgements for the uncertainty.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

(a) Impairment test on goodwill and Business license for international joint projects

Why it is determined to be a key audit matter

As at December 31, 2021, the Group owns goodwill of 958,678 million and business license for international joint projects of 274,616 million (Note 14).

The Group performs an impairment test of goodwill at the end of each reporting period. For business license for international joint projects related to the long-term RSP (Risk and Revenue Sharing Program), the Group performs an impairment test by calculating value-in-use as an indication of impairment arising from poor performance of commercial aircraft business due to COVID-19 has been identified.

By engaging objective external experts, the Group performed impairment test of goodwill and business license for international joint projects using the value-in-use calculation based on the discounted cash flow model. The value-in-use calculation involves significant judgements and estimates by management, such as discount rate, growth rate and forecast of future cash flows. Accordingly, we considered the accounting treatment for impairment assessment of goodwill and business license for international joint projects to be a key audit matter.

How our audit addressed the Key Audit Matter

Our audit procedures performed in relation to the impairment assessment of goodwill and business license for international joint projects included followings:

• We assessed competence of external experts engaged.
• We evaluated appropriateness of determination of cash-generating unit (CGU) of the Group and net assets allocated to each CGU.
• We assessed appropriateness of the valuation model used in assessing value-in-use.
• We assessed reasonableness of major assumptions used by inspection available external data and major contracts.
• We tested mathematical accuracy of calculation used in the valuation and evaluated appropriateness of value-in-use through sensitivity analysis.

(b) Revenue recognition based on the cost input method

Why it is determined to be a key audit matter

For certain sales contracts, the Group recognizes revenue over time by measuring progress towards complete satisfaction of a performance obligation by using cost input method (Note 27). The progress under the cost input method is measured at the accumulated contract costs incurred for the obligation performed, divided by the total estimated contract costs.

The measurement of contract revenue is affected by a variety of uncertainties in relation to the future outcomes, and total contract costs are estimated based on the future estimates of material costs, labor costs and others. Changes in estimates of total contract revenue and total contract costs may have impacts on the profit or loss for the current year (or for the succeeding years).

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In particular, we focused out efforts on the revenue recognized over time in the Defense division of Hanwha Systems Co., Ltd. and Hanwha Defense Co., Ltd. whose revenues are significant in amount. Estimation of contract revenue and the progress to completion involve significant judgements and estimates by management. Therefore, we considered revenue recognition based on input method to be a as key audit matter.

How our audit addressed the Key Audit Matter

Our audit procedures performed in relation to the revenue recognized based on input method particularly in the Defense division of Hanwha Systems Co., Ltd. and Hanwha Defense Co., Ltd. included followings:

• We evaluated appropriateness of accounting policies for revenue recognition.
• We assessed design and effectiveness of internal controls in relation to approval process of total contract costs.
• We performed analytical review procedures to assess reasonableness of total contract costs.
• We assessed design and effectiveness of internal controls in relation to approval process of contract amounts.
• We assessed design and effectiveness of internal controls in relation to process of aggregating cost incurred.
• We independently recalculated the percentage of completion for construction contracts.
• We tested occurrence and cut-off of cost incurred by construction contract.
• We inspected agreements which were newly entered into and whose contract amounts were significantly modified.

Other Matter

Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Korean IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations.

Those charged with governance are responsible for overseeing the Group's financial reporting process.

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