Edgar Filing: POSCO

Form 20-F

As filed with the Securities and Exchange Commission on April 29, 2015

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

(Mark One)

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

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

For the fiscal year ended December 31, 2014

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

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

Date of event requiring this shell company report

For the transition period from to

Commission file number 1-13368

POSCO

(Exact name of Registrant as specified in its charter)


POSCO		The Republic of Korea
(Translation of Registrant’s name into English)		(Jurisdiction of incorporation or organization)

POSCO Center, 440 Teheran-ro, Gangnam-gu

Seoul, Korea 135-777

(Address of principal executive offices)

Kee, Hyojin

POSCO Center, 440 Teheran-ro, Gangnam-gu,

Seoul, Korea 135-777

Telephone: +82-2-3457-2671; E-mail: irenekee@posco.com; Facsimile: +82-2-3457-1982

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.


Title of Each Class		Name of Each Exchange on Which Registered

American Depositary Shares, each representing one-fourth of one share of common stock		New York Stock Exchange, Inc.

Common Stock, par value Won 5,000 per share *		New York Stock Exchange, Inc. *

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

As of December 31, 2014, there were 79,993,028 shares of common stock, par value Won 5,000 per share, outstanding (not including 7,193,807 shares of common stock held by the company as treasury shares)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing. U.S. GAAP ¨ IFRS x Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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

TABLE OF CONTENTS


GLOSSARY			1
PART I			2
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS		2
	Item 1.A.	Directors and Senior Management	2
	Item 1.B.	Advisers	2
	Item 1.C.	Auditors	2
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		2
	Item 2.A.	Offer Statistics	2
	Item 2.B.	Method and Expected Timetable	2
ITEM 3.	KEY INFORMATION		2
	Item 3.A.	Selected Financial Data	2
	Item 3.B.	Capitalization and Indebtedness	4
	Item 3.C.	Reasons for Offer and Use of Proceeds	4
	Item 3.D.	Risk Factors	5
ITEM 4.	INFORMATION ON THE COMPANY		22
	Item 4.A.	History and Development of the Company	22
	Item 4.B.	Business Overview	22
	Item 4.C.	Organizational Structure	40
	Item 4.D.	Property, Plants and Equipment	40
ITEM 4A.	UNRESOLVED STAFF COMMENTS		43
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		43
	Item 5.A.	Operating Results	43
	Item 5.B.	Liquidity and Capital Resources	71
	Item 5.C.	Research and Development, Patents and Licenses, Etc.	74
	Item 5.D.	Trend Information	75
	Item 5.E.	Off-balance Sheet Arrangements	75
	Item 5.F.	Tabular Disclosure of Contractual Obligations	75
	Item 5.G.	Safe Harbor	75
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		75
	Item 6.A.	Directors and Senior Management	75
	Item 6.B.	Compensation	79
	Item 6.C.	Board Practices	80
	Item 6.D.	Employees	81
	Item 6.E.	Share Ownership	82
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		84
	Item 7.A.	Major Shareholders	84
	Item 7.B.	Related Party Transactions	84
	Item 7.C.	Interests of Experts and Counsel	85
ITEM 8.	FINANCIAL INFORMATION		85
	Item 8.A.	Consolidated Statements and Other Financial Information	85
	Item 8.B.	Significant Changes	86
ITEM 9.	THE OFFER AND LISTING		86
	Item 9.A.	Offer and Listing Details	86
	Item 9.B.	Plan of Distribution	88
	Item 9.C.	Markets	88


	Item 9.D.	Selling Shareholders	92
	Item 9.E.	Dilution	93
	Item 9.F.	Expenses of the Issuer	93
ITEM 10.	ADDITIONAL INFORMATION		93
	Item 10.A.	Share Capital	93
	Item 10.B.	Memorandum and Articles of Association	93
	Item 10.C.	Material Contracts	98
	Item 10.D.	Exchange Controls	98
	Item 10.E.	Taxation	102
	Item 10.F.	Dividends and Paying Agents	107
	Item 10.G.	Statements by Experts	107
	Item 10.H.	Documents on Display	107
	Item 10.I.	Subsidiary Information	107
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		107
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		109
	Item 12.A.	Debt Securities	109
	Item 12.B.	Warrants and Rights	109
	Item 12.C.	Other Securities	109
	Item 12.D.	American Depositary Shares	110
PART II			111
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		111
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		111
ITEM 15.	CONTROLS AND PROCEDURES		111
ITEM 16.	[RESERVED]		112
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT		112
ITEM 16B.	CODE OF ETHICS		112
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		113
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		113
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		114
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		114
ITEM 16G.	CORPORATE GOVERNANCE		114
ITEM 16H.	MINE SAFETY DISCLOSURE		116
PART III			116
ITEM 17.	FINANCIAL STATEMENTS		116
ITEM 18.	FINANCIAL STATEMENTS		116
ITEM 19.	EXHIBITS		116

GLOSSARY


“ADR”		American Depositary Receipt evidencing ADSs.

“ADR depositary”		Citibank, N.A.

“ADS”		American Depositary Share representing one-fourth of one share of Common Stock.

“Australian Dollar” or “A$”		The currency of the Commonwealth of Australia.

“Commercial Code”		Commercial Code of the Republic of Korea.

“common stock”		Common stock, par value Won 5,000 per share, of POSCO.

“deposit agreement”		Deposit Agreement, dated as of July 19, 2013, among POSCO, the ADR Depositary and all holders and beneficial owners from time to time of ADRs issued thereunder.

“Dollars,” “$” or “US$”		The currency of the United States of America.

“FSCMA”		Financial Investment Services and Capital Markets Act of the Republic of Korea.

“Government”		The government of the Republic of Korea.

“IASB”		International Accounting Standards Board.

“IFRS”		International Financial Reporting Standards.

“Yen” or “JPY”		The currency of Japan.

“Korea”		The Republic of Korea.

“Korean GAAP”		Generally accepted accounting principles in the Republic of Korea.

“Gwangyang Works”		Gwangyang Steel Works.

“We”		POSCO and its consolidated subsidiaries.

“Pohang Works”		Pohang Steel Works.

“POSCO Group”		POSCO and its consolidated subsidiaries.

“Renminbi”		The currency of the People’s Republic of China.

“Securities Act”		The United States Securities Act of 1933, as amended.

“Securities Exchange Act”		The United States Securities Exchange Act of 1934, as amended.

“SEC”		The United States Securities and Exchange Commission.

“tons”		Metric tons (1,000 kilograms), equal to 2,204.6 pounds.

“U.S. GAAP”		Generally accepted accounting principles in the United States of America.

“Won” or “￦”		The currency of the Republic of Korea.

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

PART I

Item 1. Identity of Directors, Senior Managers and Advisers

Item 1.A. Directors and Senior Management

Not applicable

Item 1.B. Advisers

Not applicable

Item 1.C. Auditors

Not applicable

Item 2. Offer Statistics and Expected Timetable

Not applicable

Item 2.A. Offer Statistics

Not applicable

Item 2.B. Method and Expected Timetable

Not applicable

Item 3. Key Information

Item 3.A. Selected Financial Data

The selected financial data presented below should be read in conjunction with our Consolidated Financial Statements and related notes thereto and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected financial data in Won as of December 31, 2013 and 2014 and for each of the years in the three-year period ended December 31, 2014 were derived from our Consolidated Financial Statements included elsewhere in this annual report. Our Consolidated Financial Statements are prepared in accordance with IFRS as issued by the IASB.

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with Korean International Financial Reporting Standards (“K-IFRS”) as adopted by the Korean Accounting Standards Board (the “KASB”), which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea. English translations of such financial statements are furnished to the Securities and Exchange Commission under Form 6-K. During the three years ended December 31, 2014, we are required to adopt certain amendments and interpretations to K-IFRS, relating to presentation of operating profit. Additionally, under K-IFRS, revenue from the development and sale of certain real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. As a result, our consolidated statements of comprehensive income and our consolidated statements of financial position prepared in accordance with IFRS as issued by the IASB included in this annual report differ from our consolidated statements of comprehensive income and consolidated statements of financial position prepared in accordance with K-IFRS. See “Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included in this annual report.

Selected consolidated statement of comprehensive income data


	For the Year Ended December 31,
	2010		2011			2012			2013			2014			2014
	(In billions of Won and millions of Dollars, except per share data)
Revenue ⁽¹⁾		￦ 47,887		￦ 68,890			￦ 63,345			￦ 61,766			￦ 64,759		US$	58,914
Cost of sales ⁽²⁾		39,722		59,784			55,921			54,914			57,465			52,279

Gross profit		8,165		9,105			7,425			6,852			7,293			6,635
Administrative expenses		1,492		2,035			2,129			2,232			2,310			2,101
Selling expenses		1,120		1,612			1,679			1,632			1,760			1,601
Other operating income		223		307			448			229			269			245
Other operating expenses		342		367			809			651			980			891

Operating profit		5,434		5,398			3,255			2,566			2,513			2,286
Share of profit (loss) of equity-accounted investees, net		183		51			(23	)		(180	)		(300	)		(273	)
Finance income		1,739		3,190			2,897			2,381			2,397			2,180
Finance costs		2,088		3,867			2,798			2,829			3,222			2,931

Profit before income tax		5,267		4,773			3,332			1,938			1,388			1,263
Income tax expense		1,081		1,066			974			589			824			749

Profit		4,186		3,707			2,358			1,349			564			513
Total comprehensive income		4,765		2,435			1,720			1,363			108			99
Profit (loss) for the period attributable to:
Owners of the controlling company		4,106		3,641			2,437			1,371			633			576
Non-controlling interests		80		65			(79	)		(22	)		(69	)		(63	)
Total comprehensive income (loss) attributable to:
Owners of the controlling company		4,640		2,524			1,887			1,439			182			165
Non-controlling interests		126		(89	)		(167	)		(75	)		(73	)		(66	)
Basic and diluted earnings per share ⁽³⁾		53,297		47,138			31,552			17,338			7,514			6.84
Dividends per share of common stock		10,000		10,000			8,000			8,000			8,000
Dividends per share of common stock (in Dollars) ⁽⁴⁾		US$ 8.78		US$ 8.67			US$ 7.47			US$ 7.58			US$ 7.28

Selected consolidated statements of financial position data


	As of December 31,
	2010		2011		2012		2013		2014		2014
	(In billions of Won and millions of Dollars)
Working capital ⁽⁵⁾		￦ 9,395		￦ 13,942		￦ 11,993		￦ 11,681	￦	10,833		US$ 9,855
Total current assets		27,672		33,547		31,817		32,039		33,208		30,211
Property, plant and equipment, net		25,438		28,453		32,276		35,760		35,241		32,061
Total non-current assets		41,746		44,854		47,711		52,802		52,636		47,885
Total assets		69,418		78,401		79,527		84,841		85,844		78,096

Short-term borrowings and current portion of long-term borrowings		10,476		10,792		10,509		10,714		12,195		11,095
Long-term borrowings, excluding current portion		10,664		16,020		14,412		15,533		15,233		13,858
Total liabilities		30,881		37,679		37,133		39,060		40,586		36,923

Share capital		482		482		482		482		482		439
Total equity		38,537		40,722		42,394		45,781		45,257		41,173

Selected consolidated statements of cash flows data


	For the Year Ended December 31,
	2010			2011			2012			2013			2014			2014
	(In billions of Won and millions of Dollars)
Net cash provided by operating activities		￦ 3,582			￦ 1,692			￦ 7,319			￦ 4,858			￦ 3,412			US$ 3,104
Net cash used in investing activities		(6,915	)		(5,517	)		(6,169	)		(8,752	)		(3,745	)		(3,406	)
Net cash provided by (used in) financing activities		4,588			4,900			(908	)		3,532			135			123
Net increase (decrease) in cash and cash equivalents		1,248			1,078			82			(472	)		(187	)		(170	)
Cash and cash equivalents at beginning of the year		2,273			3,521			4,599			4,681			4,209			3,829
Cash and cash equivalents at end of the year		3,521			4,599			4,681			4,209			4,022			3,659

(1)	Includes sales by our consolidated subsidiaries of steel products purchased by such subsidiaries from third parties, including trading companies to which we sell steel products.

(2)	Includes purchases of steel products by our consolidated subsidiaries from third parties, including trading companies to which we sell steel products.

(3)

See Note 36 of Notes to Consolidated Financial Statements for method of calculation. The weighted average number of common shares outstanding used to calculate basic and diluted earnings per share was 77,032,878 shares as of December 31, 2010, 77,251,818 shares as of December 31, 2011, 77,244,444 shares as of December 31, 2012, 78,009,654 shares as of December 31, 2013 and 79,801,539 shares as of December 31, 2014.

(4)	Translated into Dollars by applying the exchange rate at the end of the applicable year as announced by Seoul Money Brokerage Services, Ltd.

(5)	“Working capital” means current assets minus current liabilities.

EXCHANGE RATE INFORMATION

The following table sets out information concerning the market average exchange rate for the periods and dates indicated.


Period	At End of Period		Average Rate ⁽¹⁾		High		Low
	(Per US$1.00)
2010		1,138.9		1,156.3		1,261.5		1,104.0
2011		1,153.3		1,108.1		1,199.5		1,049.5
2012		1,071.1		1,126.9		1,181.8		1,071.1
2013		1,055.3		1,095.0		1,159.1		1,051.5
2014		1,099.2		1,053.2		1,118.3		1,008.9
October		1,054.0		1,060.3		1,072.3		1,047.0
November		1,101.1		1,095.1		1,113.1		1,058.8
December		1,099.2		1,104.2		1,118.3		1,088.1
2015 (through April 28)		1,074.5		1,097.8		1,133.9		1,074.5
January		1,090.8		1,088.9		1,108.7		1,077.3
February		1,099.2		1,098.4		1,109.8		1,088.3
March		1,104.2		1,112.6		1,133.9		1,096.5
April (through April 28)		1,074.5		1,090.6		1,109.4		1,074.5

Source: Seoul Money Brokerage Services, Ltd.

(1)

The average rate for each year is calculated as the average of the market average exchange rates on the last business day of each month during the relevant year (or portion thereof). The average rate for a month is calculated as the average of the market average exchange rates on each business day during the relevant month (or portion thereof).

Item 3.B. Capitalization and Indebtedness

Not applicable

Item 3.C. Reasons for Offer and Use of Proceeds

Not applicable

Item 3.D. Risk Factors

You should carefully consider the risks described below.

The global economic downturn may adversely affect our business and performance. The global economic outlook for the near future remains uncertain.

Our business is affected by highly cyclical market demand for our steel products from a number of industries, including the construction, automotive, shipbuilding and electrical appliances industries as well as downstream steel processors, which are sensitive to general conditions in the global economy. Macroeconomic factors, such as the economic growth rate, employment levels, interest rates, inflation rates, exchange rates, commodity prices, demographic trends and fiscal policies of governments can have a significant effect on such industries. From time to time, these industries have experienced significant and sometimes prolonged downturns, which, in turn, have negatively impacted our steel business. The global economic outlook for the near future remains uncertain, particularly in light of concerns regarding the financial difficulties affecting many governments worldwide, including southern Europe and Latin America, as well as the recent slowdown of economic growth in China and other major emerging market economies and political and social instability in various countries in the Middle East and Northern Africa, including Iraq, Syria and Yemen, as well as in Ukraine and Russia.

An actual or anticipated further deterioration of global economic conditions may result in a decline in demand for our products that could have a negative impact on the prices at which they can be sold. In such a case, we will likely face pressure to reduce prices and we may need to rationalize our production capacity and reduce fixed costs. In the past, we have adjusted our crude steel production levels and sales prices in response to sluggish demand from our customers in industries adversely impacted by the deteriorating economic conditions. We recorded crude steel production of 39.7 million tons in 2012, 38.3 million tons in 2013 and 37.7 million tons in 2014. The average unit sales prices for our semi-finished and finished steel products were Won 1,071 thousand per ton in 2012, Won 998 thousand per ton in 2013 and Won 936 thousand per ton in 2014.

We expect that fluctuation in demand for our steel products and trading services to continue to prevail at least in the near future. We may decide to further adjust our future crude steel production or our sales prices on an on-going basis subject to market demand for our products, the production outlook of the global steel industry and global economic conditions in general. In addition, economic downturns in the Korean and global economies could result in market conditions characterized by weaker demand for steel products from a number of industries as well as falling prices for export and import products and reduced trade levels. Deterioration of market conditions may result in changes in assumptions underlying the carrying value of certain assets, which in turn could result in impairment of such assets, including intangible assets such as goodwill. In addition, our ability to reduce expenditures for production facilities and research and development during an industry downturn is limited because of the need to maintain our competitive position. If we are unable to reduce our expenses sufficiently to offset reductions in price and sales volume, our margins will suffer and our business, financial condition and results of operations may be materially and adversely affected.

Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.

We are incorporated in Korea, and a substantial portion of our operations and assets are located in Korea. Korea is our most important market, accounting for 44.6% of our total revenue from steel products produced and sold by us in 2014. Domestic demand for our products is affected by the condition of major steel consuming industries, such as construction, shipbuilding, automotive, electrical appliances and downstream steel processors, and the Korean economy in general. In addition, the trading operations of Daewoo International Corporation (“Daewoo International”), our consolidated subsidiary in which we hold a 60.3% interest, are affected by the general level of trade between Korea and other countries, which in turn tends to fluctuate based on general conditions in the Korean and

global economies. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs, and future growth of the Korean economy is subject to many factors beyond our control, including developments in the global economy.

Due to recent liquidity and credit concerns and volatility in the global financial markets, the value of the Won relative to the Dollar and other foreign currencies and the stock prices of Korean companies have fluctuated significantly in recent years. In particular, there has been increased volatility in light of concerns regarding the financial difficulties affecting many governments worldwide, including southern Europe and Latin America, as well as the recent slowdown of economic growth in China and other major emerging market economies. In addition, political and social instability in various countries in the Middle East and Northern Africa, including Iraq, Syria and Yemen, as well as in Ukraine and Russia, have resulted in an increase in volatility in the global financial markets. Accordingly, the overall prospects for the Korean and global economies in the remainder of 2015 and beyond remain uncertain. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

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

•

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

•

declines in consumer confidence and a slowdown in consumer spending;

•

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

•

continuing adverse conditions in the economies of countries and regions that are important export markets for Korea, such as the United States, Europe, Japan and China, or in emerging market economies in Asia or elsewhere;

•

increasing delinquencies and credit defaults by retail and small- and medium-sized enterprise borrowers;

•

the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China), as well as a slowdown in the growth of China’s economy;

•

the economic impact of any pending or future free trade agreements;

•

social and labor unrest;

•

substantial decreases in the market prices of Korean real estate;

•

a decrease in tax revenues and a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased government budget deficit;

•

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

•

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

•

increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

•

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

•

the occurrence of severe health epidemics in Korea and other parts of the world, including the recent Ebola outbreak;

•

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;

•

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

•

hostilities or political or social tensions involving oil producing countries in the Middle East and North Africa and any material disruption in the global supply of oil or increase in the price of oil;

•

the occurrence of severe earthquakes, tsunamis and other natural disasters in Korea and other parts of the world, particularly in trading partners (such as the March 2011 earthquake in Japan, which also resulted in the release of radioactive materials from a nuclear plant that had been damaged by the earthquake); and

•

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

We rely on export sales for a significant portion of our total sales. Adverse economic and financial developments in Asia in the future may have an adverse effect on demand for our products in Asia and increase our foreign exchange risks.

Our export sales and overseas sales to customers abroad accounted for 55.4% of our total revenue from steel products produced and sold by us in 2014. Our export sales volume to customers in Asia, including China, Japan, Indonesia, Thailand and Malaysia, accounted for 66.7% of our total export sales revenue from steel products produced and exported by us in 2014, and we expect our sales to these countries, especially to China, to remain important in the future. Accordingly, adverse economic and financial developments in these countries may have an adverse effect on demand for our products. Economic weakness in Asia may also adversely affect our sales to the Korean companies that export to the region, especially companies in the construction, shipbuilding, automotive, electrical appliances and downstream steel processing industries. Weaker demand in these countries, combined with addition of new steel production capacity, particularly in China, may also reduce export prices in Dollar terms of our principal products. We attempt to maintain and expand our export sales to generate foreign currency receipts to cover our foreign currency purchases and debt service requirements. Consequently, any decrease in our export sales could also increase our foreign exchange risks.

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

Our consolidated financial statements are prepared from our local currency denominated financial results, assets and liabilities and our subsidiaries around the world, which are then translated into Won. A substantial proportion of our consolidated financial results is accounted for in currencies other than the Won. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies. In 2014, 55.4% of our total revenue from steel products produced and sold by us was in overseas markets outside of Korea. To the extent that we incur costs in one currency and make sales in another, our profit margins may be affected by changes in the exchange rates between the two currencies. Since the currency in which sales are recorded may not be the same as the currency in which expenses are incurred, foreign exchange rate fluctuations may materially affect our results of operations. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes:

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an increase in the amount of Won required for us to make interest and principal payments on our foreign currency-denominated debt;

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an increase in Won terms in the costs of raw materials and equipment that we purchase from overseas sources and a substantial portion of our freight costs, which are denominated primarily in Dollars; and

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foreign exchange translation losses on liabilities, which lower our earnings for accounting purposes.

Appreciation of the Won against major currencies, on the other hand, causes:

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our export products to be less competitive by raising our prices in Dollar, Yen and Renminbi terms; and

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a reduction in net sales and accounts receivables in Won from export sales, which are primarily denominated in Dollars and to a lesser extent in Yen and Renminbi.

We strive to naturally offset our foreign exchange risk by matching foreign currency receivables with our foreign currency payables and our overseas subsidiaries have sought to further mitigate the adverse impact of exchange rate fluctuations by conducting business transactions in the local currency of the respective market in which the transactions occur. In particular, Daewoo International’s exposure to fluctuations in exchange rates, including the Won/Dollar exchange rate, is limited because trading transactions typically involve matched purchase and sale contracts, which result in limited settlement exposure, and because Daewoo International’s contracts with domestic suppliers of products for export and with domestic purchasers of imported products are generally denominated in Dollars. Although the impact of exchange rate fluctuations is partially mitigated by such strategies, we and our subsidiaries, particularly Daewoo International and POSCO Engineering & Construction Co., Ltd. (“POSCO E&C”), also periodically enter into derivative contracts, primarily foreign currency swaps and forward exchange contracts, to further hedge our foreign exchange risks. However, our results of operations have historically been affected by exchange rate fluctuations and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. Because of the larger positive effects of the appreciation of the Won (i.e., the reverse of the negative effects caused by the depreciation of the Won, as discussed above), depreciation of the Won generally has a negative impact on our results of operations.

Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the KRX KOSPI Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRs of cash dividends, if any, paid in Won on shares of common stock represented by the ADSs.

We are dependent on imported raw materials, and significant increases in market prices of essential raw materials could adversely affect our margins and profits.

We purchase substantially all of the principal raw materials we use from sources outside Korea, including iron ore and coal. POSCO imported approximately 53.8 million dry metric tons of iron ore and 28.4 million wet metric tons of coal in 2014. Iron ore is imported primarily from Australia, Brazil and Canada. Coal is imported primarily from Australia, Canada, Russia and the United States. Although we have not experienced significant unanticipated supply disruptions in the past, supply disruptions, which could be caused by political or other events in the countries from which we import these materials, could adversely affect our operations. In addition, we are particularly exposed to increases in the prices of coal, iron ore and nickel, which represent the largest components of our cost of goods sold. The prices of our key raw materials have fluctuated significantly in recent years. For example, the average market price of coal per wet metric ton (benchmark free on board price of Australian premium hard coking coal) was US$209 in 2012, US$159 in 2013 and US$125 in 2014. The average market price of iron ore per dry metric ton (free on board price of Platts Iron Ore index with iron (Fe) 62% content) was US$122 in 2012, US$126 in 2013 and US$88 in 2014.

Our long-term supply contracts generally have terms of three to ten years and provide for periodic price adjustments to the then-market prices. We typically adjust the prices on a quarterly basis and maintain approximately one month of inventory of raw materials. Such price negotiations are driven by various factors, including the global economic outlook, global market prices of raw materials and steel products, supply and demand outlook of raw materials and production costs of raw materials. Typically, globally influenced buyers and sellers of raw materials determine benchmark prices of raw materials, based on which other buyers and sellers negotiate their prices after taking into consideration the quality of raw materials and other factors. In the case of iron ore, if we fail to agree on the quarterly price adjustment within a predetermined deadline, the supplier and we typically agree on the purchase price based on the price formula that reflects the spot market price as well as the quality of iron ore and transportation expense. As of December 31, 2014, 137 million tons of iron ore and 32 million tons of coal remained to be purchased under long-term supply contracts. Future increases in prices of our key raw materials and our inability to pass along such increases to our customers could adversely affect our margins and profits. Increased prices may also cause potential customers to defer purchase of steel products, which would have an adverse effect on our business, financial condition and results of operations.

We operate in the highly competitive steel, trading and constructing industries, and our failure to successfully compete would adversely affect our market position and business.

Steel. The markets for our steel products are highly competitive and we face intense global competition. In recent years, driven in part by strong growth in steel consumption in the developing world, particularly in China, the global steel industry has experienced renewed interest in expansion of steel production capacity. China is the largest steel producing country in the world by a significant margin, with the balance between its domestic production and demand being an important factor in the determination of global steel prices. In addition, the global steel industry has experienced consolidation in the past decade, including through the merger of Mittal and Arcelor in 2006 that created a company with approximately 10% of global steel production capacity. Competition from global steel manufacturers with expanded production capacity such as ArcelorMittal S.A. and new market entrants, especially from China and India, have resulted in significant price competition and may result in declining margins and reductions in revenue. Our larger competitors may use their resources, which may be greater than ours, against us in a variety of ways, including by making additional acquisitions, investing more aggressively in product development and capacity and displacing demand for our export products.

The increased production capacity, combined with a decrease in demand due to the recent slowdown of the global economy, has resulted in production over-capacity in the global steel industry. Production over-capacity in the global steel industry may intensify if the slowdown of the global economy is prolonged or demand from developing countries, particularly from China, does not meet the recent growth in production capacity. Production over-capacity in the global steel industry is likely to:

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reduce export prices in Dollar terms of our principal products, which in turn may reduce our sales prices in Korea;

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increase competition in the Korean market as foreign producers seek to export steel products to Korea as other markets experience a slowdown;

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negatively affect demand for our products abroad and our ability to expand export sales; and

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affect our ability to increase steel production in general.

Steel also competes with other natural and synthetic materials that may be used as steel substitutes, such as aluminum, cement, composites, glass, plastic and wood. Government regulatory

initiatives mandating the use of such materials instead of steel, whether for environmental or other reasons, as well as the development of attractive alternative substitutes for steel products, may reduce demand for steel products and increase competition in the global steel industry.

As part of our strategy to compete in this challenging landscape, we will continue to invest in developing innovative products that offer the greatest potential returns and enhance the overall quality of our products, as well as make additional investments in the development of new manufacturing technologies. However, there is no assurance that we will be able to continue to compete successfully in this economic environment or that the prolonged slowdown of the global economy or production over-capacity will not have a material adverse effect on our business, results of operations or financial condition.

Trading. Daewoo International competes principally with six other Korean general trading companies, each of which is affiliated with a major domestic business group, as well as global trading companies based in other countries. In the domestic market, competition for export transactions on behalf of domestic suppliers and import transactions on behalf of domestic purchasers was limited, as most affiliated general trading companies of large Korean business groups generally relied on affiliate transactions for the bulk of their trading business. However, in recent years, many of these Korean general trading companies have reduced their reliance on their affiliated business group and transactions carried out on behalf of their member companies and instead have generally evolved to focus on segments of the import and export markets in which they have a competitive advantage. As a result, competition among Korean general trading companies in the area of traditional trade has become more intense.

The overseas trading markets in which Daewoo International operates are also highly competitive. Daewoo International’s principal competitors in the overseas trading markets include Korean trading companies that operate in various international markets, as well as foreign trading companies, particularly those based in Japan. As Daewoo International diversifies into businesses other than traditional trading such as natural resources development, it also increasingly competes with other Korean and international companies involved in these businesses. Some of Daewoo International’s competitors may be more experienced and have greater financial resources and pricing flexibility than Daewoo International, as well as more extensive global networks and wider access to customers. There is no assurance that Daewoo International will be able to continue to compete successfully in this economic environment or that the prolonged slowdown of the global economy will not have a material adverse effect on its business, results of operations or financial condition.

Construction. POSCO E&C, our consolidated subsidiary in which we hold an 89.5% interest, operates in the highly competitive construction industry. Competition is based primarily on price, reputation for quality, reliability, punctuality and financial strength of contractors. Intense competition among construction companies may result in, among other things, a decrease in the price POSCO E&C can charge for its services, difficulty in winning bids for construction projects, an increase in construction costs and difficulty in obtaining high-quality contractors and qualified employees.

In Korea, POSCO E&C’s main competition in the construction of residential and non-residential buildings, EPC (or engineering, procurement and construction) projects, urban planning and development projects and civil works projects consists of approximately ten major domestic construction companies, all of which are member companies of other large business groups in Korea and are capable of undertaking larger-scale, higher-value-added projects that offer greater potential returns. A series of measures introduced by the Government over the past few years to regulate housing prices in Korea, as well as increasing popularity of low-bid contracts in civil works project mandates, have contributed to increased competition in the Korean construction industry in recent years.

Competition for new project awards in overseas markets is also intense. In these markets, POSCO E&C faces competition from local construction companies, as well as international

construction companies from other countries, including other major Korean construction companies with overseas operations. Construction companies from other developed countries may be more experienced, have greater financial resources and possess more sophisticated technology than POSCO E&C, while construction companies from developing countries often have the advantage of lower wage costs. Some of these competitors have achieved higher market penetration than POSCO E&C has in specific markets in which it competes, and POSCO E&C may need to accept lower margins in order for it to compete successfully against them. POSCO E&C’s failure to successfully compete in the domestic or overseas construction markets could adversely affect its market position and its results of operations and financial condition.

We may not be able to successfully execute our diversification strategy.

In part to prepare for the eventual maturation of the Korean steel market, our overall strategy includes securing new growth engines by diversifying into new businesses related to our steel operations that we believe will offer greater potential returns, such as participation in EPC projects in the steel sector and natural resources development, as well as entering into new businesses not related to our steel operations such as power generation and alternative energy solutions, production of comprehensive materials such as lithium, nickel, silicon, carbon and magnesium, information and technology consulting services, and automation and system integration engineering services. From time to time, we may selectively acquire or invest in companies to pursue such diversification strategy. For example, in September 2010, we acquired a controlling interest in Daewoo International for Won 3.37 trillion. Daewoo International is a global trading company that primarily engages in trading of steel and raw materials as well as investing in energy and mineral development projects.

The success of the overall diversification strategy will depend, in part, on our ability to realize the growth opportunities and anticipated synergies. The realization of the anticipated benefits depends on numerous factors, some of which are outside our control, including the availability of qualified personnel, establishment of new relationships and expansion of existing relationships with various customers and suppliers, procurement of necessary technology and know-how to engage in such businesses and access to investment capital at reasonable costs. The realization of the anticipated benefits may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. These factors include:

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difficulties in integrating the operations of the acquired business, including information and accounting systems, personnel, policies and procedures, and in reorganizing or reducing overlapping operations, marketing networks and administrative functions, which may require significant amounts of time, financial resources and management attention;

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unforeseen contingent risks or latent liabilities relating to the acquisition that may become apparent in the future;

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difficulties in managing a larger business; and

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loss of key management personnel or customers.

Accordingly, we cannot assure you that our diversification strategy can be completed profitably or that the diversification efforts will not adversely affect our combined business, financial condition and results of operations.

Expansion of our production operations abroad is important to our long-term success, and our limited experience in the operation of our business outside Korea increases the risk that our international expansion efforts will not be successful.

We conduct international trading and construction operations abroad, and our business relies on a global trading network comprised of overseas subsidiaries, branches and representative offices. Although many of our subsidiaries and overseas branches are located in developed countries, we also

operate in numerous countries with developing economies. In addition, we intend to continue to expand our steel production operations internationally by carefully seeking out promising investment opportunities, particularly in China, India, Southeast Asia and Latin America, in part to prepare for the eventual maturation of the Korean steel market. We may enter into joint ventures with foreign steel producers that would enable us to rely on these businesses to conduct our operations, establish local networks and coordinate our sales and marketing efforts abroad. To the extent that we enter into these arrangements, our success will depend in part on the willingness of our partner companies to dedicate sufficient resources to their partnership with us.

In other situations, we may decide to establish manufacturing facilities by ourselves instead of relying on partners. The demand and market acceptance for our products produced abroad are subject to a high level of uncertainty and are substantially dependent upon the market condition of the global steel industry. We cannot assure you that our international expansion plan will be profitable or that we can recoup the costs related to such investments.

Expansion of our trading, construction and production operations abroad requires management attention and resources. In addition, we face additional risks associated with our expansion outside Korea, including:

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challenges caused by distance, language and cultural differences;

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higher costs associated with doing business internationally;

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legal and regulatory restrictions, including foreign exchange controls that might prevent us from repatriating cash earned in countries outside Korea;

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longer payment cycles in some countries;

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credit risk and higher levels of payment fraud;

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currency exchange risks;

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potentially adverse tax consequences;

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political and economic instability; and

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seasonal reductions in business activity during the summer months in some countries.

We have limited insurance coverage and may incur significant losses resulting from operating hazards, product liability claims from customers or business interruptions.

The normal operation of our manufacturing facilities may be interrupted by accidents caused by operating hazards, power supply disruptions and equipment failures, as well as natural disasters. As with other industrial companies, our operations involve the use, handling, generation, processing, storage, transportation and disposal of hazardous materials, which may result in fires, explosions, spills and other unexpected or dangerous accidents causing property damage as well as personal injuries or death. We are also exposed to risks associated with product liability claims in the event that the use of the products we sell results in injury. We maintain property insurance for our property, plant and equipment that we believe to be consistent with market practice in Korea. However, we may not have adequate resources to satisfy a judgment in excess of our insurance coverage in the event of a successful claim against us. Any occurrence of accidents or other events affecting our operations could result in potentially significant monetary damages, diversion of resources, production disruption and delay in delivery of our products, which may have a material adverse effect on our business, financial condition and results of operations.

We may from time to time engage in acquisitions for which we may be required to seek additional sources of capital.

From time to time, we may selectively acquire or invest in companies or businesses that may complement our business. In order to finance these acquisitions, we intend to use cash on hand, funds from operations, issuances of equity and debt securities, and, if necessary, financings from banks and other sources as well as entering into consortiums with financial investors. However, no assurance can be given that we will be able to obtain sufficient financing for such acquisitions or investments on terms commercially acceptable to us or at all. We also cannot assure you that such financings and related debt payment obligations will not have a material adverse impact on our financial condition, results of operations or cash flow.

Further increases in, or new impositions of, anti-dumping, safeguard or countervailing duty proceedings may have an adverse impact on our export sales.

In recent years, we have become subject to a number of anti-dumping duties in the United States, Canada, India, Indonesia, Australia, Thailand, Brazil, Taiwan and Malaysia and safeguard duties in Thailand. We are also subject to a number of on-going anti-dumping and safeguard investigations in Malaysia, the European Union, Indonesia, India and Thailand. In addition, the Mexican government initiated an anti-dumping investigation in October 2012 relating to our exports of cold rolled steel products, and the investigation was suspended until 2018 on condition that we comply with supply undertakings. Our products that are subject to anti-dumping, safeguard or countervailing duty proceedings in the aggregate currently do not account for a material portion of our total sales, and such proceedings have not had a material adverse impact on our business and operations in recent years. However, there can be no assurance that increases in, or new impositions of, anti-dumping duties, safeguard duties, countervailing duties, quotas or tariffs on our exports of products abroad may not have a material adverse impact on our exports in the future. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”

We participate in overseas natural resources exploration, development and production projects abroad, which expose us to various risks.

As part of consortia or through acquisitions of minority interests, we engage in overseas natural resources exploration, development and production projects in various locations, including a gas field exploration project in Myanmar, in which Daewoo International had invested approximately US$ 1,808 million as of December 31, 2014 and plans to make further investments in the future. Daewoo International began recognizing revenue from the Myanmar gas field project starting in November 2013. We may also selectively acquire or invest in companies or businesses that engage in such activities. As part of our efforts to diversify our operations, we intend to continue to expand our operations by carefully seeking out promising exploration, development and production opportunities abroad. To the extent that we enter into these arrangements, our success in these endeavors will depend in part on the willingness of our partner companies to dedicate sufficient resources to their partnership with us.

The demand and market acceptance for such activities abroad are subject to a substantially higher level of uncertainty than our traditional steel business and are substantially dependent upon the market condition of the global natural resources industry as well as the political and social environment of the target countries. The performance of projects in which we participate may be adversely affected by the occurrence of military hostility, political unrest or acts of terrorism. In addition, some of our current exploration, development and production projects involve drilling exploratory wells on properties with no proven amount of natural resource reserves. Although all drilling, whether developmental or exploratory, involves risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of natural resources. We have limited experience in this business, and we cannot assure you that our overseas natural resources exploration, development and

production projects will be profitable, that we will be able to meet the financing requirements for such projects, or that we can recoup the costs related to such investments, which in turn could materially and adversely affect our business, financial condition and results of operations.

We may encounter problems with joint overseas natural resources exploration, development and production projects and large-scale infrastructure projects, which may materially and adversely affect our business.

In recent years, we have begun to focus increasingly on overseas natural resources exploration, development and production projects. We typically pursue these natural resources exploration, development and production projects jointly with consortium partners or through acquisition of minority interests in such projects, and we expect to be involved in other joint projects in the future. We sometimes hold a majority interest in the projects among the consortium partners, but we often lack a controlling interest in the joint projects. Therefore, we may not be able to require that our joint ventures sell assets or return invested capital, make additional capital contributions or take any other action without the vote of at least a majority of our consortium partners. If there are disagreements between our consortium partners and us regarding the business and operations of the joint projects, we cannot assure you that we will be able to resolve them in a manner that will be in our best interests. Certain major decisions, such as selling a stake in the joint project, may require the consent of all other partners. These limitations may adversely affect our ability to obtain the economic and other benefits we seek from participating in these projects.

In addition, our consortium partners may:

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have economic or business interests or goals that are inconsistent with us;

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take actions contrary to our instructions, requests, policies or objectives;

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be unable or unwilling to fulfill their obligations;

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have financial difficulties; or

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have disputes with us as to their rights, responsibilities and obligations.

Any of these and other factors may have a material adverse effect on the performance of our joint projects and expose us to a number of risks, including the risk that the partners may be incapable of providing the required financial support to the partnerships and the risk that the partners may not be able to fulfill their other obligations, resulting in disputes not only between our partners and us, but also between the joint ventures and their customers. Such a material adverse effect on the performance of our joint projects may in turn materially and adversely affect our business, results of operations and financial condition.

Cyclical fluctuations based on macroeconomic factors may adversely affect POSCO E&C’s business and performance.

In order to complement our steel operations, we engage in engineering and construction activities through POSCO E&C, an 89.5%-owned subsidiary. The construction segment, which accounted for approximately 12.5% of our consolidated sales in 2014 after adjusting for inter-company sales and not taking into account the basis difference described in Note 42 of Notes to Consolidated Financial Statements, is highly cyclical and tends to fluctuate based on macroeconomic factors, such as consumer confidence and income, employment levels, interest rates, inflation rates, demographic trends and policies of the Government. Although we believe that POSCO E&C’s strategy of focusing on high-value-added plant construction and urban planning and development projects such as Songdo New City has enabled it to be exposed to a lesser degree to general economic conditions in Korea in comparison to some of its domestic competitors, our construction revenues have fluctuated in the past depending on the level of domestic construction activity including new construction orders. POSCO

E&C’s construction operations could suffer in the future in the event of a general downturn in the construction market resulting in weaker demand, which could adversely affect POSCO E&C’s business, results of operations or financial condition.

Many of POSCO E&C’s domestic and overseas construction projects are on a fixed-price basis, which could result in losses for us in the event that unforeseen additional expenses arise with respect to the project.

Many of POSCO E&C’s domestic and overseas construction projects are carried out on a fixed-price basis according to a predetermined timetable, pursuant to the terms of a fixed-price contract. Under such fixed-price contracts, POSCO E&C retains all cost savings on completed contracts but is also liable for the full amount of all cost overruns and may be required to pay damages for late delivery. The pricing of fixed-price contracts is crucial to POSCO E&C’s profitability, as is its ability to quantify risks to be borne by it and to provide for contingencies in the contract accordingly.

POSCO E&C attempts to anticipate costs of labor, raw materials, parts and components in its bids on fixed-price contracts. However, the costs incurred and gross profits realized on a fixed-price contract may vary from its estimates due to factors such as:

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unanticipated variations in labor and equipment productivity over the term of a contract;

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unanticipated increases in labor, raw material, parts and components, subcontracting and overhead costs, including as a result of bad weather;

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delivery delays and corrective measures for poor workmanship; and

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errors in estimates and bidding.

If unforeseen additional expenses arise over the course of a construction project, such expenses are usually borne by POSCO E&C, and its profit from the project will be correspondingly reduced or eliminated. If POSCO E&C experiences significant unforeseen additional expenses with respect to its fixed price projects, it may incur losses on such projects, which could have a material adverse effect on its financial condition and results of operations.

POSCO E&C’s domestic residential property business is highly dependent on the real estate market in Korea.

The performance of POSCO E&C’s domestic residential property business is highly dependent on the general condition of the real estate market in Korea. The construction industry in Korea is experiencing a downturn due to excessive investment in recent years in residential property development projects, stagnation of real property prices and reduced demand for residential property, especially in areas outside of Seoul. In addition, as liquidity and credit concerns and volatility in the global financial markets increased significantly starting in September 2008, there has been a general decline in the willingness by banks and other financial institutions in Korea to engage in project financing and other lending activities to construction companies, which may adversely impact POSCO E&C’s ability to meet its desired funding needs. The Government has taken measures to support the Korean construction industry, including easing of regulations imposed on redevelopment of apartment buildings and resale restrictions in the metropolitan areas, as well as reductions in property taxes. Although the Korean real estate market temporarily recovered in the second half of 2009 and into 2010, declines in demand and price took place in the Korean real estate market in recent years due to the downturn of the domestic economic cycle and financial risk in Europe, and the overall prospects for the Korean real estate market in 2015 and beyond remain uncertain.

We are subject to environmental regulations, and our operations could expose us to substantial liabilities.

We are subject to national and local environmental laws and regulations, including increasing pressure to reduce emission of carbon dioxide relating to our manufacturing process, and our steel manufacturing and construction operations could expose us to risk of substantial liability relating to environmental or health and safety issues, such as those resulting from discharge of pollutants and carbon dioxide into the environment, the handling, storage and disposal of solid or hazardous materials or wastes and the investigation and remediation of contaminated sites. We may be responsible for the investigation and remediation of environmental conditions at currently and formerly operated manufacturing or construction sites. For example, we recognized provision expenses of Won 89 billion in 2014 related to restoration costs of contaminated land near our magnesium plant in Gangneung, Korea. We may also be subject to associated liabilities, including liabilities for natural resource damage, third party property damage or personal injury resulting from lawsuits brought by the Government or private litigants. In the course of our operations, hazardous wastes may be generated at third party-owned or operated sites, and hazardous wastes may be disposed of or treated at third party-owned or operated disposal sites. If those sites become contaminated, we could also be held responsible for the cost of investigation and remediation of such sites, for any associated natural resource damage, and for civil or criminal fines or penalties.

Failure to protect our intellectual property rights could impair our competitiveness and harm our business and future prospects.

We believe that developing new steel manufacturing technologies that can be differentiated from those of our competitors, such as FINEX, strip casting and silicon steel manufacturing technologies, is critical to the success of our business. We take active measures to obtain protection of our intellectual property by obtaining patents and undertaking monitoring activities in our major markets. However, we cannot assure you that the measures we are taking will effectively deter competitors from improper use of our proprietary technologies. Our competitors may misappropriate our intellectual property, disputes as to ownership of intellectual property may arise and our intellectual property may otherwise become known or independently developed by our competitors. Any failure to protect our intellectual property could impair our competitiveness and harm our business and future prospects.

We rely on trade secrets and other unpatented proprietary know-how to maintain our competitive position, and unauthorized disclosure of our trade secrets or other unpatented proprietary know-how could negatively affect our business.

We rely on trade secrets and unpatented proprietary know-how and information. We enter into confidentiality agreements with each of our employees and consultants upon the commencement of an employment or consulting relationship. These agreements generally provide that all inventions, ideas, discoveries, improvements and patentable material made or conceived by the individual arising out of the employment or consulting relationship and all confidential information developed or made known to the individual during the term of the relationship is our exclusive property. We cannot assure the enforceability of these types of agreements, or that they will not be breached. We also cannot be certain that we will have adequate remedies for any breach. The disclosure of our trade secrets or other know-how as a result of such a breach could adversely affect our business.

We face the risk of litigation proceedings relating to infringement of intellectual property rights of third parties, which, if determined adversely to us, could cause us to lose significant rights, pay significant damage awards or suspend the sale of certain products.

Our success depends largely on our ability to develop and use our technology and know-how in a proprietary manner without infringing the intellectual property rights of third parties. The validity and

scope of claims relating to technology and patents involve complex scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. In addition, because patent applications in many jurisdictions are kept confidential for an extended period before they are published, we may be unaware of other persons’ pending patent applications that relate to our products or manufacturing processes. Accordingly, we face the risk of litigation proceedings relating to infringement of intellectual property rights of third parties. See “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings.”

The plaintiffs in actions relating to infringement of intellectual property rights typically seek injunctions and substantial damages. Although patent and other intellectual property disputes are often settled through licensing or similar arrangements, there can be no assurance that such licenses can be obtained on acceptable terms or at all. Accordingly, regardless of the scope or validity of disputed patents or the merits of any patent infringement claims by potential or actual litigants, we may have to engage in protracted litigation. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings could subject us to pay substantial damages to third parties, require us to seek licenses from third parties and pay ongoing royalties or redesign certain products, or subject us to injunctions prohibiting the manufacture and sale of our products or the use of technologies in certain jurisdictions. The occurrence of any of the foregoing could have a material adverse effect on our reputation, business, financial condition and results of operations.

We may be exposed to potential claims for unpaid wages and become subject to additional labor costs arising from the Supreme Court of Korea’s interpretation of ordinary wages.

Under the Labor Standards Act, an employee is legally entitled to “ordinary wages.” Under the guidelines previously issued by the Ministry of Employment and Labor (formerly the Ministry of Labor), ordinary wages include base salary and certain fixed monthly allowances for overtime work performed during night shifts and holidays. Prior to the Supreme Court of Korea’s decision described below, we and other companies in Korea had interpreted these guidelines as excluding fixed bonuses that are paid other than on a monthly basis (such as bi-monthly, quarterly or biannually paid bonuses) from the scope of ordinary wages.

On December 18, 2013, the Supreme Court of Korea ruled that regularly paid bonuses, including those that are paid other than on a monthly basis, shall be deemed ordinary wages if these bonuses are paid “regularly” and “uniformly” on a “fixed basis” notwithstanding differential amounts based on seniority. The Supreme Court of Korea ruled that if regular bonus payments are limited to only those working for the employer on a specific date, such bonuses are not fixed and thus do not constitute part of ordinary wage. In addition, under this decision, any collective bargaining agreement or labor-management agreement that attempts to exclude such regular bonuses from ordinary wage will be deemed void for violation of the mandatory provisions of Korean law. However, the Supreme Court of Korea further ruled that an employee’s claim for underpayments under the expanded scope of ordinary wages for the past three years within the statute of limitations may be denied based on principles of good faith if (i) there is an agreement between the employer and employees that the regular bonus shall be excluded from ordinary wage in determining the total amount of wage, (ii) such claim results in further wage payments that far exceed the level of total amount of wage agreed between the employer and employees, and (iii) such claim would cause an unexpected financial burden to the employer leading to material managerial difficulty or a threat to the employer’s existence. The principles of good faith, however, do not apply to an agreement on wages entered into between the employer and employees after December 18, 2013, the date of the above decision of the Supreme Court of Korea.

In light of the Supreme Court of Korea’s decision above, the Ministry of Employment and Labor published its new guidelines (the “Guidelines”) on January 23, 2014. According to the Guidelines, the

Government excludes, from ordinary wage, regular bonuses contingent on employment on a specific date. Based on the Supreme Court of Korea’s decision and the Guidelines, we believe that regular bonuses that we have paid to our employees are likely to be excluded from ordinary wage since we have paid regular bonuses to only those working for us on the initial date of payment calculation, the 15th day of each month. However, the Supreme Court decision may result in additional labor costs to us in the form of additional payments under the expanded scope of ordinary wages applicable in the past three years as well as to be incurred in the future, which may have an adverse effect on our financial condition and results of operations.

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

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-il’s third son, Kim Jong-eun, has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain.

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

•

In April 2013, North Korea blocked access to the inter-Korean industrial complex in its border city of Gaeseong to South Koreans, while the U.S. deployed nuclear-capable stealth bombers and destroyers to Korean air and sea space.

•

In March 2013, North Korea stated that it had entered “a state of war” with Korea, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Korea-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests.

•

North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council unanimously passed resolutions that condemned North Korea for the nuclear tests and expanded sanctions against North Korea, most recently in March 2013.

•

In December 2012, North Korea launched a satellite into orbit using a long-range rocket, despite concerns in the international community that such a launch would be in violation of the agreement with the United States as well as the United Nations Security Council resolutions that prohibit North Korea from conducting launches that use ballistic missile technology.

•

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges that may aggravate social and political pressures within North Korea. There can be no assurance that the level of tensions affecting the

Korean peninsula will not escalate in the future. Any further increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on the Korean economy and on our business, results of operations and financial condition and the market value of our common shares and ADSs.

If you surrender your ADRs to withdraw shares of our common stock, you may not be allowed to deposit the shares again to obtain ADRs.

Under the deposit agreement, holders of shares of our common stock may deposit those shares with the ADR depositary’s custodian in Korea and obtain ADRs, and holders of ADRs may surrender ADRs to the ADR depositary and receive shares of our common stock. However, under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit that exceeds the difference between (i) the aggregate number of shares deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (ii) the number of shares on deposit with the depositary bank at the time of such proposed deposit. It is possible that we may not give the consent. As a result, if you surrender ADRs and withdraw shares of common stock, you may not be able to deposit the shares again to obtain ADRs. See “Item 10. Additional Information — Item 10.D. Exchange Controls.”

You may not be able to exercise preemptive rights for additional shares of common stock and may suffer dilution of your equity interest in us.

The Commercial Code and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we issue new shares to persons other than our shareholders (See “Item 10.B. Memorandum and Articles of Association — Preemptive Rights and Issuance of Additional Shares”), a holder of our ADSs will experience dilution of such holding. If none of these exceptions is available, we will be required to grant preemptive rights when issuing additional common shares under Korean law. Under the deposit agreement governing the ADSs, if we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the ADR depositary, after consultation with us, may make the rights available to you or use reasonable efforts to dispose of the rights on your behalf and make the net proceeds available to you. The ADR depositary, however, is not required to make available to you any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

•

a registration statement filed by us under the Securities Act is in effect with respect to those shares; or

•

the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.

We are under no obligation to file any registration statement under the Securities Act to enable you to exercise preemptive rights in respect of the common shares underlying the ADSs, and we cannot assure you that any registration statement would be filed or that an exemption from the registration requirement under the Securities Act would be available. Accordingly, if a registration statement is required for you to exercise preemptive rights but is not filed by us, you will not be able to exercise your preemptive rights for additional shares and may suffer dilution of your equity interest in us.

U.S. investors may have difficulty enforcing civil liabilities against us and our directors and senior management.

We are incorporated in Korea with our principal executive offices located in Seoul. The majority of our directors and senior management are residents of jurisdictions outside the United States, and

the majority of our assets and the assets of such persons are located outside the United States. As a result, U.S. investors may find it difficult to effect service of process within the United States upon us or such persons or to enforce outside the United States judgments obtained against us or such persons in U.S. courts, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to enforce in U.S. courts judgments obtained against us or such persons in courts in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for a U.S. investor to bring an action in a Korean court predicated upon the civil liability provisions of the U.S. federal securities laws against our directors and senior management and non-U.S. experts named in this annual report.

We could be adversely affected if the U.S. government were to determine that our affiliate’s Iran-related business activities are sanctionable under the U.S. Iranian sanction laws and regulations.

We acquired a controlling interest in Sungjin Geotec Co., Ltd. (“Sungjin Geotec”), a manufacturer of specialized equipment used in the power and energy industries in May 2010. Sungjin Geotec merged with POSCO Plantec Co., Ltd. (“POSCO Plantec”) in July 2013, and we currently hold a 73.9% interest in POSCO Plantec. Prior to the merger, Sungjin Geotec entered into contracts with various suppliers to supply equipment for the development of natural gas fields in Iran, including natural gas fields located in South Pars that is led by Pars Oil and Gas Company, a subsidiary of National Iranian Oil Company. Sungjin Geotec recognized revenues of approximately Won 27 billion in 2010, Won 240 billion in 2011 and Won 134 billion in 2012, and net profits of approximately Won 1 billion in 2010, Won 15 billion in 2011 and Won 25 billion in 2012 related to such activities. Sungjin Geotec has completed or terminated all of its remaining outstanding supply contracts to sell equipment for the development of natural gas fields in Iran, and neither Sungjin Geotec nor POSCO Plantec (subsequent to the merger with Sungjin Geotec in July 2013) recognized any revenues nor profits from such activities in 2013 and 2014. POSCO Plantec does not plan to engage in any sale of equipment in Iran related to the country’s development of petroleum resources.

In July 2010, the United States adopted legislation that expands U.S. economic sanctions against foreign companies doing business with Iran in certain sectors. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (the “CISADA”) expands the scope of sanctionable activities by, among other things, broadening the definition of “investment” under the Iran Sanctions Act (the “ISA”) arguably to include the supply of goods for use in petroleum and gas production. The CISADA also expands the severity of potential sanctions available under the ISA and imposes mandatory investigation and reporting requirements designed to increase the likelihood of enforcement. The CISADA requires the imposition of sanctions against parties found by the U.S. administration, following an investigation, to have engaged in conduct sanctionable under the ISA, subject to certain waiver provisions and exceptions.

Under the ISA, as amended, sanctions can also be imposed against a company that has actual knowledge of, or should have known of, sanctionable conduct engaged in by another company that it owns or controls. A range of sanctions may be imposed on companies that engage in sanctionable activities, including among other things the blocking of any property subject to U.S. jurisdiction in which the sanctioned company has an interest, which could include a prohibition on transactions or dealings involving securities of the sanctioned company. By its terms, the CISADA is applicable to certain investments in Iran that commenced on or after July 1, 2010.

There can be no assurance that Sungjin Geotec’s Iran-related business activities did not constitute sanctionable activities or that we will not be subjected to sanctions under the ISA as amended by the CISADA. Our business and reputation could be adversely affected if the U.S. government were to determine that Sungjin Geotec’s Iran-related business activities constituted sanctionable activity attributable to us. Investors in our securities may also be adversely affected if we

are sanctioned under the CISADA or if their investment in our securities is restricted under any sanctions regimes with which the investors are required to comply. As noted above, sanctions under the ISA could include the blocking of any property in which we have an interest, which would effectively prohibit all U.S. persons from receiving any payments from us, or otherwise acquiring, holding, withholding, using, transferring, withdrawing, transporting, importing, or exporting any property in which we have any interest.

We expect to continue operations and investments relating to countries targeted by United States and European Union economic sanctions.

The U.S. Department of the Treasury’s Office of Foreign Assets Control, or “OFAC,” enforces certain laws and regulations (“OFAC Sanctions”) that impose restrictions upon U.S. persons and, in some instances, foreign entities owned or controlled by U.S. persons, with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of OFAC Sanctions (“U.S. Sanctions Targets”). U.S. persons are also generally strictly prohibited from facilitating such activities or transactions. Similarly, the European Union enforces certain laws and regulations (“E.U. Sanctions”) that impose restrictions upon nationals of E.U. member states, persons located within E.U. member states, entities incorporated or constituted under the law of an E.U. member state, or business conducted in whole or in part in E.U. member states with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of E.U. Sanctions (“E.U. Sanctions Targets” and together with U.S. Sanctions Targets, “Sanctions Targets”). E.U. persons are also generally prohibited from activities that promote such activities or transactions.

We engage in limited business activities in countries that are deemed Sanctions Targets, including Cuba, Iran, Syria and Sudan. We produce and export, typically through our sales subsidiaries, steel products to such countries, including automotive steel sheets and other steel materials to Iranian entities. Our subsidiaries also engage in limited business activities in countries that are deemed Sanctions Targets. In particular, Daewoo International, a global trading company in which we hold a 60.3% interest, engages in the trading of steel, raw materials and other items with entities in countries that are deemed Sanctions Targets, including Iran and Sudan. We believe that such activities and investments do not involve any U.S. goods or services. Our activities and investments in Cuba, Iran, Syria and Sudan accounted for approximately 1.4% of our consolidated revenues in 2012, 0.2% in 2013 and 0.1% in 2014.

We expect to continue to engage in business activities and make investments in countries that are deemed Sanctions Targets over the foreseeable future. Although we believe that OFAC Sanctions under their current terms are not applicable to our current activities, our reputation may be adversely affected, some of our U.S. investors may be required to divest their investments in us under the laws of certain U.S. states or under internal investment policies or may decide for reputational reasons to divest such investments. We are aware of initiatives by U.S. governmental entities and U.S. institutional investors, such as pension funds, to adopt or consider adopting laws, regulations, or policies prohibiting transactions with or investment in, or requiring divestment from, entities doing business with countries identified as state sponsors of terrorism. We cannot assure you that the foregoing will not occur or that such occurrence will not have a material adverse effect on the value of our securities.

This annual report contains “forward-looking statements” that are subject to various risks and uncertainties.

This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations

concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

Item 4. Information on the Company

Item 4.A. History and Development of the Company

We were established by the Government on April 1, 1968, under the Commercial Code, to manufacture and distribute steel rolled products and plates in the domestic and overseas markets. The Government owned more than 70% of our equity until 1988, when the Government reduced its ownership of our common stock to 35% through a public offering and listing our shares on the KRX KOSPI Market. In December 1998, the Government sold all of our common stock it owned directly, and The Korea Development Bank completed the sale of our shares that it owned in September 2000. The Government no longer holds any direct interest in us, and our outstanding common stock is currently held by individuals and institutions. See “Item 7. Major Shareholders and Related Party Transactions — Item 7A. Major Stockholders.”

Our legal and commercial name is POSCO. Our principal executive offices are located at POSCO Center, 440 Teheran-ro, Gangnam-gu, Seoul, Korea 135-777, and our telephone number is (822) 3457-0114.

Item 4.B. Business Overview

The Company

We are the largest fully integrated steel producer in Korea, and one of the largest steel producers in the world, based on annual crude steel production. We produced approximately 37.7 million tons of crude steel in 2014 and approximately 38.3 million tons in 2013, a substantial portion of which was produced at Pohang Works and Gwangyang Works. As of December 31, 2014, Pohang Works had 17.4 million tons of annual crude steel and stainless steel production capacity, and Gwangyang Works had an annual crude steel production capacity of 20.8 million tons. We believe Pohang Works and Gwangyang Works are two of the most technologically advanced integrated steel facilities in the world. We manufacture and sell a diversified line of steel products, including cold rolled and hot rolled products, stainless steel products, plates, wire rods and silicon steel sheets, and we are able to meet a broad range of customer needs from manufacturing industries that consume steel, including automotive, shipbuilding, home appliance, engineering and machinery industries.

We sell primarily to the Korean market. Domestic sales accounted for 44.6% of our total revenue from steel products produced and sold by us in 2014 and 48.8% in 2013. On a non-consolidated basis, we believe that we had an overall market share of approximately 41% of the total sales volume of steel products sold in Korea in 2014 and approximately 43% in 2013. Our export sales and overseas sales to customers abroad accounted for 55.4% of our total revenue from steel products produced and sold by us in 2014 and 51.2% in 2013. Our major export market is Asia, with Asia other than China and Japan accounting for 28.3%, China accounting for 26.6%, and Japan accounting for 11.7% of our total steel export revenue from steel products produced and exported by us in 2014 and China accounting for 30.2%, Asia other than China and Japan accounting for 27.7%, and Japan accounting for 12.5% of our total steel export revenue from steel products produced and exported by us in 2013.

We also engage in businesses that complement our steel manufacturing operations as well as carefully seek out promising investment opportunities to diversify our businesses both vertically and horizontally, in part to prepare for the eventual maturation of the Korean steel market. POSCO E&C, our consolidated subsidiary in which we hold an 89.5% interest, is one of the leading engineering and construction companies in Korea that primarily engages in the planning, design and construction of industrial plants and architectural works and civil engineering. Daewoo International, our consolidated subsidiary in which we hold a 60.3% interest, is a global trading company that primarily engages in trading of steel and raw materials as well as investing in energy and mineral development projects throughout the world. POSCO Energy Corporation, our wholly-owned consolidated subsidiary in which we hold an 89.0% interest, is the largest private power generation company in Korea.

We generated revenue of Won 64,759 billion and profit of Won 564 billion in 2014, compared to revenue of Won 61,766 billion and profit of Won 1,349 billion in 2013. We had total assets of Won 85,844 billion and total equity of Won 45,257 billion as of December 31, 2014, compared to total assets of Won 84,841 billion and total equity of Won 45,781 billion as of December 31, 2013.

Business Strategy

Leveraging on our success during the past four decades, our goal is to strengthen our position as one of the leading steel producers in the world through focusing on core technologies, further solidifying our market leading position in Korea, and pursuing operational efficiencies to increase our margins in markets abroad. In order to compete effectively in the dynamic global market environment driven by emerging economies and increasing demand for more environmentally friendly products, we are committed to leveraging our competitive advantages and further enhancing our leadership positions. We believe that our proprietary technologies and expertise in developing environmentally-friendly steel production facilities, ability to independently construct such facilities, and know-how in their efficient operation and management enables us to develop differentiated steel products at a highly competitive cost structure. We also plan to selectively explore opportunities in growth industries that are integral to our overall business model, and we have identified steel, comprehensive materials, energy and new businesses as our key areas of focus.

We seek to strengthen our competitiveness and pursue growth through the following core business strategies:

Seek Opportunities to Further Strengthen Our Position in Global Markets as well as Selectively Expand Our Production Infrastructure Abroad

We plan to pursue higher margin businesses in various key markets abroad as well as further strengthen our competitiveness in new markets that we have entered in recent years. In China, which is showing signs of slowdown in economic growth and oversupply of steel products, we plan to focus on higher-margin products and pursue strategic entry or exit of various segments and regions. In Southeast Asia, we plan to pursue stabilization of our production operations in Indonesia as well as focus on increasing our market share of key products in Thailand, particularly for the automotive industry. We also plan to pursue differentiated strategies in each of our other key regions.

Drawing on our expertise in steel production, we also plan to carefully seek out promising business opportunities abroad to expand our production infrastructure. We seek out promising investment opportunities abroad, primarily in India and Southeast Asia. We believe that India and Southeast Asia continue to offer substantial growth opportunities, and we plan to selectively seek investment opportunities to construct steel production facilities.

Maintain Technology Leadership in Steel Manufacturing

As part of our strategy, we have identified core products that we plan to further develop, such as premium automotive steel sheets, silicon steel and API-grade steel, and we will continue to invest in developing innovative products that offer the greatest potential returns and enhance the overall quality

of our products. In order to increase our competitiveness and the proportion of our sales of higher margin, higher value-added products, we plan to make additional investments in the development of new manufacturing technologies and upgrade our facilities through continued modernization and rationalization.

We will continue to refine FINEX, a low cost, environmentally friendly steel manufacturing process that optimizes our production capacity by utilizing non-agglomerated iron ore fines and using non-coking coal as an energy source and a reducing agent. We believe that FINEX offers considerable environmental and economic advantages through elimination of major sources of pollution such as sintering and coking plants, as well as reducing operating and raw material costs. In recent years, we have developed proprietary manufacturing technology using a compact endless cast rolling mill that combines the FINEX process with an advanced basic oxygen steelmaking process that uses more scrap in place of pig iron, which enables us to manufacture products at a highly competitive cost structure with lower carbon dioxide emission. Our compact endless cast rolling mill directly casts coils from liquid steel and uses a rolling process that rolls hot rolled coils up to 40 slabs at a time.

Diversify into Production of Comprehensive Materials

We plan to leverage our expertise in production of various steel-applied materials and venture into the fast-growing and high value-added business of producing environmentally friendly comprehensive materials. We have identified lithium and nickel as our main investment areas. Demand for lithium, which is used as an anode material in lithium ion batteries, has been increasing in recent years, and we have developed proprietary technology to extract lithium from its brine in approximately one month compared to twelve months through conventional production processes. We believe we are also able to leverage our expertise in production of crude steel to cost-effective production of carbon and magnesium, which have wide application of industrial use.

Further Develop Our Capabilities to become an Integrated Provider of Energy Solutions

We plan to pursue strategic synergies with our member companies of the POSCO Group to further strengthen our capabilities in the energy industry. POSCO Energy Corporation is the largest private power generation company in Korea. POSCO E&C is one of the leading engineering and construction companies in Korea with expertise in the design and construction of power plants. Daewoo International engages in various natural resources procurement and energy development projects around the world. In order to secure adequate procurement of principal raw materials, we have also invested in and will continue to explore additional investment opportunities in various raw material development projects abroad, as well as enter into long-term contracts with leading suppliers of iron ore, coal and nickel, principally in Australia and Brazil. We believe that the energy industry is a sustainable business area that offers us attractive opportunities. We will continue to seek opportunities in natural resources development and further expand our power generation and alternative energy solutions businesses, as well as pursue participation in additional power plant projects abroad.

Pursue Cost-Cutting through Operational and Process Innovations

We seek to achieve cost reductions in this era of increasing raw material costs through our company wide process for innovation and enhancing efficiency of operations. We believe that strategic cost cutting measures through utilization of efficient production methods and management discipline will strengthen our corporate competitiveness. We will also strive to invest more in human resources development to nurture employees who are capable of working in the global environment.

Selectively Seek Opportunities in Growth Industries

We will continue to selectively seek opportunities in growth industries to diversify our business both vertically and horizontally. Through POSCO ICT Co., Ltd., a 65.4%-owned subsidiary, we engage in information and technology consulting services as well as automation and system integration engineering services. POSCO E&C is one of the leading engineering and construction companies in

Korea that primarily engages in the planning, design and construction of industrial plants and architectural works and civil engineering. On September 20, 2010, we acquired a controlling interest in Daewoo International Corporation for Won 3.37 trillion. Daewoo International is a global trading company that primarily engages in trading of steel and raw materials as well as investing in energy development projects. We will continue to selectively seek opportunities to identify new growth engines and diversify our operations.

Major Products

We manufacture and sell a broad line of steel products, including the following:

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cold rolled products;

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hot rolled products;

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stainless steel products;

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plates;

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wire rods; and

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silicon steel sheets.

The table below sets out our revenue of steel products produced by us and directly sold to external customers, which are recognized as external revenue of the Steel Segment, by major steel product categories for the periods indicated. Such amounts do not include steel products produced by us and sold to our consolidated subsidiaries.


	For the Year Ended December 31,
	2012					2013					2014
Steel Products	Billions of Won		%			Billions of Won		%			Billions of Won		%
Cold rolled products	￦	11,421		32.4	%	￦	9,879		31.1	%	￦	9,336		29.3	%
Hot rolled products		6,291		17.8			5,134		16.1			5,346		16.8
Stainless steel products		7,305		20.7			7,425		23.4			6,830		21.5
Plates		3,620		10.3			3,266		10.3			3,519		11.1
Wire rods		1,906		5.4			1,867		5.9			2,160		6.8
Silicon steel sheets		1,556		4.4			1,476		4.6			1,267		4.0

Sub-total		32,099		91.0			29,047		91.4			28,458		89.4

Others		3,160		9.0			2,748		8.6			3,384		10.6

Total	￦	35,259		100.0	%	￦	31,795		100.0	%	￦	31,842		100.0	%

The table below sets out our sales volume of the principal categories of steel products produced by us and directly sold to external customers, which are recognized as external sales volume of the Steel Segment, by major steel product categories for the periods indicated. Such amounts do not include steel products produced by us and sold to our consolidated subsidiaries.


	For the Year Ended December 31,
	2012					2013					2014
Steel Products	Thousands of Tons		%			Thousands of Tons		%			Thousands of Tons		%
Cold rolled products		11,863		39.6	%		11,915		40.9	%		11,881		39.1	%
Hot rolled products		8,540		28.5			7,589		26.1			7,783		25.6
Stainless steel products		2,760		9.2			2,883		9.9			2,650		8.7
Plates		4,145		13.8			3,849		13.2			4,638		15.3
Wire rods		1,531		5.1			1,735		6.0			2,400		7.9
Silicon steel sheets		1,143		3.8			1,134		3.9			1,038		3.4

Total ⁽¹⁾		29,983		100.0	%		29,104		100.0	%		30,390		100.0	%

(1)	Not including sales volume of steel products categorized under “others.”

In addition to steel products produced by us and directly sold to external customers, we engage our consolidated sales subsidiaries (including Daewoo International) to sell our steel products produced by us. Our revenue from steel products produced by us and sold to our consolidated sales subsidiaries that in turn sold them to their external customers amounted to Won 10,344 billion in 2012, Won 8,391 billion in 2013 and Won 9,176 billion in 2014. Sales of such steel products by our consolidated sales subsidiaries to external customers are recognized as external revenue of the Trading Segment.

Cold Rolled Products

Cold rolled coils and further refined galvanized cold rolled products are used mainly in the automotive industry to produce car body panels. Other users include the household goods, electrical appliances, engineering and metal goods industries.

Our deliveries of cold rolled products produced by us and directly sold to external customers amounted to 11.9 million tons in 2014, representing 39.1% of our total sales volume of principal steel products produced by us and directly sold to external customers.

Cold rolled products constitute our largest product category in terms of sales volume and revenue from steel products produced by us and directly sold to external customers. In 2014, our sales volume of cold rolled products produced by us and directly sold to external customers remained relatively unchanged compared to our sales volume in 2013.

Including sales of cold rolled products produced by us and sold through our consolidated sales subsidiaries in addition to cold rolled products produced by us and directly sold to external customers, we had a domestic market share for cold rolled products of approximately 42% on a non-consolidated basis.

Hot Rolled Products

Hot rolled coils and sheets have many different industrial applications. They are used to manufacture structural steel used in the construction of buildings, industrial pipes and tanks, and automobile chassis. Hot rolled coil is also manufactured in a wide range of widths and thickness as the feedstock for higher value-added products such as cold rolled products and silicon steel sheets.

Our deliveries of hot rolled products produced by us and directly sold to external customers amounted to 7.8 million tons in 2014, representing 25.6% of our total sales volume of principal steel products produced by us and directly sold to external customers. The largest customers of our hot rolled products are downstream steelmakers in Korea which use the products to manufacture pipes and cold rolled products.

Hot rolled products constitute our second largest product category in terms of sales volume and third largest product category in terms of revenue from steel products produced by us and directly sold to external customers. In 2014, our sales volume of hot rolled products produced by us and directly sold to external customers increased by 2.6% compared to 2013 primarily due to the commencement of production by our no. 4 hot rolling mill at Gwangyang Works in July 2014.

Including sales of hot rolled products produced by us and sold through our consolidated sales subsidiaries in addition to hot rolled products produced by us and directly sold to external customers, we had a domestic market share for hot rolled products of approximately 38% on a non-consolidated basis.

Stainless Steel Products

Stainless steel products are used to manufacture household goods and are also used by the chemical industry, paper mills, the aviation industry, the automotive industry, the construction industry and the food processing industry.

Our deliveries of stainless steel products produced by us and directly sold to external customers amounted to 2.7 million tons in 2014, representing 8.7% of our total sales volume of principal steel products produced by us and directly sold to external customers.

Stainless steel products constitute our second largest product category in terms of revenue from steel products produced by us and directly sold to external customers. Although sales of stainless steel products accounted for only 8.7% of total sales volume of the principal steel products produced by us and directly sold to external customers in 2014, they represented 21.5% of our total revenue from such steel products in 2014. Our sales volume of stainless steel products produced by us and directly sold to external customers decreased by 8.1% in 2014 compared to 2013 due to the rationalization of a stainless cold-rolling mill at Pohang Works in 2014.

Including sales of stainless steel products produced by us and sold through our consolidated sales subsidiaries in addition to stainless steel products produced by us and directly sold to external customers, we had a domestic market share for stainless steel products of approximately 38% on a non-consolidated basis.

Plates

Plates are used in shipbuilding, structural steelwork, offshore oil and gas production, power generation, mining, and the manufacture of earth-moving and mechanical handling equipment, boiler and pressure vessels and other industrial machinery.

Our deliveries of plates produced by us and directly sold to external customers amounted to 4.6 million tons in 2014, representing 15.3% of our total sales volume of principal steel products produced by us and directly sold to external customers. The Korean shipbuilding industry, which uses plates to manufacture chemical tankers, rigs, bulk carriers and containers, and the construction industry are our largest customers of plates.

In 2014, our sales volume of plates produced by us and directly sold to external customers increased by 20.5% compared to 2013 due to an increase in sales to domestic shipbuilding companies and an increase in demand from the energy industry.

Including sales of plates produced by us and sold through our consolidated sales subsidiaries in addition to plates produced by us and directly sold to external customers, we had a domestic market share for plates of approximately 37% on a non-consolidated basis.

Wire Rods

Wire rods are used mainly by manufacturers of wire, fasteners, nails, bolts, nuts and welding rods. Wire rods are also used in the manufacture of coil springs, tension bars and tire cords in the automotive industry.

Our deliveries of wire rods produced by us and directly sold to external customers amounted to 2.4 million tons in 2014, representing 7.9% of our total sales volume of principal steel products produced by us and directly sold to external customers. The largest customers for our wire rods are manufacturers of wire ropes and fasteners.

In 2014, our sales volume of wire rods produced by us and directly sold to external customers increased by 38.3% compared to 2013, primarily reflecting increase in production of wire rods from full-scale operation of the no. 4 wire rod mill in 2014, which expansion was completed in May 2013.

Including sales of wire rods produced by us and sold through our consolidated sales subsidiaries in addition to wire rods produced by us and directly sold to external customers, we had a domestic market share for wire rods of approximately 52% on a non-consolidated basis.

Silicon Steel Sheets

Silicon steel sheets are used mainly in the manufacture of power transformers and generators and rotating machines.

Our deliveries of silicon steel sheets produced by us and directly sold to external customers amounted to 1.0 million tons in 2014, representing 3.4% of our total sales volume of principal steel products produced by us and directly sold to external customers.

In 2014, our sales volume of silicon steel sheets produced by us and directly sold to external customers decreased by 8.5% compared to 2013 due to our decision to focus more on production and sale of higher margin silicon steel sheet products.

Including sales of silicon steel sheets produced by us and sold through our consolidated sales subsidiaries in addition to silicon steel sheets produced by us and directly sold to external customers, we had a domestic market share for silicon steel sheets of approximately 81% on a non-consolidated basis.

Others

Other products include lower value-added semi-finished products such as pig iron, billets, blooms and slab.

Markets

Korea is our most important market. Domestic sales represented 44.6% of our total revenue from steel products produced and sold by us in 2014. Our export sales and overseas sales to customers abroad represented 55.4% of our total revenue from steel products in 2014. Our sales strategy has been to devote our production primarily to satisfy domestic demand, while seeking export sales to utilize capacity to the fullest extent and to expand our international market presence.

Domestic Market

We primarily sell in Korea higher value-added and other finished products to end-users and semi-finished products to other steel manufacturers for further processing. Local distribution companies and sales affiliates sell finished steel products to low-volume customers. We provide service technicians for large customers and distributors in each important product area.

The table below sets out our estimate of the market share of steel products sold in Korea for the periods indicated based on sales volume.


	For the Year Ended December 31,
Source	2012			2013			2014
POSCO’s sales ⁽¹⁾		41.9	%		43.4	%		40.6	%
Other domestic steel companies’ sales		23.4			23.6			27.6
Imports		34.8			33.0			31.8

Total		100.0	%		100.0	%		100.0	%

(1)	POSCO’s sales volume includes steel products produced by us (but not by our subsidiaries) and sold through our consolidated sales subsidiaries in addition to steel products produced by us (but not by our subsidiaries) and directly sold to external customers.

Exports

Our export sales and overseas sales to customers abroad represented 55.4% of our total revenue from steel products produced and sold by us in 2014, 66.7% of which was generated from

exports sales and overseas sales to customers in Asian countries. Our export sales and overseas sales to customers abroad in terms of revenue from such products increased by 10.4% from Won 20,587 billion in 2013 to Won 22,731 billion in 2014.

The tables below set out our export sales and overseas sales to customers abroad in terms of revenue from steel products produced and sold by us, by geographical market and by product for the periods indicated.


	For the Year Ended December 31,
	2012					2013					2014
Region	Billions of Won		%			Billions of Won		%			Billions of Won		%
Asia (other than China and Japan)	￦	5,834		26.7	%	￦	5,707		27.7	%	￦	6,434		28.3	%
China		6,328		28.9			6,220		30.2			6,057		26.6
Japan		3,084		14.1			2,583		12.5			2,668		11.7
Europe		942		4.3			999		4.9			1,428		6.3
Middle East		528		2.4			381		1.8			323		1.4
North America		1,288		5.9			1,145		5.6			2,131		9.4
Others		3,884		17.7			3,552		17.3			3,689		16.2

Total	￦	21,888		100.0	%	￦	20,587		100.0	%	￦	22,731		100.0	%


	For the Year Ended December 31,
	2012					2013					2014
Steel Products	Billions of Won		%			Billions of Won		%			Billions of Won		%
Cold rolled products	￦	7,245		33.1	%	￦	6,653		32.3	%	￦	6,907		30.4	%
Hot rolled products		3,783		17.3			3,300		16.0			3,646		16.0
Stainless steel products		5,302		24.2			5,125		24.9			5,615		24.7
Plates		1,573		7.2			1,238		6.0			1,596		7.0
Wire rods		598		2.7			569		2.8			783		3.4
Silicon steel sheets		840		3.8			837		4.1			771		3.4
Others		2,546		11.6			2,863		13.9			3,412		15.0

Total	￦	21,888		100.0	%	￦	20,587		100.0	%	￦	22,731		100.0	%

The table below sets out the world’s apparent steel use for the periods indicated.


	For the Year Ended December 31,
	2012			2013			2014
Apparent steel use (million metric tons)		1,439			1,528			1,537
Percentage of annual increase		2.0	%		6.2	%		0.6	%

Source: World Steel Association.

Recent difficulties affecting the European Union and global financial sectors, adverse conditions and volatility in the European Union and worldwide credit and financial markets, fluctuations in oil and commodity prices, the general weakness of the global economy and the slowdown in growth of the Chinese economy have increased the uncertainty of global economic prospects in general and have adversely affected the global and Korean economies. The World Steel Association forecasts that global apparent steel use is expected to increase by 3.3% to 1,576 million metric tons in 2015.

In recent years, driven in part by strong growth in steel consumption in emerging economies, the global steel industry has experienced renewed interest in expansion of steel production capacity. The Organisation for Economic Co-operation and Development estimated the global crude steel production capacity to be 2,241 million tons in 2014. The increased production capacity, combined with weakening demand due primarily to the recent slowdown of the global economy, has resulted in production over-capacity in the global steel industry. Production over-capacity in the global steel industry may intensify if the slowdown of the global economy continues or demand from developing countries that have experienced significant growth in recent years does not meet the growth in production capacity.

We distribute our export products mostly through Korean trading companies, including Daewoo International, and our overseas sales subsidiaries. Our largest export market in 2014 was Asia (other than China and Japan), which accounted for 28.3% of our export revenue from steel products produced and sold by us. The principal products exported to Asia (other than China and Japan) were hot rolled products and cold rolled products. Our exports to Asia (other than China and Japan) amounted to Won 5,707 billion in 2013 and Won 6,434 billion in 2014. Our exports to Asia (other than China and Japan) increased by 12.7% in 2014 primarily due to an increase in sales of plates and slabs produced by PT Krakatau POSCO Co., Ltd., which completed a new production plant in December 2013.

Our second largest export market in 2014 was China, which accounted for 26.6% of our export revenue from steel products produced and sold by us. The principal products exported to China were cold rolled products. Our exports to China decreased by 2.6% from Won 6,220 billion in 2013 to Won 6,057 billion in 2014 primarily due to a decrease in our export prices to China as a result of a slowdown in growth of the Chinese economy. On the other hand, we recorded an increase in our exports to North America by 86.1% from Won 1,145 billion in 2013 to Won 2,131 billion in 2014 primarily due to an increase in demand from automotive parts manufacturers in North America, as well as an increase in our exports to Europe by 42.9% from Won 999 billion in 2013 to Won 1,428 billion in 2014 primarily due to an increase in demand from the energy industry.

Anti-Dumping, Safeguard and Countervailing Duty Proceedings

From time to time, our exporting activities have become subject to anti-dumping, safeguard and countervailing proceedings. In recent years, we have become subject to a number of anti-dumping duties in the United States, Canada, India, Indonesia, Australia, Thailand, Brazil, Taiwan and Malaysia and safeguard duties in Thailand. We are also subject to a number of on-going anti-dumping and safeguard investigations in Malaysia, the European Union, Indonesia, India and Thailand. In addition, the Mexican government initiated an anti-dumping investigation in October 2012 relating to our exports of cold rolled steel products, and the investigation was suspended until 2018 on condition that we comply with supply undertakings. Our products that are subject to anti-dumping, safeguard or countervailing duty proceedings in the aggregate currently do not account for a material portion of our total sales, and such proceedings have not had a material adverse impact on our business and operations in recent years.

Pricing Policy

We determine the sales price of our products based on market conditions. In setting prices, we take into account our costs, including those of raw materials, supply and demand in the Korean market, exchange rates, and conditions in the international steel market. Our prices can fluctuate considerably over time, depending on market conditions and other factors. The prices of our higher value-added steel products in the largest markets are determined considering the prices of similar products charged by our competitors.

Both our export prices and domestic sales prices decreased from 2012 to 2014, reflecting production over-capacity in the global steel industry. We may decide to adjust our sales prices in the future subject to market demand for our products, prices of raw materials, the production outlook of the global steel industry and global economic conditions in general.

Raw Materials

Steel Production

The principal raw materials used in producing steel through the basic oxygen steelmaking method are iron ore and coal. We require approximately 1.7 tons of iron ore and 0.8 tons of coal to produce one ton of steel. We import all of the coal and virtually all of the iron ore that we use. In 2014, POSCO imported approximately 53.8 million dry metric tons of iron ore and 28.4 million wet metric tons

of coal. Iron ore is imported primarily from Australia, Brazil and Canada. Coal is imported primarily from Australia, Canada, Russia and the United States. In 2014, we purchased a substantial portion of our iron ore and coal imports pursuant to long-term contracts. The supply contracts have terms of one to ten years and the long-term contracts generally provide for periodic price adjustments to the then-market prices. The long-term contracts to purchase iron ore and coal generally provide for quarterly adjustments to the purchase prices to be determined through negotiation between the supplier and us. Such price negotiations are driven by various factors, including the global economic outlook, global market prices of raw materials and steel products, supply and demand outlook of raw materials and production costs of raw materials. Typically, globally influenced buyers and sellers of raw materials determine benchmark prices of raw materials, based on which other buyers and sellers negotiate their prices after taking into consideration the quality of raw materials and other factors. We or the suppliers may cancel the long-term contracts only if performance under the contracts is prevented by causes beyond our or their control and these causes continue for a specified period.

We also make investments in exploration and production projects abroad to enhance our ability to meet the requirements for high-quality raw materials, either as part of a consortium or through an acquisition of a minority interest. We secured approximately 41% of our iron ore and coal imports in 2014 from foreign mines in which we have made investments. Our major investments to procure supplies of coal, iron ore and nickel are located in Australia, Brazil, New Caledonia and Canada, and our significant investments are as follows:

•

We made an investment of US$500 million in December 2008 to acquire a 6.48% interest in Nacional Minérios S.A., an iron ore mining company in Brazil, in a consortium with Japanese steel manufacturers and trading companies. We secured approximately 3.7 million tons of iron ore in 2014, and we have the right to secure up to such amount of iron ore per year.

•

We made an initial investment of A$249 million in 2010 to acquire a 3.75% interest in Roy Hill Holdings Pty., Ltd., an iron ore mining company in Australia. We subsequently entered into a contract in March 2012 to invest an additional A$1,495 million to increase our interest to 15% but sold a 2.5% interest in April 2012 to China Steel Corporation for A$305 million. In November 2013, we invested an additional A$47 million in order to maintain our interest of 12.5% in Roy Hill Holdings Pty. Ltd. Through our ownership interest, we expect to secure up to approximately 15.1 million tons of iron ore per year starting in 2015.

•

In July 2010, we acquired a 24.5% interest in the Australian Premium Iron (API) iron ore joint venture in Pilbara, Australia for A$184 million, which expects to supply approximately 9.8 million tons of iron ore per year starting in 2020.

•

As part of a consortium including China Steel Corporation and domestic financial investors, we made an investment of US$277 million in March 2013 to acquire a minority interest of 3.78% in an iron ore mining asset of ArcelorMittal Mines Canada Inc. in Quebec. We secured approximately 2.7 million tons of iron ore in 2014, and we have the right to secure up such amount of iron ore per year.

We will continue to selectively seek opportunities to enter into additional strategic relationships that would enhance our ability to meet the requirements for principal raw materials.

The average market price of coal per wet metric ton (benchmark free on board price of Australian premium hard coking coal) was US$209 in 2012, US$159 in 2013 and US$125 in 2014. The average market price of iron ore per dry metric ton (free on board price of Platts Iron Ore index with iron (Fe) 62% content) was US$122 in 2012, US$126 in 2013 and US$88 in 2014. We currently do not depend on any single country or supplier for our coal or iron ore.

Stainless Steel Production

The principal raw materials for the production of stainless steel are ferronickel, ferrochrome and stainless steel scrap. We purchase a majority of our ferronickel primarily from suppliers in Korea that

procure nickel ore from New Caledonia, and the remainder primarily from leading suppliers in Japan, Indonesia and Ukraine. Our primary suppliers of ferrochrome are located in South Africa, India and Kazakhstan. Our stainless steel scraps are primarily supplied by domestic and overseas suppliers in Japan and the European Union. Revert scraps from the Pohang Steelworks are also used for our stainless steel production. The average market price of nickel per ton was US$17,536 in 2012, US$15,022 in 2013 and US$16,871 in 2014.

Transportation

In order to meet our transportation needs for iron ore and coal, we have entered into long-term contracts with shipping companies in Korea to retain a fleet of dedicated vessels. These dedicated vessels transported approximately 80% of the total requirements in 2014, and the remaining approximately 20% was transported by vessels retained through short to medium term contracts, depending on market conditions. Australia and Brazil are the main countries where the vessels are loaded, and they accounted for 65% and 15%, respectively, of our total requirements in 2014. We plan to continue to optimize the fleet of dedicated vessels that we use by 2020 in order to cope with changes in the global shipping environment, as well as upgrade some of the existing vessels with others that utilize more energy-efficient technologies.

The Steelmaking Process

Our major production facilities, Pohang Works and Gwangyang Works, produce steel by the basic oxygen steelmaking method. The stainless steel plant at Pohang Works produces stainless steel by the electric arc furnace method. Continuous casting improves product quality by imparting a homogenous structure to the steel. Pohang Works and Gwangyang Works produce all of their products through the continuous casting.

Steel — Basic Oxygen Steelmaking Method

First, molten pig iron is produced in a blast furnace from iron ore, which is the basic raw material used in steelmaking. Molten pig iron is then refined into molten steel in converters by blowing pure oxygen at high pressure to remove impurities. Different desired steel properties may also be obtained by regulating the chemical contents.

At this point, molten steel is made into semi-finished products such as slabs, blooms or billets at the continuous casting machine. Slabs, blooms and billets are produced at different standardized sizes and shapes. Slabs, blooms and billets are semi-finished lower margin products that we either use to produce our further processed products or sell to other steelmakers that produce further processed steel products.

Slabs are processed to produce hot rolled coil products at hot strip mills or to produce plates at plate mills. Hot rolled coils are an intermediate stage product that may either be sold to our customers as various finished products or be further processed by us or our customers into higher value-added products, such as cold rolled sheets and silicon steel sheets. Blooms and billets are processed into wire rods at wire rod mills.

Stainless Steel — Electric Arc Furnace Method

Stainless steel is produced from stainless steel scrap, chrome, nickel and steel scrap using an electric arc furnace. Stainless steel is then processed into higher value-added products by methods similar to those used for steel production. Stainless steel slabs are produced at a continuous casting mill. The slabs are processed at hot rolling mills into stainless steel hot coil, which can be further processed at cold strip mills to produce stainless cold rolled steel products.

Competition

Domestic Market

We are the largest fully integrated steel producer in Korea. In hot rolled products, where we had a market share of approximately 38% on a non-consolidated basis in 2014, we face competition from a Korean steel producer that operates mini-mills and produces hot rolled coil products from slabs and from various foreign producers, primarily from China and Japan. In cold rolled products and stainless steel products, where we had a market share of approximately 42% and 38%, respectively, on a non-consolidated basis in 2014, we compete with smaller specialized domestic manufacturers and various foreign producers, primarily from China and Japan. For a discussion of domestic market shares, see “— Markets — Domestic Market.”

We may face increased competition in the future from new specialized or integrated domestic manufacturers of steel products in the Korean market. Our biggest competitors in Korea are Hyundai Steel Co., Ltd. with an annual crude steel production of approximately 21 million tons and Dongbu Steel Co., Ltd. with an annual crude steel production of approximately 3 million tons. In February 2015, Hyundai Steel Co., Ltd. received conditional approval from the Fair Trade Commission to take over Dongbu Special Steel Co., Ltd., an affiliate of Dongbu Steel Co., Ltd. Dongbu Specialty Steel Co., Ltd. has an annual production capacity of 400 thousand tons of specialty steel.

The Korean Government does not impose quotas on or provide subsidies to local steel producers. As a World Trade Organization signatory, Korea has also removed all steel tariffs.

Export Markets

The competitors in our export markets include all the leading steel manufacturers of the world. In the past decade, there has been a trend toward industry consolidation among our competitors, and smaller competitors in the global steel market today may become larger competitors in the future. For example, Mittal Steel’s takeover of Arcelor in 2006 created a company with approximately 10% of global steel production capacity. Competition from global steel manufacturers with expanded production capacity such as ArcelorMittal S.A., and new market entrants, especially from China and India, could result in a significant increase in competition. Major competitive factors include range of products offered, quality, price, delivery performance and customer service. Our larger competitors may use their resources, which may be greater than ours, against us in a variety of ways, including by making additional acquisitions, investing more aggressively in product development and capacity and displacing demand for our export products.

Various export markets currently impose tariffs on different types of steel products. However, we do not believe that tariffs significantly affect our ability to compete in these markets.

Subsidiaries and Global Joint Ventures

Steel Production

In order to effectively implement our strategic initiatives and to solidify our leadership position in the global steel industry, we have established various subsidiaries and joint ventures around the world that engage in steel production activities.

Korea. In order to expand our sale of value-added products, we established POSCO Coated and Color Sheet Co., Ltd. by merging a coated steel manufacturer and a color sheet manufacturer in March 1999. POSCO Coated and Color Sheet has an aggregate annual production capacity of 600 thousand tons of galvanized and aluminized steel sheets widely used in the construction, automotive parts and home appliances industries. POSCO Coated and Color Sheet also has an aggregate annual production capacity of 350 thousand tons of color sheets that are mainly used for

interior and exterior materials and home appliances. In 2014, POSCO Coated and Color Sheet produced 594 thousand tons of galvanized and aluminized steel sheets and 312 thousand tons of color sheets.

POSCO Specialty Steel produces high-quality steel products for the automotive, machinery, nuclear power plant, shipbuilding, aeronautics and electronics industries. In March 2015, SeAH Besteel Corp., Shinyoung Securities Co., Ltd. and Shinhan Investment Corp. acquired an aggregate of 52.3% of our interest in POSCO Specialty Steel for approximately Won 419 billion. As a result, we hold a 19.9% interest in the company. Production facilities operated by POSCO Specialty Steel have an aggregate annual production capacity of 1,000 thousand tons of wire rods, round bars, steel pipes and semi-finished products. POSCO Specialty Steel produced 606 thousand tons of such products in 2014.

China. We entered into an agreement with Sagang Group Co. to establish Zhangjiagang Pohang Stainless Steel Co., Ltd., a joint venture company in China for the manufacture and sale of stainless cold rolled steel products. We have an 82.5% interest in the joint venture (including 23.9% interest held by POSCO China Holding Corporation). The plant commenced production of stainless cold rolled steel products in December 1998. The joint venture also completed the construction of new mills in July 2006 with additional annual production capacity of approximately 800 thousand tons of stainless hot rolled products. Zhangjiagang Pohang Stainless Steel produced 1,100 thousand tons of stainless steel products in 2014.

We established Qingdao Pohang Stainless Steel Co., Ltd., a wholly owned subsidiary set up to manufacture and sell stainless cold rolled steel products in China. The plant became operational in December 2004, with an annual production capacity of 180 thousand tons of stainless cold rolled steel products. Qingdao Pohang Steel produced 180 thousand tons of such products in 2014.

In August 2003, we entered into a joint venture agreement with Benxi Iron and Steel Group in China to establish Benxi Steel POSCO Cold Rolled Sheet Co., Ltd. The cold rolling mill with an annual production capacity of 1.9 million tons became operational in March 2006 and the company produced 1.9 million tons of such products in 2014. We currently hold a 25.0% interest in this joint venture.

Vietnam. We entered into an agreement with Nippon Steel & Sumitomo Metal Corporation to establish POSCO Vietnam Co., Ltd., a joint venture company in Vietnam for the manufacture and sale of cold rolled steel products. We have an 85.0% interest in the joint venture. We completed the construction of a plant in September 2009 with an annual production capacity of 1.2 million tons of cold rolled products and commenced commercial production. POSCO Vietnam produced 930 thousand tons of such products in 2014.

Thailand. In order to secure an alternative sales source for stainless cold rolled steel products and an export base for expanding into the Southeast Asia stainless steel markets, we acquired a controlling interest in Thainox Stainless Public Company Limited, a major stainless steel manufacturer in Thailand, in September 2011. We renamed the company as POSCO Thainox Public Company Limited in October 2011 and currently hold an 84.9% interest in the company. The company produced 165 thousand tons of stainless cold rolled products in 2014.

Indonesia. We entered into an agreement with PT. Krakatau Steel (Persero) Tbk. to establish PT. Krakatau POSCO Co., Ltd., a joint venture company in Indonesia for the manufacture and sale of plates and slabs. We hold a 70.0% interest in the joint venture. We completed the construction of a steel manufacturing plant in December 2013 with an annual production capacity of 3.0 million tons of plates and slabs. PT. Krakatau POSCO produced 2.1 million tons of plates and slabs in 2014.

United States. We entered into 50-50 joint venture between U.S. Steel Corporation and us called USS-POSCO Industries Corporation. We sell hot rolled products to USS-POSCO Industries, which uses such products to manufacture cold rolled and galvanized steel products and tin-plate products for sale in the United States. USS-POSCO Industries produced 862 thousand tons of such products in 2014.

We entered into a joint venture in March 2007 with US Steel and SeAH to establish United Spiral Pipe LLC to produce American Petroleum Institute-compliant pipes (“API Pipes”) and non-API pipes. We hold a 35% interest in United Spiral Pipe LLC and it is in the process of selling its facilities and equipment.

Mexico. In Mexico, POSCO Mexico S.A. de C.V. completed the construction of a plant in August 2009 with an annual production capacity of 0.4 million tons of cold rolled products and commenced commercial production to supply automotive manufacturers in Mexico, Southeastern United States and South America. POSCO Mexico expanded its annual production capacity to 0.9 million tons of galvanized steel products in December 2013, and produced 474 thousand tons of cold rolled products in 2014.

Others. In addition to the above investments, we are carefully seeking out additional promising investment opportunities abroad. In June 2005, we entered into a memorandum of understanding with Odisha State Government of India for the construction of an integrated steel mill and the development of iron ore mines in Odisha State. We estimate the aggregate costs of the initial phase of construction and mine development to be approximately $3.7 billion and an additional cost of approximately $8.3 billion in order to increase the annual production capacity to 12 million tons of plates and hot rolled products. The Government of India reissued clearance for the construction of the steel mill in January 2014 and is currently in the process of preparing the land on which the integrated steel mill will be constructed. With respect to development of iron ore mines in Odisha State, we obtained a final ruling from the Indian Supreme Court in May 2013 with respect to authority of the central government to issue permission, and we are waiting for approval from the Government of India to start our exploration and development activities.

We have also established supply chain management centers around the world to provide processing and logistics services such as cutting flat steel products to smaller sizes to meet customers’ needs. In 2014, our 34 supply chain management centers recorded aggregate sales of 5.4 million tons of steel products.

Trading

Our trading activities consist primarily of trading activities of Daewoo International. We acquired a controlling interest in Daewoo International for Won 3.37 trillion on September 20, 2010, and we currently hold a 60.3% interest in Daewoo International. Our consolidated subsidiaries that also engage in trading activities include POSCO Processing & Service Co., Ltd. that primarily focuses in the domestic market, and POSCO Asia Company Limited located in Hong Kong, POSCO Japan Co., Ltd. located in Tokyo, Japan, POSCO America Corporation located in New Jersey, U.S.A. and POSCO South Asia Co., Ltd. located in Bangkok, Thailand.

Daewoo International is a global trading company that primarily engages in trading of steel and raw materials as well as investing in energy and mineral development projects. It also manufactures and sells textiles and operates a department store in Korea. Daewoo International was established in December 2000 when the international trading and construction businesses of Daewoo Corporation were spun off into three separate companies as part of a debt workout program of Daewoo Corporation.

The following table sets forth a breakdown of Daewoo International’s total sales by export sales, domestic sales and third-party trades as well as product category for the periods indicated:


	For the Year Ended December 31,
Product Category	2012					2013					2014
	(In billions of Won, except percentages)
Export Sales
Trading sales:
Steel and metal	￦	6,203		35.8	%	￦	5,397		31.5	%	￦	5,051		24.8	%
Chemical and commodities		1,686		9.7			1,535		9.0			1,836		9.0
Automobile and machinery parts		1,469		8.5			1,625		9.5			1,965		9.6
Electronics and miscellaneous items		120		0.7			72		0.4			44		0.2
Natural resources development		2		0.0			—		—			—		—

Sub-total		9,480		54.7			8,630		50.4			8,895		43.6

Manufactured product sales		13		0.1			13		0.1			22		0.1
Miscellaneous		25		0.1			14		0.1			60		0.3

Total export sales		9,517		54.9			8,657		50.6			8,977		44.0

Domestic Sales
Trading sales:
Steel and metal	￦	609		3.5	%		686		3.9	%		737		3.6	%
Chemical and commodities		69		0.4			71		0.4			81		0.4
Automobile and machinery parts		3		0.0			34		0.2			56		0.3
Electronics and miscellaneous items		7		0.1			4		0.0			11		0.1
Other goods		58		0.3			54		0.3			49		0.2

Sub-total		746		4.3			849		5.0			935		4.6

Miscellaneous		8		0.0			12		0.1			11		0.1

Total domestic sales		754		4.3			861		5.1			946		4.7

Third-Country Trades
Trading	￦	10,220		59.0	%	￦	10,598		61.9		￦	14,284		70.0
Natural resources development		78		0.5			132		0.8			550		2.7
Manufactured product trading		312		1.8			261		1.5			266		1.3

Total third-country trades		10,610		61.3			10,991		64.2			15,100		74.0

Consolidation adjustments		(3,561	)	(20.5	)		(3,399	)	(19.9	)		(4,615	)	(22.7	)

Total sales	￦	17,320		100.0	%	￦	17,109		100.0	%	￦	20,408		100.0	%

Trading Activities. Daewoo International’s trading activities consist of exporting and importing a wide variety of products and commodities, including iron and steel, raw materials for steel production, non-ferrous metals, chemicals, automotive parts, machinery and plant equipment, electronics products, agricultural commodities and textiles. Daewoo International is also engaged in third-country trade that does not involve exports from or imports to Korea. The products are obtained from and supplied to numerous suppliers and purchasers in Korea and overseas, which are procured through a global trading network comprised of overseas trading subsidiaries, branches and representative offices. Such subsidiaries and offices support Daewoo International’s trading activities by locating suitable local suppliers and purchasers on behalf of customers, identifying business opportunities and providing information regarding local market conditions.

In most cases, Daewoo International enters into trading transactions after the underlying sale and purchase contracts have been matched, which mitigates inventory and price risks to Daewoo International. Daewoo International has not experienced material losses related to such risks. Daewoo International typically enters into trading transactions as a principal, and in limited cases as an import or export agent. When acting as a principal or an agent, Daewoo International derives its gross trading profit from the margin between the selling price of the products and the purchase price it pays for such products. In the case of principal transactions, the selling price is recorded as sales and the purchase price is recorded as cost of sales, while only the margin is recorded as sales in the case of agency transactions in which Daewoo International does not assume the risks and rewards of ownership of the

goods. In the case of principal transactions, it takes an average of approximately 52 days between Daewoo International’s payment of goods and its receipt of payment from its customers. In the instances in which it acts as an arranger for a third country transaction, Daewoo International derives its gross trading profit from, and records as sales, the commission paid to it by the customer. The sizes of margins and commissions for Daewoo International’s trading activities vary depending on a number of factors, including prevailing supply and demand conditions for the product involved, the cost of financing, insurance, storage and transport and the creditworthiness of the customer, and tends to decline as the product or market matures.

In connection with its export and import transactions, Daewoo International has accounts receivable and payable in a number of currencies, but principally in Dollars. Daewoo International’s exposure to fluctuations in exchange rates, including the Won/Dollar exchange rate, is limited because trading transactions typically involve matched purchase and sale contracts, which result in limited settlement exposure, and because Daewoo International’s contracts with domestic suppliers of products for export and with domestic purchasers of imported products are generally denominated in Dollars. Although the impact of exchange rate fluctuations is substantially mitigated by such strategies, Daewoo International also periodically enters into derivative contracts, primarily currency forward contracts, to further hedge its foreign exchange risks.

In connection with its trading activities, Daewoo International arranges insurance and product transport at the request of customers, the costs of which generally become reflected in the sales price of the relevant products, and also provides financing services to its purchasers and suppliers as necessary. In the case of trading transactions involving large-scale industrial or construction projects, Daewoo International also provides necessary project planning and organizing services to its customers.

Natural Resources Development Activities. Daewoo International also invests in energy and mineral development projects throughout the world. In particular, Daewoo International joined a consortium with Korea Gas Corporation, ONGC Videsh Ltd. and the Gas Authority of India Ltd. in November 2002, which made a successful bid in the gas exploration, development and production project in the Myanmar A-1 gas field. In October 2005, the consortium made a successful bid in the gas exploration, development and production project in the Myanmar A-3 gas field, located adjacent to the Myanmar A-1 gas field. In December 2008, the consortium entered into a sales agreement with China National United Oil Corporation to sell the gas produced from the A-1 and A-3 gas fields for a period of 30 years after the commencement of production. In August 2010, Myanmar Oil & Gas Enterprise, the national oil and gas company of Myanmar, acquired a 15% interest in each of the projects. As of December 31, 2014, Daewoo International had invested approximately US$1,281 million in the A-1 and A-3 gas field projects, approximately US$230 million in a related off-shore pipeline project and approximately US$137 million in a related on-shore pipeline project. Daewoo International plans to make further investments in these gas fields in the future. Daewoo International holds a 51.0% interest in each of the A-1, A-3 and off-shore pipeline projects and a 25.0% interest in the on-shore pipeline project. Production of gas from these gas fields commenced in July 2013 and Daewoo International recognized revenue from the Myanmar gas field project starting in November 2013. Daewoo International recognized revenues of approximately Won 467 billion from the Myanmar gas field project in 2014.

Such natural resources development projects, while entailing higher risks than the traditional trading business, offer higher potential returns. Daewoo International intends to continue to expand its operations by carefully seeking out promising energy development projects abroad. Daewoo International mitigates the risks associated with such investments through subsidies from the Special Account for Energy Related Funds that is administered, among others, by Korea National Oil Corporation and Korea Resources Corporation, government agencies that promote natural resources development activities of the fund. The fund subsidizes a portion of the investment amount in the event the investor fails to develop viable deposits. If the natural resources development activities are

successful, the investor must reimburse the Fund for the subsidy amount, together with accrued interest. In most instances, Daewoo International is required to obtain consent from the Ministry of Trade, Industry & Energy prior to investing in natural resources development projects.

Competition. Daewoo International competes principally with six other Korean general trading companies, each of which is affiliated with a major domestic business group, as well as global trading companies based in other countries. In the domestic market, competition for export transactions on behalf of domestic suppliers and import transactions on behalf of domestic purchasers was limited, as most affiliated general trading companies of large Korean business groups generally relied on affiliate transactions for the bulk of their trading business. However, in recent years, many of these Korean general trading companies have reduced their reliance on their affiliated business group and transactions carried out on behalf of their member companies and instead have generally evolved to focus on segments of the import and export markets in which they have a competitive advantage. As a result, competition among Korean general trading companies in the area of traditional trade has become more intense. Daewoo International’s principal competitors in the overseas trading markets include Korean trading companies that operate in various international markets, as well as foreign trading companies, particularly those based in Japan. As Daewoo International diversifies into businesses other than traditional trading such as natural resources development, it also increasingly competes with other Korean and international companies involved in these businesses.

Construction

POSCO E&C, our consolidated subsidiary in which we hold an 89.5% interest, is one of the leading engineering and construction companies in Korea, primarily engaged in the planning, design and construction of industrial plants and architectural works and civil engineering projects. In particular, POSCO E&C has established itself as one of the premier engineering and construction companies in Korea through:

•

its strong and stable customer base; and

•

its cutting-edge technological expertise obtained from construction of advanced integrated steel plants, as well as participation in numerous modernization and rationalization projects at our Pohang Works and Gwangyang Works.

Leveraging its technical know-how and track record of building some of the leading industrial complexes in Korea, POSCO E&C has also focused on diversifying its operations into construction of high-end apartment complexes and participating in a wider range of architectural works and civil engineering projects, as well as engaging in urban planning and development projects and expanding its operations abroad. One of its landmark urban planning and development projects includes the development of a 5.7 million-square meter area of Songdo International City in Incheon, which POSCO E&C is co-developing with Gale International, a respected real estate developer based in the United States. POSCO E&C also has substantial experience in the energy field obtained from the construction of various power plants for member companies of the POSCO Group, specializing primarily in engineering and construction of liquefied natural gas (“LNG”) and coal-fired thermal power plants. In recent years, POSCO E&C has obtained various orders for such power plants, including LNG-fired power plants in Incheon, Korea and coal-fired thermal power plants in Ventanas and Angamos, Chile. In response to increasing demand from the energy industry, POSCO E&C plans to continue to target opportunities in power plant construction, which it believes offers significant growth potential, and thereby enhance its know-how and profitability.

Competition. Competition in the construction industry is based primarily on price, reputation for quality, reliability, punctuality and financial strength of contractors. In Korea, POSCO E&C’s main competition in the construction of residential and non-residential buildings, EPC projects, urban planning and development projects and civil works projects consists of approximately ten major domestic construction companies, all of which are member companies of other large business groups

in Korea and are capable of undertaking larger-scale, higher-value-added projects that offer greater potential returns. A series of measures introduced by the Government over the past few years to regulate housing prices in Korea, as well as an increasing popularity of low-bid contracts in civil works project mandates, have contributed to increased competition in the Korean construction industry in recent years. In the overseas markets, POSCO E&C faces competition from local construction companies, as well as international construction companies from other countries, including other major Korean construction companies with overseas operations. Construction companies from developed countries may be more experienced, have greater financial resources and possess more sophisticated technology than POSCO E&C, while construction companies from developing countries often have the advantage of lower wage costs.

Others

As part of our diversification efforts, we strive to identify business opportunities that supplement our steel, trading and construction segments, including power generation, LNG logistics and network and system integration.

POSCO Energy Corporation. In 2006, we acquired the largest domestic private power utility company that operates LNG combined cycle power generation facilities with total power generation capacity of 1,800 megawatts and renamed it POSCO Energy Corporation. Since our acquisition, POSCO Energy Corporation has expanded its power generation capacity by constructing additional power plants in Korea. As part of its efforts to geographically diversify its power generation facilities, POSCO Energy Corporation is constructing two 1,200 megawatts class coal power plants in Vietnam with Applied Energy Services Corporation. In Indonesia, POSCO Energy Corporation partnered with PT. Krakatau Daya Listrik and completed construction of a 200 megawatts by-product gas power plant, which is used to power our integrated mill. POSCO Energy Corporation’s total power generation capacity was approximately 3,950 megawatts as of December 31, 2014.

POSCO Energy Corporation is also selectively seeking opportunities to expand into solar, wind and other renewable energy businesses in order to become an integrated provider of energy solutions. In order to meet the increasing demand and regulatory requirements for clean energy, POSCO Energy Corporation signed a strategic partnership agreement in February 2007 with FuelCell Energy, a global leader in the field of molten carbonate fuel cell technology, pursuant to which POSCO Energy Corporation is exploring opportunities to expand its business into the stationary fuel cell market. In consultation with FuelCell Energy, POSCO Energy Corporation completed construction of a fuel cell stack manufacturing plant with an annual production capacity of 34 megawatts in 2011 with the objective of enhancing POSCO Energy Corporation’s capability to meet the growing domestic demand for fuel cell energy.

LNG Logistics. In an effort to reduce our dependency on oil, we became the first private company in Korea to import LNG in 2005, and we have steadily increased the use of natural gas for energy generation at our steel production facilities. We operate an LNG receiving terminal that is equipped with two 100,000 kiloliters storage tanks, two 165,000 kiloliters storage tanks and additional facilities with an aggregate capacity to process up to 2.4 million tons of LNG annually in Gwangyang. In order to achieve maximum operational efficiency of our LNG terminal, we participate in the LNG trading and LNG ship gas trial businesses. We are also building a synthetic natural gas production plant with an annual capacity of 500,000 tons in Gwangyang that is scheduled for completion by mid-2015. We believe that the synthetic natural gas production plant will provide us with a stable supply of LNG substitutes that we can utilize to meet our growing needs for energy generation.

Others. We acquired or established several subsidiaries that address specific services to support the operations of Pohang Works and Gwangyang Works. POSCO ICT Co., Ltd., founded in 1989, provides information and technology consulting and system network integration and outsourcing services. POSCO Processing & Service Co., Ltd., founded in 1994, provides material processing and

fabrication services. POSCO Plantec, created from the merger of POSCO Machinery & Engineering Co., Ltd. and POSCO Machinery Co., Ltd. in January 2010, provides engineering services related to plant construction and operations. Sungjin Geotec, a manufacturer of specialized equipment used in the power and energy industries, merged with POSCO Plantec in July 2013. POSCO Chemtech Company Ltd., formerly POSCO Refractories and Environment Company, Ltd., specializes in the manufacturing of refractories and lime used in steel manufacturing processes as well as a wide range of chemical products.

Insurance

We maintain property insurance for our property, plant and equipment that we believe to be consistent with market practice in Korea.

Item 4.C. Organizational Structure

The following table sets out the jurisdiction of incorporation and our ownership interests of our significant subsidiaries:


Name	Jurisdiction of Incorporation		Percentage of Ownership
Daewoo International Corporation		Korea		60.3	%
POSCO Engineering & Construction Co., Ltd		Korea		89.5	%
POSCO Energy Corporation		Korea		89.0	%
Zhangjiagang Pohang Stainless Steel Co., Ltd.		China		82.5	%
POSCO Processing & Service Co., Ltd.		Korea		96.0	%
POSCO ICT Co., Ltd.		Korea		65.4	%

Item 4.D. Property, Plants and Equipment

Our principal properties are Pohang Works, which is located at Youngil Bay on the southeastern coast of Korea, and Gwangyang Works, which is located in Gwangyang City in the southwestern region of Korea. We expect to increase our production capacity in the future when we increase our capacity as part of our facilities expansion or as a result of continued modernization and rationalization of our existing facilities. For a discussion of major items of our capital expenditures currently in progress, see “Item 5. Operating and Financial Review and Prospects — Item 5.B. Liquidity and Capital Resources — Liquidity — Capital Expenditures and Capital Expansion.”

Pohang Works

Construction of Pohang Works began in 1970 and ended in 1983. Pohang Works currently has an annual crude steel and stainless steel production capacity of 17.4 million tons. Pohang Works produces a wide variety of steel products. Products produced at Pohang Works include hot rolled sheets, plates, wire rods and cold rolled sheets, as well as specialty steel products such as stainless steel sheets and silicon steel sheets. These products can also be customized to meet the specifications of our customers.

Situated on a site of 8.9 million square meters at Youngil Bay on the southeastern coast of Korea, Pohang Works consists of 43 plants, including iron-making, crude steelmaking and continuous casting and other rolling facilities. Pohang Works also has docking facilities capable of accommodating ships as large as 200,000 tons for unloading raw materials, storage areas for up to 34 days’ supply of raw materials and separate docking facilities for ships carrying products for export. Pohang Works consumed approximately 340 thousand tons of LNG and approximately 11,662 gigawatt hours of electricity in 2014. Pohang Works is equipped with a highly advanced computerized production-management system allowing constant monitoring and control of the production process.

The following table sets out Pohang Works’ capacity utilization rates for the periods indicated.


	As of or for the Year Ended December 31,
	2012		2013		2014
Crude steel and stainless steel production capacity as of end of the year (million tons per year)		16.65		17.30		17.40
Actual crude steel and stainless steel output (million tons)		16.54		16.18		16.18
Capacity utilization rate (%) ⁽¹⁾		99.3		93.5		93.0

(1)	Calculated by dividing actual crude steel and stainless steel output by the actual crude steel and stainless steel production capacity for the relevant period as determined by us.

Gwangyang Works

Construction of Gwangyang Works began in 1985 on a site of 13.7 million square meters reclaimed from the sea in Gwangyang City in the southwestern region of Korea. Gwangyang Works currently has an annual crude steel production capacity of 20.8 million tons. Gwangyang Works specializes in high volume production of a limited number of steel products. Products manufactured at Gwangyang Works include both hot and cold rolled types.

Gwangyang Works is comprised of 47 plants, including iron-making plants, steelmaking plants, continuous casting plants, hot strip mills and thin-slab hot rolling plants. The site also features docking and unloading facilities for raw materials capable of accommodating ships of as large as 300,000 tons for unloading raw materials, storage areas for 38 days’ supply of raw materials and separate docking facilities for ships carrying products for export. Gwangyang Works consumed approximately 225 thousand tons of LNG and approximately 13,880 gigawatt hours of electricity in 2014.

We believe Gwangyang Works is one of the most technologically advanced integrated steel facilities in the world. Gwangyang Works has a completely automated, linear production system that enables the whole production process, from iron-making to finished products, to take place without interruption. This advanced system reduces the production time for hot rolled products to only four hours. Like Pohang Works, Gwangyang Works is equipped with a highly advanced computerized production-management system allowing constant monitoring and control of the production process.

Capacity utilization has kept pace with increases in capacity. The following table sets out Gwangyang Works’ capacity utilization rates for the periods indicated.


	As of or for the Year Ended December 31,
	2012		2013		2014
Crude steel production capacity as of end of the year (million tons per year)		20.80		20.80		20.80
Actual crude steel output (million tons)		21.45		20.23		21.47
Capacity utilization rate (%) ⁽¹⁾		103.1		97.3		103.2

(1)	Calculated by dividing actual crude steel output by the actual crude steel production capacity for the relevant period as determined by us.

The Environment

We are vigorous in our efforts to engage in environmentally responsible management of, and to protect the environment from damage resulting from, our operations. Our levels of pollution control are higher than those mandated by Government standards. We established an on-line environmental monitoring system with real-time feedback on pollutant levels and a forecast system of pollutant concentration in surrounding areas. We also undergo periodic environmental inspection by both internal and external inspectors in accordance with ISO 14001 standards to monitor execution and maintenance of our environmental management plan. As we continue to diversify our production

operations abroad and the importance of comprehensive environmental management continues to grow, we announced an integrated environmental management system in December 2010, pursuant to which all of our subsidiaries located in Korea as well as abroad acquired the ISO 14001 certification. We also operate a certification program targeting our suppliers and outsourcing partners, pursuant to which they are encouraged to establish environmental management systems of their own.

We have taken additional measures to ensure that we are appropriately addressing environmental issues. We recycle most of the by-products from the steelmaking process. A vital part of our production process requires consumption of water, and many of our operations are located on coastal sites or adjacent to major lakes and rivers. Recognizing the importance of water resources, we established mid-to-long-term water management strategies to more effectively utilize water resources, including increasing water recycling, reducing usage volume, developing substitute sources and reducing manufacturing discharge harmful to the environment. As part of our efforts to preserve biological diversity, we supply steel slag that is used in the construction of underwater facilities designed to restore marine ecosystems damaged by rising seawater temperatures. In addition, we have been developing environmentally friendly products such as chrome-free steel sheets in an effort to compete with products from the European Union, the United States and Japan and to meet strengthened environmental regulations. Anticipating the trend toward increasing regulation of chrome in various steel products, we introduced chrome-free steel products meeting international environmental standards in 2006 that are used to manufacture automotive oil tanks.

We plan to continue to invest in developing more environmentally friendly steel manufacturing processes. We commenced research and development for a new steel manufacturing technology called FINEX in 1992 jointly with the Research Institute of Industrial Science and Technology and VOEST Alpine, an Austrian company, and we completed the construction of our first FINEX plant in May 2003 with an annual steel production capacity of 0.6 million tons, a second FINEX plant in May 2007 with an annual steel production capacity of 1.5 million tons, and a third FINEX plant in January 2014 with an annual steel production capacity of 2.0 million tons. The first FINEX plant ceased production in July 2014, and the total annual steel production capacity of our FINEX plants is 3.5 million tons. We will continue to refine FINEX, a low cost, environmentally friendly steel manufacturing process that we believe optimizes our production capacity by utilizing non-agglomerated iron ore fines and using non-coking coal as an energy source and a reducing agent. We believe that FINEX offers considerable environmental and economic advantages by eliminating major sources of pollution such as sinter and coke plants, as well as decreasing operating and raw material costs.

Our climate change response program seeks to minimize the risks from changes in climate as well as to maximize the opportunities available in such environment by enhancing the energy efficiency of our production process. We have disclosed our carbon dioxide emission levels and efforts to deal with climate changes through various channels, including participating in the Carbon Disclosure Project. The Carbon Disclosure Project is an organization based in the United Kingdom that works with major corporations around the world to disclose their greenhouse gas emission levels. We are also in compliance with the Korea Emissions Trading Scheme, which was launched by the Government in January 2015 to reduce greenhouse gas emissions by limiting the total amount of allowable greenhouse gas emission by a manufacturer.

While we believe we are in compliance with applicable environmental laws and regulations in all material respects, we may be responsible for the investigation and remediation of environmental conditions at currently and formerly operated manufacturing or construction sites. For example, we recognized a provision of Won 89 billion in 2014 related to restoration costs of contaminated land near our magnesium plant in Gangneung, Korea. We spent Won 634 billion in 2012, Won 295 billion in 2013 and Won 299 billion in 2014 on anti-pollution facilities.

Item 4A. Unresolved Staff Comments

We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.

Item 5. Operating and Financial Review and Prospects

Item 5.A. Operating Results

The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with IFRS, as issued by the IASB. Unless otherwise noted, the amounts included in Item 5.A. are presented on a consolidated basis.

Overview

We are the largest fully integrated steel producer in Korea. We have four reportable operating segments—a steel segment, a trading segment, an engineering and construction segment and a segment that contains operations of all other entities which fall below the reporting thresholds. The steel segment includes production of steel products and sale of such products. The trading segment consists of global trading activities of Daewoo International, exporting and importing a wide range of steel products that are both obtained from and supplied to POSCO, as well as between other suppliers and purchasers in Korea and overseas. The construction segment includes planning, designing and construction of industrial plants, civil engineering projects and commercial and residential buildings, both in Korea and overseas. The “others” segment includes power generation, LNG logistics, and network and system integration. See Note 42 of Notes to Consolidated Financial Statements.

One of the major factors contributing to our historical performance has been the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.” A number of other factors have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These factors include:

•

our sales volume, unit prices and product mix;

•

costs and production efficiency; and

•

exchange rate fluctuations

As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.

Sales Volume, Prices and Product Mix

In recent years, our net sales have been affected by the following factors:

•

the demand for our products in the Korean market and our capacity to meet that demand;

•

our ability to compete for sales in the export market;

•

price levels; and

•

our ability to improve our product mix.

Domestic demand for our products is affected by the condition of major steel consuming industries, such as construction, shipbuilding, automotive, electrical appliances and downstream steel processors, and the Korean economy in general.

In 2013, unit sales prices in Won for all of our principal product lines of steel products produced by us and directly sold to external customers decreased. The weighted average unit price for such products decreased by 6.8% from 2012 to 2013, in part due to an appreciation in the average value of the Won against the Dollar in 2013 that decreased our export prices in Won terms. The average exchange rate of the Won against the Dollar appreciated from Won 1,126.9 to US$1.00 in 2012 to Won 1,095.0 to US$1.00 in 2013.

The unit sales price of cold rolled products, which accounted for 40.9% of total sales volume of the principal steel products produced by us and directly sold to external customers, decreased by 13.9% in 2013. The unit sales price of wire rods, which accounted for 6.0% of total sales volume of such products, decreased by 13.5% in 2013. The unit sales price of hot rolled products, which accounted for 26.1% of total sales volume of such products, decreased by 8.2% in 2013. The unit sales price of silicon steel sheets, which accounted for 3.9% of total sales volume of such products, decreased by 4.4% in 2013. The unit sales price of plates, which accounted for 13.2% of total sales volume of such products, decreased by 2.8% in 2013. The unit sales price of stainless steel products, which accounted for 9.9% of total sales volume of such products, decreased by 2.7% in 2013.

In 2014, unit sales prices in Won for our principal product lines of steel products produced by us and directly sold to external customers, other than hot rolled products and stainless steel products, decreased. The weighted average unit price for such products decreased by 6.2% from 2013 to 2014, in part due to an appreciation in the average value of the Won against the Dollar in 2014 that decreased our export prices in Won terms. The average exchange rate of the Won against the Dollar appreciated from Won 1,095.0 to US$1.00 in 2013 to Won 1,053.2 to US$1.00 in 2014.

The unit sales price of wire rods, which accounted for 7.9% of total sales volume of the principal steel products produced by us and directly sold to external customers, decreased by 16.4% in 2014. The unit sales price of plates, which accounted for 15.3% of total sales volume of such products, decreased by 10.6% in 2014. The unit sales price of silicon steel sheets, which accounted for 3.4% of total sales volume of such products, decreased by 6.2% in 2014. The unit sales price of cold rolled products, which accounted for 39.1% of total sales volume of such products, decreased by 5.2% in 2014. On the other hand, the unit sales price of hot rolled products, which accounted for 25.6% of total sales volume of such products, increased by 1.5% in 2014. The unit sales price of stainless steel products, which accounted for 8.7% of total sales volume of such products, increased by 0.1% in 2014.

We gradually decreased our export prices from 2012 to 2014. We may decide to adjust our export sales prices in the future subject to market demand for our products, the production outlook of the global steel industry and global economic conditions in general. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”

The table below sets out the average unit sales prices for our semi-finished and finished steel products for the periods indicated.


	For the Year Ended December 31,
Products	2012		2013		2014
	(In thousands of Won per ton)
Cold rolled products	￦	963	￦	829	￦	786
Hot rolled products		737		677		687
Stainless steel products		2,646		2,576		2,577
Plates		873		849		759
Wire rods		1,245		1,076		900
Silicon steel sheets		1,362		1,302		1,221
Average ⁽¹⁾	￦	1,071	￦	998	￦	936

(1)

“Average” prices are based on the weighted average, by sales volume, of our sales for the listed principal products produced by us and directly sold to external customers. See “Item 4. Information on the Company — Item 4.B. Business Overview — Major Products.” The average unit sales price calculation does not include sales results of steel products categorized as “others.”

Costs and Production Efficiency

Our major costs and operating expenses are raw material purchases, depreciation, labor and other purchases. The table below sets out our cost of sales and selling and administrative expenses as a percentage of our revenue as well as gross profit margin and operating profit margin for the periods indicated.


	For the Year Ended December 31,
	2012			2013			2014
	(Percentage of net sales)
Cost of sales		88.3	%		88.9	%		88.7	%
Selling and administrative expenses		6.0			6.3			6.3
Gross margin		11.7			11.1			11.3
Operating profit margin		5.1			4.2			3.9

Our operating profit margin decreased from 5.1% in 2012 to 4.2% in 2013 and further decreased to 3.9% in 2014, reflecting the current challenging business environment as discussed below.

We are closely monitoring changes in market conditions and we implemented the following measures in recent years to address challenges posed by the global economic downturn:

•

pursuing cost reduction through enhancing product designs, improving productivity and reducing transportation costs;

•

focusing on marketing activities to increase our domestic market share and export sales; and

•

establishing a special sales committee to more effectively respond to changes in market trends and preparing responses to various scenarios of future sales.

Production capacity represents our maximum production capacity that can be achieved with an optimal level of operations of our facilities. The table below sets out certain information regarding our production capacity and efficiency in the production of steel products for the periods indicated.


	For the Year Ended December 31,
	2012			2013			2014
Crude steel and stainless steel production capacity (million tons per year)⁽¹⁾		39.6			40.4			43.5
POSCO		37.5			38.1			38.2
POSCO Specialty Steel Co., Ltd.⁽¹⁾		1.1			1.2			1.2
Zhangjiagang Pohang Stainless Steel Co., Ltd.		1.0			1.1			1.1
PT. Krakatau POSCO Co., Ltd.		—			—			3.0
Actual crude steel and stainless steel output (million tons)⁽²⁾		39.7			38.3			41.4
POSCO		38.0			36.4			37.7
POSCO Specialty Steel Co., Ltd.⁽¹⁾		0.7			0.7			0.7
Zhangjiagang Pohang Stainless Steel Co., Ltd.		1.0			1.1			1.2
PT. Krakatau POSCO Co., Ltd.		—			—			1.9
Capacity utilization rate (%)⁽¹⁾		100.3	%		94.6	%		95.2	%
POSCO		101.4	%		95.5	%		98.6	%
POSCO Specialty Steel Co., Ltd.⁽¹⁾		63.3	%		61.8	%		60.1	%
Zhangjiagang Pohang Stainless Steel Co., Ltd.		103.3	%		100.3	%		104.9	%
PT. Krakatau POSCO Co., Ltd.		—			—			63.4	%

(1)	In March 2015, we sold an aggregate of 52.3% of our interest in POSCO Specialty Steel to SeAH Besteel Corp., Shinyoung Securities Co., Ltd. and Shinhan Investment Corp. for approximately Won 419 billion. As a result, we hold a 19.9% interest in POSCO Specialty Steel.

(2)	Reflects production capacity of POSCO, POSCO Specialty Steel Co., Ltd., Zhangjiagang Pohang Stainless Steel Co., Ltd and PT. Krakatau POSCO Co., Ltd.

Exchange Rate Fluctuations

•

an increase in the amount of Won required for us to make interest and principal payments on our foreign currency-denominated debt;

•

foreign exchange translation losses on liabilities, which lower our earnings for accounting purposes.

Appreciation of the Won against major currencies, on the other hand, causes:

•

our export products to be less competitive by raising our prices in Dollar terms; and

•

a reduction in net sales and accounts receivables in Won from export sales, which are primarily denominated in Dollars.

We strive to naturally offset our foreign exchange risk by matching foreign currency receivables with our foreign currency payables and our overseas subsidiaries have sought to further mitigate the adverse impact of exchange rate fluctuations by conducting business transactions in the local currency of the respective market in which the transactions occur. In particular, Daewoo International’s exposure to fluctuations in exchange rates, including the Won/Dollar exchange rate, is limited because trading transactions typically involve matched purchase and sale contracts, which result in limited settlement exposure, and because Daewoo International’s contracts with domestic suppliers of products for export and with domestic purchasers of imported products are generally denominated in Dollars. Although the impact of exchange rate fluctuations is partially mitigated by such strategies, we and our subsidiaries, particularly Daewoo International and POSCO E&C, also periodically enter into derivative contracts, primarily foreign currency swaps and forward exchange contracts, to further hedge our foreign exchange risks. However, our results of operations have historically been affected by exchange rate fluctuations and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. Because of the larger positive effects of the appreciation of the Won (i.e., the reverse of the negative effects caused by the depreciation of the Won, as discussed above), depreciation of the Won generally has a negative impact on our results of operations.

Inflation

Inflation in Korea, which was 2.2% in 2012, 1.3% in 2013 and 1.3% in 2014, has not had a material impact on our results of operations in recent years.

Critical Accounting Estimates

We have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB. These accounting principles require us to make certain estimates and judgments that affect

the reported amounts in our consolidated financial statements. Our estimates and judgments are based on historical experience, forecasted future events and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may differ under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. We believe the critical accounting policies discussed below are the most important to the portrayal of our financial condition and results of operations. Each of them is dependent on projections of future market conditions, and they require us to make the most difficult, subjective or complex judgments.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for exposures in our receivable balances that represent our estimate of probable losses in our short-term and long-term receivable balances from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate and negatively impact their ability to make payments, additional allowances may be required. Determining the allowance for doubtful accounts requires significant management judgment and estimates including, among others, the credit worthiness of our customers, experience of historical collection patterns, potential events and circumstances affecting future collections and the ongoing risk assessment of our customer’s ability to pay.

Trade account receivables are analyzed on a regular basis and, upon our becoming aware of a customer’s inability to meet its financial commitments to us, the value of the receivable is reduced through a charge to the allowance for doubtful accounts. In addition, we record a charge to the allowance for doubtful accounts upon receipt of customer claims in connection with sales that management estimates are unlikely to be collected in full. As of December 31, 2014, the percentage of allowance for doubtful accounts to gross account receivables was 6.04%. Our allowance for doubtful accounts increased by 44.2%, or Won 292 billion, from Won 662 billion as of December 31, 2013 to Won 954 billion as of December 31, 2014 primarily due to recognition of bad debt expenses related to project financing incurred by POSCO E&C. See Note 23 of Notes to Consolidated Financial Statements. Assumptions and judgments related to the allowance for doubtful accounts did not change in 2014.

Specifically, allowances for doubtful accounts are recorded when any of the following loss events occur: (i) there is objective evidence as to the uncollectibility of the account observed through bankruptcy, default or involuntary dissolution of the customer; (ii) we lose a lawsuit against the customer or our right of claim gets extinguished; (iii) our costs to collect the account exceed the payments to be received; or (iv) a dispute with the customer over the collection of the account persists for more than three years.

The actual average annual uncollected percentage rate of accounts receivables resulting in write-offs for the three years in the period ended December 31, 2014 was 0.11%. These historical results, as well as current known conditions impacting the collectability of our accounts receivable balances, are significant factors for us when we estimate the amount of the necessary allowance for doubtful accounts. Historically, losses from uncollectible accounts receivables have been within expectations and in line with the allowances established. However, unforeseen circumstances such as adverse market conditions that deviate significantly from our estimates may require us to change the timing of, and make additional allowances to, our receivable balances. In this case, our results of operations, financial condition and net worth could be materially and adversely affected.

Valuation of Financial Instruments including Debt and Equity Securities and Derivatives

We invest in various financial instruments including debt and equity securities and derivatives. Depending on the accounting treatment specific to each type of financial instrument, an estimate of fair value is required to determine the instrument’s effect on our consolidated financial statements.

If available, quoted market prices provide the best indication of fair value. We determine the fair value of our financial instruments using quoted market prices when available, including quotes from

dealers trading those securities. If quoted market prices are not available, we determine the fair value based on pricing or valuation models, quoted prices of instruments with similar characteristics, or discounted cash flows. Determining the fair value of unlisted financial instruments involves a significant degree of management resources and judgment as no quoted prices exist and such securities are generally very thinly traded. Derivatives for which quoted market prices are not available are valued using valuation models such as the discounted cash flow method. The key inputs used in the valuation of such derivatives depend upon the type of derivative and the nature of the underlying instrument and include interest rate yield curves, foreign exchange rates, the spot price of the underlying instrument, volatility and correlation. The fair values based on pricing and valuation models and discounted cash flow analysis are subject to various assumptions used that, if changed, could significantly affect the fair value of the investments.

We assess at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the asset is impaired. As part of this impairment review, the investee’s operating results, net asset value and future performance forecasts as well as general market conditions are taken into consideration in order to assess whether there is any objective evidence such as significant financial difficulty of the issuer.

We have estimated fair values of material non-marketable securities. We estimated these fair values based on pricing or valuation models, quoted prices of instruments with similar characteristics, or discounted cash flow models. The discounted cash flow model valuation technique is based on the estimated cash flow projections of the underlying investee. Key assumptions and estimates include market conditions, revenue growth rates, operating margin rates, income tax rates, depreciation and amortization rates, the level of capital expenditures, working capital amounts and the discount rates. These estimates are based on historical results of the investee and other market data. In these cash flows projections, the two most significant estimates are the discount rates and revenue growth rates. If the discount rates used in these valuations were increased by 1%, then the estimated fair values would have decreased by 28% in total. In addition, if the revenue growth rate assumptions were decreased by 1% in the cash flow models, then the estimated fair values would have decreased by 23% in total.

We recognized impairment losses on available-for-sale investments of Won 280 billion in 2013 and Won 370 billion in 2014. Losses on impairment of investments increased in 2014 primarily due to an impairment loss of Won 174 billion resulting from a significant and prolonged decline in the fair value of shares of Hyundai Heavy Industries Co., Ltd. below cost.

Historically, our estimates and assumptions used to evaluate impairment of investments have been within expectations. However, unforeseen circumstances such as adverse market conditions that deviate significantly from our estimates may require us to recognize additional losses on impairment of investments. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. The use of alternative estimates and assumptions could increase or decrease the estimated fair values of our investments and potentially result in different impacts on our results of operations.

Long-lived Assets

At each reporting date, we review the carrying amounts of our tangible and intangible assets (excluding goodwill) to determine whether there is any indication that the carrying amount of those assets may not be recoverable through continuing use. If any such indication exists, the recoverable amount of the asset (or cash generating unit) is reviewed in order to determine the amount of the impairment, if any. The recoverable amount is the higher of the asset’s net selling price (fair value reduced by selling costs) and its value in use. When the book value of long-lived asset exceeds the recoverable value of the asset due to obsolescence, physical damage or a decline in market value and

such amount is material, the impairment of the asset is recognized and the asset’s carrying value is reduced to its recoverable value and the resulting impairment loss is charged to current operations. Such recoverable value is based on our estimates of the future use of assets and is subject to changes in market conditions. Based on an impairment test as of December 31, 2014, we recognized impairment loss of property, plant and equipment amounting to Won 65 billion in 2014.

The depreciable lives and salvage values of our long-lived assets are estimated and reviewed each year based on industry practices and prior experience to reflect economic lives of long-lived assets. Effective January 1, 2011, we changed our estimated useful lives for certain machinery and equipment in our steel operating segment from the previous eight years to fifteen years based on an asset life study. Our depreciation expense decreased by Won 1,227 billion in 2011 as a result of such changes in our estimated useful lives.

Our estimates of the useful lives and recoverable values of long-lived assets are based on historical trends adjusted to reflect our best estimate of future market and operating conditions. Also, our estimates include the expected future period in which the future cash flows are expected to be generated from continuing use of the assets that we review for impairment and cash outflows to prepare the assets for use that can be directly attributed or allocated on a reasonable and consistent basis. If applicable, estimates also include net cash flows to be received or paid for the disposal of the assets at the end of their useful lives. As a result of the impairment review, when the sum of the discounted future cash flows expected to be generated by the assets is less than the book value of the assets, we recognize impairment losses based on the recoverable value of those assets. We make a number of significant assumptions and estimates in the application of the discounted cash flow model to forecast cash flows, including business prospects, market conditions, selling prices and sales volume of products, costs of production and funding sources. The estimated cash flow forecast amounts are derived from the most recent financial budgets for the next five years. For periods beyond the five year forecast period, we use a terminal value approach to estimate the cash flows for the remaining years based on an expected estimated growth rate. This estimated growth rate is based on actual historical results. As of December 31, 2014, we estimated an average discount rate of 6.10% and an average rate of revenue growth of 1.17%. However, given the current economic environment, it is likely that the estimates and assumptions will be more volatile than they have been in the past. Further impairment charges may be required if triggering events occur, such as adverse market conditions, that suggest deterioration in an asset’s recoverability or fair value. Assessment of the timing of when such declines become other than temporary and the amount of such impairment is a matter of significant judgment. Results in actual transactions could differ from those estimates used to evaluate the impairment of such long-lived assets. If our future cash flow projections are not realized, either because of an extended recessionary period or other unforeseen events, impairment charges may be required in future periods.

If the estimated average discount rates used in these valuations were increased by 1%, then the estimated fair values would have decreased by 17% in total. If the estimated average rate of revenue growth rate were decreased by 1%, then the estimated fair values would have decreased by 15% in total. These sensitivity analyses do not affect the impairment loss due to the absence of an impairment loss indicator for our long-lived assets.

Goodwill

Goodwill is tested for impairment annually at the level of the groups of cash generating units or whenever changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts of the groups of cash-generating units are determined from the higher of their fair value less cost to sell or their value-in-use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period.

Our management estimates discount rates using post-tax rates that reflect current market rates for investments of similar risk. Growth rates are based on industry growth forecasts, and changes in

selling prices and direct costs are based on historical experience and expectations of future changes in the market. Cash flow forecasts are derived from the most recent financial budgets for the next five years. Beyond the specifically forecasted period, we extrapolate cash flows for the remaining years based on an estimated growth rate. This rate does not exceed the average long-term growth rate for the relevant markets. Once recognized, impairment losses recognized for goodwill are not reversed.

In validating the value in use determined for the cash generating units, the sensitivity of key assumptions used in the discounted cash-flow model such as discount rates and the terminal growth rate was evaluated. If the estimated average discount rates used in these valuations were increased by 0.25%, the estimated value-in-use would have decreased by 2.71% in total. If the estimated terminal growth rates were decreased by 0.25%, the estimated value-in-use would have decreased by 1.64% in total. If the discount rate assumptions were increased by 0.25% or the terminal growth rate assumptions were decreased by 0.25%, there would be no impact on goodwill impairment. Based on an impairment test as of December 31, 2014, we recognized impairment loss of goodwill of Won 11 billion in 2014. We believe that determining the existence and impairment of goodwill is a critical accounting estimate because significant management judgment is involved in the evaluation of the value of goodwill, and any reasonably possible changes in the key assumptions on which the recoverable amount is based would cause a change in impairment loss of goodwill. See Note 15 of Notes to Consolidated Financial Statements.

Inventories

Inventories are stated at the lower of cost or net realizable value. Costs of inventories are determined using the moving-weighted average or weighted average method. Materials-in-transit are determined using the specific identification method. Amounts of inventory are written down to net realizable value due to losses occurring in the normal course of business and the allowance is reported as a contra inventory account, while the related charge is recognized in cost of goods sold.

The net realizable value is determined based on the latest selling price available at the end of each quarter taking into account the directly attributable selling costs. The latest selling price is the base price which is the negotiated selling price based upon the recent transactions entered into with major customers. Considering that our inventory turnover is approximately two months and inventories at the balance sheet date would be sold during the following two months, we perform valuation of inventories using the base price as of the balance sheet date and adjust for significant changes in selling price occurring subsequent to the reporting date. The selling price range used for determining the net realizable value of our inventories ranged from the inventory cost amount less 12.1% of gross profit margin to the inventory cost amount plus 24.8% of gross profit margin. For inventories in which expected selling prices are less than the cost amount, the necessary adjustment to write-down the inventories to net realizable value is made. There was no recovery in 2012, 2013 and 2014. The valuation losses of inventories recognized within cost of goods sold were Won 76 billion in 2012, Won 49 billion in 2013 and Won 42 billion in 2014.

Employee Benefits

Our accounting of employee benefits for defined benefit plans involves judgments about uncertain events including, but not limited to, discount rates, life expectancy, future pay inflation and expected rate of return on plan assets. The discount rates are determined by reference to the yield at the reporting date on high quality corporate bonds that have maturity dates approximating the terms of our benefits obligations and that are denominated in the same currency in which the benefits are expected to be paid. We determine the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments, net interest

expense, and other expenses related to defined benefit plans that are recognized in profit or loss. Due to changing market and economic conditions, the underlying key assumptions may differ from actual developments and may lead to significant changes in our defined benefit plan. We immediately recognize all actuarial gains and losses arising from defined benefit plans in retained earnings. If the estimated average discount rates by actuarial assumptions used in these valuations were increased by 1%, then the estimated provision for severance benefits would have decreased by Won 127 billion, or 7.4% in total. If the estimated future pay inflation rates were decreased by 1%, then the estimated provision for severance benefits would have decreased by Won 107 billion, or 6.2% in total.

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

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with K-IFRS as adopted by the KASB, which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea.

During the three years ended December 31, 2014, we are required to adopt certain amendments and interpretations to K-IFRS, relating to presentation of operating profit. Additionally, under K-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of certain real estate is recognized when an individual unit of residential real estate is delivered to the buyer. As a result, our consolidated statements of comprehensive income and our consolidated statements of financial position prepared in accordance with IFRS as issued by the IASB included in this annual report differ from our consolidated statements of comprehensive income and consolidated statements of financial position prepared in accordance with K-IFRS. The table below sets forth a reconciliation of our operating profit and net income or loss as presented in our consolidated statements of comprehensive income prepared in accordance with IFRS as issued by the IASB for each of the years ended December 31, 2012, 2013 and 2014 to our operating profit and net income or loss in our consolidated statements of comprehensive income prepared in accordance with K-IFRS, for each of the corresponding years, taking into account such differences:


	For the Year Ended December 31,
	2012			2013			2014
	(In millions of Won)
Operating profit under IFRS as issued by the IASB	￦	3,255,139		￦	2,566,269		￦	2,512,998
Additions:
Other bad debt expenses		44,115			111,065			96,373
Loss on disposals of assets held for sale		9,510			26,498			14
Impairment loss on assets held for sale		258,451			1,814			17,205
Loss on disposals of property, plant and equipment		65,486			121,133			50,006
Impairment loss of property, plant and equipment		12,977			9,742			64,833
Impairment losses on intangible assets		21,776			125,316			55,220
Idle tangible assets expenses		31,297			17,624			12,214
Impairment loss on other non-current assets		36,453			9,000			38,137
Other provision expenses		—			65,896			126,601
Donations		73,963			60,940			69,544
Loss on disposal of investments in associates		15,119			19,404			2,556
Loss on disposal of wastes		45,480			15,231			16,386
Penalty and default losses		149,437			19,340			352,173
Others		45,401			47,803			78,412

		809,465			650,806			979,674
Deductions:
Gain on disposal of assets held for sale		(193,333	)		(101,611	)		(48,231	)
Gain on disposals of investment in associates		(39,441	)		(7,668	)		(41,258	)
Gain on disposals of property, plant and equipment		(42,290	)		(14,177	)		(15,039	)
Reversal of impairment loss on intangible assets		(530	)		(122	)		(2,794	)
Reversal of provision expenses		(16,037	)		(2,924	)		(19,769	)
Rental revenues		(1,898	)		(1,588	)		(1,743	)
Outsourcing income		(29,136	)		(25,428	)		(14,200	)
Gain on disposal of wastes		(38,597	)		(16,541	)		(11,357	)
Gain from claim compensation		(31,613	)		(14,525	)		(29,171	)
Penalty income from early termination of contracts		(15,054	)		(16,477	)		(34,606	)
Grant income		(3,198	)		(2,287	)		(1,441	)
Others		(36,993	)		(25,725	)		(49,796	)

		(448,120	)		(229,073	)		(269,406	)

Revenue recognition related to development and sale of real estate		258,893			98,907			339,820
Cost of sales recognition related to development and sale of real estate		(222,269	)		(90,775	)		(349,556	)

Operating profit under K-IFRS	￦	3,653,108		￦	2,996,134		￦	3,123,530


	For the Year Ended December 31,
	2012			2013			2014
	(In millions of Won)
Net income (loss) under IFRS as issued by the IASB	￦	2,357,846		￦	1,349,016		￦	564,039
Adjustments related to development and sale of real estate:
Revenue		258,893			98,907			339,820
Cost of sales		(222,269	)		(90,775	)		(349,556	)
Income tax		(8,863	)		(1,968	)		2,356

Net income under K-IFRS	￦	2,385,607		￦	1,355,180		￦	556,659

Operating Results — 2013 Compared to 2014

The following table presents our income statement information and changes therein for 2013 and 2014.


							Changes
	For the Year Ended December 31,						2013 versus 2014
	2013			2014			Amount			%
	(In billions of Won)
Revenue	￦	61,766		￦	64,759		￦	2,993			4.8	%
Cost of sales		54,914			57,465			2,552			4.6

Gross profit		6,852			7,293			441			6.4
Administrative expenses		2,232			2,310			78			3.5
Selling expenses		1,632			1,760			128			7.8
Other operating income		229			269			40			17.6
Other operating expenses		651			980			329			50.5

Operating profit		2,566			2,513			(53	)		(2.1	)
Share of loss of equity-accounted investees		180			300			120			66.8
Finance income		2,381			2,397			16			0.7
Finance costs		2,829			3,222			393			13.9

Profit before income tax		1,938			1,388			(550	)		(28.4	)
Income tax expense		589			824			235			39.9

Profit		1,349			564			(785	)		(58.2	)
Profit for the period attributable to owners of the controlling company		1,371			633			(738	)		(53.8	)
Loss for the period attributable to non-controlling interests		(22	)		(69	)		(47	)		214.1

Revenue

The following table presents our revenue by segment and changes therein for 2013 and 2014.


							Changes
	For the Year Ended December 31,						2013 versus 2014
	2013			2014			Amount			%
	(In billions of Won)
Steel Segment:
External revenue	￦	31,795		￦	31,842		￦	47			0.1	%
Internal revenue		16,229			17,755			1,526			9.4

Total revenue from Steel Segment		48,024			49,597			1,573			3.3

Trading Segment:
External revenue		18,308			21,166			2,858			15.6
Internal revenue		7,611			10,095			2,484			32.6

Total revenue from Trading Segment		25,919			31,261			5,342			20.6

Construction Segment:
External revenue		6,897			8,119			1,222			17.7
Internal revenue		3,885			2,185			(1,701	)		(43.8	)

Total revenue from Construction Segment		10,782			10,304			(478	)		(4.4	)

Others Segment:
External revenue		4,865			3,972			(894	)		(18.4	)
Internal revenue		3,019			3,095			75			2.5

Total revenue from Others Segment		7,885			7,066			(818	)		(10.4	)

Total revenue prior to consolidation adjustments and basis difference		92,610			98,228			5,618			6.1

Consolidation adjustments		(30,745	)		(33,129	)		(2,384	)		7.8
Basis difference⁽¹⁾		(99	)		(340	)		(241	)		243.4

Revenue	￦	61,766		￦	64,759			2,993			4.8

(1)

Basis difference is related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 42 of Notes to Consolidated Financial Statements.

Our revenue increased by 4.8%, or Won 2,993 billion, from Won 61,766 billion in 2013 to Won 64,759 billion in 2014 due to increases in external revenues from the Trading Segment and the Construction Segment, which were offset in part by a decrease in external revenue from the Others Segment. External revenues from the Steel Segment remained relatively unchanged. Specifically:

Steel Segment. External revenue from the Steel Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, increased slightly by 0.1%, or Won 47 billion, from Won 31,795 billion in 2013 to Won 31,842 billion in 2014 primarily due to an increase in our sales volume of the steel products produced by us and directly sold to external customers (including miscellaneous steel products not included in any of our major product categories), which was largely offset by a decrease in the average unit sales price per ton of the principal steel products produced by us and directly sold to external customers. The overall sales volume of the steel products produced by us and directly sold to external customers (including miscellaneous steel products) increased by 4.4% from 29.1 million tons in 2013 to 30.4 million tons in 2014, while the weighted average unit sales price per ton of the principal steel products produced by us and directly sold to external customers decreased by 6.2% from Won 998,012 per ton in 2013 to Won 936,405 per ton in 2014. Such factors were principally attributable to the following:

•

The sales volume of wire rods, plates and hot rolled produced by us and directly sold to external customers increased by 38.3%, 20.5% and 2.6%, respectively, from 2013 to 2014. On the other hand, our sales volume of silicon steel sheets, stainless steel products and cold rolled produced by us and directly sold to external customers decreased by 8.5%, 8.1% and

0.3%, respectively, from 2013 to 2014. For a discussion of changes in sales volume of each of our principal product lines, see “Item 4.B. Business Overview — Major Products.”

•

The unit sales prices in Won of wire rods, plates, silicon steel sheets and cold rolled products produced by us and directly sold to external customers decreased by 16.4%, 10.6%, 6.2% and 5.2%, respectively, from 2013 to 2014. On the other hand, the unit sales prices in Won of hot rolled products and stainless steel products produced by us and directly sold to external customers increased by 1.5% and 0.1%, respectively, from 2013 to 2014. For a discussion of changes in the unit sales prices of each of our principal product lines, see “— Overview — Sales Volume, Prices and Product Mix” above.

Total revenue from the Steel Segment, which includes internal revenue from inter-company transactions, increased by 3.3%, or Won 1,573 billion, from Won 48,024 billion in 2013 to Won 49,597 billion in 2014, as internal revenue from inter-company transactions increased from 2013 to 2014 due to an increase in reliance on sales subsidiaries for the sale of our steel products.

Total revenue from the Trading Segment, which includes internal revenue from inter-company transactions, increased by 20.6%, or Won 5,342 billion, from Won 25,919 billion in 2013 to Won 31,261 billion in 2014 primarily due to the reasons stated above, which was enhanced by an increase in reliance on sales subsidiaries by us on our steel trading activities.

Construction Segment. External revenue from the Construction Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, increased by 17.7%, or Won 1,222 billion, from Won 6,897 billion in 2013 to Won 8,119 billion in 2014 primarily due to an increase in POSCO E&C’s construction activities in architectural works.

Total revenue from the Construction Segment, which includes internal revenue from inter-company transactions, decreased by 4.4%, or Won 478 billion, from Won 10,782 billion in 2013 to Won 10,304 billion in 2014 primarily due to a decrease in internal revenue from inter-company transactions by 43.8%, or Won 1,701 billion, from Won 3,885 billion in 2013 to Won 2,185 billion in 2014 resulting from a decrease in the amount of construction activities for POSCO. The impact from such decrease was offset in part by an increase in external revenue as discussed above.

Others Segment. The Others Segment includes power generation, LNG production, network and system integration, logistics and magnesium coil and sheet production. External revenue from the Others Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, decreased by 18.4%, or Won 894 billion, from Won 4,865 billion in 2013 to Won 3,972 billion in 2014 primarily due to a decrease in revenue of POSCO Energy Corporation reflecting a decrease in demand for fuel cell energy as well as a decrease in revenue of POSCO ICT Co., Ltd. following the completion of some of its major service contracts in 2014.

Total revenue from the Others Segment, which includes internal revenue from inter-company transactions, decreased by 10.4%, or Won 818 billion, from Won 7,885 billion in 2013 to Won 7,066 billion in 2014, primarily due to the reasons stated above.

Cost of Sales

Our cost of sales increased by 4.6%, or Won 2,552 billion, from Won 54,914 billion in 2013 to Won 57,465 billion in 2014. The increase in cost of sales was primarily due to increases in our sales volume of steel products and trading activities as discussed above, which were partially offset by decreases in the average price in Won terms of key raw materials that were used to manufacture our steel products sold.

The following table presents a breakdown of our cost of sales by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2013 and 2014.


							Changes
	For the Year Ended December 31,						2013 versus 2014
	2013			2014			Amount			%
	(In billions of Won)
Steel Segment	￦	43,274		￦	44,587		￦	1,313			3.0	%
Trading Segment		24,816			29,884			5,068			20.4
Construction Segment		9,848			9,554			(294	)		(3.0	)
Others Segment		7,123			6,366			(757	)		(10.6	)
Consolidation adjustments		(30,056	)		(32,576	)		(2,520	)		8.4
Basis difference⁽¹⁾		(91	)		(350	)		(259	)		284.6

Cost of sales	￦	54,914		￦	57,465			2,552			4.6

(1)

Steel Segment. The cost of sales of our Steel Segment, prior to consolidation adjustments, increased by 3.0%, or Won 1,313 billion, from Won 43,274 billion in 2013 to Won 44,587 billion in 2014 primarily due to increase in our sales volume of the principal steel products produced by us and directly sold to external customers, the impact of which was partially offset by decreases in the average price in Won terms of key raw materials that were used to manufacture our finished goods sold.

Trading Segment. The cost of sales of our Trading Segment, prior to consolidation adjustments, increased by 20.4%, or Won 5,068 billion, from Won 24,816 billion in 2013 to Won 29,884 billion in 2014 primarily due to an increase in our trading volumes as well as an increase in the production costs related to gas produced at the Myanmar gas field and sold to customers. The Myanmar gas field began its commercial production in July 2013.

Construction Segment. The cost of sales of our Construction Segment, prior to consolidation adjustments, decreased by 3.0%, or Won 294 billion, from Won 9,848 billion in 2013 to Won 9,554 billion in 2014 primarily due to a decrease in the construction activities of POSCO E&C.

Others Segment. The cost of sales of our Others Segment, prior to consolidation adjustments, decreased by 10.6%, or Won 757 billion, from Won 7,123 billion in 2013 to Won 6,366 billion in 2014 primarily due to decreases in the average price in Won terms of key raw materials that were used by POSCO Energy Corporation in its power generation activities, as well as a decrease in costs from completion of POSCO ICT Co., Ltd.’s major service contracts in 2014.

Gross Profit

Our gross profit increased by 6.4%, or Won 441 billion, from Won 6,852 billion in 2013 to Won 7,293 billion in 2014 primarily due to increases in gross profit of our Trading Segment and Steel Segment, which were partially offset by a decrease in gross profit of our Construction Segment. Our gross margin increased from 11.1% in 2013 to 11.3% in 2014.

The following table presents our gross profit by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2013 and 2014.


	For the Year Ended December 31,						Changes
	For the Year Ended December 31,						2013 versus 2014
	2013			2014			Amount			%
	(In billions of Won)
Steel Segment	￦	4,749		￦	5,010		￦	260			5.5	%
Trading Segment		1,103			1,376			274			24.8
Construction Segment		934			750			(184	)		(19.7	)
Others Segment		761			700			(61	)		(8.0	)
Consolidation adjustments		(687	)		(553	)		134			(19.5	)
Basis difference⁽¹⁾		(8	)		10			18			N.A.	⁽²⁾

Gross profit	￦	6,852		￦	7,293			441			6.4

(1)

(2)	N.A. means not applicable.

Steel Segment. The gross profit of our Steel Segment, prior to consolidation adjustments, increased by 5.5%, or Won 260 billion, from Won 4,749 billion in 2013 to Won 5,010 billion in 2014 primarily due to an increase in the overall sales volume of our steel products, as discussed above, which was partially offset by a decrease in the average unit sales price per ton of our principal steel products as well as a decrease in the average price in Won terms of coal and other key raw materials that were used to manufacture our finished steel products sold. The gross margin of our Steel Segment, which is gross profit as a percentage of total revenue prior to consolidation adjustments, increased slightly from 9.9% in 2013 to 10.1% in 2014.

Trading Segment. The gross profit of our Trading Segment, prior to consolidation adjustments, increased by 24.8%, or Won 274 billion, from Won 1,103 billion in 2013 to Won 1,376 billion in 2014, reflecting an increase in overall trading volumes as well as an increase in the gross profit from our sale of gas produced at the Myanmar gas field. The gross margin of our Trading Segment, prior to consolidation adjustments, increased slightly from 4.3% in 2013 and 4.4% in 2014.

Construction Segment. The gross profit of our Construction Segment, prior to consolidation adjustments, decreased by 19.7%, or Won 184 billion, from Won 934 billion in 2013 to Won 750 billion in 2014, and the gross margin decreased from 8.7% in 2013 to 7.3% in 2014 primarily due to a decrease in POSCO E&C’s construction activities for POSCO as well as a decrease in its participation of construction projects with higher margins in 2014.

Others Segment. The gross profit of our Others Segment, prior to consolidation adjustments, decreased by 8.0%, or Won 61 billion, from Won 761 billion in 2013 to Won 700 billion in 2014 while its gross margin increased from 9.7% in 2013 to 9.9% in 2014, primarily due to the results of POSCO Energy Corporation described above.

Selling and Administrative Expenses

The following table presents a breakdown of our selling and administrative expenses and changes therein for 2013 and 2014.


					Changes
	For the Year Ended December 31,				2013 versus 2014
	2013		2014		Amount			%
	(In billions of Won)
Freight and custody expenses	￦	1,433	￦	1,552	￦	119			8.3	%
Sales commissions		74		66		(8	)		(10.2	)
Sales promotion		27		26		(1	)		(5.0	)
Sales insurance premium		27		40		13			46.3
Contract cost		37		50		13			33.7
Others		34		27		(7	)		(20.5	)

Total selling expenses	￦	1,632	￦	1,760		128			7.8

Wages and salaries	￦	755	￦	781	￦	27			3.5	%
Expenses related to post-employment benefits		67		67		(1	)		(1.1	)
Other employee benefits		166		174		8			5.1
Depreciation and amortization		228		273		45			19.6
Rental		110		137		27			24.7
Repairs		6		14		8			143.9
Advertising		106		104		(1	)		(1.1	)
Research and development		193		175		(18	)		(9.1	)
Service fees		240		216		(24	)		(10.0	)
Bad debt allowance		90		109		19			20.9
Others		271		258		(12	)		(4.6	)

Total administrative expenses	￦	2,232	￦	2,310		78			3.5

Total selling and administrative expenses	￦	3,864	￦	4,070		206			5.3

Our selling and administrative expenses increased by 5.3%, or Won 206 billion, from Won 3,864 billion in 2013 to Won 4,070 billion in 2014 primarily due to increases in freight and custody expenses and depreciation and amortization expenses, which were partially offset by a decrease in service fees and research and development expenses. Such factors were principally attributable to the following:

•

Our freight and custody expense increased by 8.3%, or Won 119 billion, from Won 1,433 billion in 2013 to Won 1,552 billion in 2014 primarily due to increases in freight rates as well as an increase in our export volume.

•

Our depreciation and amortization expenses increased by 19.6%, or Won 45 billion, from Won 228 billion in 2013 to Won 273 billion in 2014 primarily due to an increase in amortization of intangible assets related to upgrading of our new information technology infrastructure in 2014.

•

Our service fees decreased by 10.0%, or Won 24 billion, from Won 240 billion in 2013 to Won 216 billion in 2014 primarily due to a decrease in professional advisory services provided to us resulting from our reduction in investment activities.

•

Our research and development expenses decreased by 9.1%, or Won 18 billion, from Won 193 billion in 2013 to Won 175 billion in 2014 primarily reflecting a decrease in our development activities for new products.

Other Operating Income and Expenses

The following table presents a breakdown of our other operating income and expenses and changes therein for 2013 and 2014.


					Changes
	For the Year Ended December 31,				2013 versus 2014
	2013		2014		Amount			%
	(In billions of Won)
Gains on disposals of assets held for sale	￦	102	￦	48	￦	(53	)		(52.5	)%
Gains on disposals of investment in associates		8		41		34			438.1
Gains on disposals of property, plant and equipment		14		15		1			6.1
Reversal of other provision expenses		3		20		17			576.1
Outsourcing income		25		14		(11	)		(44.2	)
Gain on disposals of waste		17		11		(5	)		(31.3	)
Gain from claim compensation		15		29		15			100.8
Penalty income from early termination of contracts		16		35		18			110.0
Others		30		56		26			87.7

Total other operating income	￦	229	￦	269		40			17.6

Our other operating income increased by 17.6%, or Won 40 billion, from Won 229 billion in 2013 to Won 269 billion in 2014 primarily due to increases in gains on disposals of investment in associates, penalty income from early termination of contracts and reversal of other provision expenses, which were offset in part by a decrease in gains on disposal of assets for sale. Our gains on disposals of investment in associates increased more than four-fold, or Won 34 billion, from Won 8 billion in 2013 to Won 41 billion in 2014 primarily due to gains related to POSCO Plantec that became our consolidated subsidiary in 2014. Our penalty income from early termination of contracts increased by 110.0%, or Won 18 billion, from Won 16 billion in 2013 to Won 35 billion in 2014 primarily due to an increase in delayed payments to subcontractors as a result of the prolonged downturn in the construction industry. Our reversal of other provision expenses increased more than five-fold, or Won 17 billion, from Won 3 billion in 2013 to Won 20 billion in 2014 primarily due to reversal of provisions of Daewoo International of Won 8 billion in connection with guarantees provided for the acquisition of Shandong Cement and reversal of provisions of POSCO Engineering Co., Ltd. of Won 9 billion relating to settled litigation regarding deferred compensation. On the other hand, our gains on disposals of assets held for sale decreased by 52.5%, or Won 53 billion, from Won 102 billion in 2013 to Won 48 billion in 2014. In 2013, we recognized a gain of Won 102 billion on disposal of assets held for sale primarily from our disposition of SK Telecom shares and SeAH Steel shares. In 2014, we recognized a gain of Won 48 billion on disposal of assets held for sale primarily from our disposition of International Business Center Corporation shares.


					Changes
	For the Year Ended December 31,				2013 versus 2014
	2013		2014		Amount			%
	(In billions of Won)
Other bad debt expenses	￦	111	￦	96	￦	(15	)		(13.2	)%
Losses on disposals of assets held for sale		26		0		(26	)		(99.9	)
Impairment losses on assets held for sale		2		17		15			848.5
Losses on disposals of property, plant and equipment		121		50		(71	)		(58.7	)
Impairment losses on property, plant and equipment		10		65		55			565.5
Impairment losses on intangible assets		125		55		(70	)		(55.9	)
Idle tangible assets expenses		18		12		(5	)		(30.7	)
Impairment losses on other non-current assets		9		38		29			323.7
Other provision expenses		66		127		61			92.1
Donations		61		70		9			14.1
Loss on disposal of investment in associates		19		3		(17	)		(86.8	)
Loss on disposal of wastes		15		16		1			7.6
Penalty and additional tax payments		19		352		333			1,721.0
Others		48		78		31			64.0

Total other operating expenses	￦	651	￦	980		329			50.5

Our other operating expenses increased by 50.5%, or Won 329 billion, from Won 651 billion in 2013 to Won 980 billion in 2014, primarily due to an increase in penalty and additional tax payments and other provisions expenses, which were partially offset by decreases in our losses on disposals of property, plant and equipment and impairment losses on intangible assets. Such factors were principally attributable to the following:

•

Our penalty and additional tax payments increased more than seventeen-fold, or Won 333 billion, from Won 19 billion in 2013 to Won 352 billion in 2014 primarily due to additional tax payments of Won 272 billion resulting from Korea National tax Service’s periodic audit completed in 2014, which mostly related to value added taxes.

•

Our other provision expenses increased by 92.1%, or Won 61 billion, from Won 66 billion in 2013 to Won 127 billion in 2014 primarily due to a provision of Won 89 billion in 2014 related to restoration costs of contaminated land near our magnesium plant in Gangneung, Korea.

•

Our losses on disposals of property, plant and equipment decreased by 58.7%, or Won 71 billion, from Won 121 billion in 2013 to Won 50 billion in 2014 primarily due to removal and dismantlement costs related to the restoration work of furnace no. 1 and no. 2 in Gwangyang in 2013 compared to no such loss in 2014.

•

Our impairment losses on intangible assets decreased by 55.9%, or Won 70 billion, from Won 125 billion in 2013 to Won 55 billion in 2014 primarily due to impairment loss of Won 97 billion related to the decrease in value of POSCO Thainox Public Company Limited in 2013 compared to no such impairment loss in 2014.

Operating Profit

Due to the factors described above, our operating profit decreased by 2.1%, or Won 53 billion, from Won 2,566 billion in 2013 to Won 2,513 billion in 2014. Our operating margin decreased from 4.2% in 2013 to 3.9% in 2014.

Share of Loss of Equity-Accounted Investees

Our share of loss of equity-accounted investees increased by 66.8%, or by Won 120 billion, from Won 180 billion in 2013 to Won 300 billion in 2014. In 2013, we recognized a net loss for our proportionate share of equity-accounted investees of Won 180 billion primarily due to our share of loss of POSCO Plantec (Won 49 billion), Roy Hill Holdings Pty Ltd. (Won 8 billion) and CSP-Compania Siderurgica do Pecem (Won 34 billion), which was partially offset by our share of profit of KOBRASCO (Won 22 billion), Korea LNG Ltd. (Won 22 billion) and CAML Resources Pty Ltd. (Won 18 billion). In 2014, we recognized a net loss for our proportionate share of equity-accounted investees of Won 300 billion primarily due to our share of loss of POSCO Plantec (Won 211 billion) and CSP-Compania Siderurgica do Pecem (Won 57 billion), which was partially offset by our share of profit of KOBRASCO (Won 30 billion) and South-East Asia Gas Pipeline Company Ltd. (Won 26 billion). For a discussion of our share of profits or losses of equity-accounted investees, see Note 11 of Notes to Consolidated Financial Statements.

Finance Income and Finance Costs

The following table presents a breakdown of our finance income and costs and changes therein for 2013 and 2014.


					Changes
	For the Year Ended December 31,				2013 versus 2014
	2013		2014		Amount			%
	(In billions of Won)
Interest income	￦	260	￦	228	￦	(32	)		(12.3	)%
Dividend income		59		48		(11	)		(19.2	)
Gain on foreign currency transactions		998		1,022		25			2.5
Gain on foreign currency translations		511		453		(58	)		(11.3	)
Gain on derivatives transactions of		370		328		(43	)		(11.5	)
Gain on valuations of derivatives		72		73		1			1.4
Gain on disposals of available-for-sale financial assets		106		236		131			124.0
Others		4		7		3			72.6

Total finance income	￦	2,381	￦	2,397		16			0.7

Interest expenses	￦	658	￦	796	￦	138			21.0	%
Loss on foreign currency transactions		927		1,034		106			11.5
Loss on foreign currency translations		345		429		84			24.4
Loss on derivatives transactions		287		353		67			23.3
Loss on valuations of derivatives		291		101		(190	)		(65.2	)
Impairment loss on available-for-sale financial assets		280		370		89			31.9
Loss on disposals of available-for-sale financial assets		4		55		51			1370.3
Loss on financial guarantee		6		10		4			71.4
Others		31		75		43			137.7

Total finance costs	￦	2,829	￦	3,222		393			13.9

Our net gain on foreign currency translations decreased by 85.2%, or Won 141 billion, from Won 166 billion in 2013 to Won 25 billion in 2014, and we recognized a net gain on foreign currency transactions of Won 70 billion in 2013 compared to a net loss on foreign currency transactions of Won 11 billion in 2014, as the Won appreciated against the Dollar in 2013 while it depreciated against the Dollar in 2014 and the Won depreciated at a greater level against the Yen in 2013 compared to 2014. In terms of the market average exchange rates announced by Seoul Money Brokerage Services, Ltd., the Won appreciated from Won 1,071.1 to US$1.00 as of December 31, 2012 to Won 1,055.3 to US$1.00 as of December 31, 2013 but depreciated to Won 1,099.2 to US$1.00 as of December 31, 2014. The Won appreciated against the Yen from Won 1,247.5 per Yen 100 as of December 31, 2012 to Won 1,004.7 per Yen 100 as of December 31, 2013 and appreciated further to Won 920.1 per Yen 100 as of December 31, 2014. Against such fluctuations, we recognized a decrease of 87.2% in net loss on valuations of derivatives, or Won 191 billion, from Won 219 billion in 2013 to Won 28 billion in 2014, as well as a net gain on derivatives transactions of Won 84 billion in 2013 compared to a net loss on derivatives transactions of Won 28 billion in 2014.

Our interest expenses increased by 21.0%, or Won 138 billion, from Won 658 billion in 2013 to Won 796 billion in 2014 primarily due to an increase in the average balance of our interest-bearing payables and financial liabilities, which was partially offset by a general decrease in interest rates in Korea.

Our impairment loss on available-for-sale financial assets increased by 31.9%, or Won 89 billion, from Won 280 billion in 2013 to Won 370 billion in 2014 primarily due to a prolonged decline in the fair value of shares of Hyundai Heavy Industries Co., Ltd. and unmarketable securities of Dongbu Metal Co., Ltd.

Our gain on disposal of available-for-sale financial assets increased by 124.0%, or Won 131 billion, from Won 106 billion in 2013 to Won 236 billion in 2014, as we recognized a Won 199 billion gain in 2014 from our disposal of interest in SK Telecom Co., Ltd.

Income Tax Expense

Our income tax expense increased by 39.9%, or Won 235 billion, from Won 589 billion in 2013 to Won 824 billion in 2014. Our effective tax rate increased from 30.4% in 2013 to 59.4% in 2014 primarily due to an increase in tax related to investments in subsidiaries, associates and joint ventures from Won 251 billion in 2013 to Won 372 billion in 2014 (that resulted in an increase in effective tax rate of 13.8%), a decrease in tax credits from Won 169 billion in 2013 to Won 50 billion in 2014 due to a decrease in job creation tax credit (that resulted in an increase in effective tax rate of 5.2%), an increase in tax effects due to permanent differences from Won 8 billion in 2013 to Won 70 billion in 2014 (that resulted in an increase in effective tax rate of 4.6%), as well as adjustments on prior year tax of Won 56 billion resulting from the tax audit completed in 2014 (that resulted in an increase in effective tax rate of 4.1%). See Note 35 of Notes to Consolidated Financial Statements.

Profit

Due to the factors described above, our profit decreased by 58.2%, or Won 785 billion, from Won 1,349 billion in 2013 to Won 564 billion in 2014. Our net profit margin decreased from 2.2% in 2013 to 0.9% in 2014.

The following table presents our profit by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2013 and 2014.


							Changes
	For the Year Ended December 31,						2013 versus 2014
	2013			2014			Amount			%
	(In billions of Won)
Steel Segment	￦	1,449		￦	857		￦	(592	)		(40.9	)%
Trading Segment		10			181			172			1,804.6
Construction Segment		147			13			(134	)		(91.2	)
Others Segment		197			9			(189	)		(95.7	)
Consolidation adjustments		(448	)		(503	)		(55	)		12.3
Basis difference⁽¹⁾		(6	)		7			13			N.A.	⁽²⁾

Profit for the period	￦	1,349		￦	564			(785	)		(58.2	)

(1)

(2)	N.A. means not applicable.

Operating Results – 2012 Compared to 2013

The following table presents our income statement information and changes therein for 2012 and 2013.


							Changes
	For the Year Ended December 31,						2012 versus 2013
	2012			2013			Amount			%
	(In billions of Won)
Revenue	￦	63,345		￦	61,766		￦	(1,580	)		(2.5	)%
Cost of sales		55,921			54,914			(1,007	)		(1.8	)

Gross profit		7,424			6,852			(573	)		(7.7	)
Administrative expenses		2,129			2,232			102			4.8
Selling expenses		1,679			1,632			(47	)		(2.8	)
Other operating income		448			229			(219	)		(48.9	)
Other operating expenses		809			651			(159	)		(19.6	)

Operating profit		3,255			2,566			(689	)		(21.2	)
Share of loss of equity-accounted investees		23			180			157			692.0
Finance income		2,897			2,381			(516	)		(17.8	)
Finance costs		2,798			2,829			32			1.1

Profit before income tax		3,332			1,938			(1,394	)		(41.8	)
Income tax expense		974			589			(385	)		(39.5	)

Profit		2,358			1,349			(1,009	)		(42.8	)

Profit for the period attributable to owners of the controlling company		2,437			1,371			(1,066	)		(43.8	)
Loss for the period attributable to non-controlling interests		(79	)		(22	)		58			(72.5	)

Revenue

The following table presents our revenue by segment and changes therein for 2012 and 2013.


							Changes
	For the Year Ended December 31,						2012 versus 2013
	2012			2013			Amount			%
	(In billions of Won)
Steel Segment:
External revenue	￦	35,259		￦	31,795		￦	(3,464	)		(9.8	)%
Internal revenue		17,610			16,229			(1,381	)		(7.8	)

Total revenue from Steel Segment		52,869			48,024			(4,845	)		(9.2	)

Trading Segment:
External revenue		18,946			18,308			(638	)		(3.4	)
Internal revenue		7,468			7,611			144			1.9

Total revenue from Trading Segment		26,414			25,919			(494	)		(1.9	)

Construction Segment:
External revenue		4,676			6,897			2,221			47.5
Internal revenue		5,050			3,885			(1,165	)		(23.1	)

Total revenue from Construction Segment		9,726			10,782			1,056			10.9

Others Segment:
External revenue		4,724			4,865			141			3.0
Internal revenue		2,857			3,019			162			5.7

Total revenue from Others Segment		7,581			7,885			304			4.0

Total revenue prior to consolidation adjustments and basis difference		96,589			92,610			(3,979	)		(4.1	)

Consolidation adjustments		(32,985	)		(30,745	)		2,240			(6.8	)
Basis difference⁽¹⁾		(259	)		(99	)		160			(61.8	)

Revenue	￦	63,345		￦	61,766			(1,580	)		(2.5	)

(1)

Our revenue decreased by 2.5%, or Won 1,580 billion, from Won 63,345 billion in 2012 to Won 61,766 billion in 2013 due to decreases in external revenues from the Steel Segment and the Trading Segment, which were offset in part by increases in external revenues from the Construction Segment and the Others Segment. Specifically:

Steel Segment. External revenue from the Steel Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, decreased by 9.8%, or Won 3,464 billion, from Won 35,259 billion in 2012 to Won 31,795 billion in 2013 primarily due to a decrease in the average unit sales price per ton of the principal steel products produced by us and directly sold to external customers, as well as a decrease in our sales volume of the steel products produced by us and directly sold to external customers (including miscellaneous steel products not included in any of our major product categories). The weighted average unit sales price per ton of the principal steel products produced by us and directly sold to external customers decreased by 6.8% from Won 1,070,565 per ton in 2012 to Won 998,012 per ton in 2013, while the overall sales volume of the steel products produced by us and directly sold to external customers (including miscellaneous steel products) decreased by 2.9% from 30.0 million tons in 2012 to 29.1 million tons in 2013. Such factors were principally attributable to the following:

•

The unit sales prices in Won for all of our principal product lines of steel products produced by us and directly sold to external customers decreased from 2012 to 2013, ranging from a decrease of 2.7% for stainless steel products to a decrease of 13.9% for cold rolled products. For a discussion of changes in the unit sales prices of each of our principal product lines, see “— Overview — Sales Volume, Prices and Product Mix” above.

•

The sales volume of hot rolled products, plates and silicon steel sheets produced by us and directly sold to external customers decreased by 11.1%, 7.1% and 0.8%, respectively, from 2012 to 2013. On the other hand, our sales volume of wire rods, stainless steel and cold rolled products produced by us and directly sold to external customers increased by 13.3%, 4.4% and 0.4%, respectively, from 2012 to 2013. For a discussion of changes in sales volume of each of our principal product lines, see “Item 4.B. Business Overview — Major Products.”

Total revenue from the Steel Segment, which includes internal revenue from inter-company transactions, decreased by 9.2%, or Won 4,845 billion, from Won 52,869 billion in 2012 to Won 48,024 billion in 2013, as internal revenue from inter-company transactions decreased from 2012 to 2013 due to a decrease in reliance on sales subsidiaries for the sale of our steel products.

Trading Segment. External revenue from the Trading Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, decreased by 3.4%, or Won 638 billion, from Won 18,946 billion in 2012 to Won 18,308 billion in 2013 primarily due to a decrease in external revenues of Daewoo International and our other trading subsidiaries from 2012 to 2013, reflecting market conditions related to the prolonged slowdown of the global economy that has been characterized by weaker demand and falling prices for export and import products and reduced trading volume.

Total revenue from the Trading Segment, which includes internal revenue from inter-company transactions, decreased by 1.9%, or Won 494 billion, from Won 26,414 billion in 2012 to Won 25,919 billion in 2013, primarily due to the reasons stated above, which was partially offset by an increase in reliance on sales subsidiaries by us on our steel trading activities.

Construction Segment. External revenue from the Construction Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, increased by 47.5%, or Won 2,221 billion, from Won 4,676 billion in 2012 to Won 6,897 billion in 2013 primarily due to increases in POSCO E&C’s construction activities of architectural works.

Total revenue from the Construction Segment, which includes internal revenue from inter-company transactions, increased by 10.9%, or Won 1,056 billion, from Won 9,726 billion in 2012 to Won 10,782 billion in 2013 primarily due to an increase in revenue of POSCO E&C. POSCO E&C’s revenue increased primarily due to the reasons stated above, which was partially offset by a decrease in internal revenue from inter-company transactions by 23.1%, or Won 1,165 billion, from Won 5,050 billion in 2012 to Won 3,885 billion in 2013 primarily due to a decrease in the amount of construction activities for POSCO.

Others Segment. The Others Segment includes power generation, LNG production, network and system integration, logistics and magnesium coil and sheet production. External revenue from the Others Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, increased by 3.0%, or Won 141 billion, from Won 4,724 billion in 2012 to Won 4,865 billion in 2013 primarily due to an increase in revenue of POSCO Energy Corporation as it increased its power generation capacity in the second half of 2012.

Total revenue from the Others Segment, which includes internal revenue from inter-company transactions, increased by 4.0%, or Won 304 billion, from Won 7,581 billion in 2012 to Won 7,885 billion in 2013 primarily due to an increase in revenue of POSCO Energy Corporation by 3.4%, or Won 92 billion, from Won 2,809 billion in 2012 to Won 2,901 billion in 2013.

Cost of Sales

Our cost of sales decreased by 1.8%, or Won 1,007 billion, from Won 55,921 billion in 2012 to Won 54,914 billion in 2013. The decrease in cost of sales was primarily due to decreases in our sales volume of steel products and trading activities as discussed above, as well as decreases in the average price in Won terms of key raw materials that were used to manufacture our finished steel products sold, which were partially offset by increases in our construction activities and sales volume of non-steel products.


							Changes
	For the Year Ended December 31,						2012 versus 2013
	2012			2013			Amount			%
	(In billions of Won)
Steel Segment	￦	47,616		￦	43,274		￦	(4,342	)		(9.1	)%
Trading Segment		25,287			24,816			(471	)		(1.9	)
Construction Segment		8,937			9,848			911			10.2
Others Segment		6,771			7,123			353			5.2
Consolidation adjustments		(32,468	)		(30,056	)		2,412			(7.4	)
Basis difference⁽¹⁾		(222	)		(91	)		131			(59.0	)

Cost of sales	￦	55,921		￦	54,914			(1,007	)		(1.8	)

(1)

Steel Segment. The cost of sales of our Steel Segment, prior to consolidation adjustments, decreased by 9.1%, or Won 4,342 billion, from Won 47,616 billion in 2012 to Won 43,274 billion in 2013, primarily due to decreases in the average price in Won terms of coal and other key raw materials (other than iron ore) that were used to manufacture our finished goods sold as well as in our sales volume of the principal steel products produced by us and directly sold to external customers. For a discussion of fluctuations in prices of our key raw materials, see “Item 4.B. Business Overview — Raw Materials.”

Trading Segment. The cost of sales of our Trading Segment, prior to consolidation adjustments, decreased by 1.9%, or Won 471 billion, from Won 25,287 billion in 2012 to Won 24,816 billion in 2013, primarily due to a decrease in our trading volumes.

Construction Segment. The cost of sales of our Construction Segment, prior to consolidation adjustments, increased by 10.2%, or Won 911 billion, from Won 8,937 billion in 2012 to Won 9,848 billion in 2013, primarily due to an increase in the construction activities of POSCO E&C.

Others Segment. The cost of sales of our Others Segment, prior to consolidation adjustments, increased by 5.2%, or Won 353 billion, from Won 6,771 billion in 2012 to Won 7,123 billion in 2013, primarily due to costs related to an increase in POSCO Energy Corporation’s power generation activities in 2013 resulting from an increase in its power generation capacity in the second half of 2012.

Gross Profit

Our gross profit decreased by 7.7%, or Won 573 billion, from Won 7,425 billion in 2012 to Won 6,852 billion in 2013 primarily due to a decrease in gross profit of our Steel Segment. Our gross margin decreased from 11.7% in 2012 to 11.1% in 2013.

The following table presents our gross profit by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2012 and 2013.


							Changes
	For the Year Ended December 31,						2012 versus 2013
	2012			2013			Amount			%
	(In billions of Won)
Steel Segment	￦	5,253		￦	4,749		￦	(504	)		(9.6	)%
Trading Segment		1,127			1,103			(24	)		(2.1	)
Construction Segment		788			934			146			18.5
Others Segment		810			761			(49	)		(6.1	)
Consolidation adjustments		(517	)		(687	)		(170	)		32.9
Basis difference⁽¹⁾		(36	)		(8	)		28			(77.8	)

Gross profit	￦	7,425		￦	6,852			(573	)		(7.7	)

(1)

Steel Segment. The gross profit of our Steel Segment, prior to consolidation adjustments, decreased by 9.6%, or Won 504 billion, from Won 5,253 billion in 2012 to Won 4,749 billion in 2013 primarily due to a decrease in the average unit sales price per ton of our principal steel products as well as a decrease in the overall sales volume of our principal steel products, as discussed above, which were partially offset by a decrease in the average price in Won terms of coal and other key raw materials (other than iron ore) that were used to manufacture our finished steel product sold. The gross margin of our Steel Segment, which is gross profit as a percentage of total revenue prior to consolidation adjustments, remained constant at 9.9% in 2012 and 2013.

Trading Segment. The gross profit of our Trading Segment, prior to consolidation adjustments, decreased by 2.1%, or Won 24 billion, from Won 1,127 billion in 2012 to Won 1,103 billion in 2013, reflecting market conditions related to the prolonged slowdown of the global economy as discussed above. The gross margin of our Trading Segment, prior to consolidation adjustments, remained constant at 4.3% in 2012 and 2013.

Construction Segment. The gross profit of our Construction Segment, prior to consolidation adjustments, increased by 18.5%, or Won 146 billion, from Won 788 billion in 2012 to Won 934 billion in 2013, and the gross margin increased from 7.9% in 2012 to 8.7% in 2013 primarily due to POSCO E&C’s participation in construction projects with higher margins in 2013.

Others Segment. The gross profit of our Others Segment, prior to consolidation adjustments, decreased by 6.1%, or Won 49 billion, from Won 810 billion in 2012 to Won 761 billion in 2013, and the gross margin decreased from 10.7% in 2012 to 9.7% in 2013 as POSCO Energy Corporation’s gross margin was negatively impacted in 2013 from an increase in its power generation capacity in the second half of 2012 and the ramp-up of the capacity utilization rate.

Selling and Administrative Expenses

The following table presents a breakdown of our selling and administrative expenses and changes therein for 2012 and 2013.


					Changes
	For the Year Ended December 31,				2012 versus 2013
	2012		2013		Amount			%
	(In billions of Won)
Freight and custody expenses	￦	1,473	￦	1,433	￦	(40	)		(2.7	)%
Sales commissions		74		74		(0	)		(0.5	)
Sales promotion		18		27		10			54.8
Sales insurance premium		32		27		(5	)		(15.7	)
Contract cost		52		37		(15	)		(28.5	)
Others		30		34		4			13.4

Total selling expenses	￦	1,679	￦	1,632		(47	)		(2.8	)

Wages and salaries	￦	695	￦	755	￦	60			8.7	%
Expenses related to defined benefit plan		61		67		6			10.2
Other employee benefits		171		166		(5	)		(2.9	)
Depreciation		219		228		10			4.5
Rental		93		110		17			18.1
Repairs		12		6		(6	)		(51.5	)
Advertising		56		106		50			89.4
Research and development		192		193		0			0.3
Service fees		264		240		(24	)		(9.2	)
Vehicle maintenance		22		12		(10	)		(46.0	)
Training		18		12		(6	)		(32.2	)
Warranty expense		13		19		6			45.1
Bad debt allowance		79		90		11			13.7
Others		234		227		(6	)		(2.7	)

Total administrative expenses	￦	2,129	￦	2,232		102			4.8

Total selling and administrative expenses	￦	3,808	￦	3,864		56			1.5

Our selling and administrative expenses increased by 1.5%, or Won 56 billion, from Won 3,808 billion in 2012 to Won 3,864 billion in 2013 primarily due to increases in labor-related expenses and advertising expense, which was partially offset by a decrease in freight and custody expense and service fees. Such factors were principally attributable to the following:

•

Our labor-related expenses included in selling and administrative expenses, which consist of wages and salaries, expenses related to defined benefit plans and other employee benefits, increased by 6.6%, or Won 61 billion, from Won 927 billion in 2012 to Won 988 billion in 2013 primarily due to an increase in the number of employees and a rise in their wages.

•

Our advertising expense increased by 89.4%, or Won 50 billion, from Won 56 billion in 2012 to Won 106 billion in 2013 primarily due to diversification of our advertising channels.

•

Our freight and custody expense decreased by 2.7%, or Won 40 billion, from Won 1,473 billion in 2012 to Won 1,433 billion in 2013 primarily due to decreases in freight rates as well as a decrease in our export volume.

•

Our service fees decreased by 9.2%, or Won 24 billion, from Won 264 billion in 2012 to Won 240 billion in 2013 primarily due to a decrease in professional advisory services provided to us resulting from our reduction in investment activities.

Other Operating Income and Expenses

The following table presents a breakdown of our other operating income and expenses and changes therein for 2012 and 2013.


					Changes
	For the Year Ended December 31,				2012 versus 2013
	2012		2013		Amount			%
	(In billions of Won)
Gain on disposals of assets held for sale	￦	193	￦	102	￦	(92	)		(47.4	)%
Gain on disposals of investments in associates		39		8		(32	)		(80.6	)
Gain on disposals of property, plant and equipment		42		14		(28	)		(66.5	)
Reversal of other provisions		16		3		(13	)		(81.8	)
Outsourcing income		29		25		(4	)		(12.7	)
Gain on disposal of wastes		39		17		(22	)		(57.1	)
Gain from claim compensation		32		15		(17	)		(54.1	)
Penalty income from early termination of contracts		15		16		1			9.5
Others		43		30		(13	)		(30.3	)

Total other operating income	￦	448	￦	229		(219	)		(48.9	)

Our other operating income decreased by 48.9%, or Won 219 billion, from Won 448 billion in 2012 to Won 229 billion in 2013 primarily due to a decrease in our gain on disposal of assets held for sale. Our gain on disposal of assets held for sale decreased by 47.4%, or Won 92 billion, from Won 193 billion in 2012 to Won 102 billion in 2013. In 2012, we recognized a gain of Won 146 billion from Daewoo International’s disposal of Daewoo Cement (Shandong) Co., Ltd. to China United Cement Group Co., Ltd. in June 2012. In addition, we recognized a gain of Won 46 billion from Daewoo International’s disposal of its interest in Kyobo Life Insurance Co., Ltd. (“Kyobo Life Insurance”), subsequent to our impairment of Won 258 billion of such asset as described below. In 2013, we recognized a gain of Won 102 billion on disposal of assets held for sale primarily from our disposition of SK Telecom shares and SeAH Steel shares.


					Changes
	For the Year Ended December 31,				2012 versus 2013
	2012		2013		Amount			%
	(In billions of Won)
Other bad debt expenses	￦	44	￦	111	￦	67			151.8	%
Loss on disposals of asset held for sale		10		26		17			178.6
Impairment loss on assets held for sale		258		2		(257	)		(99.3	)
Loss on disposals of property, plant and equipment		65		121		56			85.0
Impairment loss on property, plant and equipment		13		10		(3	)		(24.9	)
Impairment losses on intangible assets		22		125		104			475.5
Idle tangible assets expenses		31		18		(14	)		(43.7	)
Impairment loss on other non-current assets		36		9		(27	)		(75.3	)
Other provision expenses		—		66		66			N.A.	⁽¹⁾
Donations		74		61		(13	)		(17.6	)
Loss on disposal of investment in associates		15		19		4			28.3
Loss on disposal of wastes		45		15		(30	)		(66.5	)
Penalty and additional tax payments		149		19		(130	)		(87.1	)
Others		45		48		2			5.3

Total other operating expenses	￦	809	￦	651		(159	)		(19.6	)

(1)	N.A. means not applicable

Our other operating expenses decreased by 19.6%, or Won 159 billion, from Won 809 billion in 2012 to Won 651 billion in 2013, primarily due to significant decreases in our impairment loss on assets held for sale and penalty and additional tax payments, which were partially offset by increases in our impairment losses on intangible assets, other bad debt expenses, other provision expenses and

loss on disposals of property, plant and equipment. Such factors were principally attributable to the following:

•

Our impairment loss on assets held for sale decreased significantly, by Won 257 billion, from Won 258 billion in 2012 to Won 2 billion in 2013. We recognized an impairment loss on assets held for sale of Won 258 billion in 2012 related to a decrease in the market value of Daewoo International’s interest in Kyobo Life Insurance, compared to no such loss in 2013.

•

Our penalty and additional tax payments decreased significantly, or Won 130 billion, from Won 149 billion in 2012 to Won 19 billion in 2013 primarily due to our payment of a fine imposed by the Korea Fair Trade Commission on us and POSCO Coated & Color Steel Co., Ltd. in 2012 for alleged antitrust violations.

•

Our impairment losses on intangible assets increased by more than five-fold, or Won 104 billion, from Won 22 billion in 2012 to Won 125 billion in 2013 due to impairment loss of Won 97 billion in POSCO Thainox Public Company Limited in 2013.

•

Our other bad debt expenses more than doubled, by Won 67 billion, from Won 44 billion in 2012 to Won 111 billion in 2013 due to increase in bad debt expenses of POSCO E&C related to some of its construction projects.

•

We recorded other provision expenses of Won 66 billion in 2013 compared to no such expense in 2012, as POSCO E&C recorded reserves for subrogation payments related to some of its construction projects.

•

Our loss on disposals of property, plant and equipment increased by 85.0%, or Won 56 billion, from Won 65 billion in 2012 to Won 121 billion in 2013 primarily due to loss resulting from the merger of Sungjin Geotec with POSCO Plantec in July 2013 as well as sale of certain assets of POSCO Energy Corporation in 2013.

Operating Profit

Due to the factors described above, our operating profit decreased by 21.2%, or Won 689 billion, from Won 3,255 billion in 2012 to Won 2,566 billion in 2013. Our operating margin decreased from 5.1% in 2012 to 4.2% in 2013.

Share of Loss of Equity-Accounted Investees

Our share of loss of equity-accounted investees increased nearly eight-fold, or by Won 157 billion, from Won 23 billion in 2012 to Won 180 billion in 2013. In 2012, we recognized a net loss for our proportionate share of equity-accounted investees of Won 23 billion primarily due to our share of loss of AMCI (WA) Pty Ltd. (Won 39 billion) and Busan-Gimhae Light Rail Transit Co., Ltd. (Won 27 billion), which was partially offset by our share of profit of Kyobo Life Insurance (Won 37 billion) and KOBRASCO (Won 29 billion). In 2013, we recognized a net loss for our proportionate share of equity-accounted investees of Won 180 billion primarily due to our share of loss of POSCO Plantec (Won 49 billion), Roy Hill Holdings Pty Ltd. (Won 8 billion) and CSP-Compania Siderurgica do Pecem (Won 34 billion), which was partially offset by our share of profit of KOBRASCO (Won 22 billion), Korea LNG Ltd. (Won 22 billion) and CAML Resources Pty Ltd. (Won 18 billion). For a discussion of our share of profits or losses of equity-accounted investees, see Note 11 of Notes to Consolidated Financial Statements.

Finance Income and Finance Costs

The following table presents a breakdown of our finance income and costs and changes therein for 2012 and 2013.


					Changes
	For the Year Ended December 31,				2012 versus 2013
	2012		2013		Amount			%
	(In billions of Won)
Interest income	￦	279	￦	260	￦	(18	)		(6.6	)%
Dividend income		124		59		(65	)		(52.5	)
Gain on foreign currency transactions		935		998		62			6.6
Gain on foreign currency translations		937		511		(426	)		(45.4	)
Gain on transactions of derivatives of		408		370		(37	)		(9.2	)
Gain on valuations of derivatives		94		72		(22	)		(23.5	)
Gain on disposals of available-for-sale investments		112		106		(7	)		(5.8	)
Others		7		4		(3	)		(40.0	)

Total finance income	￦	2,897	￦	2,381		(516	)		(17.8	)

Interest expenses	￦	871	￦	658	￦	(214	)		(24.5	)%
Loss on foreign currency transactions		839		927		88			10.5
Loss on foreign currency translations		243		345		102			41.9
Loss on transactions of derivatives		309		287		(22	)		(7.3	)
Loss on valuations of derivatives		160		291		132			82.6
Impairment loss on available-for-sale investments		224		280		56			25.0
Loss on disposals of available-for-sale investments		36		4		(33	)		(89.7	)
Loss on Financial guarantee		38		6		(33	)		(84.7	)
Others		76		31		(45	)		(58.9	)

Total finance costs	￦	2,798	￦	2,829		32			1.1

Our net gain on foreign currency translations decreased by 76.0%, or Won 527 billion, from Won 693 billion in 2012 to Won 166 billion in 2013, and our net gain on foreign currency transactions decreased by 27.1%, or Won 26 billion, from Won 96 billion in 2012 to Won 70 billion in 2013 as the Won appreciated against the Dollar and Yen in 2012 and 2013. In terms of the market average exchange rates announced by Seoul Money Brokerage Services, Ltd., the Won appreciated from Won 1,153.3 to US$1.00 as of December 31, 2011 to Won 1,071.1 to US$1.00 as of December 31, 2012 and appreciated further to Won 1,055.3 to US$1.00 as of December 31, 2013. The Won appreciated against the Yen from Won 1,485.2 per Yen 100 as of December 31, 2011 to Won 1,247.5 per Yen 100 as of December 31, 2012 and appreciated further to Won 1,004.7 as of December 31, 2013. Against such appreciation, we recognized a more than three-fold increase in net loss on valuation of derivatives, or by Won 154 billion, from Won 65 billion in 2012 to Won 219 billion in 2013, as well as a decrease of 15.1% in net gain on transactions of derivatives, or Won 15 billion, from Won 99 billion in 2012 to Won 84 billion in 2013.

Our impairment loss on available-for-sale investments increased by 25.0%, or Won 56 billion, from Won 224 billion in 2012 to Won 280 billion in 2013 primarily due to a significant decline in the fair value of shares of KB Financial Group and others for a prolonged period, which was considered as objective evidence of impairment.

Our interest expenses decreased by 24.5%, or Won 214 billion, from Won 871 billion in 2012 to Won 658 billion in 2013 primarily due to a decrease in the average balance of our payables and financial liabilities as well as a general decrease in interest rates in Korea.

Income Tax Expense

Our income tax expense decreased by 39.5%, or Won 385 billion, from Won 974 billion in 2012 to Won 589 billion in 2013. Our effective tax rate increased from 29.2% in 2012 to 30.4% in 2013 primarily due to an increase in the amount of unrecognized deferred tax assets caused by net loss from our subsidiaries. See Note 35 of Notes to Consolidated Financial Statements.

Profit

Due to the factors described above, our profit decreased by 42.8%, or Won 1,009 billion, from Won 2,358 billion in 2012 to Won 1,349 billion in 2013. Our net profit margin decreased from 3.7% in 2012 to 2.2% in 2013.

The following table presents our profit by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2012 and 2013.


							Changes
	For the Year Ended December 31,						2012 versus 2013
	2012			2013			Amount			%
	(In billions of Won)
Steel Segment	￦	2,246		￦	1,449		￦	(797	)		(35.5	)%
Trading Segment		325			10			(315	)		(96.9	)
Construction Segment		345			147			(198	)		(57.4	)
Others Segment		302			197			(105	)		(34.8	)
Consolidation adjustments		(833	)		(448	)		385			(46.2	)
Basis difference⁽¹⁾		(27	)		(6	)		21			(77.8	)

Profit for the period	￦	2,358		￦	1,349			(1,009	)		(42.8	)

(1)

Basis difference is related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief operating decision maker and the consolidated financial statements. See Notes 3 and 42 of Notes to Consolidated Financial Statements.

Item 5.B. Liquidity and Capital Resources

The following table sets forth the summary of our cash flows for the periods indicated.


	For the Year Ended December 31,
	2012			2013			2014
	(In billions of Won)
Net cash provided by operating activities	￦	7,319		￦	4,858		￦	3,412
Net cash used in investing activities		(6,169	)		(8,752	)		(3,745	)
Net cash provided by (used in) financing activities		(908	)		3,532			135
Effect of exchange rate fluctuations on cash held		(161	)		(111	)		12
Cash and cash equivalents at beginning of period		4,599			4,681			4,209
Cash and cash equivalents at end of period		4,681			4,209			4,022
Net increase (decrease) in cash and cash equivalents		82			(472	)		(186	)

Capital Requirements

Historically, uses of cash consisted principally of purchases of property, plant and equipment and other assets and repayments of outstanding debt and payments of dividends.

Net cash used in investing activities was Won 6,169 billion in 2012, Won 8,752 billion in 2013 and Won 3,745 billion in 2014. These amounts included acquisition of property, plant and equipment of Won 7,055 billion in 2012, Won 6,570 billion in 2013 and Won 3,506 billion in 2014. We plan to spend between Won 4 trillion to Won 5 trillion in capital expenditures in 2015, which we may adjust on an on-going basis subject to market demand for our products, the production outlook of the global steel industry and global economic conditions in general. We may delay or not implement some of our current capital expenditure plans based on our assessment of such market conditions. We had net disposals of short-term financial instruments of Won 232 billion in 2012, net acquisitions of short-term financial instruments of Won 548 billion in 2013 and net disposals of short-term financial instruments of Won 1,539 billion in 2014. We also had net disposals of available-for-sale investments of Won 393 billion in 2012, net acquisitions of available-for-sale investments of Won 40 billion in 2013 and net disposals of available-for-sale investments of Won 176 billion in 2014.

In our financing activities, we used cash of Won 1,884 billion in 2012, Won 2,846 billion in 2013 and Won 2,802 billion in 2014 for repayments of borrowings. We paid dividends on common stock in the amount of Won 752 billion in 2012, Won 649 billion in 2013 and Won 677 billion in 2014.

In recent years, we have also selectively considered various opportunities to acquire or invest in companies that may complement our businesses, as well as invest in overseas resources development projects. For example, we acquired a controlling interest in Daewoo International in September 2010 for Won 3.37 trillion, and we spent Won 390 billion in 2011 to acquire a controlling interest in Thainox Stainless Public Company Limited, a major stainless steel manufacturer in Thailand. We may require additional capital for such acquisitions or entering into other strategic relationships. Other than capital required for such activities, we anticipate that capital expenditures, repayments of outstanding debt and payments of cash dividends will represent the most significant uses of funds for the next several years.

Payments of contractual obligations and commitments will also require considerable resources. In our ordinary course of business, we routinely enter into commercial commitments for various aspects of our operations, as well as issue guarantees for our related companies’ indebtedness. The following table sets forth the amount of long-term debt, capital lease and operating lease obligations as of December 31, 2014.


	Payments Due by Period
Contractual Obligations	Total		Less Than 1 Year		1 to 3 Years		4 to 5 Years		After 5 Years
	(In billions of Won)
Long-term debt obligations ^(a)	￦	18,154	￦	2,419	￦	3,490	￦	2,978	￦	9,267
Interest payments on long-term debt ^(b)		2,504		520		903		507		574
Capital lease obligations ^(c)		25		6		9		9		1
Operating lease obligations ^(d)		14		6		8		—		—
Purchase obligations ^(e)		21,744		6,842		7,366		2,624		4,912
Accrued severance benefits ^(f)		1,583		89		208		278		1,008

Total	￦	44,024	￦	9,882	￦	11,984	￦	6,396	￦	15,762

(a)	Includes the current portion and premium on bond redemption but excludes amortization of discount on debentures and issuance costs.

(b)	As of December 31, 2014, a portion of our long-term debt carried variable interest rates. We used the interest rate in effect as of December 31, 2014 in calculating the interest payments on long-term debt for the periods indicated.

(c)	We entered into a capital lease contract with Ilshin Shipping Co., Ltd. for a vessel for transporting plates and other products.

(d)	We acquired certain tools and equipment under operating lease agreements with Orix Rentec Korea Co., Ltd. and others.

(e)

Our purchase obligations include supply contracts to purchase iron ore, coal, LNG and other raw materials. These contracts generally have terms of one to ten years and the long-term contracts provide for periodic price adjustments according to the market prices. As of December 31, 2014, 137 million tons of iron ore and 32 million tons of coal remained to be purchased under long-term contracts. In addition, we entered into an agreement with Tangguh LNG Consortium in Indonesia to purchase 550 thousand tons of LNG for 20 years commencing in August 2005. The purchase price under the agreement with Tangguh LNG Consortium is variable based on the monthly standard oil price (as represented by the Japan Customs cleared Crude Price), subject to a ceiling. We used the market price and exchange rate in effect as of December 31, 2014 in calculating the iron ore, coal and LNG purchase obligations described above for the periods indicated.

(f)

Represents, as of December 31, 2014, the expected amount of severance benefits that we will be required to pay under applicable Korean law to all of our employees when they reach their normal retirement age. The amounts were determined based on the employees’ current salary rates and the number of service years that will be accumulated upon their retirement. These amounts do not include amounts that may be paid to employees who cease to work at the company before their normal retirement age.

Capital Resources

We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through

long-term debt and short-term borrowings. We expect that these sources will continue to be our principal sources of cash in the future. From time to time, we may also generate cash through issuance of hybrid bonds and sale of treasury shares and our holdings in available-for-sale securities.

Our net cash provided by operating activities decreased by 33.6%, or Won 2,461 billion, from Won 7,319 billion in 2012 to Won 4,858 billion in 2013. Our gross cash flow from our sales activities decreased as discussed above. In addition, we continued to manage our inventory levels in 2013 in response to a decrease in demand resulting from continuing uncertainties in the global economy. The inventory turnover was faster in 2013 compared to 2012 as we maintained a relatively lower inventory level in 2013 compared to 2012. Our outstanding trade accounts and notes receivables also increased in 2013, as we extended payment terms for some of our key customers, which in turn negatively impacted our net cash provided by operating activities.

Our net cash provided by operating activities decreased by 29.8%, or Won 1,446 billion, from Won 4,858 billion in 2013 to Won 3,412 billion in 2014. Our gross cash flow from our sales activities increased as discussed above. However, our cash outflows increased due to the buildup of semi-finished and finished goods resulting from continuing uncertainties in the global economy affecting China and other major emerging market economies.

Net proceeds from borrowings, after deducting for repayment of borrowings, were Won 1,123 billion in 2012 and Won 2,253 billion in 2013. We had net repayment of borrowings of Won 280 billion in 2014. We had net repayments of short-term borrowings, after deducting for repayment of short-term borrowings, of Won 1,412 billion in 2012. Net proceeds from short-term borrowings, after deducting for repayment of short-term borrowings, were Won 87 billion in 2013 and Won 1,038 billion in 2014. We also raised Won 1,495 billion from our issuances of hybrid bonds in 2013, which are accounted for as part of our equity. Long-term borrowings, excluding current portion, were Won 14,412 billion as of December 31, 2012, Won 15,533 billion as of December 31, 2013 and Won 15,233 billion as of December 31, 2014. Total short-term borrowings and current portion of long-term borrowings were Won 10,509 billion as of December 31, 2012, Won 10,714 billion as of December 31, 2013 and Won 12,195 billion as of December 31, 2014. Outstanding hybrid bonds were Won 997 billion as of December 31, 2013 and 2014. Our net borrowings-to-equity ratio, which is calculated by deducting cash and cash equivalents from total borrowings and dividing the net amount with our total equity, was 47.74% as of December 31, 2012, 48.14% as of December 31, 2013 and 52.18% as of December 31, 2014.

We periodically increase our short-term borrowings and adjust our long-term debt financing levels depending on changes in our capital requirements. We also generated cash of Won 14 billion in 2013 and Won 43 billion in 2014 from the sale of our treasury shares. We believe that we have sufficient working capital for our current requirements and that we have a variety of alternatives available to us to satisfy our liquidity requirements to the extent that they are not met by funds generated by operations, including the issuance of debt and equity securities and bank borrowings denominated in Won and various foreign currencies. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and the global financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings.

Liquidity

We had working capital (current assets minus current liabilities) of Won 11,993 billion as of December 31, 2012, Won 11,681 billion as of December 31, 2013 and Won 10,833 billion as of December 31, 2014. Our holding of cash and cash equivalents were Won 4,681 billion as of December 31, 2012, Won 4,209 billion as of December 31, 2013 and Won 3,811 billion as of December 31, 2014 (which does not include Won 211 billion of cash and cash equivalents categorized under “assets held for sale”). See Note 10 of Notes to Consolidated Financial Statements. Our holding

of other receivables and other short-term financial assets were Won 3,846 billion as of December 31, 2012, Won 4,861 billion as of December 31, 2013 and Won 3,419 billion as of December 31, 2014. As of December 31, 2014, approximately 34% of our cash and cash equivalents, other receivables and other short-term financial assets were held outside of Korea, which we expect to use in our operations abroad, including capital expenditure activities. In the event that such assets are needed for our operations in Korea, such amounts are typically not restricted under local laws from being used in Korea. In addition, we believe that there are no material tax implications in the event our foreign subsidiaries elect to grant cash dividends to us. POSCO had total available credit lines of Won 2,209 billion as of December 31, 2014, none of which was used as of such date. We have not had, and do not believe that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements.

Our liquidity is affected by exchange rate fluctuations. See “— Overview — Exchange Rate Fluctuations.”

Capital Expenditures and Capacity Expansion

Cash used for acquisitions of property, plant and equipment was Won 7,055 billion in 2012, Won 6,570 billion in 2013 and Won 3,506 billion in 2014. We plan to spend between Won 4 trillion to Won 5 trillion in capital expenditures in 2015, which we may adjust on an on-going basis subject to market demand for our products, the production outlook of the global steel industry and global economic conditions in general. We may delay or not implement some of our current capital expenditure plans based on our assessment of such market conditions.

Our current plan for capital investment in production facilities emphasizes capacity rationalization, increased production of higher value-added products and improvements in the efficiency of older facilities in order to reduce operating costs. The following table sets out the major items of our capital expenditures as of December 31, 2014:


Project	Expected Completion Date		Total Cost of Project		Estimated Remaining Cost of Completion as of December 31, 2014
	(In billions of Won)
Steel Segment:
Miscellaneous capital expenditures, including rationalization and upgrading of raw materials treatment and transportation facilities		December 2016		2,767		1,014
Construction of cold rolling mill by POSCO Maharashtra Steel Private Limited		January 2015		738		—
Rationalization of furnace no. 5 at Gwangyang Works		June 2016		521		488
Rationalization of furnace no. 2 at Pohang Works		June 2015		439		330
Construction of no. 7 CGL at Gwangyang Works		June 2017		255		255
Others Segment:
Construction of backup power plant no. 7, no. 8 and no. 9 in Incheon by POSCO Energy		January 2015		1,063		190
Construction of synthetic natural gas plant by POSCO Green Gas Technology		November 2015		1,050		233

Item 5.C. Research and Development, Patents and Licenses, Etc.

We maintain a research and development program to carry out basic research and applied technology development activities. As of December 31, 2014, POSCO Technical Research Laboratories employed 1,091 personnel, including 517 researchers. Our technology development department also works closely with the Pohang University of Science & Technology, Korea’s first research-oriented college founded by us in 1986, and the Research Institute of Industrial Science and Technology, Korea’s first private comprehensive research institute founded by us in 1987. We also established POSCO Research Institute (POSRI) in 1994, which engages in research activities and consulting services.

We recorded research and development expenses of Won 385 billion as cost of sales in 2012, Won 370 billion in 2013 and Won 353 billion in 2014, as well as research and development expenses of Won 192 billion as selling and administrative expenses in 2012, Won 193 billion in 2013 and Won 175 billion in 2014.

Our research and development program has filed over 37,000 industrial rights applications relating to steel-making technology, approximately one-third of which were registered as of December 31, 2014, and has successfully applied many of these to the improvement of our manufacturing process.

Item 5.D. Trend Information

These matters are discussed under Item 5.A. and Item 5.B. above where relevant.

Item 5.E. Off-balance Sheet Arrangements

As of December 31, 2013 and 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 5.F. Tabular Disclosure of Contractual Obligations

These matters are discussed under Item 5.B. above where relevant.

Item 5.G. Safe Harbor

See “Item 3. Key Information — Item 3.D. Risk Factors — This annual report contains “forward-looking statements” that are subject to various risks and uncertainties.

Item 6. Directors, Senior Management and Employees

Item 6.A. Directors and Senior Management

Board of Directors

Our board of directors has the ultimate responsibility for the management of our business affairs. Our board consists of five directors who are our executive officers (“Inside Directors”) and seven directors who are outside directors (“Outside Directors”). Our shareholders elect both the Inside Directors and Outside Directors at a general meeting of shareholders. Candidates for Inside Directors are recommended to shareholders by the board of directors after the board reviews such candidates’ qualifications, and candidates for Outside Directors are recommended to the shareholders by a separate board committee consisting of three Outside Directors and one Inside Director (“Director Candidate Recommendation Committee”) after the committee reviews such candidates’ qualifications. Any shareholder holding our outstanding shares with voting rights may suggest candidates for Outside Directors to the Director Candidate Recommendation Committee.

Our board of directors maintains the following six sub-committees:

•

the Director Candidate Recommendation Committee;

•

the Evaluation and Compensation Committee;

•

the Finance and Operation Committee;

•

the Executive Management Committee;

•

the Audit Committee; and

•

the Related Party Transactions Committee.

Our board committees are described in greater detail below under “— Item 6.C. Board Practices.”

Under the Commercial Code and our articles of incorporation, one Chairman should be elected among the Outside Directors and several Representative Directors may be elected among the Inside Directors by our board of directors’ resolution.

Inside Directors

Our current Inside Directors are:

Name

Position

Responsibilities and
Division

Years
as
Director

Years
with
POSCO

Age

Expiration
of Term of
Office

Kwon, Oh-Joon

Chief Executive Officer

and Representative

Director

—

March
2017

Kim, Jin-Il

President and

Representative Director

Head of Steel Production
Division

March
2017

Yoon, Dong-Jun

Senior Executive Vice
President and
Representative Director

Head of Corporate
Infrastructure Division

March
2016

Lee, Young-Hoon

Senior Executive Vice
President

Head of Finance and
Investment Division

March
2017

Oh, In-Hwan

Senior Executive Vice
President

Head of Steel Business
Division

March
2017

All Inside Directors are engaged in our business on a full-time basis.

Outside Directors

Our current Outside Directors are set out in the table below. Each of our Outside Directors meets the applicable independence standards set forth under the rules of the Financial Investment Services and Capital Markets of Korea (the “FSCMA”).

Name

Position

Principal Occupation

Years
as
Director

Age

Expiration
of Term of
Office

Shin, Chae-Chol

Chairman

Former Chairman and CEO,

IBM Korea Inc.

March 2018

Lee, Myoung-Woo

Director

President, Dongwon Industries

March 2016

Kim, Il-Sup

Director

President, Seoul School of Integrated
Sciences & Technologies

March 2017

Sunwoo, Young

Director

Representative Lawyer, Rhi & Partners

March 2017

Ahn, Dong-Hyun

Director

Professor, Seoul National University

March 2017

Bahk, Byong-Won

Director

Chairman, Korea Employers Federation

March 2018

Kim, Joo-Hyun

Director

Advisory, Hyundai Research Institute

March 2018

The term of office of the Directors elected in March 2015 is up to three (3) years. Each Director’s term expires at the close of the ordinary general meeting of shareholders convened in respect of the fiscal year that is the last one to end during such Director’s tenure.

Senior Management

In addition to the Inside Directors who are also our executive officers, we have the following executive officers:

Name

Position

Responsibility and Division

Years
with
POSCO

Age

Song, Se-Bin

Senior Executive Vice President

Department Manager of Legal Affairs Dept.

Park, Sung-Ho

Senior Executive Vice President

Head of Technical Research Laboratories

An, Tong-Il

Senior Executive Vice President

General Superintendent, Gwangyang Works

Kim, Hag-Dong

Senior Executive Vice President

General Superintendent, Pohang Works

Cho, Chung-Myong

Senior Executive Vice President

Department Manager of Value Management

Dept.

Lee, Woo-Kyu

Executive Vice President

Department Manager of Corporate Audit

Dept.

Yim, Chang-Hee

Executive Vice President

General Manager of Europe Office

Ko, Suk-Bum

Executive Vice President

Department Manager of Labor and Outside

Services Dept.

Kim, Jhi-Yong

Executive Vice President

Project Manager of Regional Head Office Establishment Team in Indonesia

Yu, Seong

Executive Vice President

Department Manager of New Business Development Dept.

Chang, In-Hwa

Executive Vice President

Department Manager of Steel Solution Marketing Dept.

Jung, Dong-chang

Executive Vice President

Department Manager of External Relation Dept.

Nam, Sik

Executive Vice President

Project Manager of Regional Head Office Establishment Team in Vietnam

Min, Kyung-Zoon

Executive Vice President

President, PT Krakatau POSCO Co., Ltd.

Jeong, Tak

Executive Vice President

Department Manager of Energy and Shipbuilding Materials Marketing Dept.

Lee, Tae-Ju

Executive Vice President

Department Manager of Safety and Production Strategy Dept.

Kim, Hong-Soo

Executive Vice President

Department Manager of Steel Planning Dept.

Son, Chang Hwan

Executive Vice President

Department Manager of Steel Business Strategy Dept.

Choi, Jong-Jin

Senior Vice President

Deputy General Superintendent (Administration, Pohang Works)

Han, Sung-Hee

Senior Vice President

Department Manager of Public Relations Dept.

Kim, Hak-Yong

Senior Vice President

Department Manager of Plant, Equipment and Materials Procurement Dept.

Yi, Kyung-Jo

Senior Vice President

Deputy General Superintendent (Hot and Cold Rolling, Gwangyang Works)

Cho, Il-Hyun

Senior Vice President

Deputy General Superintendent (Safety and Maintenance, Pohang Works)

Choi, Seung-Deug

Senior Vice President

Department Manager of New Business Planning Dept.

Kim, Jun-Hyung

Senior Vice President

Deputy General Superintendent (Hot and Cold Rolling, Pohang Works)

Name

Position

Responsibility and Division

Years
with
POSCO

Age

Park, Joo-Cheul

Senior Vice President

Deputy General Superintendent (Safety and Maintenance, Gwangyang Works)

Park, Young-Kwan

Senior Vice President

Deputy General Superintendent (Iron and Steel Making, Pohang Works)

Noh, Min-Yong

Senior Vice President

Department Manager of Finance Dept.

Lee, Won-Hwi

Senior Vice President

Department Manager of Automotive Materials Marketing Dept.

Lee, Duk-Lak

Senior Vice President

Department Manager of Corporate Project Management Dept.

Kim, Dong-Ho

Senior Vice President

President, CSP

Yun, Han-Kuen

Senior Vice President

General Manager of Pohang Research Lab

Lee, Young-Woo

Senior Vice President

Department Manager of Wire Rod Marketing Dept.

Choi, Joo

Senior Vice President

Deputy General Superintendent (Iron and Steel Making, Gwangyang Works)

Kang, Seog-Beom

Senior Vice President

Department Manager of Global Marketing Coordination Dept.

Kwon, Woo-Taeck

Senior Vice President

Department Manager of Investment Planning & Engineering Dept.

Yoo, Byeong-Og

Senior Vice President

Department Manager of Stainless Steel Raw Materials Dept.

Shin, Hak Kyun

Senior Vice President

Department Manager of Carbon Steel Raw Materials Dept.

Bang, Gil-Ho

Senior Vice President

Department Manager of Hot Rolled and Construction Steel Materials Marketing Dept.

Yang, Weon-Jun

Senior Vice President

Department Manager of Human Resources Dept.

Lee, Eun-Seok

Senior Vice President

Deputy General Superintendent (Stainless Steel Production, Pohang Works)

Kim, Soon-Ki

Senior Vice President

Deputy General Superintendent (Administration, Gwangyang Works)

Park, Mi-Hwa

Senior Vice President

Department Manager of Information Planning Dept.

Kim, Kwang-Soo

Senior Vice President

Department Manager of Stainless Steel Marketing Dept.

Min, Jung-Ki

Senior Vice President

Head of Production Division, PT Krakatau POSCO Co., Ltd.

Ha, Dae-Ryong

Senior Vice President

Department Manager of Electrical and Electronic Materials Marketing Dept.

Park, Hyeon

Senior Vice President

Department Manager of Environment, Energy and Social Responsibility Dept.

Choo, Se-Don

Senior Vice President

General Manager of Gwangyang Research Lab.

Lee, Sang-Hyeon

Senior Vice President

Center Manager of Engineering Solution Center

Lee, Hoo-Geun

Executive Vice President

Finance and Investment Division

Jeong, Chul-Gyu

Executive Vice President

Steel Production Division

Kim, Jeong-Sik

Executive Vice President

Steel Production Division

Yoon, Tae-Yang

Executive Vice President

Steel Business Division

Lee, Yun-Yong

Senior Vice President

Finance and Investment Division

Chon, Jung-Son

Senior Vice President

Value Management Dept.

Chin, Kwang-Geun

Senior Vice President

Technical Research Laboratories

Cho, Yong-Doo

Senior Vice President

Value Management Dept.

Name

Position

Responsibility and Division

Years
with
POSCO

Age

Shin, Geon

Senior Vice President

Technical Research Laboratories

Jeong, Ki-Seop

Senior Vice President

Value Management Dept.

Moon, Hee-Kyung

Senior Vice President

Steel Production Division

Lee, Jong-Sub

Senior Vice President

Steel Business Division

Park, Yong-Kyu

Senior Vice President

Steel Production Division

Kwak Jeong-Shik

Senior Vice President

Value Management Dept.

Lee, Chang-Sun

Senior Vice President

Technical Research Laboratories

Kim, Gyo-Sung

Senior Vice President

Steel Business Division

Yi, Sang-Ho

Senior Vice President

Steel Production Division

Oh, Sung-Chel

Senior Vice President

Value Management Dept.

Hong, Moon-Hi

Senior Vice President

Steel Production Division

Yang, Seong-Sik

Senior Vice President

Steel Business Division

Han Chan-Hee

Senior Vice President

Technical Research Laboratories

Won, Hyung-Il

Senior Vice President

Legal Affairs Dept.

Kim, Sun-Koo

Senior Vice President

Technical Research Laboratories

Kim, Gwang-Soo

Senior Vice President

Steel Business Division

Lim, Seung-Kyu

Senior Vice President

Finance and Investment Division

Chon, Uong

Senior Vice President

Finance and Investment Division

Item 6.B. Compensation

Compensation of Directors and Officers

Salaries and bonuses for Inside Directors and salaries for Outside Directors are paid in accordance with standards decided by the board of directors within the limitation of directors remuneration approved by the annual general meeting of shareholders. In addition, executive officers’ compensation is paid in accordance with standards decided by the board of directors. The aggregate compensation paid and accrued to all Directors and executive officers was approximately Won 33.4 billion in 2014 and the aggregate amount set aside or accrued by us to provide pension and retirement benefits to such persons was Won 6.4 billion in 2014.

The compensation of our directors and executive officers who received total annual compensation exceeding Won 500 million in 2014 were as follows:


Name	Position	Total Compensation in 2014		Long-term Incentive Compensation for Payment Subsequent to 2014
		(In millions of Won)
Kwon, Oh-Joon	Chief Executive Officer and Representative Director	￦	1,094	—

Kim, Jin-Il	President and Representative Director	￦	700	—

Chang, In-Hwan	Senior Executive Vice President and Representative Director	￦	692	—

Yoon, Dong-Jun	Senior Executive Vice President and Representative Director	￦	595	—

Lee, Young-Hoon	Senior Executive Vice President	￦	598	—

Chung, Joon-Yang⁽¹⁾	Former Chief Executive Officer and Representative Director	￦	3,996	￦455 in 2015 and ￦112 in 2016


Name	Position	Total Compensation in 2014		Long-term Incentive Compensation for Payment Subsequent to 2014
		(In millions of Won)

Park, Ki-Hong⁽¹⁾	Former President and Representative Director	￦	1,679	￦147 in 2015 and ￦147 in 2016

Kim, Joon-Sik⁽¹⁾	Former President and Representative Director	￦	1,671	￦144 in 2014 and ￦144 in 2015

Kim, Yeung Gyu⁽¹⁾	Former Senior Executive Vice President	￦	920	￦68 in 2015 and ￦68 in 2016

(1)	Includes severance payment for members of board of directors who resigned on March 2014.

We have also granted stock options to some of our Directors and executive officers. See “— Item 6.E. Share Ownership” for a list of stock options granted to our Directors and executive officers. At the annual shareholders’ meeting held in February 2006 our shareholders elected to terminate the stock option program. Stock options granted prior to this meeting remain valid and outstanding pursuant to the articles of incorporation in effect at the time of the issuance of the stock option.

Item 6.C. Board Practices

Director Candidate Recommendation Committee

The Director Candidate Recommendation Committee is composed of three Outside Directors, Ahn, Dong-Hyun (committee chair), Kim, Il-Sup, Kim, Joo-Hyun and one Inside Director, Kim, Jin-Il. The Director Candidate Recommendation Committee reviews the qualifications of potential candidates and proposes nominees to serve on our board of directors as an Outside Director. Any shareholder holding our outstanding shares with voting rights may suggest candidates for Outside Directors to the Director Candidate Recommendation Committee.

Evaluation and Compensation Committee

The Evaluation and Compensation Committee is composed of four Outside Directors, Sunwoo, Young (committee chair), Shin, Chae-Chol, Lee, Myoung-Woo and Bahk, Byong-Won. The Evaluation and Compensation Committee’s primary responsibilities include establishing evaluation procedures and compensation plans for executive officers and taking necessary measures to execute such plans.

Finance and Operation Committee

The Finance and Operation Committee is composed of three Outside Directors, Lee, Myoung-Woo (committee chair), Ahn, Dong-Hyun, Bahk, Byong-Won and two Inside Directors, Yoon, Dong-Jun and Lee, Young-Hoon. This committee is an operational committee that oversees decisions with respect to finance and operational matters, including making assessments with respect to potential capital investments and evaluating prospective capital-raising activities.

Executive Management Committee

The Executive Management Committee is composed of five Inside Directors, Kwon, Oh-Joon (committee chair), Kim, Jin-Il, Yoon, Dong-Jun, Lee, Young-Hoon and Oh, In-Hwan. This committee oversees decisions with respect to our operational and management matters, including review of management’s proposals of new strategic initiatives, as well as deliberation over critical internal matters related to organization structure and development of personnel.

Audit Committee

Under Korean law and our articles of incorporation, we are required to have an Audit Committee. The Audit Committee may be composed of three or more directors; all members of the

Audit Committee must be Outside Directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. Members of the Audit Committee are elected by the shareholders at the ordinary general meeting of shareholders. We currently have an Audit Committee composed of three Outside Directors. Members of our Audit Committee are Kim, Il-Sup (committee chair), Kim, Joo-Hyun and Sunwoo, Young.

The duties of the Audit Committee include:

•

engaging independent auditors;

•

approving independent audit fees;

•

approving audit and non-audit services;

•

reviewing annual financial statements;

•

reviewing audit results and reports, including management comments and recommendations;

•

reviewing our system of controls and policies, including those covering conflicts of interest and business ethics; and

•

examining improprieties or suspected improprieties.

In addition, in connection with general meetings of stockholders, the committee examines the agenda for, and financial statements and other reports to be submitted by, the board of directors at each general meeting of stockholders. Our internal and external auditors report directly to the Audit Committee. The committee holds regular meetings at least once each quarter, and more frequently as needed.

Related Party Transactions Committee

The Related Party Transaction Committee is composed of three Outside Directors, Kim, Il-Sup (committee chair), Kim, Joo-Hyun and Sunwoo, Young. This committee reviews related party and other internal transactions and ensures compliance with the Monopoly Regulation and Fair Trade Act.

Item 6.D. Employees

As of December 31, 2014, we had 37,225 employees, including 19,538 persons employed by our subsidiaries, almost all of whom were employed within Korea. Of the total number of employees, approximately 80% are technicians and skilled laborers and 20% are administrative staff. We use subcontractors for maintenance, cleaning and transport activities. We had 34,713 employees, including 16,881 persons employed by our subsidiaries, as of December 31, 2013, and 35,094 employees, including 17,471 persons employed by our subsidiaries, as of December 31, 2012. To improve operational efficiency and increase labor productivity, we plan to reduce the number of our employees in future years through natural attrition. However, we expect the number of persons employed by our subsidiaries in growth industries to increase in the future.

We consider our relations with our work force to be excellent. We have never experienced a work stoppage or strike. Wages of our employees are among the highest of manufacturing companies in Korea. In addition to a base monthly wage, employees receive periodic bonuses and allowances. Base wages are determined annually following consultation between the management and employee representatives, who are currently elected outside the framework of the POSCO labor union. A labor union was formed by our employees in June 1988. Union membership peaked at 19,026 employees at the beginning of 1991, but has steadily declined since then. As of December 31, 2014, only 12 of our employees were members of the POSCO labor union.

In accordance with the National Pension Act of Korea, we contribute an amount equal to 4.5% of an employee’s standard monthly wages, and each employee contributes 4.5% of his or her standard monthly wages, into his or her personal pension account. Our employees, including executive officers as well as non-executive employees, are subject to a pension insurance system, under which we make monthly contributions to the pension accounts of the employees, and upon retirement, such employees are paid from their pension accounts. Prior to 2011, our executive and non-executive employees were subject to a lump-sum severance payment system, under which they were entitled to receive a lump-sum severance payment upon termination of their employment, based on their length of service and salary level at the time of termination. Starting in 2011, in accordance with the Korean Employee Retirement Income Security Act, we replaced such lump-sum severance payment system with our current pension insurance system in the form of either a defined benefit plan or a defined contribution plan, with a total unfunded portion of Won 125 billion as of December 31, 2014. Our employees have the option of choosing either the defined benefit plan or the defined contribution plan. Lump-sum severance amounts previously accrued prior to our adoption of the current pension insurance system continue to remain payable. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company-provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, and cultural and athletic facilities.

As of December 31, 2014, our employees owned, through our employee stock ownership association, approximately 0.001% of our common stock in their association accounts and 1.84% of our common stock in their employee accounts.

Item 6.E. Share Ownership

Common Stock

The persons who are currently our Directors or executive officers held, as a group, 20,586 common shares as of April 22, 2015, the most recent practicable date for which this information is available. The table below shows the ownership of our common shares by our Directors and executive officers.


Kwon, Oh-Joon			1,620
Park, Joo-Chul			680
Lee, Hoo-Geun			672
Park, Yong-Gyu			630
Yoon, Dong-Jun			581
Yim, Chang-Hee			509
Song, Sebin			500
Lee, Yun-Yong			494
Min, Kyung-Zoon			470
Kim, Jeong-Sik			464
Jeong, Chul-Gyu			450
Park, Sung-Ho			446
Kim, Hak-Yong			438
Kwon, Woo-Taeck			433
Nam, Sik			401
Lee, Tae-Ju			377
Kim, Hag-Dong			375
Kim, Hong-Soo			371
Kim, Sun-Koo			358
Ko, Suk-Bum			350
Shin, Chae-Chol			350
Kim, Kwang Soo			344
Yang, Seong-Sik			343
Lee, Chang-Sun			340
Lee, Woo Kyu			336
Kim, Dong-Ho			330


Yi, Sang-Ho			330
Lee, Eun-Seok			320
Han, Chan-Hee			320
Kim, Jin-Il			300
Kim, Soon-Ki			300
Yu, Seong			298
Yang, Weon-Jun			293
Cho, Il-Hyun			281
Kim, Jhi-Yong			273
Yoo, Byeong-Og			265
Choi, Joo			264
Kang, Seog-Beom			264
Lee, Jong-Seob			261
An, Tong-Il			260
Park, Young-Kwan			255
Lee, Young-Woo			252
Kwak, Jeong-Shik			219
Kim, Gyo-Sung			198
Chon, Jung-Son			194
Park, Hyeon			193
Lee, Young-Hoon			178
Yi, Kyung-Jo			160
Oh, In-Hwan			150
Son, Chang-Hwan			144
Shin, Geon			144
Moon, Hee-Kyung			143
Choi, Jong-Jin			141
Lim, Seung-Kyu			138
Chang, In-Hwa			130
Kim, Jun-Hyung			129
Chin, Kwang-Geun			122
Choo, Se-Don			116
Cho, Chung-Myong			100
Kim, Il-Sup			100
Hong, Moon-Hi			89
Jeong, Tak			80
Cho, Yong-Doo			80
Lee, Won-Hwi			78
Min, Jung Ki			77
Oh, Sung-Chel			59
Choi, Seung-Duk			50
Noh, Min-Yong			50
Yun, Han-Kuen			36
Kim, Gwang-Soo			27
Lee, Sang-Hyeon			25
Ha, Dae-Ryong			14
Lee, Duk-Lak			12
Bang, Gil-Ho			12
Jung, Dongchang			—
Han, Sung-Hee			—
Shin, Hak Kyun			—
Park, Mi Hwa			—
Yoon, Tae-Yang			—
Jeong, Ki Seop			—
Won, Hyung Il			—
Chon, Uong			—
Lee, Myoung-Woo			—
Sunwoo, Young			—
Ahn, Dong-Hyun			—
Bahk, Byong-Won			—
Kim, Joo-Hyun			—

Total			20,586

Stock Options

With respect to the options granted, we may elect either to issue shares of common stock, distribute treasury stock or to pay in cash the difference between the exercise and the market price at the date of exercise. The options may be exercised by a person who has continued employment with POSCO for two or more years from the date on which the options are granted. Expiration date of options is seven years from the date on which the options are granted. All of the stock options below relate to our common stock.

At the annual shareholders’ meeting held in February 2006, our shareholders elected to terminate the stock option program. Stock options granted prior to this meeting remain valid and outstanding pursuant to the articles of incorporation in effect at the time of the issuance of the stock option. Currently, there are no outstanding exercisable stock options. The following table sets forth information regarding the stock options we have granted to our current Directors and executive officers as of April 30, 2015.

Grant Date

Exercise Period

Exercise
Price

Granted
Options

Exercised
Options

Exercisable
Options

Director

From

Kwon, Oh-Joon

April 26, 2003

4/27/2005

4/26/2010

102,900

9,604

Kim, Jin-II

April 25, 2003

4/27/2005

4/26/2010

102,900

9,604

Item 7. Major Shareholders and Related Party Transactions

Item 7.A. Major Shareholders

The following table sets forth certain information relating to the shareholders of our common stock issued as of December 31, 2014.


Shareholders	Number of Shares Owned		Percentage
National Pension Service		7,203,493		8.26	%
Nippon Steel & Sumitomo Metal Corporation⁽¹⁾		4,394,712		5.04
Kingdom of Saudi Arabia		2,109,593		2.42
Hyundai Heavy Industries Co., Ltd. and subsidiaries		1,319,560		1.51
Pohang University of Science and Technology		1,905,000		2.18
KB Financial Group Inc. and subsidiaries		1,847,438		2.12
Directors and executive officers as a group		22,755		0.03
Public ⁽²⁾		61,190,477		70.18
POSCO (held in the form of treasury stock)		7,193,807		8.25

Total issued shares of common stock		87,186,835		100.00	%

(1)	Held in the form of ADRs.

(2)	Includes ADRs.

As of December 31, 2014, there were 12,905,615 shares of common stock outstanding in the form of ADRs, representing 14.80% of the total issued shares of common stock.

Item 7.B. Related Party Transactions

We have issued guarantees of Won 9,140 billion as of December 31, 2012, Won 9,704 billion as of December 31, 2013 and Won 10,260 billion as of December 31, 2014, in favor of affiliated and related companies. We have also engaged in various transactions with our subsidiaries and affiliated companies. See Notes 37 and 38 of Notes to Consolidated Financial Statements.

As of December 31, 2012, 2013 and 2014, we had no loans outstanding to our executive officers and Directors.

Item 7.C. Interests of Experts and Counsel

Not applicable

Item 8. Financial Information

Item 8.A. Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pages F-1 through F-113.

Legal Proceedings

During the course of its internal audit in July 2014, POSCO E&C, one of our subsidiaries, discovered certain officers’ use, for unauthorized and unidentified purposes, of approximately Won 10 billion belonging to POSCO E&C’s project management office and its subsidiary in Vietnam between 2009 to 2012, which related to certain construction projects in Vietnam. POSCO E&C, after such discovery through its internal audit, undertook an internal investigation over other projects for further assessment, strengthened its internal control procedures, such as segregating duties and enhancing monitoring procedures, to ensure similar cases do not arise and reprimanded the responsible employees, including dismissal of the responsible officers. In March 2015, the prosecutors’ office of Korea commenced an investigation into such use of funds after POSCO E&C’s internal audit result was publicized by the press. We are unable to predict the outcome of such investigation, which is currently on-going.

In 2012, the Korea Fair Trade Commission imposed a fine of Won 118 billion on us and POSCO Coated & Color Steel Co., Ltd., our consolidated subsidiary, for alleged antitrust violations, including price fixing of galvanization surcharge rates. We intend to vigorously defend against such administrative action and filed for judicial review of such administrative action in the Seoul High Court on February 28, 2013, which ruling is currently pending.

In April 2012, Nippon Steel & Sumitomo Metal Corporation filed civil lawsuits in Japan relating to claims of alleged improper acquisition and infringement of intellectual property rights related to production of grain oriented electrical steel sheets. Nippon Steel & Sumitomo Metal Corporation is seeking an injunction to prohibit us from manufacturing and selling the allegedly infringing products as well as seeking compensation of Yen 99 billion. We are vigorously defending against such claims. Since we do not believe that we have any present obligations, we have not recorded any provision for this lawsuit.

In May 2002, Industrial Development Bank of India Limited filed lawsuits against Daewoo International, Daewoo Motors India Ltd., Daewoo Co., Ltd. and Daewoo Engineering & Construction Co., Ltd. in the India Delhi Mumbai Court, seeking judgment relating to its loans to Daewoo Motors

India Ltd. guaranteed by Daewoo Co., Ltd. (predecessor of Daewoo International). The total claim amount of such lawsuits is Won 77 billion, and Daewoo International recorded provision of Won 23 billion relating to its portion of the guarantee. The outcome of such lawsuits remains uncertain and Daewoo International’s provision is classified as a non-current liability as of December 31, 2014.

Except as described above, we are not involved in any pending or threatened legal or arbitration proceedings that may have, or have had during the last 12 months, a material adverse effect on our results of operations or financial position.

Dividends

The amount of dividends paid on our common stock is subject to approval at the annual general meeting of shareholders, which is typically held in February or March of the following year. In addition to our annual dividends, our board of directors is authorized to declare and distribute interim dividends once a year under our articles of incorporation. If we decide to pay interim dividends, our articles of incorporation authorize us to pay them in cash, shares or other form of property to the shareholders of record as of June 30 of the relevant fiscal year. We may pay cash dividends out of retained earnings that have not been appropriated to statutory reserves.

The table below sets out the annual dividends declared on the outstanding common stock to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding common stock to shareholders of record on June 30 of the years indicated. A total of 87,186,835 shares of common stock were issued as of December 31, 2014. Of these shares and as of such date, 79,993,028 shares were outstanding and 7,193,807 shares were held by us in treasury. The annual dividends set out for each of the years below were paid in the immediately following year.


Year	Annual Dividend per Common Stock to Public	Interim Dividend per Common Stock	Average Total Dividend per Common Stock
	(In Won)
2010	7,500	2,500		10,000
2011	7,500	2,500		10,000
2012	6,000	2,000		8,000
2013	6,000	2,000		8,000
2014	6,000	2,000		8,000

Owners of the ADSs are entitled to receive any dividends payable in respect of the underlying shares of common stock.

Historically, we have paid to holders of record of our common stock an annual dividend. However, we can give no assurance that we will continue to declare and pay any dividends in the future.

Item 8.B. Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our Consolidated Financial Statements included in this annual report.

Item 9. The Offer and Listing

Item 9.A. Offer and Listing Details

Market Price Information

Notes

Not applicable

Common Stock

The principal trading market for our common stock is the KRX KOSPI Market. Our common stock, which is in registered form and has a par value of Won 5,000 per share, has been listed on the first section of the KRX KOSPI Market since June 1988 under the identifying code 005490. The table below shows the high and low trading prices and the average daily volume of trading activity on the KRX KOSPI Market for our common stock.


	Price				Average Daily Trading Volume
	High		Low		Average Daily Trading Volume
	(In Won)				(Number of Shares)
2010
First Quarter		625,000		516,000		255,173
Second Quarter		560,000		434,500		343,367
Third Quarter		524,000		460,500		257,784
Fourth Quarter		538,000		448,500		299,776
2011
First Quarter		517,000		450,500		345,785
Second Quarter		565,000		421,000		282,070
Third Quarter		480,000		358,500		277,876
Fourth Quarter		351,000		308,000		235,063
2012
First Quarter		424,000		376,000		198,239
Second Quarter		385,000		351,500		169,135
Third Quarter		391,000		353,500		159,508
Fourth Quarter		367,000		308,000		202,895
2013
First Quarter		371,000		321,500		169,232
Second Quarter		326,000		292,500		182,277
Third Quarter		340,000		292,500		225,474
Fourth Quarter		338,000		307,500		183,055
2014
First Quarter		322,000		272,500		222,494
Second Quarter		317,000		285,500		170,778
Third Quarter		361,000		291,500		201,548
Fourth Quarter		321,500		275,500		191,916
October		321,500		300,000		190,755
November		318,500		290,500		243,414
December		307,000		275,500		144,031
2015
First Quarter		290,500		242,500		211,737
January		290,500		252,500		201,172
February		277,000		254,000		175,370
March		278,000		242,500		249,924
Second Quarter (through April 17)		256,000		236,000		248,874
April (through April 17)		256,000		236,000		248,874

ADSs

Our common stock is also listed on the New York Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange in the form of ADSs. The ADSs have been issued by Citibank, N.A. as ADR depositary and are listed on the New York Stock Exchange under the symbol “PKX.” One ADS represents one-fourth of one share of common stock. As of December 31, 2014, 51,622,460 ADSs representing 12,905,615 common shares were outstanding, representing 14.80% shares of common stock.

The table below shows the high and low trading prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs.


	Price				Average Daily Trading Volume
	High		Low		Average Daily Trading Volume
	(In US$)				(Number of ADSs)
2010
First Quarter		140.10		108.23		429,700
Second Quarter		124.83		88.78		559,765
Third Quarter		113.98		94.67		344,102
Fourth Quarter		120.47		95.34		376,905
2011
First Quarter		117.57		100.50		403,646
Second Quarter		116.83		95.86		348,986
Third Quarter		112.41		76.01		344,454
Fourth Quarter		89.16		72.51		366,073
2012
First Quarter		94.06		80.28		268,347
Second Quarter		85.09		74.82		262,176
Third Quarter		85.55		77.21		190,260
Fourth Quarter		82.97		71.85		187,932
2013
First Quarter		86.69		72.41		258,130
Second Quarter		74.82		63.23		252,261
Third Quarter		78.75		64.29		186,347
Fourth Quarter		80.40		72.19		177,415
2014
First Quarter		75.88		64.03		298,320
Second Quarter		76.56		69.60		223,292
Third Quarter		86.37		71.97		232,861
Fourth Quarter		75.11		63.61		361,829
October		75.11		69.81		349,342
November		70.86		66.92		349,029
December		69.07		63.51		385,939
2015
First Quarter		66.00		54.66		305,147
January		66.00		58.23		294,290
February		63.41		58.36		345,571
March		63.43		54.66		280,105
Second Quarter (through April 20)		58.67		53.65		304,605
April (through April 20)		58.67		53.65		304,605

Item 9.B. Plan of Distribution

Not applicable

Item 9.C. Markets

The Korean Securities Market

On January 27, 2005, the Korea Exchange was established pursuant to the Korea Securities and Futures Exchange Act by consolidating the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc., or the KOSDAQ, and the KOSDAQ Committee of the Korea Securities Dealers Association, which had formerly managed the KOSDAQ. There are three different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, and the KRX Derivatives Market. The Korea Exchange has two trading floors located in Seoul, one for the KRX KOSPI Market and one for the KRX KOSDAQ Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a limited liability company, the shares of which are held by (i) investment brokers and investment dealers that were formerly members of the Korea Futures Exchange or the Korea Stock Exchange and (ii) the stockholders of the KOSDAQ. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members most of the Korean investment brokers and investment dealers and some Korean branches of foreign investment brokers and investment dealers.

According to data published by the Korea Exchange, as of December 31, 2014, the aggregate market value of equity securities listed on the KRX KOSPI Market and the KRX KOSDAQ Market was approximately Won 1,335 trillion, and the average daily trading volume of equity securities for 2014 was approximately 632 million shares with an average transaction value of Won 5,953 billion. The Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security pursuant to the Regulation on Listing on the Korea Exchange. The Korea Exchange also restricts share price movements. All listed companies are required to file accounting reports annually, semi-annually and quarterly and to release immediately all information that may affect trading in a security.

The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community that can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.

The Korea Exchange publishes the Korea Composite Stock Price Index, or KOSPI, every ten seconds, which is an index of all equity securities listed on the Korea Exchange. On January 1, 1983, the method of computing KOSPI was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

Movements in KOSPI are set out in the following table together with the associated dividend yields and price earnings ratios.


									Period Average
Year	Opening		High		Low		Closing		Dividend Yield ⁽¹⁾⁽²⁾ (Percent)		Price Earnings Ratio ⁽²⁾⁽³⁾
1986		161.40		279.67		153.85		272.61		4.3		7.6
1987		264.82		525.11		264.82		525.11		2.6		10.9
1988		532.04		922.56		527.89		907.20		2.4		11.2
1989		919.61		1,007.77		844.75		909.72		2.0		13.9
1990		908.59		928.82		566.27		696.11		2.2		12.8
1991		679.75		763.10		586.51		610.92		2.6		11.2
1992		624.23		691.48		459.07		678.44		2.2		10.9
1993		697.41		874.10		605.93		866.18		1.6		12.7
1994		879.32		1,138.75		855.37		1,027.37		1.2		16.2
1995		1,027.45		1,016.77		847.09		882.94		1.2		16.4
1996		882.29		986.84		651.22		651.22		1.3		17.8
1997		647.67		792.29		350.68		376.31		1.5		17.0
1998		374.41		579.86		280.00		562.46		1.9		10.8
1999		565.10		1,028.07		498.42		1,028.07		1.1		13.5
2000		1,028.33		1,059.04		500.60		504.62		1.6		18.6
2001		503.31		704.50		468.76		693.70		2.0		14.2
2002		698.00		937.61		584.04		627.55		1.4		17.8
2003		633.03		822.16		515.24		810.71		2.2		10.9
2004		821.26		936.06		719.59		895.92		2.1		15.8
2005		896.00		1,379.37		870.84		1,379.37		1.7		11.0
2006		1,383.32		1,464.70		1,203.86		1,434.46		1.7		11.4
2007		1,438.89		2,015.48		1,345.08		1,897.13		1.4		16.8
2008		1,891.45		1,888.88		938.75		1,124.47		2.6		8.9
2009		1,132.87		1,718.88		1,018.81		1,682.77		1.2		23.7
2010		1,681.71		2,052.97		1,552.79		2,051.00		1.1		19.0
2011		2,063.69		2,231.47		1,644.11		1,825.12		1.3		13.1
2012		1,831.69		2,057.28		1,758.99		1,997.05		1.3		12.9
2013		2,031.10		2,059.58		1,780.63		2,011.34		1.1		15.0
2014		2,013.11		2,093.08		1,881.73		1,915.19		1.1		15.3
2015 (through April 17)		1,914.24		2,144.76		1,876.27		2,143.50		1.0		17.9

Source: The KRX KOSPI Market

(1)	Dividend yields are based on daily figures. Before 1983, dividend yields were calculated at the end of each month. Dividend yields after January 3, 1984 include cash dividends only.

(2)

Starting in April 2000, dividend yield and price earnings ratio are calculated based on KOSPI 200, an index of 200 equity securities listed on the KRX KOSPI Market. Starting in April 2000, KOSPI 200 excludes classified companies, companies which did not submit annual reports to the KRX KOSPI Market, and companies which received qualified opinion from external auditors.

(3)	The price earnings ratio is based on figures for companies that record a profit in the preceding year.

Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period. Since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.

With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Korea Exchange to 15% of the previous day’s closing price of the shares, rounded down as set out below:


Previous Day’s Closing Price (Won)	Rounded Down to (Won)
Less than 5,000		5
5,000 to less than 10,000		10
10,000 to less than 50,000		50
50,000 to less than 100,000		100
100,000 to less than 500,000		500
500,000 or more		1,000

As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.

Due to deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the Korea Exchange by the financial investment companies with a brokerage license. In addition, a securities transaction tax of 0.15% of the sales price will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares if traded on the KRX KOSPI Market. An agricultural and fishery special surtax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the Korea Exchange. See “Item 10. Additional Information — Item 10.E. Taxation — Korean Taxation.”

The number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:


	Market Capitalization on the Last Day of Each Period						Average Daily Trading Volume, Value
Year	Number of Listed Companies		(Billions of Won)		(Millions of US$) ⁽¹⁾		Thousands of Shares		(Millions of Won)		(Thousands of US$) ⁽¹⁾
1986		355	￦	11,994	US$	13,924		31,755	￦	32,870	US$	38,159
1987		389		26,172		33,033		20,353		70,185		88,583
1988		502		64,544		94,348		10,367		198,364		289,963
1989		626		95,477		140,490		11,757		280,967		414,430
1990		669		79,020		110,301		10,866		183,692		256,411


	Market Capitalization on the Last Day of Each Period						Average Daily Trading Volume, Value
Year	Number of Listed Companies		(Billions of Won)		(Millions of US$) ⁽¹⁾		Thousands of Shares		(Millions of Won)		(Thousands of US$) ⁽¹⁾
1991		686		73,118		96,107		14,022		214,263		281,629
1992		688		84,712		107,448		24,028		308,246		390,977
1993		693		112,665		139,420		35,130		574,048		710,367
1994		699		151,217		191,730		36,862		776,257		984,223
1995		721		141,151		182,201		26,130		487,762		629,613
1996		760		117,370		139,031		26,571		486,834		576,680
1997		776		70,989		50,162		41,525		555,759		392,707
1998		748		137,799		114,091		97,716		660,429		546,803
1999		725		349,504		305,137		278,551		3,481,620		3,039,655
2000		704		188,042		149,275		306,163		2,602,211		2,065,739
2001		689		255,850		192,934		473,241		1,997,420		1,506,237
2002		683		258,681		215,496		857,245		3,041,598		2,533,815
2003		684		355,363		296,679		542,010		2,216,636		1,850,589
2004		683		412,588		395,275		372,895		2,232,109		2,138,445
2005		702		655,075		646,158		467,629		3,157,662		3,114,679
2006		731		704,588		757,948		279,096		3,435,180		3,695,331
2007		745		951,900		1,016,770		363,741		5,539,653		5,917,168
2008		763		576,888		458,758		352,599		3,211,039		2,553,510
2009		770		887,935		762,503		485,657		5,595,552		4,976,859
2010		777		1,141,885		1,006,243		380,859		5,619,768		4,952,210
2011		791		1,041,999		904,670		353,760		6,836,146		5,935,185
2012		930		1,154,294		1,078,578		486,479		4,823,642		4,507,234
2013		777		1,185,974		1,123,720		328,425		3,993,422		3,783,800
2014		773		1,192,253		1,084,655		278,081		3,983,580		3,624,072
2015 (through April 17)		764		1,266,908		1,163,368		410,425		5,156,786		4,735,341

Source: The Korea Exchange

(1)	Converted at the Concentration Base Rate of The Bank of Korea or the Market Average Exchange Rate, as the case may be, at the end of the periods indicated.

The Korean securities markets are principally regulated by the Financial Services Commission and under the regulations set forth in the FSCMA. In July 2007, the National Assembly of Korea enacted the FSCMA. The FSCMA, which came into effect on February 4, 2009, comprehensively regulates the Korean capital markets, the financial investment business (including collective investment businesses and trust businesses) and financial investment products (such as securities and derivatives). The FSCMA imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests. The FSCMA regulates the operation and monitoring of the securities and derivatives markets.

Protection of Customer’s Interest in Case of Insolvency of Investment Brokers or Investment Dealers

Under Korean law, the relationship between a customer and an investment broker or an investment dealer in connection with a securities sell or buy order is deemed to be a consignment and the securities acquired by a consignment agent (i.e., the investment broker or the investment dealer) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving an investment broker or an investment dealer, the customer of the investment broker or the investment dealer is entitled to the proceeds of the securities sold by the investment broker or the investment dealer.

When a customer places a sell order with an investment broker or an investment dealer that is not a member of the KRX KOSPI Market or the KRX KOSDAQ Market and this investment broker or investment dealer places a sell order with another investment broker or investment dealer that is a member of the KRX KOSPI Market or the KRX KOSDAQ Market, the customer is still entitled to the proceeds of the securities sold and received by the non- member company from the member company regardless of the bankruptcy or reorganization of the non-member company.

Under the FSCMA, the Korea Exchange is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by members of the KRX KOSPI Market or the KRX KOSDAQ Market. If an investment broker or an investment dealer that is a member of the KRX KOSPI Market or the KRX KOSDAQ Market breaches its obligation in connection with a buy order, the Korea Exchange is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.

When a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.

As the cash deposited with an investment broker or an investment dealer is regarded as belonging to the investment broker or investment dealer, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the investment broker or the investment dealer if a bankruptcy or rehabilitation procedure is instituted against the investment broker or the investment dealer and, therefore, can suffer from loss or damage as a result. However, in case of the investment broker or the investment dealer’s bankruptcy, liquidation, cancellation of investment broker or investment dealer license or other insolvency events, the Depositor Protection Act provides that the Korea Deposit Insurance Corporation will, upon the request of the investors, pay each investor up to a total of Won 50 million, which shall represent both actual cash deposited and any interest accrued thereon. Pursuant to the FSCMA, as amended, investment brokers or investment dealers are required to deposit the cash received from its customers at the securities finance company established pursuant to the FSCMA. Set-off or attachment of cash deposits by investment brokers or investment dealers is prohibited. The premiums related to this insurance are paid by investment brokers or investment dealers.

Clearance and Settlement

The settlement of trades on the Korea Exchange is required to be handled by a settlement agency of the Korea Exchange. The Korea Securities Depository is the institution commissioned by the Korea Exchange to handle all such settlement of trades. The settlement of trades on the Korea Exchange takes place through a clearance and settlement procedure. The Korea Exchange has adopted the multilateral netting system and carries out the clearance of the trades by netting the sales and purchases of each Korea Securities Depository participant. The Korea Exchange is required to provide the daily net settlement results of the trades to the Korea Securities Depository one business day after the day of the sale and purchase contract. The Korea Securities Depository then handles settlement of the securities and the funds based on the information received from the Korea Exchange. The securities are settled through book-entry changes in the accounts of Korea Securities Depository participants and the funds are settled by transfer to an account at a bank designated by the Korea Securities Depository. Settlement of trades is generally required to take place on the third day following the day of the sale and purchase contract.

Item 9.D. Selling Shareholders

Not applicable

Item 9.E. Dilution

Not applicable

Item 9.F. Expenses of the Issuer

Not applicable

Item 10. Additional Information

Item 10.A. Share Capital

Currently, our authorized share capital is 200,000,000 shares, which consists of shares of common stock, par value Won 5,000 per share (“Common Shares”) and shares of non-voting stock, par value Won 5,000 per share (“Non-Voting Preferred Shares”). Our Non-Voting Preferred Shares have a preferential right to dividend payments. Common Shares and Non-Voting Preferred Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issue Non-Voting Preferred Shares up to the limit prescribed by applicable law, the aggregate of which currently is one-quarter of our total issued and outstanding capital stock. As of December 31, 2014, 87,186,835 Common Shares were issued, of which 7,193,807 shares were held by us in treasury. We have never issued any Non-Voting Preferred Shares. All of the issued and outstanding Common Shares are fully-paid and non-assessable and are in registered form. We issue share certificates in denominations of 1, 3, 4, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.

Item 10.B. Memorandum and Articles of Association

This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the FSCMA, the Commercial Code and related laws, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the FSCMA and the Commercial Code. We have filed copies of our articles of incorporation and these laws (except for the newly enacted the FSCMA) as exhibits to registration statements under the Securities Act or the Securities Exchange Act previously filed by us.

Dividends

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. The Common Shares represented by the ADSs have the same dividend rights as other outstanding Common Shares.

Holders of Non-Voting Preferred Shares are entitled to receive dividends in priority to the holders of Common Shares in an amount not less than 9% of the par value of the Non-Voting Preferred Shares as determined by the board of directors at the time of their issuance. If the amount available for dividends is less than the aggregate amount of such minimum dividend, we do not have to declare dividends on the Non-Voting Preferred Shares.

We may declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash, Shares or other form of property. However, a dividend of Shares must be distributed at par value. Dividends in Shares may not exceed one-half of the annual dividend. In addition, we may declare, and distribute in cash, shares or other forms of property, interim dividends pursuant to a board resolution once a fiscal year to the eligible shareholders recorded as of June 30 of the relevant fiscal year. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.

Under the Commercial Code, we may pay an annual dividend only to the extent the net asset amount in our balance sheets exceeds the sum of the following: (i) our stated capital, (ii) the total amount of our capital surplus reserve and legal reserve accumulated up to the end of the relevant dividend period, (iii) the legal reserve to be set aside for annual dividend, and (iv) unrealized profits determined in the Presidential Decree to the Commercial Code. We may not pay an annual dividend unless we have set aside as earned surplus reserve an amount equal to at least 10% of the cash portion of the annual dividend or unless we have accumulated earned surplus reserve of not less than one-half of our stated capital. We may not use legal reserve to pay cash dividends but may transfer amounts from legal reserve to capital stock or use legal reserve to reduce an accumulated deficit.

Distribution of Free Shares

In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.

Preemptive Rights and Issuance of Additional Shares

We may issue authorized but unissued shares at the times and, unless otherwise provided in the Commercial Code, on the terms our board of directors may determine. All our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give public notice of the preemptive rights regarding new Shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.

Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:

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offered publicly or to underwriters for underwriting pursuant to the FSCMA;

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issued to members of our employee stock ownership association pursuant to the FSCMA;

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represented by depositary receipts pursuant to the FSCMA;

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issued in a general public offering pursuant to a board resolution in accordance with the FSCMA, the amount of which is no more than 10% of the outstanding Shares;

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issued to our creditors pursuant to a debt-equity swap;

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issued to domestic or foreign corporations pursuant to a joint venture agreement, strategic coalition or technology inducement agreement when deemed necessary for management purposes; or

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issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.

In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of Won 2 trillion, to persons other than existing shareholders.

Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20% of the Shares publicly offered pursuant to the FSCMA. This right is exercisable only to the extent that the total number of

Shares so acquired and held by members of our employee stock ownership association does not exceed 20% of the total number of Shares then issued. As of December 31, 2014, our employees owned, through our employee stock ownership association, approximately 0.001% of our common stock in their association accounts and 1.84% of our common stock in their employee accounts.

General Meeting of Shareholders

We hold the annual general meeting of shareholders within three months after the end of each fiscal year. The record date of the register of shareholders is December 31 of each year, and such shareholders listed on the register of shareholder as of the record date are entitled to exercise their right at the general meeting of shareholders. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:

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as necessary;

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at the request of holders of an aggregate of 3% or more of our outstanding Shares;

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at the request of shareholders holding an aggregate of 1.5% or more of our outstanding Shares for at least six months; or

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at the request of our audit committee.

Holders of Non-Voting Preferred Shares may request a general meeting of shareholders only after the Non-Voting Preferred Shares become entitled to vote or “enfranchised,” as described under “— Voting Rights” below.

We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of 1% or less of the total number of issued and outstanding voting Shares, we may give notice by placing at least two public notices in at least two daily newspapers or by notices to be posted on the electronic disclosure database system maintained by the Financial Supervisory Service or the Korea Exchange at least two weeks in advance of the meeting. Currently, we use The Seoul Shinmun published in Seoul, The Maeil Shinmun published in Taegu and The Kwangju Ilbo published in Kwangju for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders of Non-Voting Preferred Shares, unless enfranchised, are not entitled to receive notice of general meetings of shareholders, but may attend such meetings. Our general meetings of shareholders are held either in Pohang or Seoul.

Voting Rights

Holders of our Common Shares are entitled to one vote for each Common Share, except that voting rights of Common Shares held by us, or by a corporate shareholder that is more than 10% owned by us either directly or indirectly, may not be exercised. The Commercial Code permitted cumulative voting, under which voting method each shareholder would have multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting Shares present or represented at the meeting, where the affirmative votes also represent at least one-fourth of our total voting Shares then issued and outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting Shares present or represented at a meeting, where the affirmative votes also represent at least one-third of our total voting Shares then issued and outstanding:

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amending our articles of incorporation;

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removing a director;

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effecting any dissolution, merger or consolidation of us;

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transferring the whole or any significant part of our business;

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acquisition of all or a part of the business of any other company that may have a material impact on our business;

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issuing any new Shares at a price lower than their par value; or

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approving matters required to be approved at a general meeting of shareholders, which have material effects on our assets, as determined by the Board of Directors.

In general, holders of Non-Voting Preferred Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, or any merger or consolidation of us, or in some other cases that affect the rights or interests of the Non-Voting Preferred Shares, approval of the holders of Non-Voting Preferred Shares is required. We may obtain the approval by a resolution of holders of at least two-thirds of the Non-Voting Preferred Shares present or represented at a class meeting of the holders of Non-Voting Preferred Shares, where the affirmative votes also represent at least one-third of our total issued and outstanding Non-Voting Preferred Shares.

Shareholders may exercise their voting rights by proxy. When a shareholder is a corporate entity, such shareholder may give proxies to its officers or directors.

Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying Common Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Common Shares underlying their ADSs.

Rights of Dissenting Shareholders

In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their Shares. Only the shareholders who have executed a share purchase agreement evidencing their acquisition of the relevant Shares on or prior to the day immediately following the public disclosure of the board resolutions approving any of the aforementioned transactions have the rights to require us to purchase their Shares. To exercise this right, shareholders, including holders of Non-Voting Preferred Shares, must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their Shares. We are obligated to purchase the Shares of dissenting shareholders within one month after the expiration of the 20-day period. The purchase price for the Shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily Share prices on the Korea Exchange for the two-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily Share price on the Korea Exchange for the one month period before the date of the adoption of the relevant resolution and (3) the weighted average of the daily Share price on the Korea Exchange for the one week period before such date of the adoption of the relevant resolution. However, the court may determine this price if we or dissenting shareholders do not accept the purchase price. Holders of ADSs will not be able to exercise dissenter’s rights unless they have withdrawn the underlying common stock and become our direct shareholders.

Register of Shareholders and Record Dates

Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registers transfers of Shares on the register of shareholders on presentation of the Share certificates.

The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from January 1 to January 15 of each year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.

Annual Report

At least one week before the annual general meeting of shareholders, we must make our annual report and audited financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

Under the FSCMA, we must file with the Financial Services Commission and the Korea Exchange (1) an annual business report within 90 days after the end of our fiscal year, (2) a half-year report within 45 days after the end of the first six months of our fiscal year, and (3) quarterly reports within 45 days after the end of the third month and the ninth month of our fiscal year. Copies of these reports are or will be available for public inspection at the Financial Services Commission and the Korea Exchange.

Transfer of Shares

Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. A non-Korean shareholder may file a specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.

Under current Korean regulations, the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a brokerage, dealing or collective investment license and internationally recognized custodians may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares by non-residents or non-Koreans. See “Item 10. Additional Information — Item 10.D. Exchange Controls.”

Our transfer agent is Kookmin Bank, located at 26, Gukjegeumyung-ro, Yeongdeungpo-gu, Seoul, Korea.

Acquisition of Shares by Us

We may acquire our own Shares, subject to the approval by the general meeting of shareholders. In addition, we may acquire Shares through purchases on the Korea Exchange or through a tender offer or by acquiring the interests in a trust account holding our own Shares through agreements with trust companies and asset management companies. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends available at the end of the preceding fiscal year less the amount of dividends and mandatory reserves required to be set aside for that fiscal year, subject to certain procedural requirements.

In accordance with the Commercial Code, we may resell or transfer any Shares acquired by us to a third party, subject to the approval by the Board of Directors. In general, corporate entities in which we own more than 50% equity interest may not acquire our Shares. Under the FSCMA, we are subject to certain selling restrictions for the Shares acquired by us.

Liquidation Rights

In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders of Non-Voting Preferred Shares have no preference in liquidation.

Item 10.C. Material Contracts

None.

Item 10.D. Exchange Controls

Shares and ADSs

The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively, “Foreign Exchange Transaction Laws”) and the Foreign Investment Promotion Law regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities subject to procedural requirements in accordance with these laws. The Financial Services Commission has also adopted, pursuant to its authority under the FSCMA, regulations that restrict investment by foreigners in Korean securities.

Subject to certain limitations, the Ministry of Strategy and Finance has the authority to take the following actions under the Foreign Exchange Transaction Laws:

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if the Government deems it necessary on account of war, armed conflict, natural disaster or grave and sudden and significant changes in domestic or foreign economic circumstances or similar events or circumstances, the Ministry of Strategy and Finance may temporarily suspend performance under any or all foreign exchange transactions, in whole or in part, to which the Foreign Exchange Transaction Laws apply (including suspension of payment and receipt of foreign exchange) or impose an obligation to deposit, safe-keep or sell any means of payment to The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies; and

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if the Government concludes that the international balance of payments and international financial markets are experiencing or are likely to experience significant disruption or that the movement of capital between Korea and other countries is likely to adversely affect the Won, exchange rates or other macroeconomic policies, the Ministry of Strategy and Finance may take action to require any person who intends to effect a capital transaction to obtain permission or to require any person who effects a capital transaction to deposit a portion of the means of payment acquired in such transactions with The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies.

Government Review of Issuance of ADSs

In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with our designated foreign exchange bank or the Ministry of Strategy and Finance, depending on the issuance amount. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.

Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required.

Reporting Requirements for Holders of Substantial Interests

Under the FSCMA, any person whose direct or beneficial ownership of shares with voting rights, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively, “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5% or more of the total outstanding Equity Securities is required to report the status and the purpose (whether or not to exert an influence on management control over the issuer) of the holdings to the Financial Services Commission and the Korea Exchange within five business days after reaching the 5% ownership interest. In addition, any change in the purpose of holding such ownership interest or a change in the ownership interest subsequent to the report which equals or exceeds 1% of the total outstanding Equity Securities is required to be reported to the Financial Services Commission and the Korea Exchange within five business days from the date of the change. However, the reporting deadline of such reporting requirement is extended to the tenth day of the month immediately following the month of such change in their shareholding for (1) certain professional investors, as specified under the FSCMA, or (2) persons who hold shares for purposes other than management control. Those who report the purpose of shareholding as management control of the issuer are prohibited from exercising their voting rights and acquiring additional shares for five days subsequent to their report under the FSCMA.

Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the ownership of Equity Securities exceeding 5%. Furthermore, the Financial Services Commission may issue an order to dispose of non-reported Equity Securities.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of a company’s shares accounts for 10% or more of the total issued and outstanding shares with voting rights (a “major stockholder”) must report the status of his or her shareholding to the Securities and Futures Commission and the Korea Exchange within five business days after he or she becomes a major stockholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Securities and Futures Commission and the Korea Exchange by the fifth business day of any changes in his or her shareholding. Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment.

Under the KRX regulations, if a company listed on the KRX KOSPI Market has submitted public disclosure of material matters to a foreign financial investment supervisory authority pursuant to the laws of the foreign jurisdiction, then it must submit a copy of the public disclosure and a Korean translation thereof to the Korea Exchange. In addition, if a company listed on the KRX KOSPI Market is approved for listing on a foreign stock exchange or determined to be de-listed from the foreign stock exchange or actually lists on, or de-lists from, a foreign stock exchange, then it must submit to the Korea Exchange a copy, together with a Korean translation thereof, of all documents submitted to, or received from, the relevant foreign government, supervisory authority or stock exchange.

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the Financial Supervisory Service as described below. The acquisition of the shares by a foreigner must be immediately reported by the foreigner or his standing proxy in Korea to the Governor of the Financial Supervisory Service (“Governor”).

Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.

In addition, under the Financial Services Commission regulations, effective as of November 30, 2006, we are required to file a securities registration statement with the Financial Services Commission and such securities registration statement has to become effective pursuant to the FSCMA in order for us to issue shares represented by ADSs, except in certain limited circumstances.

Restrictions Applicable to Shares

Under the Foreign Exchange Transaction Laws and the Financial Services Commission regulations (together, the “Investment Rules”), foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including, among others:

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odd-lot trading of shares;

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acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company;

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acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

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over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded with certain exceptions;

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shares acquired by direct investment as defined in the Foreign Investment Promotion Law;

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disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;

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disposal of shares in connection with a tender offer;

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acquisition of shares by a foreign depositary in connection with the issuance of depositary receipts;

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acquisition and disposal of shares through overseas stock exchange market if such shares are simultaneously listed on the KRX KOSPI Market or the KRX KOSDAQ Market and such overseas stock exchange; and

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arm’s length transactions between foreigners, if all of such foreigners belong to an investment group managed by the same person.

The Investment Rules require a foreign investor who wishes to invest in shares for the first time on the Korea Exchange (including Converted Shares) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares or who acquire the shares in an over-the-counter transaction or dispose of shares where such acquisition or disposal is deemed to be a foreign direct investment pursuant to the Foreign Investment Promotion Law. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration card which must be presented each time the foreign investor opens a brokerage account with a financial investment company with a brokerage license or dealing license in Korea. Foreigners eligible to obtain an investment registration card include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international

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organizations, corporations incorporated under foreign laws and any person in any additional category designated by the Enforcement Decree to the FSCMA. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the Korea Exchange, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the Korea Exchange (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor at the time of each such acquisition or sale; provided, however, that a foreign investor must ensure that any acquisition or sale by it of shares outside the Korea Exchange in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor by the Korea Securities Depository, financial investment companies with a dealing or brokerage license or securities finance companies engaged to facilitate such transaction. A foreign investor must appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks) financial investment companies with a dealing, brokerage or collective investment license and internationally recognized custodians which will act as a standing proxy to exercise shareholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor in cases deemed inevitable by reason of conflict between laws of Korea and those of the home country of the foreign investor.

Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license, the Korea Securities Depository and internationally recognized custodians are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person according to its articles of incorporation. We set this ceiling at 3% until the discontinuation of our designation as a public corporation on September 28, 2000. As a result, we currently do not have any ceiling on the acquisition of shares by a single person or by foreigners in the aggregate. Furthermore, an investment by a foreign investor of not less than 10% of the outstanding shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Law, which is, in general, subject to the report to, and acceptance by, the Ministry of Trade, Industry & Energy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the

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purchase price of, a stock purchase transaction to a Won account opened in the name of a financial investment company with a dealing, brokerage or collective investment license. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s financial investment company with a dealing, brokerage or collective investment license or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Financial investment companies with a dealing, brokerage or collective investment license are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these financial investment companies and asset management companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, as counterparty to foreign investors, without the investors having to open their own accounts with foreign exchange banks.

Item 10.E. Taxation

The following summary is based upon tax laws of the United States and Korea as in effect on the date of this annual report on Form 20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the shares of common stock or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any foreign, state or local tax laws.

Korean Taxation

The following is a summary of the principal Korean tax consequences to owners of the common shares or ADSs, as the case may be, who are non-resident individuals or non-Korean corporations without a permanent establishment in Korea to which the relevant income is attributable or with which the relevant income is effectively connected (“Non-resident Holders”). The statements regarding Korean tax laws set forth below are based on the laws in force and as interpreted by the Korean taxation authorities as of the date hereof. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor and potential investors are advised to satisfy themselves as to the overall tax consequences of the acquisition, ownership and disposition of the common shares or ADSs, including specifically the tax consequences under Korean law, the laws of the jurisdiction of which they are resident, and any tax treaty between Korea and their country of residence, by consulting their own tax advisers.

Tax on Dividends

Dividends on the common shares or ADSs paid (whether in cash or in shares) to a Non-resident Holder will be subject to Korean withholding taxes at the rate of 22% (including local income tax) or such lower rate as is applicable under a treaty between Korea and such Non-resident Holder’s country of tax residence. Free distributions of shares representing a capitalization of certain capital surplus reserves may be subject to Korean withholding taxes.

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The tax is withheld by the payer of the dividend. Since the payer is required to withhold the tax, Korean law does not entitle the person who was subject to the withholding of Korean tax to recover from the Government any part of the Korean tax withheld, even if it subsequently produces evidence that it was entitled to have tax withheld at a lower rate, except in certain limited circumstances.

Tax on Capital Gains

As a general rule, capital gains earned by Non-resident Holders upon transfer of the common shares or ADSs are subject to Korean withholding tax at the lower of (i) 11% (including local income tax) of the gross proceeds realized or (ii) 22% (including local income tax) of the net realized gains (subject to the production of satisfactory evidence of the acquisition costs and certain direct transaction costs), unless exempt from Korean income taxation under the effective Korean tax treaty with the Non-resident Holder’s country of tax residence.

However, a Non-resident Holder will not be subject to Korean income taxation on capital gains realized upon the sale of the common shares through the KRX KOSPI Market if the Non-resident Holder (i) has no permanent establishment in Korea and (ii) did not or has not owned (together with any shares owned by any entity with a specified special relationship with such Non-resident Holder) 25% or more of the total issued and outstanding shares of us at any time during the calendar year in which the sale occurs and during the five calendar years prior to the calendar year in which the sale occurs.

It should be noted that capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from a transfer of ADSs outside Korea will generally be exempt from Korean income taxation, provided that the ADSs are deemed to have been issued overseas. If and when an owner of the underlying common shares transfers the ADSs following the conversion of the underlying shares for ADSs, such person will not be exempt from Korean income taxation.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (1) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea and (2) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. The taxes are imposed if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.

Under Korean inheritance and gift tax laws, securities issued by a Korean corporation are deemed to be located in Korea irrespective of where they are physically located or by whom they are owned.

Securities Transaction Tax

Securities transaction tax is imposed on the transfer of shares issued by a Korean corporation or the right to subscribe for such shares generally at the rate of 0.5% of the sales price. In the case of the transfer of shares listed on the KRX KOSPI Market (such as the common shares), the securities transaction tax is imposed generally at the rate of (i) 0.3% of the sales price of such shares (including agricultural and fishery special surtax thereon) if traded on the KRX KOSPI Market or (ii) subject to certain exceptions, 0.5% of the sales price of such shares if traded outside the KRX KOSPI Market.

Securities transaction tax or the agricultural and fishery special surtax is not applicable if (i) the shares or rights to subscribe for shares are listed on a designated foreign stock exchange and (ii) the sale of the shares takes place on such exchange.

Securities transaction tax, if applicable, must be paid by the transferor of the shares or rights, in principle. When the transfer is effected through a securities settlement company, such settlement

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company is generally required to withhold and pay (to the tax authority) the tax, and when such transfer is made through a financial investment company with a brokerage license only, such company is required to withhold and pay the tax. Where the transfer is effected by a Non-resident Holder without a permanent establishment in Korea, other than through a securities settlement company or a financial investment company with a brokerage license, the transferee is required to withhold the securities transaction tax. Failure to do so will result in the imposition of penalties equal to the sum of (i) between 10% to 40% of the tax amount due, depending on the nature of the improper reporting, and (ii) 10.95% per annum on the tax amount due for the default period.

Tax Treaties

Currently, Korea has income tax treaties with a number of countries, including, inter alia, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Luxembourg, Ireland, the Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, the United Kingdom and the United States of America, under which the rate of withholding tax on dividend and interest is reduced, generally to between 5% and 16.5% (including local income tax), and the tax on capital gains derived by a non-resident from the transfer of securities issued by a Korean company is often eliminated.

Each Non-resident Holder of common shares should inquire for itself whether it is entitled to the benefits of a tax treaty with Korea. It is the responsibility of the party claiming the benefits of a tax treaty in respect of interest, dividend, capital gains or “other income” to submit to us (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, prior to or at the time of payment, such evidence of tax residence of the party claiming the treaty benefit as the Korean tax authorities may require in support of its claim for treaty protection. In the absence of sufficient proof, we (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, must withhold tax at the normal rates.

Furthermore, in order for a non-resident of Korea to obtain the benefits of tax exemption on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires such non-resident (or its agent) to submit to the payer of such Korean source income an application for a tax exemption along with a certificate of tax residency of such non-resident issued by a competent authority of the non-resident’s country of tax residence, subject to certain exceptions. The payer of such Korean source income, in turn, is required to submit such application to the relevant district tax office by the ninth day of the month following the date of the first payment of such income.

For a non-resident of Korea to obtain the benefits of treaty-reduced tax rates on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires such non-resident (or its agents) to submit to the payer of such Korean source income an application for treaty-reduced tax rates prior to receipt of such Korean source income; provided, however, that an owner of ADSs who is a non-resident of Korea is not required to submit such application, if the Korean source income on the ADSs is paid through an account opened at the Korea Securities Depository by a foreign depository.

At present, Korea has not entered into any tax treaty relating to inheritance or gift tax.

United States Taxation

This summary describes the material U.S. federal income tax consequences for a U.S. holder (as defined below) of owning our shares of common stock or ADSs. This summary applies to you only if you hold shares of common stock or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:

•

a dealer in securities or currencies;

•

a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;

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•

a bank;

•

a life insurance company;

•

a tax-exempt organization;

•

a person that holds shares of common stock or ADSs that are a hedge or that are hedged against interest rate or currency risks;

•

a person that holds shares of common stock or ADSs as part of a straddle or conversion transaction for tax purposes;

•

a person whose functional currency for tax purposes is not the Dollar;

•

a person that owns or is deemed to own 10% or more of any class of our stock; or

•

a partnership that holds shares of common stock or ADSs, or a partner therein.

This summary is based on laws, treaties and regulatory interpretations in effect on the date hereof, all of which are subject to change, possibly on a retroactive basis.

Please consult your own tax advisers concerning the U.S. federal, state, local and other foreign tax consequences of purchasing, owning and disposing of shares of common stock or ADSs in your particular circumstances.

For purposes of this summary, you are a “U.S. holder” if you are a beneficial owner of a share of common stock or ADS that is:

•

a citizen or resident of the United States;

•

a U.S. domestic corporation; or

•

subject to U.S. federal income tax on a net income basis with respect to income from the share of common stock or ADS.

Shares of Common Stock and ADSs

In general, if you are the beneficial owner of ADSs, you will be treated as the beneficial owner of the shares of common stock represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the shares of common stock represented by that ADS.

Dividends

The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income. Dividends paid in Won will be included in your income in a Dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the payment is in fact converted into Dollars. If such a dividend is converted into Dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisers regarding the treatment of any foreign currency gain or loss on any Won received by U.S. holders that are converted into Dollars on a date subsequent to receipt.

Subject to certain exceptions for short-term and hedged positions, the Dollar amount of dividends received by an individual with respect to the ADSs and common stock will be subject to taxation at a preferential rate applicable to long-term capital gains if the dividends are “qualified dividends.” Dividends paid on the ADSs and common stock will be treated as qualified dividends if

105

(i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service has approved for the purposes of the qualified dividend rules and (ii) we were not, in the year prior to the year in which the dividend is paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The income tax treaty between Korea and the United States (“Treaty”) has been approved for the purposes of the qualified dividend rules, and we believe we are eligible for benefits under the Treaty. Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2013 or 2014 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2015 taxable year. You should consult your own tax advisers regarding the availability of the reduced dividend tax rate in the light of your own particular circumstances.

Distributions of additional shares in respect of shares of common stock or ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

Sales and Other Dispositions

For U.S. federal income tax purposes, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of common stock or ADSs equal to the difference, if any, between the amount realized (Dollars) on the sale or exchange and your adjusted tax basis in the common stock or ADSs. Any gain realized by a U.S. holder on the sale or other disposition of common stock or ADSs generally will be treated as U.S. source income for U.S. foreign tax credit purposes. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shares of common stock or ADSs were held for more than one year. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at a reduced rate.

Foreign Tax Credit Considerations

You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you generally may claim a credit, up to any applicable reduced rates provided under the Treaty, against your U.S. federal income tax liability for Korean taxes withheld from dividends on shares of common stock or ADSs, so long as you have owned the shares of common stock or ADSs (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may, at your election, deduct such Korean taxes in computing your taxable income, provided that you do not elect to claim a foreign tax credit for any foreign income taxes paid or accrued for the relevant tax year and subject to generally applicable limitations under U.S. tax law. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain hedged positions in securities and may not be allowed in respect of arrangements in which your expected economic profit is insubstantial. You may not be able to use the foreign tax credit associated with any Korean withholding tax imposed on a distribution of additional shares that is not subject to U.S. federal income tax unless you can use the credit against U.S. federal income tax due on other foreign-source income.

Any Korean securities transaction tax or agriculture and fishery special tax that you pay will not be creditable for foreign tax credit purposes.

The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involves the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.

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U.S. Information Reporting and Backup Withholding Rules

Payments in respect of shares of common stock or ADSs that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.

Item 10.F. Dividends and Paying Agents

See “Item 8.A. Consolidated Statements and Other Financial Information — Dividends” above for information concerning our dividend policies and our payment of dividends. See “Item 10.B. Memorandum and Articles of Association — Dividends” for a discussion of the process by which dividends are paid on shares of our common stock. The paying agent for payment of our dividends on ADSs in the United States is the Citibank, N.A.

Item 10.G. Statements by Experts

Not applicable

Item 10.H. Documents on Display

We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the Public Reference Rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any filings we make electronically will be available to the public over the Internet at the SEC’s web site at http://www.sec.gov.

Item 10.I. Subsidiary Information

Not applicable

Item 11. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to foreign exchange rate and interest rate risk primarily associated with underlying liabilities, and to changes in the commodity prices of principal raw materials. Following evaluation of these positions, we selectively enter into derivative financial instruments to manage the related risk exposures, primarily with respect to foreign exchange rate and interest rate risks, which are entered into with major financial institutions in order to minimize the risk of credit loss. Our market risk management policy determines the market risk tolerance level, measuring period, controlling responsibilities, management procedures, hedging period and hedging ratio very specifically. We also prohibit all speculative hedging transactions and evaluate and manage foreign exchange exposures to receivables and payables.

None of our loss exposures related to derivative contracts are unlimited, and we do not believe that our net derivative positions could result in a material loss to our profit before income tax or total equity due to significant fluctuations of major currencies against the Korean Won. Due to the nature of our derivative contracts primarily as hedging instruments that manage foreign exchange risks, net gain or net loss on derivatives transactions and valuation of derivatives are typically offset by net loss or net gain on foreign currency transaction and translation. We recorded net gain on derivatives transactions

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of Won 84 billion and net loss on valuation of derivatives of Won 219 billion in 2013, and we recorded net loss on derivatives transactions of Won 26 billion and net loss on valuation of derivatives of Won 28 billion in 2014.

Exchange Rate Risk

Korea is our most important market and, therefore, a substantial portion of our cash flow is denominated in Won. Most of our exports are denominated in Dollars. Japan is also an important market for us, and we derive significant cash flow denominated in Yen. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, which represent a substantial sum and are mostly denominated in Dollars, relate primarily to imported raw material costs and freight costs. Foreign currency denominated liabilities relate primarily to foreign currency denominated debt.

Our foreign currency exposure and changes in gain or loss resulting from a 10% foreign exchange rate change against the Korean Won are as follows:


	For the Years Ended December 31,
	2012					2013					2014
	Increase			Decrease		Increase			Decrease		Increase			Decrease
	(In billions of Won)
US Dollars	￦	(519	)	￦	519	￦	(502	)	￦	502	￦	(356	)	￦	356
Japanese Yen		(178	)		178		(125	)		125		(96	)		96
Euro		(1	)		1		(4	)		4		(30	)		30

Interest Rate Risk

We are also subject to market risk exposure arising from changing interest rates. In particular, we are exposed to interest rate risk on our existing floating rate borrowings and on additional debt financings that we may periodically undertake for various reasons, including capital expenditures and refinancing of our existing borrowings. A rise in interest rates will increase the cost of our existing variable rate borrowings. If interest rates on borrowings with floating rates had been 1% higher or lower with all other variables held constant, the impact on the gain or loss of the applicable period would be as follows:

For the Years Ended December 31,

2012

2013

2014

(In billions of Won)

Increase or decrease in annual profit and net equity

￦

106

￦

102

A reduction of interest rates also increases the fair value of our debt portfolio, which is primarily of a fixed interest nature. From time to time, we use, to a limited extent, interest rate swaps to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt.

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The following table summarizes the carrying amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 2014 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency.


	Maturities
																			December 31, 2014					December 31, 2013
	2015			2016			2017			2018			2019			Thereafter			Total			Fair Value		Total			Fair Value
	(In billions of Won except rates)
Local currency:
Fixed rate		2,291			821			967			610			764			2,798			8,251			8,349		9,439			9,523
Average weighted rate ⁽¹⁾		4.20	%		3.89	%		3.98	%		3.69	%		3.45	%		4.15	%		4.02	%				4.35	%
Variable rate		738			175			10			69			103			129			1,224			1,223		1,327			1,345
Average weighted rate ⁽¹⁾		2.88	%		3.71	%		3.80	%		3.43	%		2.72	%		2.91	%		3.03	%				3.47	%

Sub-total		3,029			996			977			679			867			2,927			9,475			9,572		10,766			10,868

Foreign currency, principally Dollars and Yen:
Fixed rate		4,014			282			274			738			0			3,099			8,407			8,669		6,913			6,988
Average weighted rate ⁽¹⁾		1.62	%		1.39	%		3.84	%		3.00	%		0	%		4.43	%		2.84	%				3.72	%
Variable rate		4,623			753			215			435			263			3,257			9,546			9,515		8,568			8,634
Average weighted rate ⁽¹⁾		1.56	%		1.69	%		1.96	%		2.93	%		2.91	%		3.30	%		2.27	%				1.81	%

Sub-total		8,637			1,035			489			1,173			263			6,356			17,953			18,184		15,481			15,623

Total		11,666			2,031			1,466			1,852			1,130			9,283			27,428			27,756		26,247			26,490

(1)	Weighted average rates of the portfolio at the period end.

Item 12. Description of Securities Other than Equity Securities

Not applicable

Item 12.A. Debt Securities

Not applicable

Item 12.B. Warrants and Rights

Not applicable

Item 12.C. Other Securities

Not applicable

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Item 12.D. American Depositary Shares

Fees and Charges

We switched our depositary from The Bank of New York Mellon to Citibank, N.A. in July 2013. Holders of our ADSs are required to pay the following service fees to the depositary:


Services		Fees
Issuance of ADSs upon deposit of shares		Up to $5.00 per 100 ADSs issued
Delivery of deposited shares against surrender of ADSs		Up to $5.00 per 100 ADSs surrendered
Distributions of cash dividends or other cash distributions		None
Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs		None
Distribution of securities other than ADSs or rights to purchase additional ADSs		None
General depositary services		None

Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:

•

fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares);

•

expenses incurred for converting foreign currency into Dollars;

•

expenses for cable, telex and fax transmissions and for delivery of securities;

•

taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit);

•

fees and expenses incurred in connection with compliance with exchange control regulations and other regulatory requirements; and

•

fees and expenses incurred in connection with the delivery or servicing of shares on deposit.

Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.

The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via the Korea Securities Depositary, or KSD), the depositary generally collects its fees through the systems provided by KSD (whose nominee is the registered holder of the ADSs held in KSD) from the brokers and custodians holding ADSs in their KSD accounts. The brokers and custodians who hold their clients’ ADSs in KSD accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.

In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.

110

The fees and charges that holders of our ADSs may be required to pay may vary over time and may be changed by us and by the depositary. Holders of our ADSs will receive prior notice of such changes.

Fees and Payments from the Depositary to Us

In 2014, we received the following payments from the depositary, net of tax:


Reimbursement of expenses for preparation of SEC filing and submission:	$	89,057

Reimbursement of listing fees:	$	128,950

Reimbursement of legal fees:	$	160,423

Reimbursement of proxy process expenses (printing, postage and distribution):	$	77,034

Contributions toward our investor relations efforts:	$	209,931

Miscellaneous:	$	139,605

Total:	$	805,000

In addition, as part of its service to us, the depositary waives its fees for the standard costs associated with the administration of the ADS facility, associated operating expenses, investor relations advice and access to an internet-based tool used in our investor relations activities.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable

Item 15. Controls and Procedures

a. Disclosure Controls and Procedures

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2014. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

b. Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected

111

by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management has completed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on criteria in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2014.

c. Report of the Independent Registered Public Accounting Firm

KPMG Samjong Accounting Corp. (“KPMG Samjong”), an independent registered public accounting firm, which audited our consolidated financial statements as of, and for the year ended, December 31, 2014, has issued an audit report on the effectiveness of our internal control over financial reporting, which report is included in Item 18 of this Form 20-F.

d. Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the year covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our adoption of Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission did not have, and is not reasonably likely to have, any material effect on our internal control over financial reporting.

Item 16. [Reserved]

Item 16A. Audit Committee Financial Expert

The board of directors has approved the members of our audit committee. Kim, Il-Sup is an audit committee financial expert and is independent within the meaning of applicable SEC rules.

Item 16B. Code of Ethics

We have adopted a code of business conduct and ethics, as defined in Item 16B. of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of business conduct and ethics, called Code of Conduct, applies to our chief executive officer and chief financial officer, as well as to our directors, other officers and employees. Our Code of Conduct is available on our web site at www.posco.com. If we amend the provisions of our Code of Conduct that apply to our chief executive officer or chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site at the same address.

112

Item 16C. Principal Accountant Fees and Services

Audit and Non-Audit Fees

The following table sets forth the fees billed to us by our independent auditor, KPMG, in 2012, 2013 and 2014:


	For the Year Ended December 31,
	2012		2013		2014
	(In millions of Won)
Audit fees	￦	6,501	￦	5,356	￦	5,481
Audit-related fees		170		90		—
Tax fees		1,730		1,110		1,082
Other fees		48		25		16

Total fees	￦	8,449	￦	6,581	￦	6,579

Audit fees in 2014 as set forth in the above table are the aggregate fees billed by KPMG in connection with the audit of our annual financial statements and the annual financial statements of other related companies and review of interim financial statements.

Audit-related fees in 2014 as set forth in the above table are the aggregate fees billed by KPMG for comfort letter services related to our securities offering. There are no audit-related fees incurred in 2014.

Tax fees in 2014 as set forth in the above table are fees billed by KPMG for our tax compliance and tax planning, as well as tax planning and preparation of other related companies.

Other fees in 2014 as set forth in the above table are fees billed by KPMG primarily in relation to certifications in connection with forward contracts.

Audit Committee Pre-Approval Policies and Procedures

Our audit committee has not established pre-approval policies and procedures for the engagement of our independent auditors for services. Our audit committee expressly approves on a case-by-case basis any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or us.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable

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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth the repurchases of common shares by us or any affiliated purchasers during the fiscal year ended December 31, 2014:

Period

Total Number of
Shares
Purchased

Average Price
Paid Per Share (In
Won)

Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans

Maximum
Number of
Shares
that May
Yet Be
Purchased
Under the
Plans

January 1 to January 31

—

February 1 to February 29

—

March 1 to March 31

—

April 1 to April 30

—

May 1 to May 31

—

June 1 to June 30

—

July 1 to July 31

—

August 1 to August 31

—

September 1 to September 30

—

October 1 to October 31

—

November 1 to November 30

—

December 1 to December 31

—

Total

—

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable

Item 16G. Corporate Governance

Pursuant to the rules of the New York Stock Exchange applicable to foreign private issuers like us that are listed on the New York Stock Exchange, we are required to disclose significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law and in accordance with our own internal procedures. The following is a summary of such significant differences.


NYSE Corporate Governance Standards		POSCO’s Corporate Governance Practice
Director Independence

Listed companies must have a majority of independent directors		Our articles of incorporation provide that our board of directors must comprise no less than a majority of Outside Directors. Our Outside Directors must meet the criteria for outside directorship set forth under the Korean Securities and Exchange Act. The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 7 out of 12 directors are Outside Directors. Under our articles of incorporation, we may have up to five Inside Directors and seven Outside Directors.

Nomination/Corporate Governance Committee

A nomination/corporate governance committee of independent directors is required. The committee must have a charter that addresses the purpose, responsibilities (including development of corporate governance guidelines) and annual performance evaluation of the committee		We have not established a separate nomination corporate governance committee. However, we maintain a Director Candidate Recommendation Committee composed of three Outside Directors and one Inside Director.

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NYSE Corporate Governance Standards		POSCO’s Corporate Governance Practice

Compensation Committee

A compensation committee of independent directors is required. The committee must have a charter that addresses the purpose, responsibilities and annual performance evaluation of the committee. The charter must be made available on the company’s website. In addition, in accordance with the U.S. Securities and Exchange Commission rules adopted pursuant to Section 952 of the Dodd-Frank Act, the New York Stock Exchange listing standards were amended to expand the factors relevant in determining whether a committee member has a relationship with the company that will materially affect that member’s duties to the compensation committee. Additionally, the committee may obtain or retain the advice of a compensation adviser only after taking into consideration all factors relevant to determining that adviser’s independence from management		We maintain an Evaluation and Compensation Committee composed of four Outside Directors.

Executive Session

Non-management directors must meet in regularly scheduled executive sessions without management. Independent directors should meet alone in an executive session at least once a year		Our Outside Directors hold meetings solely attended by Outside Directors in accordance with operation guidelines of our board of directors.

Audit Committee

Listed companies must have an audit committee that satisfies the independence and other requirements of Rule 10A-3 under the Exchange Act. All members must be independent. The committee must have a charter addressing the committee’s purpose, an annual performance evaluation of the committee, and the duties and responsibilities of the committee. The charter must be made available on the company’s website		We maintain an Audit Committee comprised of three Outside Directors who meet the applicable independence criteria set forth under Rule 10A-3 under the Exchange Act.

Audit Committee Additional Requirements

Listed companies must have an audit committee that is composed of at least three directors.		Our Audit Committee has three members, as described above.

Shareholder Approval of Equity Compensation Plan

Listed companies must allow their shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan		We currently have an Employee Stock Ownership Program. We previously provided a stock options program for officers and directors, as another equity compensation plan. However, during our annual shareholders’ meeting in February 2006, our shareholders resolved to terminate the stock option program and amended our articles of incorporation to delete the provision allowing grant of stock options to officers and directors. Consequently, since February 24, 2006, we have not granted stock options to officers and directors. Matters related to the Employee Stock Ownership Program are not subject to shareholders’ approval under Korean law.

Corporate Governance Guidelines

Listed companies must adopt and disclose corporate governance guidelines		We have adopted a Corporate Governance Charter setting forth our practices with respect to relevant corporate governance matters. Our Corporate Governance Charter is in compliance with Korean law but does not meet all requirements established by the New York Stock Exchange for U.S. companies listed on the exchange. A copy of our Corporate Governance Charter is available on our website at www.posco.com.

115


NYSE Corporate Governance Standards		POSCO’s Corporate Governance Practice

Code of Business Conduct and Ethics

Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers		We have adopted a Code of Conduct for all directors, officers and employees. A copy of our Code of Conduct is available on our website at www.posco.com.

Item 16H. Mine Safety Disclosure

Not applicable

PART III

Item 17. Financial Statements

Not applicable

Item 18. Financial Statements


	Page
Report of Independent Registered Public Accounting Firm, KPMG Samjong Accounting Corp., on Consolidated Financial Statements		F-1
Report of Independent Registered Public Accounting Firm, KPMG Samjong Accounting Corp., on Internal Control over Financial Reporting		F-2
Consolidated Statements of Financial Position as of December 31, 2013 and 2014		F-3
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2013 and 2014		F-5
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2012, 2013 and 2014		F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2013 and 2014		F-9
Notes to Consolidated Financial Statements		F-11

Item 19. Exhibits


1.1	—	Articles of Incorporation of POSCO (English translation) (incorporated by reference to Exhibit 1.1 to the Registrant’s filing on Form 20-F (File No. 001-13368), filed on May 12, 2014)*
2.1	—	Form of Common Stock Certificate (including English translation) (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement No. 333-189473)*
2.2	—	Form of Deposit Agreement (including Form of American Depositary Receipts) (incorporated by reference to the Registrant’s Registration Statement (File No. 33-84318) on Form F-6)*
8.1	—	List of consolidated subsidiaries
12.1	—	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2	—	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1	—	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed previously

116

Table of Contents


	Page
Report of Independent Registered Public Accounting Firm		F-1

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting		F-2

Consolidated Financial Statements

Consolidated Statements of Financial Position		F-3

Consolidated Statements of Comprehensive Income		F-5

Consolidated Statements of Changes in Equity		F-6

Consolidated Statements of Cash Flows		F-9

Notes to the Consolidated Financial Statements		F-11

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

POSCO:

We have audited the accompanying consolidated statements of financial position of POSCO and subsidiaries as of December 31, 2013 and 2014 and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of POSCO’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that 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 POSCO and subsidiaries as of December 31, 2013 and 2014 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of POSCO’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 27, 2015 expressed an unqualified opinion on the effectiveness of POSCO’s internal control over financial reporting.

/s/ KPMG Samjong Accounting Corp.

Seoul, Korea

April 27, 2015

F-1

Report of Independent Registered Public Accounting Firm

on Internal Control over Financial Reporting

The Board of Directors and Stockholders

POSCO:

We have audited POSCO’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. POSCO’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on POSCO’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, POSCO maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of POSCO and subsidiaries as of December 31, 2013 and 2014, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2014, and our report dated April 27, 2015 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG Samjong Accounting Corp.

Seoul, Korea

April 27, 2015

F-2

POSCO and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2013 and 2014


	Notes		December 31, 2013 (note 2)		December 31, 2014
	(in millions of Won)
Assets
Cash and cash equivalents		4,5,23	￦	4,208,562		3,811,202
Trade accounts and notes receivable, net		6,23,29,37		11,512,644		11,664,587
Other receivables, net		7,23		1,890,423		1,956,216
Other short-term financial assets		8,23,37		2,970,665		1,462,920
Inventories		9		10,150,838		11,173,343
Current income tax assets		35		32,417		36,147
Assets held for sale		10		2,494		2,127,087
Other current assets		16		1,270,668		976,425

Total current assets				32,038,711		33,207,927

Long-term trade accounts and notes receivable, net		6,23		97,000		79,336
Other receivables, net		7,23		797,455		1,144,160
Other long-term financial assets		8,23		4,465,730		2,455,900
Investments in associates and joint ventures		11		3,808,693		4,060,507
Investment property, net		13		425,229		1,055,592
Property, plant and equipment, net		14		35,760,119		35,241,195
Intangible assets, net		15,41		5,929,840		6,884,989
Deferred tax assets		35		1,153,133		1,206,408
Other long-term assets		16		365,198		507,549

Total non-current assets				52,802,397		52,635,636

Total assets			￦	84,841,108		85,843,563

See accompanying notes to the consolidated financial statements.

F-3

POSCO and Subsidiaries

Consolidated Statements of Financial Position, Continued

As of December 31, 2013 and 2014


	Notes		December 31, 2013 (note 2)			December 31, 2014
	(in millions of Won)
Liabilities
Trade accounts and notes payable		23,37	￦	4,231,322			3,950,786
Short-term borrowings and current installments of long-term borrowings		4,17,23		10,713,646			12,195,484
Other payables		18,23		2,128,854			2,194,713
Other short-term financial liabilities		19,23,37		135,904			111,637
Current income tax liabilities		35		358,930			453,613
Liabilities of disposal group held for sale		10		—			590,982
Provisions		20		107,329			150,030
Other current liabilities		22,29		2,681,559			2,727,793

Total current liabilities				20,357,544			22,375,038

Long-term trade accounts and notes payable		23,37		559			88,469
Long-term borrowings, excluding current installments		4,17,23		15,532,959			15,232,773
Other payables		18,23		206,634			169,986
Other long-term financial liabilities		19,23		260,021			91,095
Defined benefit liabilities, net		21		273,160			290,325
Deferred tax liabilities		35		1,711,762			1,832,260
Long-term provisions		20		146,272			223,239
Other long-term liabilities		22		571,515			282,982

Total non-current liabilities				18,702,882			18,211,129

Total liabilities				39,060,426			40,586,167

Equity
Share capital		24		482,403			482,403
Capital surplus		24		1,078,266			1,083,718
Hybrid bonds		25		996,919			996,919
Reserves		26		(23,076	)		(408,773	)
Treasury shares		27		(1,579,124	)		(1,534,457	)
Retained earnings				41,053,632			40,937,148

Equity attributable to owners of the controlling company				42,009,020			41,556,958
Non-controlling interests		25		3,771,662			3,700,438

Total equity				45,780,682			45,257,396

Total liabilities and equity			￦	84,841,108			85,843,563

See accompanying notes to the consolidated financial statements.

F-4

POSCO and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2012, 2013 and 2014


	Notes		2012 (note 2)			2013 (note 2)			2014
	(in millions of Won, except per share information)
Revenue		28,29,37	￦	63,345,258			61,765,743			64,758,625
Cost of sales		29,31,34,37		(55,920,623	)		(54,913,816	)		(57,465,485	)

Gross profit				7,424,635			6,851,927			7,293,140
Selling and administrative expenses		30,34
Administrative expenses		31		(2,129,463	)		(2,231,805	)		(2,309,756	)
Selling expenses				(1,678,688	)		(1,632,120	)		(1,760,118	)
Other operating income and expenses		32,37
Other operating income				448,120			229,073			269,406
Other operating expenses		34		(809,465	)		(650,806	)		(979,674	)

Operating profit				3,255,139			2,566,269			2,512,998
Share of loss of equity-accounted investees, net		11		(22,702	)		(179,809	)		(299,893	)
Finance income and costs		23,33
Finance income				2,897,063			2,380,838			2,396,762
Finance costs				(2,797,638	)		(2,829,253	)		(3,221,987	)

Profit before income taxes				3,331,862			1,938,045			1,387,880
Income tax expense		35		(974,016	)		(589,029	)		(823,841	)

Profit				2,357,846			1,349,016			564,039
Other comprehensive income (loss)
Items that will never be reclassified subsequently to profit or loss :
Remeasurements of defined benefit pension plans		21		(62,527	)		6,224			(75,101	)
Items that are or may be reclassified subsequently to profit or loss :
Capital adjustment arising from investments in equity-method investees				(130,836	)		(183,836	)		(45,754	)
Net changes in the unrealized fair value of available-for-sale investments		23		(81,471	)		412,346			(333,891	)
Foreign currency translation differences				(363,088	)		(220,464	)		(836	)

Other comprehensive income (loss), net of tax				(637,922	)		14,270			(455,582	)

Total comprehensive income			￦	1,719,924			1,363,286			108,457

Profit (loss) attributable to :
Owners of the controlling company			￦	2,437,227			1,370,878			632,706
Non-controlling interests				(79,381	)		(21,862	)		(68,667	)

Profit			￦	2,357,846			1,349,016			564,039

Total comprehensive income (loss) attributable to :
Owners of the controlling company			￦	1,886,652			1,438,744			181,525
Non-controlling interests				(166,728	)		(75,458	)		(73,068	)

Total comprehensive income			￦	1,719,924			1,363,286			108,457

Basic and diluted earnings per share (in Won)		36		31,552			17,338			7,514

See accompanying notes to the consolidated financial statements.

F-5

POSCO and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2012, 2013 and 2014


	Attributable to owners of the controlling company																			Non-controlling interests			Total
	Share capital		Capital surplus			Hybrid bonds		Reserves			Treasury shares			Retained earnings			Sub total			Non-controlling interests			Total
	(in millions of Won)
Balance as of January 1, 2012 (note 2)	￦	482,403		1,150,452			—		405,426			(2,391,406	)		38,702,830			38,349,705			2,372,792			40,722,497
Comprehensive income:
Profit		—		—			—		—			—			2,437,227			2,437,227			(79,381	)		2,357,846
Other comprehensive income
Net changes in accumulated comprehensive income of investments in associates, net of tax		—		—			—		(112,974	)		—			—			(112,974	)		(17,862	)		(130,836	)
Net changes in the unrealized fair value of available-for-sale investments, net of tax		—		—			—		(86,661	)		—			—			(86,661	)		5,190			(81,471	)
Foreign currency translation differences, net of tax		—		—			—		(292,015	)		—			—			(292,015	)		(71,073	)		(363,088	)
Remeasurements of defined benefit pension plans, net of tax		—		—			—		—			—			(58,925	)		(58,925	)		(3,602	)		(62,527	)

Total comprehensive income		—		—			—		(491,650	)		—			2,378,302			1,886,652			(166,728	)		1,719,924

Transactions with owners of the controlling company, recognized directly in equity:
Year-end dividends		—		—			—		—			—			(579,333	)		(579,333	)		(19,751	)		(599,084	)
Interim dividends		—		—			—		—			—			(154,489	)		(154,489	)		—			(154,489	)
Changes in subsidiaries		—		—			—		—			—			—			—			35,870			35,870
Changes in ownership interests in subsidiaries		—		(41,924	)		—		—			—			—			(41,924	)		715,148			673,224
Issue of hybrid bonds		—		—			—		—			—			—			—			—			—
Interest of hybrid bonds		—		—			—		—			—			—			—			—			—
Disposal of treasury shares		—		—			—		—			—			—			—			—			—
Others		—		(3,714	)		—		(1,926	)		—			(32,328	)		(37,968	)		34,260			(3,708	)

Total transactions with owners of the controlling company		—		(45,638	)		—		(1,926	)		—			(766,150	)		(813,714	)		765,527			(48,187	)

Balance as of December 31, 2012	￦	482,403		1,104,814			—		(88,150	)		(2,391,406	)		40,314,982			39,422,643			2,971,591			42,394,234

See accompanying notes to the consolidated financial statements.

F-6

POSCO and Subsidiaries

Consolidated Statements of Changes in Equity, Continued

For the years ended December 31, 2012, 2013 and 2014


	Attributable to owners of the controlling company																			Non-controlling interests			Total
	Share capital		Capital surplus			Hybrid bonds		Reserves			Treasury shares			Retained earnings			Sub total			Non-controlling interests			Total
	(in millions of Won)
Balance as of January 1, 2013	￦	482,403		1,104,814			—		(88,150	)		(2,391,406	)		40,314,982			39,422,643			2,971,591			42,394,234
Comprehensive income:
Profit		—		—			—		—			—			1,370,878			1,370,878			(21,862	)		1,349,016
Other comprehensive income
Net changes in accumulated comprehensive income of investments in associates, net of tax		—		—			—		(166,787	)		—			—			(166,787	)		(17,049	)		(183,836	)
Net changes in the unrealized fair value of available-for-sale investments, net of tax		—		—			—		412,453			—			—			412,453			(107	)		412,346
Foreign currency translation differences, net of tax		—		—			—		(180,839	)		—			—			(180,839	)		(39,625	)		(220,464	)
Remeasurements of defined benefit pension plans, net of tax		—		—			—		—			—			3,039			3,039			3,185			6,224

Total comprehensive income		—		—			—		64,827			—			1,373,917			1,438,744			(75,458	)		1,363,286

Transactions with owners of the controlling company, Recognized directly in equity:
Year-end dividends		—		—			—		—			—			(463,467	)		(463,467	)		(30,544	)		(494,011	)
Interim dividends		—		—			—		—			—			(154,490	)		(154,490	)		—			(154,490	)
Changes in subsidiaries		—		—			—		—			—			—			—			40,506			40,506
Changes in ownership interests in subsidiaries		—		(31,417	)		—		—			—			—			(31,417	)		373,963			342,546
Issue of hybrid bonds		—		—			996,919		—			—			—			996,919			498,468			1,495,387
Interest of hybrid bonds		—		—			—		—			—			(24,161	)		(24,161	)		(6,228	)		(30,389	)
Disposal of treasury shares		—		5,348			—		—			812,282			—			817,630			—			817,630
Others		—		(479	)		—		247			—			6,851			6,619			(636	)		5,983

Total transactions with owners of the controlling company		—		(26,548	)		996,919		247			812,282			(635,267	)		1,147,633			875,529			2,023,162

Balance as of December 31, 2013	￦	482,403		1,078,266			996,919		(23,076	)		(1,579,124	)		41,053,632			42,009,020			3,771,662			45,780,682

See accompanying notes to the consolidated financial statements.

F-7

POSCO and Subsidiaries

Consolidated Statements of Changes in Equity, Continued

For the years ended December 31, 2012, 2013 and 2014


	Attributable to owners of the controlling company																			Non-controlling interests			Total
	Share capital		Capital surplus			Hybrid bond		Reserves			Treasury shares			Retained earnings			Sub total			Non-controlling interests			Total
	(in millions of Won)
Balance as of January 1, 2014	￦	482,403		1,078,266			996,919		(23,076	)		(1,579,124	)		41,053,632			42,009,020			3,771,662			45,780,682
Comprehensive income:
Profit		—		—			—		—			—			632,706			632,706			(68,667	)		564,039
Other comprehensive income
Net changes in accumulated comprehensive income of investments in associates, net of tax		—		—			—		(50,920	)		—			—			(50,920	)		5,166			(45,754	)
Net changes in the unrealized fair value of available-for-sale investments, net of tax		—		—			—		(335,626	)		—			—			(335,626	)		1,735			(333,891	)
Foreign currency translation differences, net of tax		—		—			—		517			—			—			517			(1,353	)		(836	)
Remeasurements of defined benefit pension plans, net of tax		—		—			—		—			—			(65,152	)		(65,152	)		(9,949	)		(75,101	)

Total comprehensive income		—		—			—		(386,029	)		—			567,554			181,525			(73,068	)		108,457

Transactions with owners of the controlling company, Recognized directly in equity:
Year-end dividends		—		—			—		—			—			(478,702	)		(478,702	)		(32,887	)		(511,589	)
Interim dividends		—		—			—		—			—			(159,568	)		(159,568	)		(76,854	)		(236,422	)
Changes in subsidiaries		—		—			—		—			—			—			—			91,551			91,551
Changes in ownership interests in subsidiaries		—		(9,401	)		—		—			—			—			(9,401	)		44,265			34,864
Interest of hybrid bonds		—		—			—		—			—			(43,600	)		(43,600	)		(26,175	)		(69,775	)
Disposal of treasury shares		—		14,576			—		—			44,667			—			59,243			—			59,243
Others		—		277			—		332			—			(2,168	)		(1,559	)		1,944			385

Total transactions with owners of the controlling company		—		5,452			—		332			44,667			(684,038	)		(633,587	)		1,844			(631,743	)

Balance as of December 31, 2014	￦	482,403		1,083,718			996,919		(408,773	)		(1,534,457	)		40,937,148			41,556,958			3,700,438			45,257,396

See accompanying notes to the consolidated financial statements.

F-8

POSCO and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2012, 2013 and 2014


	Notes	2012			2013			2014
		(in millions of Won)
Cash flows from operating activities
Profit		￦	2,357,846			1,349,016			564,039
Adjustments for:
Depreciation			2,405,769			2,505,536			2,894,609
Amortization			157,991			180,014			343,940
Finance income			(1,553,200	)		(1,012,281	)		(1,046,718	)
Finance costs			1,605,414			1,585,778			1,801,015
Income tax expense			974,016			589,029			823,841
Gain on disposal of property, plant and equipment			(42,290	)		(14,177	)		(15,039	)
Loss on disposal of property, plant and equipment			65,486			121,133			50,006
Impairment loss on property, plant and equipment			12,977			9,742			64,833
Share of loss of equity-accounted investees			22,702			179,809			299,893
Costs for defined benefit plans			226,132			247,748			237,886
Provision expense			25,127			111,364			245,470
Bad debt expenses			123,373			201,185			205,306
Loss on valuation of inventories			76,484			49,172			41,713
Impairment loss on goodwill and intangible assets			21,776			125,316			55,220
Gain on disposals of assets held for sale			(193,333	)		(101,611	)		(48,232	)
Impairment loss on assets held for sale			258,451			1,814			17,205
Others, net			(26,636	)		31,079			56,890

			4,160,239			4,810,650			6,027,838

Changes in operating assets and liabilities	39		1,969,982			(108,300	)		(1,853,782	)
Interest received			238,231			227,989			238,817
Interest paid			(874,711	)		(797,316	)		(882,183	)
Dividends received			178,317			193,008			114,694
Income taxes paid			(710,448	)		(816,912	)		(797,324	)

Net cash provided by operating activities		￦	7,319,456			4,858,135			3,412,099

Cash flows from investing activities	40
Acquisitions of short-term financial instruments		￦	(3,616,118	)		(4,449,312	)		(3,096,602	)
Proceeds from disposal of short-term financial instruments			3,847,682			3,901,527			4,635,120
Acquisition of long-term financial instruments			(178,163	)		(123,703	)		(24,683	)
Increase in loans			(434,156	)		(575,343	)		(361,671	)
Collection of loans			318,745			417,971			76,717
Acquisitions of available-for-sale investments			(307,712	)		(309,469	)		(75,582	)
Proceeds from disposal of available-for-sale investments			700,686			269,363			252,056
Acquisitions of investments of equity-accounted investees			(492,681	)		(1,076,763	)		(702,989	)
Proceeds from disposal of investments of equity-accounted investees			18,428			89,533			21,359
Acquisitions of property, plant and equipment			(7,054,543	)		(6,569,613	)		(3,505,549	)
Proceeds from disposal of property, plant and equipment			272,948			82,153			62,829
Acquisitions of investment property			(29,689	)		(20,945	)		(406,603	)
Proceeds from diposal of investment property			42,616			8,464			43,167
Acquisitions of intangible assets			(448,214	)		(543,666	)		(343,804	)
Proceeds from disposal of intangible assets			10,945			5,429			9,043
Proceeds from disposal of assets held for sale			1,268,545			126,809			8,301
Cash received from (paid in) acquistion of business, net of cash acquired			(98,880	)		5,729			(388,578	)
Cash received from disposal of business, net of cash transferred			13,041			5,962			48,949
Other, net			(2,483	)		4,204			3,338

Net cash used in investing activities			(6,169,003	)		(8,751,670	)		(3,745,182	)

See accompanying notes to the consolidated financial statements.

F-9

POSCO and Subsidiaries

Consolidated Statements of Cash Flows, Continued

For the years ended December 31, 2012, 2013 and 2014


	Notes		2012			2013			2014
			(in millions of Won)
Cash flows from financing activities		40
Proceeds from borrowings				3,007,017			5,098,702			2,522,495
Repayment of borrowings				(1,884,140	)		(2,845,957	)		(2,802,150	)
Proceeds from (repayment of) short-term borrowings, net				(1,412,138	)		86,475			1,037,912
Payment of cash dividends				(751,908	)		(648,580	)		(677,000	)
Proceeds from issuance of hybrid bonds				—			1,495,387			—
Payment of interest of hybrid bonds				—			(26,088	)		(69,713	)
Capital contribution from non-controlling interests and proceeds from disposal of subsidiary while maintaining control				375,850			385,122			54,066
Capital deduction from non-controlling interests and additional acquisition of interests in subsidiaries				(167,663	)		(22,078	)		—
Proceeds from disposal of treasury shares				—			14,019			43,188
Other, net				(74,645	)		(4,666	)		26,314

Net cash provided by (used in) financing activities				(907,627	)		3,532,336			135,112

Effect of exchange rate fluctuation on cash held				(160,982	)		(110,765	)		11,545

Net increase (decrease) in cash and cash equivalents				81,844			(471,964	)		(186,426	)
Cash and cash equivalents at beginning of the period				4,598,682			4,680,526			4,208,562

Cash and cash equivalents at end of the period		10	￦	4,680,526			4,208,562			4,022,136

See accompanying notes to the consolidated financial statements.

F-10

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2012, 2013 and 2014

1.	General Information

General information about POSCO, its 47 domestic subsidiaries including POSCO Engineering & Construction Co., Ltd., 181 foreign subsidiaries including POSCO America Corporation (collectively “the Company”) and its 97 associates and joint ventures are as follows:

(a) The controlling company

POSCO, the controlling company, was incorporated on April 1, 1968, under the Commercial Code of the Republic of Korea to manufacture and sell steel rolled products and plates in the domestic and foreign markets.

The shares of POSCO have been listed on the Korea Exchange since 1988. POSCO owns and operates two steel plants (Pohang and Gwangyang) and one office in Korea and it also operates internationally through seven of its overseas liaison offices.

As of December 31, 2013 and 2014, POSCO’s shareholders are as follows:


	2013				2014
Shareholder’s name	Number of shares		Ownership (%)		Number of shares		Ownership (%)
National Pension Service		6,577,907		7.54		7,203,493		8.26
Nippon Steel & Sumitomo Metal Corporation⁽*¹⁾		4,394,712		5.04		4,394,712		5.04
Saudi Arabia, Kingdom of Saudi Arabia		948,477		1.09		2,109,593		2.42
Hyundai Heavy Industries Co.,Ltd. and subsidiaries ⁽*²⁾		2,197,707		2.52		1,319,560		1.51
Pohang University of Science and Technology		1,905,000		2.18		1,905,000		2.18
KB Financial Group Inc. and subsidiaries ⁽*²⁾		1,846,994		2.12		1,847,438		2.12
Others		69,316,038		79.51		68,407,039		78.47

		87,186,835		100.00		87,186,835		100.00

(*1)	Nippon Steel & Sumitomo Metal Corporation owns American Depository Receipts (ADRs) of POSCO, each of which represents 0.25 share of POSCO’s common share which has par value of ￦5,000 per share.

(*2)	Includes shares held by subsidiaries pursuant to Articles of Incorporation.

As of December 31, 2014, the shares of POSCO are listed on the Korea Exchange, while its depository shares are listed on the New York, Tokyo and London Stock Exchanges.

F-11

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) Consolidated subsidiaries

Details of consolidated subsidiaries as of December 31, 2013 and 2014 are as follows:


		Ownership (%)
		December 31, 2013						December 31, 2014
	Principal operations	POSCO		Subsidiaries		Total		POSCO		Subsidiaries		Total		Region
[Domestic]
POSCO ENGINEERING & CONSTRUCTION., LTD.	Engineering and construction		89.53		—		89.53		89.53		—		89.53	Pohang
POSCO Processing & Service	Steel sales and service		95.31		—		95.31		96.01		—		96.01	Seoul
POSCO COATED & COLOR STEEL Co., Ltd.	Coated steel manufacturing		56.87		—		56.87		56.87		—		56.87	Pohang
POSCO ICT	Computer hardware and software distribution		65.38		—		65.38		65.38		—		65.38	Seongnam
POSCO Research Institute	Economic research and consulting		100.00		—		100.00		100.00		—		100.00	Seoul
POSMATE	Business facility maintenance		54.46		11.77		66.23		57.25		11.05		68.30	Suncheon
POSCO A&C	Architecture and consulting		100.00		—		100.00		100.00		—		100.00	Seoul
POSCO Specialty Steel Co., Ltd.	Steel manufacturing and sales		72.09		—		72.09		72.09		—		72.09	Changwon
POSCO Venture Capital Co., Ltd.	Investment in venture companies		95.00		—		95.00		95.00		—		95.00	Pohang
eNtoB Corporation	Electronic commerce		32.19		30.19		62.38		—		62.38		62.38	Seoul
POSCO CHEMTECH	Manufacturing and sellings of refractories		60.00		—		60.00		60.00		—		60.00	Pohang
POSCO-Terminal Co., Ltd.	Transporting and warehousing		51.00		—		51.00		51.00		—		51.00	Gwangyang
POSCO M-TECH^(*1)	Packing materials manufacturing		48.85		—		48.85		48.85		—		48.85	Pohang
POSCO ENERGY CO., LTD.	Generation of electricity		89.02		—		89.02		89.02		—		89.02	Seoul
POSCO TMC Co., Ltd.	Component manufacturing		34.20		40.36		74.56		—		74.56		74.56	Cheonan
POSCO NIPPON STEEL RHF JOINT VENTURE.CO.,Ltd.	Steel manufacturing and sales		70.00		—		70.00		70.00		—		70.00	Pohang
MegaAsset Co.,Ltd.	Real estate rental and sales		—		100.00		100.00		—		100.00		100.00	Cheonan
POSCO Engineering CO.,Ltd	Construction and engineering service		—		95.56		95.56		—		95.56		95.56	Seongnam
POSCO AST	Steel manufacturing and sales		100.00		—		100.00		—		100.00		100.00	Ansan
POSHIMETAL Co., Ltd.	Steel manufacturing and sales		65.00		—		65.00		65.00		—		65.00	Gwangyang
Poscoene	Handling & disposal of waste matter		—		100.00		100.00		—		100.00		100.00	Seoul
POSFINE Co., Ltd.	Non metallic minerals manufacturing		69.23		—		69.23		69.23		—		69.23	Gwangyang
POSCO Humans	Construction		90.30		—		90.30		90.30		—		90.30	Pohang
Mapo Hibroad Parking co., Ltd.	Construction		—		71.00		71.00		—		71.00		71.00	Seoul
Steel Processing and Fabricating Center Co.,LTD	Steel manufacturing		—		70.52		70.52		—		84.89		84.89	Gwangyang
Plant Engineering service Technology Co., Ltd.	Engineering service		—		100.00		100.00		—		100.00		100.00	Pohang
POSCO PLANTEC Co., Ltd.	Steel work maintenance and machinery installation		—		—		—		60.84		13.10		73.94	Pohang
Busan E&E Co,. Ltd.	Handling & disposal of waste matter		70.00		—		70.00		70.00		—		70.00	Busan

F-12

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


		Ownership (%)
		December 31, 2013						December 31, 2014
	Principal operations	POSCO		Subsidiaries		Total		POSCO		Subsidiaries		Total		Region
POSCO Family Strategy Fund	Financial investment		60.79		39.21		100.00		60.79		39.21		100.00	Pohang
POREKA Co., Ltd.	Advertising agency		100.00		—		100.00		100.00		—		100.00	Seoul
Daewoo International Corporation	Trading and Energy & Resource development		60.31		—		60.31		60.31		—		60.31	Seoul
POSCO LED Co., Ltd.	LED lightening		16.70		63.30		80.00		16.70		63.30		80.00	Seongnam
Pohang Scrap Recycling Distribution Center Co., Ltd.	Steel processing and sales		—		51.00		51.00		—		51.00		51.00	Pohang
PSC Energy Global Co., Ltd.	Investment in energy industry		—		100.00		100.00		—		100.00		100.00	Pohang
Suncheon Eco Trans Co., Ltd	Train manufacturing & management		100.00		—		100.00		100.00		—		100.00	Suncheon
New Altec Co., Ltd	Aluminum products manufacturing and sales		—		60.10		60.10		—		60.10		60.10	Incheon
PONUTech Co.,Ltd.	Nuclear power plant design and repair service		—		100.00		100.00		—		100.00		100.00	Ulsan
Tamra Offshore Wind Power Co., Ltd	Cogeneration plant operation		—		64.00		64.00		—		64.00		64.00	Jeju
POS-HiAL	Aluminum products manufacturing and sales		—		51.00		51.00		—		51.00		51.00	Youngam
IT Engineering ^(*2)	Automotive engineering service		—		17.00		17.00		—		17.00		17.00	Seoul
Future Creation Fund Postech Early Stage account^(*2)	Investment in venture companies		—		—		—		—		40.00		40.00	Seoul
Keystone Private Equity	Investment in New Regeneration Energy		—		—		—		—		55.12		55.12	Seoul
POSCO Green Gas Technology	Gas manufacturing and Plumber		—		—		—		100.00		—		100.00	Gwangyang
POSCO WOMAN’S FUND^(*2)	Investment in venture companies		—		—		—		—		40.00		40.00	Seoul
Chun Sa wind	Other development		—		—		—		—		100.00		100.00	Seoul
POSPOWER CO., Ltd.	Other development		—		—		—		—		100.00		100.00	Samchuck
Songdo Posco family Housing	House manufacturing and management		—		—		—		—		100.00		100.00	Incheon
[Foreign]
POSCO America Corporation	Steel trading		99.45		0.55		100.00		99.45		0.55		100.00	USA
POSCO AUSTRALIA PTY LTD	Iron ore sales & mine development		100.00		—		100.00		100.00		—		100.00	Australia
POSCO Canada Ltd.	Coal sales		—		100.00		100.00		—		100.00		100.00	Canada
POSCAN Elkveiw Coal Ltd.	Coal sales		—		100.00		100.00		—		100.00		100.00	Canada
POSCO Asia Co., Ltd.	Steel and raw material trading		100.00		—		100.00		100.00		—		100.00	Hongkong
POSCO-CTPC Co., Ltd.	Steel manufacturing		56.60		43.40		100.00		56.60		43.40		100.00	China
POSCO-JKPC Co., Ltd.	Steel manufacturing		—		95.00		95.00		—		89.18		89.18	Japan
INTERNATIONAL BUSINESS CENTER CORPORATION	Leasing service		—		60.00		60.00		—		—		—	Vietnam
POSCO E&C Vietnam Co., Ltd.	Steel manufacturing		—		100.00		100.00		—		100.00		100.00	Vietnam
Zhangjiagang Pohang Stainless Steel Co., Ltd.	Stainless steel manufacturing		58.60		23.88		82.48		58.60		23.88		82.48	China
POSCO (Guangdong) Steel Co., Ltd.	Plating steel sheet manufacturing		87.04		10.04		97.08		87.04		10.04		97.08	China
POSCO (Thailand) Company Limited	Steel manufacturing		85.62		14.38		100.00		85.62		14.38		100.00	Thailand

F-13

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


		Ownership (%)
		December 31, 2013						December 31, 2014
	Principal operations	POSCO		Subsidiaries		Total		POSCO		Subsidiaries		Total		Region
Myanmar POSCO Steel Co., Ltd	Zinc relief manufacturing		70.00		—		70.00		70.00		—		70.00	Myanmar
POSCO-JOPC Co., Ltd.	Steel manufacturing		—		56.84		56.84		—		—		—	Japan
POSCO Investment Co., Ltd.	Financial Service		100.00		—		100.00		100.00		—		100.00	Hongkong
POSCO-MKPC SDN BHD	Steel manufacturing		44.69		25.31		70.00		44.69		25.31		70.00	Malaysia
Qingdao Pohang Stainless Steel Co., Ltd.	Stainless steel manufacturing		70.00		30.00		100.00		70.00		30.00		100.00	China
POSCO (Suzhou) Automotive Processing Center Co., Ltd.	Steel manufacturing		90.00		10.00		100.00		90.00		10.00		100.00	China
POSCO BIOVENTURES I, L.P.	Bio tech Industry		—		100.00		100.00		—		100.00		100.00	USA
PT. POSNESIA Stainless Steel Industry	Steel manufacturing		70.00		—		70.00		70.00		—		70.00	Indonesia
POSEC Hawaii, Inc.	Real estate Industry		—		100.00		100.00		—		100.00		100.00	USA
POSCO-China Qingdao Processing Center Co., Ltd.	Steel manufacturing		—		100.00		100.00		—		100.00		100.00	China
POS-ORE PTY LTD	Iron ore sales & mine development		—		100.00		100.00		—		100.00		100.00	Australia
POSCO-China Holding Corp.	Holding company		100.00		—		100.00		100.00		—		100.00	China
POSCO JAPAN Co., Ltd.	Steel trading		100.00		—		100.00		100.00		—		100.00	Japan
POS-CD PTY LTD	Coal sales		—		100.00		100.00		—		100.00		100.00	Australia
POS-GC PTY LTD	Coal sales		—		100.00		100.00		—		100.00		100.00	Australia
POSCO-India Private Limited	Steel manufacturing		100.00		—		100.00		100.00		—		100.00	India
POSCO-India Pune Processing Center. Pvt. Ltd.	Steel manufacturing		65.00		—		65.00		65.00		—		65.00	India
POSCO-JEPC Co., Ltd.	Steel manufacturing		—		88.02		88.02		—		88.02		88.02	Japan
POSCO-CFPC Co., Ltd.	Steel manufacturing		39.60		60.40		100.00		39.60		60.40		100.00	China
POSCO E&C CHINA Co., Ltd.	Construction and civil engineering		—		100.00		100.00		—		100.00		100.00	China
POSCO MPPC S.A. de C.V.	Steel manufacturing		—		95.00		95.00		—		95.00		95.00	Mexico
Zhangjigang Pohang Port Co., Ltd.	Loading and unloading service		—		100.00		100.00		—		100.00		100.00	China
Qingdao Pos-metal Co., Ltd.	Steel manufacturing		—		100.00		100.00		—		100.00		100.00	China
POSCO-VIETNAM Co., Ltd.	Steel manufacturing		85.00		—		85.00		85.00		—		85.00	Vietnam
POSCO MEXICO S.A. DE C.V.	Automotive steel sheet manufacturing		84.84		15.16		100.00		84.84		15.16		100.00	Mexico
POSCO India Delhi Steel Processing Centre Private Limited	Steel manufacturing		66.40		10.00		76.40		66.40		10.00		76.40	India
POSCO-Poland Wroclaw Processing Center Sp. z o. o.	Steel manufacturing		60.00		—		60.00		60.00		—		60.00	Poland
POS-NP PTY LTD	Coal sales		—		100.00		100.00		—		100.00		100.00	Australia
POSCO-Vietnam Processing Center Co., Ltd.	Steel manufacturing		91.63		—		91.63		87.10		5.00		92.10	Vietnam
POSCO(Chongqing) Automotive Processing Center Co., Ltd.	Steel manufacturing		90.00		10.00		100.00		90.00		10.00		100.00	China
SUZHOU POSCO-CORE TECHNOLOGY CO., LTD.	Component manufacturing		—		100.00		100.00		—		100.00		100.00	China
POSCO-Malaysia SDN. BHD.	Steel manufacturing		80.07		13.34		93.41		81.79		13.63		95.42	Malaysia
POS-Minerals Corporation	Mine development & sales		—		100.00		100.00		—		100.00		100.00	USA

F-14

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


		Ownership (%)
		December 31, 2013						December 31, 2014
	Principal operations	POSCO		Subsidiaries		Total		POSCO		Subsidiaries		Total		Region
POSCO(Wuhu) Automotive Processing Center Co., Ltd.	Steel manufacturing		68.57		31.43		100.00		68.57		31.43		100.00	China
POSCO Engineering and Construction India Private Limited	Construction and engineering		—		100.00		100.00		—		100.00		100.00	India
POSCO E&C SMART S DE RL DE CV	Construction and engineering		—		100.00		100.00		—		100.00		100.00	Mexico
POSCO Philippine Manila Processing Center, Inc.	Steel manufacturing		—		100.00		100.00		—		100.00		100.00	Philippines
POSCO Gulf SFC LLC	Steel manufacturing		—		81.93		81.93		—		81.93		81.93	UAE
Dalian POSCO ICT-DONGFANG Engineering Co., Ltd.	Electric control equipment manufacturing		—		100.00		100.00		—		100.00		100.00	China
SANPU TRADING Co., Ltd.	Raw material trading		—		70.00		70.00		—		70.00		70.00	China
Zhangjiagang BLZ Pohang International Trading	Steel transit trading		—		100.00		100.00		—		100.00		100.00	China
POSCO MEXICO HUMAN TECH S.A. de C.V.	Service		80.00		20.00		100.00		80.00		20.00		100.00	Mexico
POSCO MESDC S.A. DE C.V.	Steel product sales		—		56.80		56.80		—		56.80		56.80	Mexico
POSCO ICT-China	IT service and DVR business		—		100.00		100.00		—		100.00		100.00	China
DWEMEX, S.A.DE.C.V.	Construction		—		99.00		99.00		—		99.00		99.00	Mexico
POSCO MPC Servicios S.A. de C.V.	Steel manufacturing		—		61.00		61.00		—		61.00		61.00	Mexico
POSCO-Uruguay S.A	Lumber manufacturing & sales		98.00		—		98.00		98.10		—		98.10	Uruguay
Pos-Sea Pte Ltd	Steel transit trading		—		67.54		67.54		—		67.54		67.54	Singapore
POSCO Europe Steel Distribution Center	Steel product sales		50.00		20.00		70.00		50.00		20.00		70.00	Slovenia
VECTUS LIMITED	PRT test track construction		—		99.57		99.57		—		99.69		99.69	England
Zeus(Cayman)	Service		100.00		—		100.00		100.00		—		100.00	Cayman
														Islands
POSCO VST CO., LTD.	Stainless steel manufacturing		95.65		—		95.65		95.65		—		95.65	Vietnam
POSCO Maharashtra Steel Private Limited	Steel manufacturing		100.00		—		100.00		100.00		—		100.00	India
POSCO India Chennai Steel Processing Centre Pvt. Ltd.	Steel manufacturing		100.00		—		100.00		100.00		—		100.00	India
POSCO TNPC Otomotiv Celik San. Ve Tic. A.S	Steel manufacturing		100.00		—		100.00		100.00		—		100.00	Turkey
POSCO Vietnam Ha Noi Processing Center Co., Ltd.	Steel manufacturing		70.00		—		70.00		70.00		—		70.00	Vietnam
POSCO(Liaoning) Automotive Processing Center Co., Ltd.	Steel manufacturing		90.00		10.00		100.00		90.00		10.00		100.00	China
POSCO-Indonesia Jakarta Processing Center	Steel manufacturing		65.00		20.00		85.00		65.00		20.00		85.00	Indonesia
POSCO E&C VENEZUELA C.A.	Construction and engineering		—		100.00		100.00		—		100.00		100.00	Venezuela
Motta Resources Indonesia	Mine development		65.00		—		65.00		65.00		—		65.00	Indonesia
POSCO TMC INDIA PRIVATE LIMITED	Steel manufacturing		—		100.00		100.00		—		100.00		100.00	India
POSCO America Alabama Processing Center Co., Ltd.	Steel manufacturing		—		100.00		100.00		—		100.00		100.00	USA

F-15

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


		Ownership (%)
		December 31, 2013						December 31, 2014
	Principal operations	POSCO		Subsidiaries		Total		POSCO		Subsidiaries		Total		Region
PT PEN INDONESIA	Construction		—		95.00		95.00		—		67.00		67.00	Indonesia
POSCO(Yantai) Automotive Processing Center Co., Ltd.	Steel manufacturing		90.00		10.00		100.00		90.00		10.00		100.00	China
POSCO India Steel Distribution Center Private Ltd.	Steel logistics		—		100.00		100.00		—		100.00		100.00	India
POSCO China Dalian Plate Processing Center Co., Ltd.	Steel manufacturing		80.00		10.00		90.00		80.00		10.00		90.00	China
POSCO-South Asia Company Limited	Steel product sales		100.00		—		100.00		100.00		—		100.00	Thailand
POSCO SS-VINA	Steel manufacturing		—		100.00		100.00		—		100.00		100.00	Vietnam
POSCO-NCR Coal Ltd.	Coal sales		—		100.00		100.00		—		100.00		100.00	Canada
POSCO WA PTY LTD	Iron ore sales & mine development		100.00		—		100.00		100.00		—		100.00	Australia
POSCO Engineering and Construction — UZ	Construction		—		100.00		100.00		—		100.00		100.00	Uzbekistan
POSCO AUSTRALIA GP PTY LIMITED	Resource development		—		100.00		100.00		—		100.00		100.00	Australia
Daewoo International (America) Corp.	Trading business		—		100.00		100.00		—		100.00		100.00	USA
Daewoo International (Deutschland) GmbH.	Trading business		—		100.00		100.00		—		100.00		100.00	Germany
Daewoo International Japan Corp.	Trading business		—		100.00		100.00		—		100.00		100.00	Japan
DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.	Trading business		—		100.00		100.00		—		100.00		100.00	Singapore
Daewoo Italia S.r.l.	Trading business		—		100.00		100.00		—		100.00		100.00	Italy
Daewoo (China) Co., Ltd.	Trading business		—		100.00		100.00		—		100.00		100.00	China
DAEWOO TEXTILE FERGANA LLC	Textile manufacturing		—		100.00		100.00		—		100.00		100.00	Uzbekistan
DAEWOO TEXTILE BUKHARA LLC	Textile manufacturing		—		100.00		100.00		—		100.00		100.00	Uzbekistan
DAEWOO INTERNATIONAL AUSTRALIA HOLDINGS PTY LTD	Resource development		—		100.00		100.00		—		100.00		100.00	Australia
Daewoo Paper Manufacturing Co., Ltd.	Paper manufacturing		—		66.70		66.70		—		66.70		66.70	China
Tianjin Daewoo Paper Manufacturing Co., Ltd.	Paper manufacturing		—		68.30		68.30		—		68.30		68.30	China
POSCO MAURITIUS LIMITED	Coal development and sales		—		100.00		100.00		—		100.00		100.00	Mauritius
PT. KRAKATAU POSCO	Steel manufacturing		70.00		—		70.00		70.00		—		70.00	Indonesia
Myanmar Daewoo Limited	Trading business		—		100.00		100.00		—		100.00		100.00	Myanmar
DAEWOO INTERNATIONAL MEXICO S.A. DE C.V.	Trading business		—		100.00		100.00		—		100.00		100.00	Mexico
Daewoo International Guangzhou Corp.	Trading business		—		100.00		100.00		—		100.00		100.00	China
Daewoo (M) SDN. BHD.	Trading business		—		100.00		100.00		—		100.00		100.00	Malaysia
Daewoo EL SALVADOR S.A. DE C.V.	Trading business		—		88.00		88.00		—		88.00		88.00	El Salvador
POSCO (Zhangjiagang) STS Processing Center Co., Ltd	Steel manufacturing		—		100.00		100.00		—		100.00		100.00	China
Daewoo International (M) SDN BHD	Trading business		—		100.00		100.00		—		100.00		100.00	Malaysia
Daewoo International SHANGHAI CO., LTD.	Trading business		—		100.00		100.00		—		100.00		100.00	China

F-16

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


		Ownership (%)
		December 31, 2013						December 31, 2014
	Principal operations	POSCO		Subsidiaries		Total		POSCO		Subsidiaries		Total		Region
DAEWOO POWER AND INFRA (PTY) LTD.	Electricity		—		100.00		100.00		—		100.00		100.00	Republic of South Africa
PGSF, L.P.	Investment in Bio tech Industry		—		100.00		100.00		—		100.00		100.00	USA
Xenesys Inc.	Power generation equipment manufacturing		29.58		21.35		50.93		29.58		21.35		50.93	Japan
Daewoo International INDIA Private Ltd.	Trading business		—		100.00		100.00		—		100.00		100.00	India
TECHREN Solar, LLC	Electrical Industry		—		99.92		99.92		—		99.92		99.92	USA
PT. POSCO E&C INDONESIA	Construction		—		100.00		100.00		—		100.00		100.00	Indonesia
HUME COAL PTY LTD	Raw material manufacturing		—		100.00		100.00		—		100.00		100.00	Australia
POSCO FOUNDATION	Non-profit charitable organization		—		100.00		100.00		—		100.00		100.00	India
EPC EQUITIES LLP	Construction		—		70.00		70.00		—		80.00		80.00	England
SANTOS CMI CONSTRUCTION TRADING LLP	Construction		—		99.90		99.90		—		99.90		99.90	England
SANTOS CMI INC. USA	Construction		—		100.00		100.00		—		100.00		100.00	USA
SANTOS CMI ENGENHARIA E CONSTRUCOES LTDA	Construction		—		99.98		99.98		—		99.98		99.98	Brazil
SANTOS CMI PERU S.A.	Construction		—		99.99		99.99		—		99.99		99.99	Peru
SANTOS CMI CONSTRUCCIONES S.A.	Construction		—		100.00		100.00		—		100.00		100.00	Uruguay
GENTECH INTERNATIONAL INC.	Construction		—		90.00		90.00		—		90.00		90.00	Panama
EPC INVESTMENTS C.V.	Construction		—		99.99		99.99		—		99.99		99.99	Netherlands
SANTOSCMI S.A.	Construction		—		70.00		70.00		—		80.00		80.00	Ecuador
SANTOSCMI CONSTRUCCIONES DE CHILE S.A.	Construction		—		99.00		99.00		—		99.00		99.00	Chile
S&K -SANTOSCMI S.A. DE C.V.	Construction		—		99.00		99.00		—		—		—	Mexico
COMPANIADEAUTOMATI ZACION& CONTROL, GENESYS S.A.	Construction		—		90.00		90.00		—		90.00		90.00	Ecuador
VAUTIDAMERICAS S.A.	Construction		—		51.00		51.00		—		51.00		51.00	Ecuador
POSCO ENGINEERING & CONSTRUCTION DO BRAZIL LTDA.	Construction		—		100.00		100.00		—		100.00		100.00	Brazil
POSCO Electrical Steel India Private Limited	Electrical Steel manufacturing		100.00		—		100.00		100.00		—		100.00	India
Daewoo International Cameroon S.A.	Resource Development		—		100.00		100.00		—		—		—	Cameroon
POSCO ASSAN TST STEEL INDUSTRY	Steel manufacturing		60.00		10.00		70.00		60.00		10.00		70.00	Turkey
HONG KONG POSCO E&C (CHINA) INVESTMENT Co., Ltd.	Investment		—		100.00		100.00		—		100.00		100.00	Hongkong
POSCO Klappan Coal Ltd.	Coal sales		—		100.00		100.00		—		100.00		100.00	Canada
DAESAN (CAMBODIA) Co., Ltd.	Investment		—		100.00		100.00		—		100.00		100.00	Cambodia
Brazil Sao Paulo Steel Processing Center	Steel manufacturing		—		76.00		76.00		—		76.00		76.00	Brazil
POSCO(Dalian) IT Center Development Co., Ltd.	Investment		—		100.00		100.00		—		100.00		100.00	China
PT. POSCO RESOURCES INDONESIA	Mine development		100.00		—		100.00		100.00		—		100.00	Indonesia

F-17

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


		Ownership (%)
		December 31, 2013						December 31, 2014
	Principal operations	POSCO		Subsidiaries		Total		POSCO		Subsidiaries		Total		Region
PT.POSCO ICT INDONESIA	IT service and Electric Control Engineering		—		66.99		66.99		—		66.99		66.99	Indonesia
PT. POSCO MTECH INDONESIA	Steel manufacturing		—		60.00		60.00		—		71.43		71.43	Indonesia
PT. KRAKATAU POSCO ENERGY	Manufacturing & management		—		90.00		90.00		—		90.00		90.00	Indonesia
POSCO RUS LLC	Trading business		90.00		10.00		100.00		90.00		10.00		100.00	Russia
POSCO Thainox Public Company Limited	Steel manufacturing		84.93		—		84.93		84.93		—		84.93	Thailand
DAEWOO INTERNATIONAL SHANGHAI WAIGAOQIAO CO., LTD.	Merchandising trade		—		100.00		100.00		—		100.00		100.00	China
PT. Bio Inti Agrindo	Forest resources development		—		85.00		85.00		—		85.00		85.00	Indonesia
POSCO ENGINEERING AND CONSTRUCTION AUSTRALIA PTY LTD	Iron ore sales		—		100.00		100.00		—		100.00		100.00	Australia
POSCO-TISCO (JILIN) PROCESSING CENTER Co., Ltd.	Steel manufacturing		50.00		10.00		60.00		50.00		10.00		60.00	China
Hunchun Posco Hyundai International Logistics Complex Development Co., Ltd	Logistics		—		72.93		72.93		—		80.00		80.00	China
USA-SRDC	Scrap sales		—		100.00		100.00		—		100.00		100.00	USA
Daewoo International Vietnam Co., Ltd.	Trading business		—		100.00		100.00		—		100.00		100.00	Vietnam
PT.Krakatau Posco Chemtech Calcination	Manufacturing and selling of quicklime		—		80.00		80.00		—		80.00		80.00	Indonesia
POSCO AFRICA (PROPRIETARY) LIMITED	Trading business		100.00		—		100.00		100.00		—		100.00	Republic of South Africa
EPC INGENIERIA & SERVICIOS DE COSTA RICA SA	Construction and engineering service		—		100.00		100.00		—		100.00		100.00	Costa Rica
POSCO ICT BRASIL	IT service and engineering		—		100.00		100.00		—		100.00		100.00	Brazil
LA-SRDC	Scrap manufacturing		—		68.41		68.41		—		68.41		68.41	USA
DONG FANG JIN HONG	Real estate development, rental and management		—		99.00		99.00		—		99.00		99.00	China
PRODUCTOS OFERTAS SISTEMAS Y COMERCIALIZADORA ORIENTAL S DE RL DE CV	Steel sales		—		100.00		100.00		—		100.00		100.00	Mexico
POSCO(Guangdong) Automotive Steel Co., Ltd.	Steel manufacturing and sales		83.64		10.00		93.64		83.64		10.00		93.64	China
POSCO MAPC SA DE CV	Steel manufacturing and sales		80.00		20.00		100.00		80.00		20.00		100.00	Mexico
POSCO AMERICA COMERCIALIZADORA S DE RL DE CV	Human-resource service		—		100.00		100.00		—		100.00		100.00	Mexico
POSCO ENGINEERING (THAILAND) CO., LTD. ^(*2)	Chemical plant		—		48.90		48.90		—		48.90		48.90	Thailand
POSCO YongXin Rare Earth Metal Co., Ltd.	Magnet material manufacturing and sales		—		51.67		51.67		—		51.67		51.67	China
POSCO-Mory-Maruyasu PIPE	Common steel welded pipe manufacturing and selling		—		50.00		50.00		—		50.00		50.00	Japan

F-18

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


		Ownership (%)
		December 31, 2013						December 31, 2014
	Principal operations	POSCO		Subsidiaries		Total		POSCO		Subsidiaries		Total		Region
PT KRAKATAU BLUE WATER	Wastewater treamtment facilities operation and maintemance		—		67.00		67.00		—		67.00		67.00	Indonesia
KRAKATAU POS-CHEM DONG-SUH CHEMICAL ^(*2)	Chemical by-product manufacturing and sales		—		45.00		45.00		—		45.00		45.00	Indonesia
Myanmar Daewoo International Corporation	Trading business		—		100.00		100.00		—		100.00		100.00	Myanmar
POSCO-Italy Processing Center	Stainless steel sheet manufacturing and sales		80.00		10.00		90.00		80.00		10.00		90.00	Italy
DAEWOO E&P CANADA CORPORATION	Crude oil and natural gas mining		—		100.00		100.00		—		100.00		100.00	Canada
Yingkou Puxiang Trade Co.,Ltd.	Refractory quality test and import and export trade		—		100.00		100.00		—		100.00		100.00	China
Myanmar POSCO C&C Company, Limited.	Steel manufacturing and sales		—		70.00		70.00		—		70.00		70.00	Myanmar
POSCO ICT VIETNAM	IT service and electric control engineering		—		100.00		100.00		—		100.00		100.00	Vietnam
Daewoo Global Development. Pte., Ltd	Real estate development		—		51.00		51.00		—		51.00		51.00	Myanmar
Myanmar POSCO Engineering& Construction Company, Limited.	Construction and engineering service		—		100.00		100.00		—		100.00		100.00	Myanmar
POSCO COATED STEEL (THAILAND) CO., LTD.	Automotive steel sheet manufacturing and sales		100.00		—		100.00		100.00		—		100.00	Thailand
POSCO China Suzhou Processing Center Co.,Ltd (formerly, POSCO-SAMSUNG Suzhou Processing Center Co.,Ltd.)	Steel manufacturing		—		—		—		30.00		70.00		100.00	China
Hanjung Power Pty., Ltd	Electricity prodction		—		—		—		—		100.00		100.00	Papua New Guinea
Daewoo Amara Company Limited	Real estate development		—		—		—		—		98.54		98.54	Myanmar
POSMATE-CHINA CO., LTD	Business facility maintenance		—		—		—		—		100.00		100.00	China
Daewoo Precious Resources Co., Ltd.	Resources development		—		—		—		—		60.00		60.00	Myanmar
POSCO-Mexico Villagran Wire-rod Processing Center	Steel manufacturing		—		—		—		56.75		10.00		66.75	Mexico
SANTOS CMI Guatemala S.A.	Construction		—		—		—		—		99.00		99.00	Guatemala
POSCO-China Dalian Steel Fabricating Center	Steel manufacturing		—		—		—		42.16		25.39		67.55	China
POSCO E&C HOLDINGS CO.,Ltd.	Holding company		—		—		—		—		100.00		100.00	Thailand
POSCO E&C (THAILAND) CO.,Ltd.	Construction		—		—		—		—		100.00		100.00	Thailand
SUNGJIN CANADA LTD.	Machinery installation		—		—		—		—		70.00		70.00	Canada
POSCO PLANTEC Thiland CO. LTD ^(*2)	Steel work maintenance and machinery installation		—		—		—		—		48.78		48.78	Thailand
DAEWOO POWER PNG Ltd.	Electricity prodction		—		—		—		—		100.00		100.00	Papua New Guinea

(*1)	Included as a subsidiary as the Company has the power over more than half of the voting rights by virtue of an agreement with Postech, which has a 4.72% ownership interest.

(*2)	These subsidiaries are included in the consolidated financial statements as the controlling company has control over them in consideration of the board of directors’ composition and others.

F-19

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

The amounts recognized in equity as a result of changes in the Company’s ownership interests in subsidiaries that did not result in a loss of control (2012: POSCO Specialty Steel Co., Ltd., POSCO ENERGY Co., Ltd., POSCO-Thainox Public Company Limited, etc., 2013: POSCO Specialty Steel Co., Ltd., POSCO ICT Co., Ltd., POSCO TMC Co., Ltd. etc., 2014: POSCO P&S Co., Ltd., SPFC Co., Ltd. etc.) were ￦41,924 million, ￦31,417 million and ￦9,401 million for the years ended December 31, 2012, 2013 and 2014, respectively.

Cash dividends paid to POSCO by subsidiaries for the years ended December 31, 2012, 2013 and 2014 amounted to ￦22,581 million, ￦71,970 million and ￦58,488 million, respectively.

As of December 31, 2014, there are no restrictions on the ability of subsidiaries to transfer funds to the Controlling Company, such as in the form of cash dividends, repayment of loans or payment of advances.

1) December 31, 2013


	Daewoo International Corporation			PT. KRAKATAU POSCO			POSCO Specialty Steel Co., Ltd.			POSCO ENGINEERING & CONSTRUCTION CO., LTD.			POSCO ENERGY Co., Ltd.			Others			Total
	(in millions of Won)
Current assets	￦	4,313,678			427,029			633,583			5,443,747			697,234			9,773,753			21,289,024
Non-current assets		6,110,630			3,019,191			879,536			1,075,367			3,115,599			8,538,325			22,738,648
Current liabilities		(4,258,245	)		(611,434	)		(269,749	)		(3,632,188	)		(674,370	)		(8,990,091	)		(18,436,077	)
Non-current liabilities		(1,835,835	)		(1,862,078	)		(264,596	)		(788,734	)		(1,760,156	)		(3,038,981	)		(9,550,380	)
Equity		4,330,228			972,708			978,774			2,098,192			1,378,307			6,283,006			16,041,215
Non-controlling interests		1,718,562			291,812			273,143			219,777			151,274			1,451,734			4,106,302
Sales		16,838,559			—			1,316,781			7,937,845			2,901,117			25,405,268			54,399,570
Profit for the period		42,312			(41,844	)		31,749			138,724			146,419			(143,940	)		173,420
Profit (loss) attributable to non-controlling interests		16,793			(12,553	)		8,860			14,530			16,070			(15,634	)		28,066
Cash flows from operating activities		(67,785	)		(50,209	)		18,721			40,815			32,174			23,342			(2,942	)
Cash flows from investing activities		(123,609	)		(405,186	)		(54,152	)		(15,888	)		(94,741	)		(337,253	)		(1,030,829	)
Cash flows from financing activities (before dividends to non-controlling interest)		156,326			467,617			80,213			(29,059	)		62,273			375,947			1,113,317
Dividend to non-controlling interest		(13,558	)		—			(2,217	)		(2,885	)		—			(9,125	)		(27,785	)
Effect of exchange rate fluctuation on cash held		(114	)		(560	)		—			(360	)		—			(9,036	)		(10,070	)
Net increase in cash and cash equivalents		(48,740	)		11,662			42,565			(7,377	)		(294	)		43,875			41,691

F-20

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) December 31, 2014


	Daewoo International Corporation			PT. KRAKATAU POSCO			POSCO CHEMTECH			POSCO ENGINEERING & CONSTRUCTION CO., LTD.			POSCO ENERGY Co., Ltd.			Others			Total
	(in millions of Won)
Current assets	￦	5,177,495			645,598			360,673			5,082,514			501,219			12,781,184			24,548,683
Non-current assets		6,028,358			3,303,632			251,206			1,333,612			3,393,917			10,135,827			24,446,552
Current liabilities		(5,046,468	)		(988,132	)		(131,389	)		(3,494,647	)		(546,791	)		(11,493,074	)		(21,700,501	)
Non-current liabilities		(1,807,698	)		(2,118,519	)		(7,150	)		(882,025	)		(2,513,129	)		(3,681,307	)		(11,009,828	)
Equity		4,351,687			842,579			473,340			2,039,454			835,216			7,742,630			16,284,906
Non-controlling interests		1,727,078			252,773			189,336			213,624			91,668			1,677,400			4,151,879
Sales		19,938,711			1,129,977			1,331,527			7,174,890			2,533,673			28,738,206			60,846,984
Profit for the period		83,167			(232,503	)		68,196			50,023			21,100			(159,066	)		(169,083	)
Profit (loss) attributable to non-controlling interests		33,007			(69,751	)		27,278			5,240			2,316			(62,302	)		(64,212	)
Cash flows from operating activities		(149,695	)		(27,383	)		20,676			24,592			36,346			(121,697	)		(217,161	)
Cash flows from investing activities		(167,573	)		(74,454	)		(28,349	)		(33,755	)		(117,154	)		(230,954	)		(652,239	)
Cash flows from financing activities (before dividends to non-controlling interest)		336,114			75,680			—			(15,162	)		83,014			406,904			886,550
Dividend to non-controlling interest		(13,558	)		—			(3,544	)		(1,923	)		(2,648	)		(5,748	)		(27,421	)
Effect of exchange rate fluctuation on cash held		(46	)		134			43			(8	)		—			3,636			3,759
Net increase in cash and cash equivalents		5,242			(26,023	)		(11,174	)		(26,256	)		(442	)		52,141			(6,512	)

F-21

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(d) Details of associates and joint ventures

1) Associates

Details of associates as of December 31, 2013 and 2014 are as follows:

Ownership (%)

Investee

Category of business

2013

2014

Region

[Domestic]

EQP POSCO Global NO1 Natual Resources PEF

Investment in new technologies

27.23

28.48

Seoul

SNNC

Raw material manufacturing and sales

49.00

Gwangyang

QSONE Co.,Ltd.

Real estate rental and facility management

50.00

Seoul

Incheon-Gimpo Expressway Co., Ltd.

Construction

29.94

25.76

Anyang

BLUE OCEAN Private Equity Fund

Private equity financial

27.52

Seoul

UITrans LRT Co., Ltd.

Transporting

38.19

Seoul

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co.,Ltd

Real estate development

25.10

Chungju

KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund ^(*1)

Investment in new technologies

12.50

Seoul

KONES, Corp.

Technical service

41.67

Gyeongju

Gunggi Green Energy ^(*1)

Electricity generation

19.00

Hwaseong

Gale International Korea, LLC

Real estate rental

29.90

Seoul

Pohang Techno Valley PFV Corporation ^(*2)

Real estate development

54.99

Pohang

Pohang Special Welding Co.,Ltd.

Welding material and tools manafacturing and sales

50.00

Pohang

KC Chemicals ^(*1)

Machinery manufacturing

19.00

Hwaseong

Green Jang Ryang Co.Ltd

Sewerage treatment

25.00

Pohang

DAEHO GLOBAL MANAGEMENT CO., LTD.

Investment advisory service

35.82

Pohang

Daewoo Public Car Sales (Gwangju) CO.,Ltd

Leasing services

50.00

Gwangju

Clean Gimpo Co., Ltd.

Construction

29.58

Gimpo

Pajoo & Viro Co., Ltd.

Construction

40.00

Paju

Posco-IDV Growth Ladder IP Fund ^(*1,3)

Investment in new technologies

—

17.86

Seoul

SuNAM Co., Ltd ^(*1)

Power supply manufacturing

19.17

Seoul

Pureun Tongyeong Enviro Co., Ltd.

Sewerage treatment

20.40

Tongyeong

Postech Early Stage Fund ^(*1)

Investment in venture companies

10.00

Pohang

Posgreen Co., Ltd. ^(*1)

Plastic manufacturing

19.00

Gwangyang

POSTECH Social Enterprise Fund ^(*1)

Investment in new technologies

9.17

Seoul

Applied Science Corp.

Machinery manufacturing

27.11

26.47

Paju

Suwon Green Environment Co.,Ltd

Construction

27.50

Hwaseong

Universal Studios Resort Asset Management Corporation

Real estate services

26.17

Seoul

Noel Green Energy Co., Ltd. ^(*3)

Electricity generation

—

20.00

Seoul

Synergy Private Equity Fund ^(*1,3)

Investment in new technologies

—

17.86

Seoul

Pure Gimpo Co., Ltd.

Construction

28.79

Seoul

Pohang Techno Valley AMC

Construction

29.50

Pohang

New Songdo International City Development, LLC

Real estate rental

29.90

Seoul

MTAPOLIS Co.,Ltd.

Multiplex •development

40.05

Hwaseong

Busan-Gimhae Light Rail Transit Co., Ltd.

Transporting

25.00

Gimhae

Clean Iksan Co., Ltd.

Construction

23.50

Pohang

Mokpo Deayang Industrial Corporation

Real estate development

27.40

Mokpo

Chun-cheon Energy Co., Ltd

Electricity generation

29.90

Chuncheon

Innovalley Co., Ltd.

Real estate developement

28.77

Yongin

Garolim Tidal Power Plant Co.,Ltd

Tidal power plant construction and management

32.13

Seosan

Posco e&c Songdo International Building

Non-resident building lease

49.00

Seoul

F-22

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Ownership (%)

Investee

Category of business

2013

2014

Region

POSCO PLANTEC Co., Ltd. ^(*4)

Industrial structure manufacturing

43.97

—

Ulsan

Future Creation Fund Postech Early Stage account ^(*4)

Investment in new technologies

40.00

—

Seoul

Taegisan Wind Power Corporation ^(*5)

Wind power plant construction and management

50.00

—

Hoengseong

Dakos Co., Ltd. ^(*6)

Railway equipment manufacturing

31.00

—

Seongnam

Gyeonggi CES Co.,Ltd ^(*5)

Facility construction

21.83

—

Yangju

Hyundai Investment Network Private Equity Fund I ^(*6)

Mine investment

50.00

—

Seoul

[Foreign]

Eureka Moly LLC

Steel processing and sales

20.00

USA

South-East Asia Gas Pipeline Company Ltd.

Pipeline construction

25.04

Myanmar

7623704 Canada Inc. ^(*1)

Investments management

10.40

Canada

Nickel Mining Company SAS

Raw material manufacturing and sales

49.00

New
Caledonia

AES-VCM Mong Duong Power Company Limited

Electricity generation

30.00

Vietnam

AMCI (WA) PTY LTD.

Iron ore sales & mine development

49.00

Australia

KOREA LNG LTD.

Gas production and sales

20.00

England

CAML RESOURCES PTY LTD.

Raw material manufacturing and sales

33.34

Australia

NCR LLC

Coal sales

29.41

Canada

Zhongyue POSCO (Qinhuangdao) Tinplate Industrial Co., Ltd

Tinplate manufacturing and sales

34.00

China

PT. Batutua Tembaga Raya ^(*3)

Raw material manufacturing and sales

—

24.10

Indonesia

VSC POSCO Steel Corporation

Steel manufacturing and sales

50.00

Vietnam

PT. Wampu Electric Power

Construction and engneering service

20.00

Indonesia

POSCO SeAH Steel Wire (Nantong) Co., Ltd.

Steel processing and sales

25.00

China

POSCHROME (PROPRIETARY) LIMITED

Raw material manufacturing and sales

50.00

South Africa

LLP POSUK Titanium

Titanium manufacturing and sales

36.83

Kazahstan

IMFA ALLOYS FINLEASE LTD

Raw material manufacturing and sales

24.00

India

AN KHANH NEW CITY DEVELOPMENT J.V CO., LTD.

Highway construction and new town development

50.00

Vietnam

XG Sciences ^(*3)

New materials manufacturing and development

—

26.27

USA

General Medicines Company Ltd.

Medicine manufacturing and sales

33.00

Sudan

PT.INDONESIA POS CHEMTECH CHOSUN Ref

Refractory manufacturing and sales

30.19

Indonesia

PT. Tanggamus Electric Power

Construction and engneering service

20.00

20.59

Indonesia

POS-SEAHSTEELWIRE(TIANJIN)CO.,Ltd

Steel manufacturing and sales

25.00

China

SHANGHAI LANSHENG DAEWOO CORP.

Trading

49.00

China

POSK(Pinghu) Steel Processing Center Co., Ltd.

Steel processing and sales

20.00

China

SHANGHAI WAIGAOQIAO FREE TRADE ZONE LANSHENG DAEWOO IN’L TRADING CO., LTD.

Trading

49.00

China

NS-Thainox Auto Co., Ltd.

Steel manufacturing and sales

49.00

Vietnam

BGC-POS PTY LTD.

Construction

49.00

Australia

Sebang Steel

Scrap sales

49.00

Japan

Hamparan Mulia

Resource development

45.00

Indonesia

Baganuur Energy Corporation

Refined oil manufacturing

50.00

Mongolia

POSCO-Poggenamp Electrical Steel Pvt. Ltd.

Steel manufacturing

26.00

India

Fifth Combined Heat and Power Plant LLC

Thermal power generation

30.00

Mongolia

GLOBAL KOMSCO Daewoo LLC

Mintage

35.00

Uzbekistan

KG Power(M) SDN. BHD

Energy & resource development

20.00

Malaysia

F-23

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Ownership (%)

Investee

Category of business

2013

2014

Region

Arctos Anthracite Joint Venture

Coal sales

20.00

Canada

LI3 ENERGY INC

Energy & resource development

26.06

Peru

POSCO China Suzhou Processing Center Co.,Ltd. (formerly, POSCO-SAMSUNG Suzhou Processing Center Co.,Ltd.) ^(*4)

Steel processing and sales

30.00

—

China

Hanjung Power Pty., Ltd ^(*4)

Electric power manufacturing and sales

49.00

—

Papua
New Guinea

POSVINA Co., Ltd. ^(*5)

Plating steel sheet manufacturing and sales

50.00

—

Vietnam

Yingkou Posrec Refractories Co., Ltd. ^(*6)

Refractory manufacturing

25.00

—

China

Daewoo (THAILAND) CO., LTD. ^(*6)

Trading

49.00

—

Thailand

N.I.CO., LTD. ^(*6)

Trading

50.00

—

North Korea

Boulder Solar Power, LLC ^(*5)

Electric power manufacturing

21.74

—

USA

(*1)	The Company is able to exercise significant influence over the investees even though the Company’s percentage of ownership is below 20%.

(*2)	Considering the composition of board of directors, the Company is not able to exercise control over the investee even though the Company’s percentage of ownership is above 50%.

(*3)	These associates were newly established or acquired in 2014.

(*4)	Reclassified to subsidiary from associate due to an increase in ownership percentage and acquisition of control during the year ended December 31, 2014.

(*5)	Excluded from associates due to the disposal of shares during the year ended December 31, 2014.

(*6)	Excluded from associates due to the liquidation during the year ended December 31, 2014.

2) Joint ventures

Details of joint ventures as of December 31, 2013 and 2014 are as follows:

Ownership (%)

Investee

Category of business

2013

2014

Region

[Domestic]

POSCO ES MATERIALS

Secondary battery manufacturing

50.00

Gumi

POSCO MITSUBISHI CARBON TECHNOLOGY

Steel processing and sales

60.00

Gwangyang

[Foreign]

Roy Hill Holdings Pty Ltd

Energy & resource development

12.50

Austrailia

POSCO-NPS Niobium LLC

Mine development

50.00

USA

CSP — Compania Siderurgica do Pecem

Steel manufacturing and sales

20.00

Brazil

DMSA/AMSA

Energy & resource development

4.00

Madagascar

KOBRASCO

Facility lease

50.00

Brazil

BX STEEL POSCO Cold Rolled Sheet Co., Ltd.

Steel processing and sales

25.00

China

PT. POSMI Steel Indonesia

Steel processing and sale

36.69

Indonesia

POSCO-CDPC(POSCO ChengDu Processing
Center) Co., Ltd ⁽*¹⁾

Steel processing and sale

—

43.00

China

Henan Tsingpu Ferro Alloy Co., Ltd.

Raw material manufacturing and sales

49.00

China

TANGGANG-POSCO LED ⁽*¹⁾

Led manufacturing and sales

—

50.00

China

VNS-DAEWOO Co., Ltd. ⁽*¹⁾

Steel processing and sale

—

40.00

Veitnam

POSCO-SAMSUNG-Slovakia Processing Center

Steel processing and sales

30.00

Slovakia

Zhangjiagang Pohang Refractories Co., Ltd.

Refractory manufacturing

50.00

China

Korea Siberia Wood CJSC

Forest resource development

50.00

Russia

United Spiral Pipe, LLC

Material manufacturing and sales

35.00

USA

SUNGJIN DRIVER INC⁽*¹⁾

Moduel and Plant manufacturing

—

50.00

Canada

USS-POSCO Industries

Cold rolled coil manufacturing and sales

50.00

USA

(*1)	These joint ventures were newly established or acquired in 2014.

F-24

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(e) Newly included subsidiaries

1) Consolidated subsidiaries acquired or newly established during the year ended December 31, 2014 are as follows:


Company	Date of acquisition	Ownership (%)		Reason
Hanjung Power Pty., Ltd	January 2014		100.00	Reclassification from associate
Daewoo Amara Company Limited	January 2014		85.00	New establishment
POSMATE-CHINA CO., LTD	January 2014		100.00	New establishment
Daewoo Precious Resources Co., Ltd.	March 2014		60.00	New establishment
POSCO-Mexico Villagran Wire-rod Processing Center	March 2014		66.75	New establishment
POSCO Green Gas Technology	April 2014		100.00	New establishment
SANTOS CMI Guatemala S.A.	April 2014		100.00	Acquisition
Santos CMI Construction Inc S.A	April 2014		100.00	Acquisition
POSCO-China Dalian Steel Fabricating Center	May 2014		51.00	New establishment
Keystone Private Equity	June 2014		55.12	Reclassification from associate
POSCO WOMAN’S FUND ⁽*¹⁾	July 2014		40.00	New establishment
Chun Sa wind	July 2014		100.00	Acquisition
POSCO China Suzhou Processing Center Co.,Ltd. (formerly, POSCO-SAMSUNG Suzhou Processing Center Co.,Ltd.)	July 2014		100.00	Reclassification from associate
POSPOWER Co., Ltd.	August 2014		100.00	Acquisition
Future Creation Fund Postech Early Stage account ⁽*¹⁾	September 2014		40.00	Reclassification from associate
POSCO E&C HOLDINGS CO.,Ltd.	October 2014		100.00	New establishment
POSCO E&C (THAILAND) CO.,Ltd.	October 2014		100.00	New establishment
Songdo Posco family Housing	November 2014		100.00	New establishment
POSCO PLANTEC Co., Ltd.	December 2014		73.94	Reclassification from associate
SUNGJIN CANADA LTD.	December 2014		70.00	Reclassification by POSCO PLANTEC Co., Ltd.
POSCO PLANTEC Thailand CO. LTD	December 2014		82.40	Reclassification by POSCO PLANTEC Co., Ltd.
DAEWOO POWER PNG Ltd.	December 2014		100.00	New establishment

(*1)	These subsidiaries are included in the consolidated financial statements as the controlling company has control over them in consideration of the board of directors’ composition and others.

2) Cash outflows (inflows) caused by the acquisitions for the years ended December 31, 2012, 2013 and 2014.


	2012			2013			2014
	(in millions of Won)
Consideration transferred	￦	287,085			4,359			747,569
Less: Cash and cash equivalent acquired		(188,205	)		(10,088	)		(358,991	)

Total	￦	98,880			(5,729	)		388,578

F-25

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(f) Excluded subsidiaries

Subsidiaries that were excluded from consolidation during the year ended December 31, 2014 are as follows:


Company	Date of disposal	Reason
POSCO-JOPC Co., Ltd.	January 2014	Statutory merger by POSCO-JWPC Co., Ltd. (formerly, POSCO-JKPC Co., Ltd.)
S&K -SANTOSCMI S.A. DE C.V.	March 2014	Exclusion upon liquidation
Santos CMI Construction Inc S.A	September 2014	Statutory merger by SANTOS CMI Guatemala S.A
Daewoo International Cameroon S.A.	November 2014	Disposal
INTERNATIONAL BUSINESS CENTER CORPORATION	December 2014	Disposal

2.	Statement of Compliance

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”), as issued by the International Accounting Standards Board.

The consolidated financial statements were authorized for issue by the authorized directors on February 26, 2015.

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the statement of financial position, as described in the accounting policy below.

(a)

Derivatives instruments are measured at fair value

(b)

Financial instruments at fair value through profit or loss (FVTPL) are measured at fair value

(c)

Available-for-sale financial assets are measured at fair value

(d)

Defined benefit liabilities are measured at the present value of the defined benefit obligation less the fair value of the plan assets

Functional and presentation currency

These consolidated financial statements are presented in Korean won, which is POSCO’s functional currency and the currency of the primary economic environment in which POSCO operates.

Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period prospectively.

F-26

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(a)

Judgments

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following notes:

•

Note 1 — Subsidiaries, associates and joint venture

•

Note 8 — Other financial assets

•

Note 12 — Joint operations

•

Note 13 — Investment property, net

•

Note 14 — Property, plant and equipment, net

•

Note 15 — Goodwill and other intangibles

(b)

Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the following notes:

•

Note 20 — Provisions

•

Note 21 — Employee benefits

•

Note 29 — Construction contracts

•

Note 35 — Income taxes

•

Note 38 — Commitments and contingencies

(c)

Measurement of fair value

The Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Company has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values, and reports directly to the financial officer.

The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS including the level in the fair value hierarchy in which such valuation techniques should be classified.

When measuring the fair value of an asset or a liability, the Company uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

•

Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities.

•

Level 2 — inputs other than quoted prices included in Level 1 that are observable for the assets or liability, either directly or indirectly.

•

Level 3 — inputs for the assets or liability that are not based on observable market data.

F-27

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Information about the assumptions made in measuring fair values is included in the following note:

•

Note 23 — Financial instruments

Changes in accounting policies

The Company has adopted the following amendments to standards and new interpretation with a date of initial application of January 1, 2014.

IAS No. 32, “Financial Instruments: Presentation”

IAS No. 36, “Impairment of Assets”

IFRIC No. 21, “Levies”

The details of changes in accounting policies are as follows:

Offsetting financial assets and financial liabilities

The Company has adopted amendments to IAS No. 32, “Offsetting Financial Assets and Financial Liabilities” since January 1, 2014. The amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’. According to the amendments, the right to set off should not be contingent on a future event, and legally enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy of the entity and all of the counterparties. The amendments also state that some gross settlement systems would be considered equivalent to net settlement if they eliminate or result in insignificant credit and liquidity risk and process receivables and payables in a single settlement process or cycle.

Disclosure of impairment loss

The Company has adopted amendments to IAS No. 36 “Impairment of Assets” since January 1, 2014. The amendments require the disclosure of information about the recoverable amount of impaired assets, if that amount is based on fair value less costs of disposal. They also require the disclosure of additional information about that fair value measurement. In addition, if the recoverable amount of impaired assets based on fair value less costs of disposal was measured using a present value technique, the amendments also require the disclosure of the discount rates that have been used in the current and previous measurements.

Levies

The Company has adopted IFRIC No. 21, “Levies” since January 1, 2014. IFRIC No. 21 is an Interpretation of IAS No. 37 “Provisions, Contingent Liabilities and Contingent Assets”, on the accounting for levies imposed by governments. IAS No. 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present

F-28

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

obligation as a result of a past event (or “obligating event”). IFRIC No. 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy.

The interpretation does not provide guidance on the accounting for the costs arising from recognizing the liability to pay a levy. Other IFRSs should be applied to determine whether the recognition of a liability to pay a levy gives rise to an asset or an expense.

Impact of changes in accounting policies

Upon adoption of amendments to IAS No. 32 and IFRIC No. 21, there is no impact on the Company’s prior year’s consolidated financial statements. Upon adoption of amendments to IAS No. 36, the Company has made the required disclosures in the annual financial statements as applicable (see note 15).

Correction of prior year financial statements for immaterial errors

The accompanying consolidated financial statements of the Company as of December 31, 2013 and for the years ended December 31, 2012 and 2013 have been adjusted to correct the following immaterial errors.

Previously, revenue and expenses from the development and sale of certain residential real estate were recognized by reference to the stage of completion of the contract activity at the end of the reporting period. In 2014, the Company re-evaluated its accounting for sale of residential real estate under IFRS as issued by IASB, and has concluded that revenue and expenses from development and sale of such residential real estate should be recognized when an individual unit of residential real estate is delivered to the buyer.

The effect of this correction on the prior financial statements is as follows:


	As of January 1, 2012
	As reported		Correction			As adjusted
	(in millions of Won)
Current assets	￦	33,556,911		(9,793	)		33,547,118
Non-current assets		44,851,927		2,370			44,854,297
Current liabilities		19,605,358		—			19,605,358
Non-current liabilities		18,073,560		—			18,073,560

Retained earnings		38,709,475		(6,645	)		38,702,830
Non-controlling interests		2,373,570		(778	)		2,372,792


	As of and for the year ended December 31, 2012
	As reported		Correction			As adjusted
	(in millions of Won, except per share information)
Current assets	￦	31,566,116		250,389			31,816,505
Non-current assets		47,699,735		11,233			47,710,968
Current liabilities		19,775,001		48,590			19,823,591
Non-current liabilities		17,061,432		248,216			17,309,648

Revenue		63,604,151		(258,893	)		63,345,258
Cost of sales		56,142,892		(222,269	)		55,920,623
Profit before income tax		3,368,486		(36,624	)		3,331,862
Profit		2,385,607		(27,761	)		2,357,846
Basic and diluted earnings per share (in Won)		31,874		(322	)		31,552

F-29

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


	As of and for the year ended December 31, 2013
	As reported		Correction			As adjusted
	(in millions of Won, except per share information)
Current assets	￦	31,666,211		372,500			32,038,711
Non-current assets		52,789,196		13,201			52,802,397
Current liabilities		20,241,159		116,385			20,357,544
Non-current liabilities		18,392,218		310,664			18,702,882

Revenue		61,864,650		(98,907	)		61,765,743
Cost of sales		55,004,591		(90,775	)		54,913,816
Profit before income tax		1,946,177		(8,132	)		1,938,045
Profit		1,355,180		(6,164	)		1,349,016
Basic and diluted earnings per share (in Won)		17,409		(71	)		17,338

3.	Summary of Significant Accounting Policies

The significant accounting policies applied by the Company in preparation of its consolidated financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these financial statements, except for those as disclosed in note 2.

Basis of consolidation

(a)

Business combinations

The Company accounts for business combinations using the acquisition method when control is transferred to the Company.

The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on bargain purchase is recognized in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss.

Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.

If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards), then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based measure of the replacement awards compared with the market-based measure of the acquiree’s awards and the extent to which the replacement awards relate to pre-combination service.

(b)

Non-controlling interests

Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date.

Changes in the Company’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

F-30

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(c)

Subsidiaries

Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

(d)

Loss of control

When the Company loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related non-controlling interests and other components of equity. Any resulting gain or loss is recognized in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

(e)

Interests in equity-accounted investees

The Company’s interests in equity-control investees comprise interests in associates and joint ventures. Associates are those entities in which the Company has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Company has joint control, whereby the Company has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

Interests in associates and joint ventures are accounted for using the equity method. They are recognized initially at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income of equity-accounted investees, until the date on which significant influence or joint control ceases.

(f)

Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated. Unrealized gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Company’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

Foreign currency transactions and translation

Foreign currency transactions

Foreign currency transactions are initially recorded using the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. At the end of each reporting period, foreign currency monetary items are translated using the closing rate. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the original transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rate at the date fair value was initially determined.

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized in profit or

F-31

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

loss in the period in which they arise. When gains or losses on non-monetary items are recognized in other comprehensive income, exchange components of those gains or losses are recognized in other comprehensive income. Conversely, when gains or losses on non-monetary items are recognized in profit or loss, exchange components of those gains or losses are recognized in profit or loss.

Foreign operations

If the presentation currency of the Company is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation. Thus, they are expressed in the functional currency of the foreign operation and translated at the closing rate.

When a foreign operation is disposed of, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such cumulative amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

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

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, demand deposits, and short-term investments in highly liquid securities that are readily convertible to known amounts of cash with maturities of three months or less from the acquisition date and which are subject to an insignificant risk of changes in value. Equity investments are excluded from cash and cash equivalents.

Non-derivative financial assets

The Company recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets. The Company recognizes financial assets in the consolidated statement of financial position when the Company becomes a party to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

F-32

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(a) Financial assets at fair value through profit or loss

Financial assets are classified at fair value through profit or loss if they are held for trading or designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

(b) Held-to-maturity financial assets

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

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method unless the effect of discounting is immaterial.

(d) Available-for-sale financial assets

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

(e) Derecognition of non-derivative financial assets

The Company derecognizes non-derivative financial assets when the contractual rights to the cash flows from the financial asset expire, or the Company transfers the rights to receive the contractual cash flows from the financial asset as well as substantially all the risks and rewards of ownership of the financial asset. Any interest in a transferred financial asset that is created or retained by the Company is recognized as a separate asset or liability.

If the Company retains substantially all the risks and rewards of ownership of the transferred financial assets, the Company continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

(f) Offsetting a financial asset and a financial liability

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Company currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

F-33

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Inventories

Inventory costs, except materials-in-transit in which costs are determined by using specific identification method, are determined by using the moving-weighted average method. The cost of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The allocation of fixed production overheads to the costs of finished goods or work in progress are based on the normal capacity of the production facilities.

When inventories are sold, the carrying amount of those inventories is recognized as cost of goods sold in the period in which the related revenue is recognized. Inventories are measured at the lower of cost or net realizable value. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories arising from an increase in net realizable value is recognized as a reduction in the amount of inventories recognized as a cost of goods sold in the period in which the reversal occurs.

Non-current assets held for sale

Non-current assets or disposal groups comprising assets and liabilities that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. In order to be classified as held for sale, the assets or disposal groups must be available for immediate sale in their present condition and their sale must be highly probable. The assets or disposal groups that are classified as non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell.

The Company recognizes an impairment loss for any initial or subsequent write-down of an asset or disposal group to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized in accordance with IAS No. 36 “Impairment of Assets”.

A non-current asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

Investment property

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

Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred.

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

F-34

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Property, plant and equipment

Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and any accumulated impairment losses. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and, when the Company has an obligation to remove the asset or restore the site, an estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

The cost of replacing a part of an item is recognized in the carrying amount of the item of property, plant and equipment, if the following recognition criteria are met:

(a) it is probable that future economic benefits associated with the item will flow to the Company; and

(b) the cost can be measured reliably.

The carrying amount of the replaced part is derecognized at the time the replacement part is recognized. The costs of the day-to-day servicing of the item are recognized in profit or loss as incurred.

Items of property, plant and equipment are depreciated from the date they are available for use or, in respect of self-constructed assets, from the date that the asset is completed and ready for use. Other than land, the costs of an asset less its estimated residual value are depreciated. Depreciation of property, plant and equipment is recognized in profit or loss on a straight-line basis, which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset, over the estimated useful lives of each component of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Land is not depreciated.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.

The gain or loss arising from the derecognition of an item of property, plant and equipment is included in profit or loss when the item is derecognized.

The estimated useful lives for the current and comparative periods are as follows:


Buildings		5-60 years
Structures		4-50 years
Machinery and equipment		2-25 years
Vehicles		3-10 years
Tools		4-10 years
Furniture and fixtures		3-10 years
Lease assets		3-18 years

The estimated residual value, useful lives and the depreciation method are reviewed at least at the end of each reporting period and, if expectations differ from previous estimates, the changes are accounted for as changes in accounting estimates.

Borrowing costs

The Company capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized

F-35

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

To the extent that the Company borrows funds specifically for the purpose of obtaining a qualifying asset, the Company determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. The Company immediately recognizes other borrowing costs as an expense. To the extent that the Company borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Company shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Company that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Company capitalizes during a period shall not exceed the amount of borrowing costs incurred during that period.

Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods over which club memberships are expected to be available for use, this intangible asset is determined as having an indefinite useful life and not amortized.


Intellectual property rights		5-10 years
Development costs		3-10 years
Port facilities usage rights		4-75 years
Other intangible assets		2-25 years

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

F-36

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Exploration for and evaluation of mineral resources

POSCO is engaged in exploration projects for mineral resources through subsidiaries, associates and joint ventures in the mines or other contractual arrangements. Expenditures related to the development of mineral resources are recognized as exploration or development intangible assets. The nature of these intangible assets are as follows:

(a)

Exploration and evaluation assets

Exploration and evaluation assets consist of expenditures for topographical studies, geophysical studies and trenching. These assets are reclassified as development assets when it is proved that the exploration has identified commercially viable mineral deposit.

(b)

Development assets

When proved reserves are determined and development is sanctioned, development expenditures incurred are capitalized. These expenditures include evaluation of oil fields, construction of oil/gas wells, drilling for viability and others. On completion of development and inception of extraction for commercial production of developed proved reserves, the development assets are reclassified as either property, plant and equipment or as intellectual property rights (mining rights) under intangible assets based on the nature of the capitalized expenditure.

The respective property, plant and equipment and intellectual property (mining rights) are each depreciated and amortized based on proved reserves on a unit of production basis.

Government grants

Government grants are not recognized unless there is reasonable assurance that the Company will comply with the grant’s conditions and that the grant will be received.

(a)

Grants related to assets

Government grants whose primary condition is that the Company purchase, construct or otherwise acquire long-term assets are deducted from the carrying amount of the assets and recognized in profit or loss on a systematic and rational basis over the life of the depreciable assets.

(b)

Grants related to income

Government grants which are intended to compensate the Company for expenses incurred are deducted from the related expenses.

Leases

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

(a)

Finance leases

At the commencement of the lease term, the Company recognizes as finance assets and finance liabilities the lower amount of the fair value of the leased property and the present

F-37

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the Company adopts for similar depreciable assets that are owned. If there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life.

(b)

Operating leases

Lease obligations under operating leases are recognized as an expense on a straight-line basis over the lease term. Contingent rents are charged as expenses in the periods in which they are incurred.

(c)

Determining whether an arrangement contains a lease

Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset) and the arrangement conveys a right to use the asset.

At inception or reassessment of the arrangement, management of the Company separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If management of the Company concludes for a financial lease that it is impracticable to separate the payments reliably, the Company recognizes an asset and a liability at an amount equal to the fair value of the underlying asset that was identified as the subject of the lease. Subsequently, the liability shall be reduced as payments are made and an imputed finance charge on the liability recognized using the purchaser’s incremental borrowing rate of interest.

Impairment for financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

Objective evidence that a financial asset or group of financial assets are impaired includes:

(a)

significant financial difficulty of the issuer or obligor;

(b)

a breach of contract, such as a default or delinquency in interest or principal payments;

(c)

the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

F-38

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(d)

it becoming probable that the borrower will enter bankruptcy or other financial reorganization;

(e)

the disappearance of an active market for that financial asset because of financial difficulties; or

(f)

observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If there is objective evidence that financial assets are impaired, impairment losses are measured and recognized.

(a)

Financial assets measured at amortized cost

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

(b)

Financial assets carried at cost

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

(c)

Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

F-39

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Impairment for non-financial assets

The carrying amounts of the Company’s non-financial assets, other than assets arising from construction contracts, employee benefits, inventories, deferred tax assets and non-current assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

Management estimates the recoverable amount of an individual asset. If it is impossible to measure the individual recoverable amount of an asset, then management estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value-in-use and its fair value less costs to sell. The Company determined that individual operating entities are CGUs.

The recoverable amount of an asset or CGU is the greater of its value-in-use and its fair value less costs to sell. The value-in-use is estimated by applying a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Derivative financial instruments and hedges

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in profit or loss.

(a)

Embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met: (a) the economic characteristics and risks of the host contract and the embedded derivatives are not clearly and closely related to a separate instrument with the same terms as the embedded derivative that would meet the definition of a derivative, and (b) the hybrid (combined) instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives from the host contract are recognized immediately in profit or loss. However, convertible rights of convertible bonds are not separated from the host contract and the compound financial instruments of bonds and convertible rights are designated and measured at fair value through profit and loss.

F-40

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b)

Other derivatives

Changes in the fair value of a derivative that is not designated as a hedging instrument are recognized immediately in profit or loss.

Non-derivative financial liabilities

The Company classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Company recognizes financial liabilities in the consolidated statement of financial position when the Company becomes a party to the contractual provisions of the financial liability.

(a)

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

(b)

Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities.

Financial guarantee liabilities are initially measured at their fair values and, if not designated as financial liabilities at fair value through profit or loss, they are subsequently measured at the higher of:

the amount of the best estimate of the expenditure required to settle the present obligation at the end of the reporting period; and

the amount initially recognized less, cumulative amortization recognized on a straight-line basis over the guarantee period

At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

The Company derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

Construction work in progress

Construction work in progress represents the gross unbilled amount expected to be collected from customers for contract work performed to date. It is measured at cost plus profit recognized to date less progress billings and recognized losses. Cost includes all expenditures related directly to specific projects and an allocation of fixed and variable overheads incurred in the Company’s contract activities based on normal operating capacity.

Construction work in progress is presented as part of trade accounts and notes receivable in the consolidated statement of financial position for all contracts in which costs incurred plus recognized

F-41

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

profits exceed progress billings. If progress billings exceed costs incurred plus recognized profits, then the difference is presented as amounts due to customers for contract work in the consolidated statement of financial position.

Employee benefits

(a)

Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within twelve months after the end of the period in which the employees render the related service. When an employee has rendered service to the Company during an accounting period, the Company recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service as profit or loss. If the Company has a legal or constructive obligation which can be reliably measured, the Company recognizes the amount of expected payment for profit-sharing and bonuses payable as liabilities.

(b)

Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods, less the fair value of any related assets. The present value is determined by discounting the expected future cash flows using the interest rate of corporate bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise.

(c)

Retirement benefits: Defined contribution plans

For defined contribution plans, when an employee has rendered service to the Company during a period, the Company recognizes the contribution payable to a defined contribution plan in exchange for that service as an accrued expense, after deducting any contributions already paid. If the contributions already paid exceed the contribution due for service before the end of the reporting period, the Company recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

(d)

Retirement benefits: Defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the projected unit credit method.

The discount rate is the yield at the reporting date on corporate bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The Company recognizes all actuarial gains and losses arising from actuarial assumption changes and experiential adjustments in other comprehensive income when incurred.

F-42

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

When the fair value of plan assets exceeds the present value of the defined benefit obligation, the Company recognizes an asset, to the extent of the present value of the total of cumulative any economic benefits available in the form of refunds from the plan or reduction in the future contributions to the plan.

Remeasurements of net defined benefit liabilities, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments, net interest expense and other expenses related to defined benefit plans are recognized in profit or loss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss in curtailment is recognized immediately in profit or loss. The Company recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs.

Provisions

Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Where some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

A provision for warranties is recognized when the underlying products are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.

Regarding provision for construction warranties, warranty period starts from the completion of construction in accordance with construction contracts. If the Company has an obligation for warranties, provision for warranties which are estimated based on historical warranty data are recorded as cost of construction and provision for warranties during the construction period.

F-43

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Equity instruments

(a)

Share capital

Common stock is classified as equity and the incremental costs arising directly attributable to the issuance of common stock less their tax effects are deducted from equity.

If the Company reacquires its own equity instruments, the amount of those instruments (“treasury shares”) are presented as a contra equity account. No gain or loss is recognized in profit or loss on the purchase, sale, issuance or cancellation of its own equity instruments. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase to equity, and the resulting surplus or deficit on the transaction is recorded in capital surplus.

(b)

Hybrid Bonds

Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of financial liability and an equity instrument. When the Company has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the instruments are classified as equity instruments.

Revenue

Revenue from the sale of goods, services provided and the use of assets is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates, which are not significant for all periods presented.

(a)

Sale of goods

Revenue from the sale of goods in the ordinary course of activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The appropriate timing for transfer of risks and rewards varies depending on the individual terms and conditions of the sales contract. For international sales, this timing depends on the type of international commercial terms of the contract.

(b)

Services rendered

Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

(c)

Construction contracts

Construction contracts of the Company primarily consist of contracts for the construction of plants and commercial or residential buildings (excluding certain pre-sale contracts), and revenue recognition for different types of contracts is as follows:

When the outcome of a construction contract can be estimated reliably, contract revenue is recognized in profit or loss in proportion to the stage of completion of the contract. Contract

F-44

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

revenue includes the initial amount agreed in the contract plus any variation in contract work, claims and incentive payments, to the extent that it is probable that they will result in revenue and can be measured reliably. The stage of completion of a contract is determined based on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.

When the outcome of a construction contract cannot be estimated reliably, the revenue is recognized only to the extent of contract costs incurred that it is probable will be recoverable. An expected loss on the construction contract is recognized as an expense immediately.

(d)

Rental income

Rental income from investment property, net of lease incentives granted, is recognized in profit or loss on a straight-line basis over the term of the lease.

Finance income and finance costs

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets and changes in the fair value of financial assets at fair value through profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest rate method. Dividend income is recognized in profit or loss on the date that the Company’s right to receive payment is established.

Finance costs comprise interest expense on borrowings and changes in the fair value of financial assets at fair value through profit or loss. Borrowing costs are recognized in profit or loss using the effective interest rate method.

Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

(a)

Current income tax

Current income tax is the expected income tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in determining taxable profit of future periods, and non-taxable or non-deductible items from the accounting profit.

(b)

Deferred income tax

The measurement of deferred income tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

The Company recognizes a deferred income tax liability for all taxable temporary differences associated with investments in subsidiaries, associates, and joint ventures, except to the extent that the Company is able to control the timing of the reversal of the

F-45

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Company recognizes a deferred income tax asset for deductible temporary differences arising from investments in subsidiaries, associates and joint ventures, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized. However, deferred income tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting profit or loss nor taxable income.

The carrying amount of a deferred income tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred income tax liabilities and deferred income tax assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred income tax assets and liabilities are offset only if there is a legally enforceable right to offset the related current income tax liabilities and assets, and they relate to income taxes levied by the same tax authority and they intend to settle current income tax liabilities and assets on a net basis.

Earnings per share

Management calculates basic earnings per share (“EPS”) data for the Company’s ordinary shares, which is presented at the end of the statement of comprehensive income. Basic EPS is calculated by dividing profit attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held.

Operating segments

An operating segment is a component of the Company that : a) engages in business activities from which it may earn revenues and incur expenditures, including revenues and expenses that relate to transactions with any of the Company’s other components, b) whose operating results are regularly reviewed by the Company’s chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. Management has determined that the CODM of the Company is the CEO.

With regard to construction segment, segment profit and loss is determined in the same way that consolidated profit after tax for the period is determined under IFRS except that revenues and expenses from the development and sale of certain residential real estate are determined by reference to the stage of completion of the contact activity at the end of the reporting period, while in the consolidated financial statements, they are recognized when an individual unit of residential real estate is delivered to the buyer. No adjustments are made for corporate allocations to segment profit and loss. In addition, segment assets and liabilities are measured based on total assets and liabilities in

F-46

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

accordance with IFRS without any adjustment for corporate allocations, except that assets and liabilities in connection with the construction and sale of residential real estate are determined by reference to the stage of completion of the contract activity at the end of each period.

For the other segments, segment profit and loss is determined the same way that consolidated net after tax profit for the period is determined under IFRS without any adjustment for corporate allocations. The accounting policies used by each segment are consistent with the accounting policies used in the preparation of the consolidated financial statements. Segment assets and liabilities are measured based on total assets and liabilities in accordance with IFRS without any adjustment for corporate allocations. Also, segment assets and liabilities are based on the separate financial statements of the entities instead of on consolidated basis. In addition, there are varying levels of transactions amongst the reportable segments. These transactions include sales of property, plant and assets, and rendering of construction service and so on. Inter-segment transactions are accounted for on an arm’s length basis.

Segment results that are reported to the CEO include items directly attributable to a segment and do not include allocated items. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.

New standards and interpretations not yet adopted

The following new standards, interpretations and amendments to existing standards have been published and are mandatory for the Company for annual periods beginning after January 1, 2014, and the Company has not early adopted them.

(a)

Amendments to IAS No. 19 “Employee Benefits”

Amendments to IAS No. 19 introduced a practical expedient to accounting for defined benefit plan, when employees or third parties pay contributions if certain criteria are met. According to the amendments, an entity is permitted to recognize those contributions as a reduction of the service cost in the period in which the related service is rendered, instead of forecast future contributions from employees or third parties and attribute them to periods or service as negative benefits. This amendment is effective for the Company for annual periods beginning on or after January 1, 2015, with early adoption permitted.

Management believes the impact of the amendments on the Company’s consolidated financial statements is not significant.

(b)

IFRS No. 15 “Revenue from Contracts with Customers”

IFRS No.15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS No. 18 “Revenue”, IAS No. 11 “Construction Contracts” and IFRIC No. 13 “Customer Loyalty Programmes”. IFRS No. 15 is effective for annual reporting periods beginning on or after January 1, 2017, with early adoption permitted.

The Company is in the process of assessing the potential impact on its consolidated financial statements resulting from the application of IFRS No 15.

F-47

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

4.	Financial risk management

The Company has exposure to the following risks from its use of financial instruments:

•

credit risk

•

liquidity risk

•

market risk

•

capital risk

This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

(a)

Financial risk management

Risk management policy

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities.

The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. In addition, credit risk arises from finance guarantees.

The Company implements a credit risk management policy under which the Company only transacts business with counterparties that have a certain level of credit rate evaluated based on financial condition, historical experience, and other factors. The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The default risk of a nation or an industry in which a customer operates its business does not have a significant influence on credit risk. The Company has established a credit policy under which each new customer is analyzed individually for creditworthiness.

The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for companies of similar assets in respect of losses that have been incurred but not yet identified. The collective

F-48

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

loss allowance is determined based on historical data of payment statistics for similar financial assets. Debt securities are analyzed individually, and an expected loss shall be directly deducted from debt securities.

Credit risk also arises from transactions with financial institutions, and such transactions include transactions of cash and cash equivalents, various deposits, and financial instruments such as derivative contracts. The Company manages its exposure to this credit risk by only entering into transactions with banks that have high international credit ratings. The Company’s treasury department authorizes, manages, and overseas new transactions with financial institutions with whom the Company has no previous relationship. Furthermore, the Company limits its exposure to credit risk of financial guarantee contracts by strictly evaluating their necessity based on internal decision making processes, such as the approval of the Board of Directors.

Liquidity risk management

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

The Company’s cash flow from business, borrowing or financing is sufficient to meet the cash requirements for the Company’s strategic investments. Management believes that the Company is capable of raising funds by borrowing or financing if the Company is not able to generate cash flow requirements from its operations. The Company has committed borrowing facilities with various banks.

Market risk management

Market risk means that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The goal of market risk management is optimization of profit and controlling the exposure to market risk within acceptable limits.

Currency risk

Each segment is influenced by a risk factor of changes in foreign currency exchange rates for the different directions due to the difference in structure of each industry regarding the cash inflows and cash outflows in foreign currency. The steel segment generally has a lack of foreign currency cash outflows, while the engineering and construction segments generally have excessive foreign currency inflows due to the nature of their respective business. Therefore, the result of the business is affected by the changes of foreign exchange rates.

The trading segment is structured such that the cash inflows and outflows of foreign currencies are to be offset; however, the trading segment is exposed to a risk of changes in foreign currency exchange rates when there are differences in currencies on receiving and paying the foreign currency amount and time differences.

F-49

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

The Company’s policy in respect of foreign currency risks is a natural hedge whereby foreign currency income is offset with foreign currency expenditures. The remaining net exposures after the natural hedge have been hedged using derivative contracts such as forward exchange contracts. In addition, the Company’s derivative transactions are limited to hedging actual foreign currency transactions and speculative hedging is not permitted. Based on this policy, the Company entities have performed currency risk management specific to various characteristics of different segments. The entities in the steel industry, which has a lack of foreign currency cash flows, has foreign currency borrowings from banks and hedges foreign currency risks of the foreign currency borrowings by using foreign currency swaps. The entities in the engineering and construction segments, which have excessive foreign currency cash flows, have hedged foreign currency risks by using forward exchange contracts. Entities in the trading industry have hedged foreign currency risks by using forward exchange contracts when the foreign currencies received and paid are different.

‚

Interest rate risk

The Company mostly borrows at fixed interest rates. The Company’s management monitors interest rate risks regularly.

Other market price risk

Equity price risk arises from listed equity securities among available-for-sale equity securities. Management of the Company measures regularly the fair value of listed equity securities and the risk of variance in future cash flow caused by market price fluctuations. Significant investments are managed separately and all buy and sell decisions are approved by management of the Company.

(b)

Management of capital risk

The fundamental goal of capital management is the maximization of shareholders’ value by means of the stable dividend policy and the retirement of treasury shares. The capital structure of the Company consists of equity and net debt, deducting cash and cash equivalents and current financial instruments from borrowings. The Company applied the same financial risk management strategy that was applied in the previous period.

Net borrowing-to-equity ratio as of December 31, 2013 and 2014 is as follows:


	2013			2014
	(in millions of Won)
Total borrowings	￦	26,246,605			27,428,257
Less: Cash and cash equivalents		4,208,562			3,811,202

Net borrowings		22,038,043			23,617,055
Total equity		45,780,682			45,257,396
Net borrowings-to-equity ratio		48.14	%		52.18	%

F-50

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

5.	Cash and Cash Equivalents

Cash and cash equivalents as of December 31, 2013 and 2014 are as follows:


	2013		*2014 ^(2)**
	(in millions of Won)
Cash	￦	12,575		2,100
Demand deposits and checking accounts		1,199,768		1,209,367
Time deposits		2,325,449		1,185,146
Other cash equivalents ^(*1)		670,770		1,414,589

	￦	4,208,562		3,811,202

(*1)	Mainly includes money market trust and others.

(*2)

Cash and cash equivalents as of December 31, 2014 in the statement of cash flows are different from the amounts in the statement of financial position as disclosed above by ￦210,934 million, as the information disclosed above does not include cash and cash equivalents held by POSCO Specialty Steel Co., Ltd., and others which were classified as asset groups held for sale as of December 31, 2014.

6.	Trade Accounts and Notes Receivable

(a) Trade accounts and notes receivable as of December 31, 2013 and 2014 are as follows:


	2013			2014
	(in millions of Won)
Current
Trade accounts and notes receivable	￦	10,338,891			10,814,881
Finance lease receivables		36,029			24,344
Unbilled due from customers for contract work		1,555,907			1,406,678
Less: Allowance for doubtful accounts		(418,183	)		(581,316	)

		11,512,644			11,664,587

Non-current
Trade accounts and notes receivable		50,639			60,583
Finance lease receivables		67,251			42,907
Less: Allowance for doubtful accounts		(20,890	)		(24,154	)

	￦	97,000			79,336

Trade accounts and notes receivable sold to financial institutions, for which the derecognition conditions were not met, amounted to ￦73,956 million and ￦106,985 million as of December 31, 2013 and 2014, respectively, and are included in short-term borrowings from financial institutions (Note 17).

(b) Finance lease receivables are as follows:


Customer	Contents	2013		2014
	(in millions of Won)
Korea Electric Power Corporation	Combined thermal power plant 1~4	￦	102,887		66,858
KC CHEMICAL Co., Ltd.	Machinery and equipment		393		393

		￦	103,280		67,251

F-51

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


	2013			2014
	(in millions of Won)
Less than 1 year	￦	48,112			32,302
1 year – 5 years		84,270			51,999
Unrealized interest income		(29,102	)		(17,050	)

Present value of minimum lease payment	￦	103,280			67,251

7. Other Receivables

Other receivables as of December 31, 2013 and 2014 are as follows:


	2013			2014
	(in millions of Won)
Current
Short-term loans	￦	298,289			254,108
Other accounts receivable		1,322,352			1,523,659
Accrued income		74,968			76,393
Deposits		69,502			58,384
Others		275,892			227,192
Less : Allowance for doubtful accounts		(150,580	)		(183,520	)

	￦	1,890,423			1,956,216

Non-current
Long-term loans	￦	604,478			960,652
Long-term other accounts receivable		152,383			158,018
Accrued income		1,110			1,533
Deposits		111,482			189,120
Less : Allowance for doubtful accounts		(71,998	)		(165,163	)

	￦	797,455			1,144,160

F-52

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

8.	Other Financial Assets

Other financial assets as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Current
Derivatives assets held for trading	￦	44,082		77,182
Available-for-sale securities		10,772		25,512
Current portion of held-to-maturity securities (bonds)		2,232		15,297
Short-term financial instruments ^(*1,2)		2,913,579		1,344,929

	￦	2,970,665		1,462,920

Non-current
Derivatives assets held for trading	￦	34,140		19,084
Available-for-sale securities (equity instruments) ^(*3,4)		4,068,766		2,294,244
Available-for-sale securities (bonds)		32,456		33,350
Available-for-sale securities (others)		54,390		67,135
Held-to-maturity securities (bonds)		1,602		1,796
Long-term financial instruments ^(*2)		274,376		40,291

	￦	4,465,730		2,455,900

(*1)	As of December 31, 2013 and 2014, ￦949 million and ￦5,465 million, respectively, are restricted for the use in a government project.

(*2)	As of December 31, 2013 and 2014, financial instruments amounting to ￦261,034 million and ￦177,014 million, respectively, are restricted for use in financial arrangements, pledge and others.

(*3)

During the year ended December 31, 2014, there was objective evidence of impairment for shares such as HYUNDAI Heavy Industries and others due to the significant decline in the fair value of the shares for a prolonged period. As a result, an impairment loss of ￦369,723 million was recognized in profit or loss during the year ended December 31, 2014.

(*4)	As of December 31, 2013 and 2014, ￦691,801 million and ￦173,632 million of available-for-sale securities, respectively, have been provided as collateral for construction projects and borrowings.

9.	Inventories

(a) Inventories as of December 31, 2013 and 2014 are as follows:


	2013			2014
	(in millions of Won)
Finished goods	￦	1,406,297			1,647,331
Merchandise		711,802			902,347
Semi-finished goods		1,711,294			1,654,556
Raw materials		2,228,110			2,334,992
Fuel and materials		801,992			759,193
Construction inventories		1,535,847			1,831,383
Materials-in-transit		1,848,389			2,109,207
Others		96,389			96,274

		10,340,120			11,335,283

Less: Allowance for inventories valuation		(189,282	)		(161,940	)

	￦	10,150,838			11,173,343

F-53

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) The changes of allowance for inventories valuation for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012			2013			2014
	(in millions of Won)
Beginning	￦	215,594			214,795			189,282
Loss on valuation of inventories		76,484			49,172			41,713
Write-off		(71,459	)		(73,220	)		(69,996	)
Reversal and others		(5,824	)		(1,465	)		941

Ending	￦	214,795			189,282			161,940

10.

Assets Held for Sale

Details of assets held for sale and related liabilities as of December 31, 2013 and 2014 are as follows:


	2013						2014
	Controlling company^(*7)		*Subsidiaries^(8)**		Total		Controlling company^(1,6)		*Subsidiaries^{(2,3,4,5,6)}**		Total
	(in millions of Won)
Assets
Cash and cash equivalents	￦	—		—		—		—		210,934		210,934
Trade accounts and notes receivableand other receivables		—		—		—		—		90,811		90,811
Other financial assets		—		—		—		580,062		21,028		601,090
Inventories		—		—		—		—		289,716		289,716
Investments in associates		1,304		—		1,304		—		—		—
Investment property		—		—		—		—		22,067		22,067
Property, plant and equipment		—		1,190		1,190		2,672		895,391		898,063
Other assets		—		—		—		—		14,406		14,406

	￦	1,304		1,190		2,494		582,734		1,544,353		2,127,087

Liabilities
Trade accounts and notes payableand other payables	￦	—		—		—		—		225,403		225,403
Borrowings		—		—		—		—		330,059		330,059
Other liabilities		—		—		—		—		35,520		35,520

	￦	—		—		—		—		590,982		590,982

(*1)

In November 2014, Nacional Minerios S.A. (which was an available-for-sale investment of the Company) entered into a merger agreement with another entity through share exchange. The merger transaction was approved by the Company’s Board of Directors on December 12, 2014. Pursuant to the merger agreement, the Company will dispose of its equity interests in Nacional Minerios S.A. in exchange for equity interests in the new entity. Therefore, the Company reclassified the available-for-sale investment to assets held for sale. Before the reclassification, the Company recognized an impairment loss of ￦88,572 million in the investment due to a prolonged decline in the fair value of the shares below its cost.

(*2)

The Company agreed to sell 52.2% of its shares of POSCO Specialty Steel Co., Ltd. to SeAH Besteel Corp. by and entered into a disposal agreement. The agreement was approved by the Board of Directors on December 12, 2014, and the Company classified the related assets and liabilities as held for sale. Related assets and liabilities on POSCO Specialty Steel Co., Ltd. are current assets of ￦580,299 million, non-current assets of ￦795,295 million, current liabilities of ￦315,399 million and non-current liabilities of ￦210,696 million.

F-54

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(*3)	The Company agreed to sell its shares of POSFINE Co.,Ltd., an associate of the Company, to Hahn & Company PRIVATE EQUITY FUND No.1. The transaction was approved by the Board of Directors on November 7, 2014 and the Company classified the shares as assets held for sale.

(*4)

Daewoo International Corporation, a subsidiary of the Company, entered into a sales contract to dispose its Daewoo Department Store located in Masan in accordance with the Board of Directors’ resolution on August 18, 2014. Accordingly, the Company classified it as assets held for sale and recognized an impairment loss of ￦16,769 million.

(*5)	POSCO M-TECH, a subsidiary of the Company, determined to dispose of its rare metal department and some of its assets in the Molybdenum factory in Yeongwol, and classified them as assets held-for-sale.

(*6)	The controlling company and POSCO-VIETNAM Co., Ltd., a subsidiary of the Company, determined to dispose of some tangible assets including land and disused facilities and classified them as assets held for sale.

(*7)

The Company determined to dispose of its shares in POSVINA Co., Ltd., an associate of the Company, and classified it as assets held for sale as of December 31, 2013. The Company completed the disposal of this investment during the year ended December 31, 2014 and recognized a loss of ￦14 million on disposal of assets held for sale.

(*8)	POSCO AST, a subsidiary of the Company, determined to dispose of its land and building for employee welfare and classified them as assets held for sale as of December 31, 2012. POSCO AST recognized a loss of ￦436 million on impairment on assets held for sale during the year ended December 31, 2014.

11.

Investments in Associates and Joint ventures

(a) Investments in associates and joint ventures as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Investments in associates	￦	1,830,047		1,626,801
Investments in joint ventures		1,978,646		2,433,706

	￦	3,808,693		4,060,507

F-55

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) Details of investments in associates as of December 31, 2013 and 2014 are as follows:


	2013		2014
Company	Book value		Number of shares		Ownership (%)		Acquisition cost		Book value
	(in millions of Won)
[Domestic]
EQP POSCO Global NO1 Natual Resources PEF	￦	177,563		178,565		28.48	￦	178,566	￦	176,899
SNNC		123,969		18,130,000		49.00		90,650		131,671
POSCO PLANTEC Co., Ltd.^(*1)		234,203		—		—		—		—
QSONE Co.,Ltd.		84,096		200,000		50.00		84,395		83,849
Incheon-Gimpo Expressway Co., Ltd.^(*2)		37,759		9,032,539		25.76		45,163		43,045
BLUE OCEAN Private Equity Fund		29,391		333		27.52		33,300		31,439
UITrans LRT Co., Ltd.^(*2)		19,185		4,395,669		38.19		21,978		30,098
CHUNGJU ENTERPRISE CITY DEVELOPMENT Co.,Ltd^(*2)		23,733		2,008,000		25.10		10,040		19,801
KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund		6,685		11,862,500		12.50		11,863		12,268
KONES, Corp.		5,784		3,250,000		41.67		6,893		5,430
Gunggi Green Energy^(*2)		4,996		2,880,000		19.00		14,400		4,642
Others (31 companies)^(*2)		52,761								28,869

		800,125								568,011

[Foreign]
Eureka Moly LLC		217,513		—		20.00		240,123		228,004
South-East Asia Gas Pipeline Company Ltd.		140,202		135,219,000		25.04		150,779		172,805
7623704 Canada Inc.		119,516		114,452,000		10.40		124,341		117,100
Nickel Mining Company SAS		135,178		3,234,698		49.00		157,585		107,408
AES-VCM Mong Duong Power Company Limited		81,436		—		30.00		74,161		93,021
AMCI (WA) PTY LTD		98,467		49		49.00		209,664		88,050
KOREA LNG LTD.		64,453		2,400		20.00		135,205		72,089
CAML RESOURCES PTY LTD		43,820		3,239		33.34		40,388		38,240
NCR LLC		30,496		—		29.41		32,348		32,598
Zhongyue POSCO (Qinhuangdao) Tinplate Industrial Co., Ltd		20,600		10,200,000		34.00		9,517		21,032
PT. Batutua Tembaga Raya		—		128,285		24.10		14,785		14,653
VSC POSCO Steel Corporation		9,464		1,000,000		50.00		9,014		7,621
PT. Wampu Electric Power^(*2)		7,237		7,800,000		20.00		9,028		7,611
POSCO SeAH Steel Wire(Nantong) Co., Ltd.		6,083		50		25.00		4,723		6,969
Others (23 companies)		55,457								51,589

		1,029,922								1,058,790

	￦	1,830,047							￦	1,626,801

(*1)	During the year ended December 31, 2014, the investment in associates was reclassified from associate to subsidiary due to increase in percentage of ownership through capital increase.

(*2)	As of December 31, 2014, investment in associates amounting to ￦110,721 million is provided as collateral related to associates’ borrowings.

F-56

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


	2013		2014
Company	Book value		Number of shares		Ownership (%)		Acquisition cost		Book value
	(in millions of Won)
[Domestic]
POSCO MITSUBISHI CARBON TECHNOLOGY	￦	115,708		11,568,000		60.00	￦	115,680	￦	112,837
POSCO ES MATERIALS		40,386		1,000,000		50.00		43,000		38,021

		156,094								150,858

[Foreign]
Roy Hill Holdings Pty Ltd ^(*1)		825,901		13,117,972		12.50		1,528,672		1,268,678
POSCO-NPS Niobium LLC		343,590		325,050,000		50.00		364,609		357,874
CSP - Compania Siderurgica do Pecem		263,419		827,771,230		20.00		469,891		260,906
DMSA/AMSA ^(*2)		180,355		—		4.00		193,182		165,094
KOBRASCO		95,233		2,010,719,185		50.00		32,950		99,787
BX STEEL POSCO Cold Rolled Sheet Co., Ltd.		96,309		—		25.00		61,961		98,893
Others (11 companies)		17,745								31,616

		1,822,552								2,282,848

	￦	1,978,646							￦	2,433,706

(*1)	As of December 31, 2014, investment in joint ventures amounting to ￦1,268,678 million is provided as collateral in relation to loan from project financing of Roy Hill Holdings Pty Ltd.

(*2)	As of December 31, 2014, investment in joint ventures amounting to ￦165,094 million is provided as collateral for the joint venture’s guarantees.

F-57

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(d) The movements of investments in associates and joint ventures for the years ended December 31, 2013 and 2014 were as follows:

1) For the year ended December 31, 2013


Company	December 31, 2012 Book value		Acquisition		Dividends			Share of profits (losses)			Other increase *(decrease) ^(1)**			December 31, 2013 Book value
	(in millions of Won)
[Domestic]
EQP POSCO Global NO1 Natual Resources PEF	￦	—		178,566		—			(1,017	)		14			177,563
SNNC		147,539		—		(27,685	)		2,183			1,932			123,969
POSCO PLANTEC Co., Ltd.		181,361		101,210		—			(49,065	)		697			234,203
QSONE Co.,Ltd.		—		84,395		—			(299	)		—			84,096
Incheon-Gimpo Expressway Co., Ltd.		13,680		24,521		—			(441	)		(1	)		37,759
BLUE OCEAN Private Equity Fund		33,839		—		—			(2,015	)		(2,433	)		29,391
UITrans LRT Co., Ltd.		16,444		1,967		—			668			106			19,185
CHUNGJU ENTERPRISE CITY DEVELOPMENT Co.,Ltd		29,414		—		—			(5,535	)		(146	)		23,733
KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund		—		7,013		—			(327	)		(1	)		6,685
KONES, Corp.		6,476		—		—			(740	)		48			5,784
Gunggi Green Energy		7,353		5,475		—			(8,213	)		381			4,996
POSCO MITSUBISHI CARBON TECHNOLOGY		28,060		86,760		—			888			—			115,708
POSCO ES MATERIALS		42,388		—		—			(1,963	)		(39	)		40,386
Others (34 companies)		104,445		11,325		—			(6,585	)		(56,424	)		52,761

		610,999		501,232		(27,685	)		(72,461	)		(55,866	)		956,219

[Foreign]
Eureka Moly LLC		213,136		—		—			—			4,377			217,513
South-East Asia Gas Pipeline Company Ltd.		144,831		—		—			(2,585	)		(2,044	)		140,202
7623704 Canada Inc.		—		124,341		—			(1	)		(4,824	)		119,516
Nickel Mining Company SAS		146,699		—		—			(16,617	)		5,096			135,178
AES-VCM Mong Duong Power Company Limited		48,636		—		—			(12,841	)		45,641			81,436
AMCI (WA) PTY LTD		123,018		—		—			(6,283	)		(18,268	)		98,467
KOREA LNG LTD.		99,976		—		(21,999	)		21,898			(35,422	)		64,453
CAML RESOURCES PTY LTD		62,227		—		(12,428	)		17,984			(23,963	)		43,820
NCR LLC		39,303		—		—			(9,609	)		802			30,496
Zhongyue POSCO (Qinhuangdao) Tinplate Industrial Co., Ltd		19,045		—		—			1,304			251			20,600
VSC POSCO Steel Corporation		9,347		—		(433	)		760			(210	)		9,464
PT. Wampu Electric Power		7,414		—		—			—			(177	)		7,237
POSCO SeAH Steel Wire(Nantong) Co., Ltd.		5,274		—		(62	)		717			154			6,083
Roy Hill Holdings Pty Ltd		527,129		446,201		—			(37,781	)		(109,648	)		825,901
POSCO-NPS Niobium LLC		348,646		—		(16,188	)		16,079			(4,947	)		343,590
CSP - Compania Siderurgica do Pecem		214,761		128,185		—			(34,410	)		(45,117	)		263,419
DMSA/AMSA		124,326		58,374		—			31			(2,376	)		180,355
KOBRASCO		113,847		—		(26,482	)		21,948			(14,080	)		95,233
BX STEEL POSCO Cold Rolled Sheet Co., Ltd.		92,888		—		—			2,400			1,021			96,309
Others (35 companies)		87,759		7,439		(11,953	)		(70,342	)		60,299			73,202

		2,428,262		764,540		(89,545	)		(107,348	)		(143,435	)		2,852,474

	￦	3,039,261		1,265,772		(117,230	)		(179,809	)		(199,301	)		3,808,693

(*1)	Other increase or decrease represents the changes in investments in associates and joint ventures due to disposals and change in capital adjustments arising from translations of financial statements of foreign investees and others.

F-58

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) For the year ended December 31, 2014


Company	December 31, 2013 Book value		Acquisition		Dividends			Share of profits (losses)			Other increase *(decrease) ^(1)**			December 31, 2014 Book value
	(in millions of Won)
[Domestic]
EQP POSCO Global NO1 Natual Resources PEF	￦	177,563		—		—			(664	)		—			176,899
SNNC		123,969		—		(5,149	)		13,873			(1,022	)		131,671
POSCO PLANTEC Co., Ltd. ^(*2)		234,203		25,356		—			(210,616	)		(48,943	)		—
QSONE Co., Ltd.		84,096		—		—			(247	)		—			83,849
Incheon-Gimpo Expressway Co., Ltd.		37,759		8,331		—			(340	)		(2,705	)		43,045
BLUE OCEAN Private Equity Fund		29,391		—		—			2,193			(145	)		31,439
UITrans LRT Co., Ltd.		19,185		2,330		—			8,583			—			30,098
CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd		23,733		—		—			(3,714	)		(218	)		19,801
KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund		6,685		6,113		—			(530	)		—			12,268
KONES, Corp.		5,784		—		—			(378	)		24			5,430
Gunggi Green Energy		4,996		—		—			(354	)		—			4,642
POSCO MITSUBISHI CARBON TECHNOLOGY		115,708		—		—			(2,835	)		(36	)		112,837
POSCO ES MATERIALS		40,386		—		—			(2,229	)		(136	)		38,021
Others (31 companies)		52,761		12,875		—			(24,284	)		(12,483	)		28,869

		956,219		55,005		(5,149	)		(221,542	)		(65,664	)		718,869

[Foreign]
Eureka Moly LLC		217,513		—		—			(37	)		10,528			228,004
South-East Asia Gas Pipeline Company Ltd.		140,202		—		—			25,638			6,965			172,805
7623704 Canada Inc.		119,516		—		(5,505	)		(1,678	)		4,767			117,100
Nickel Mining Company SAS		135,178		—		—			(17,391	)		(10,379	)		107,408
AES-VCM Mong Duong Power Company Limited		81,436		—		—			(3,845	)		15,430			93,021
AMCI (WA) PTY LTD		98,467		—		—			(6,477	)		(3,940	)		88,050
KOREA LNG LTD.		64,453		—		(18,668	)		18,613			7,691			72,089
CAML RESOURCES PTY LTD		43,820		—		—			(2,191	)		(3,389	)		38,240
NCR LLC		30,496		—		—			(3,984	)		6,086			32,598
Zhongyue POSCO (Qinhuangdao) Tinplate Industrial Co., Ltd		20,600		—		(352	)		378			406			21,032
PT. Batutua Tembaga Raya		—		14,785		—			—			(132	)		14,653
VSC POSCO Steel Corporation		9,464		—		(1,850	)		7			—			7,621
PT. Wampu Electric Power		7,237		—		—			134			240			7,611
POSCO SeAH Steel Wire(Nantong) Co., Ltd.		6,083		—		—			679			207			6,969
Roy Hill Holdings Pty Ltd		825,901		530,492		—			(14,783	)		(72,932	)		1,268,678
POSCO-NPS Niobium LLC		343,590		—		(16,414	)		16,370			14,328			357,874
CSP - Compania Siderurgica do Pecem		263,419		75,966		—			(57,127	)		(21,352	)		260,906
DMSA/AMSA		180,355		—		—			(21,793	)		6,532			165,094
KOBRASCO		95,233		—		(18,429	)		30,356			(7,373	)		99,787
BX STEEL POSCO Cold Rolled Sheet Co., Ltd.		96,309		—		—			943			1,641			98,893
Others (34 companies)		73,202		50,605		(858	)		(42,163	)		2,419			83,205

		2,852,474		671,848		(62,076	)		(78,351	)		(42,257	)		3,341,638

	￦	3,808,693		726,853		(67,225	)		(299,893	)		(107,921	)		4,060,507

(*1)	Other increase or decrease represents the changes in investments in associates and joint ventures due to disposals and change in capital adjustments arising from translations of financial statements of foreign investees and others.

(*2)

As of December 31, 2014, there is objective evidence of impairment due to the prolonged decline in the fair value of the investment below its cost. As a result, the Company recognized an impairment loss of ￦88,600 million as the carrying value was higher than its recoverable amount as of December 31, 2014.

F-59

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(e) Summarized financial information of associates and joint ventures as of and for years ended December 31, 2013 and 2014 is as follows:

1) December 31, 2013


Company	Assets		Liabilities		Equity (deficit)		Sales		Net income (loss)
	(in millions of Won)
[Domestic]
EQP POSCO Global NO1 Natural Resources PEF	￦	652,849		1,034		651,815		—		(3,684	)
SNNC		504,351		235,830		268,521		405,419		8,458
POSCO PLANTEC Co., Ltd.		900,409		765,481		134,928		597,561		(98,435	)
QSONE Co., Ltd.		247,592		79,399		168,193		882		(597	)
Incheon-Gimpo Expressway Co., Ltd.		157,082		32,691		124,391		—		(1,473	)
BLUE OCEAN Private Equity Fund		341,118		234,321		106,797		425,678		(7,321	)
UITrans LRT Co., Ltd.		102,828		56,438		46,390		—		(925	)
CHUNGJU ENTERPRISE CITY DEVELOPMENT Co.,Ltd		284,290		222,246		62,044		10,224		(15,924	)
KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund		55,195		1,712		53,483		1,064		(1,116	)
KONES, Corp.		3,748		2,296		1,452		7,442		(1,612	)
Gunggi Green Energy		333,027		263,608		69,419		21,577		(5,526	)
POSCO MITSUBISHI CARBON TECHNOLOGY		243,644		51,747		191,897		—		89
POSCO ES MATERIALS		59,807		10,590		49,217		5,759		(3,926	)
[Foreign]
South-East Asia Gas Pipeline Company Ltd.		1,755,847		1,195,935		559,912		19,878		(10,323	)
7623704 Canada Inc.		1,161,363		15		1,161,348		—		(10	)
Nickel Mining Company SAS		416,878		91,851		325,027		120,324		(39,686	)
KOREA LNG LTD.		381,437		98		381,339		111,602		109,495
CAML RESOURCES PTY LTD		185,465		52,782		132,683		238,296		53,950
Zhongyue POSCO (Qinhuangdao) Tinplate Industrial Co., Ltd		133,554		67,202		66,352		205,453		3,859
VSC POSCO Steel Corporation		33,116		17,860		15,256		110,059		1,766
PT. Wampu Electric Power		122,733		89,862		32,871		27,042		(3,496	)
POSCO SeAH Steel Wire(Nantong) Co., Ltd.		63,304		38,951		24,353		79,578		3,134
Roy Hill Holdings Pty Ltd		2,703,533		244,437		2,459,096		—		(302,248	)
POSCO-NPS Niobium LLC		686,978		—		686,978		—		32,158
CSP - Compania Siderurgica do Pecem		1,520,989		78,847		1,442,142		—		(16,915	)
DMSA/AMSA		8,636,317		5,190,558		3,445,759		—		(473	)
KOBRASCO		203,467		13,001		190,466		70,428		42,852
BX STEEL POSCO Cold Rolled Sheet Co., Ltd.		776,557		418,958		357,599		1,479,765		5,359

F-60

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) December 31, 2014


Company	Assets		Liabilities		Equity (deficit)			Sales		Net income (loss)
	(in millions of Won)
[Domestic]
EQP POSCO Global NO1 Natual Resources PEF	￦	621,960		1,044		620,916			—		(576	)
SNNC		826,597		528,246		298,351			345,836		41,117
QSONE Co., Ltd.		247,590		79,891		167,699			13,674		(603	)
Incheon-Gimpo Expressway Co., Ltd.		337,639		172,464		165,175			—		(1,148	)
BLUE OCEAN Private Equity Fund		361,810		247,573		114,237			574,476		8,489
UITrans LRT Co., Ltd.		169,574		117,996		51,578			—		(887	)
CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd		256,207		208,960		47,247			5,240		(14,789	)
KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund		100,063		1,917		98,146			1,932		(4,238	)
KONES, Corp.		3,756		3,155		601			7,269		(907	)
Gunggi Green Energy		328,976		264,278		64,698			124,181		(4,720	)
POSCO MITSUBISHI CARBON TECHNOLOGY		405,387		218,275		187,112			—		(4,725	)
POSCO ES MATERIALS		64,088		19,602		44,486			13,403		(4,459	)

[Foreign]
South-East Asia Gas Pipeline Company Ltd.		1,997,068		1,306,957		690,111			353,439		102,385
7623704 Canada Inc.		1,138,126		4		1,138,122			—		(612	)
Nickel Mining Company SAS		410,230		140,860		269,370			133,975		(24,800	)
KOREA LNG LTD.		393,581		45		393,536			94,936		93,067
CAML RESOURCES PTY LTD		159,281		38,591		120,690			172,093		(6,570	)
Zhongyue POSCO (Qinhuangdao) Tinplate Industrial Co., Ltd		148,077		80,538		67,539			186,733		1,112
PT. Batutua Tembaga Raya		100,142		151,591		(51,449	)		1,309		(2,110	)
VSC POSCO Steel Corporation		38,388		26,942		11,446			103,877		73
PT. Wampu Electric Power		172,950		138,012		34,938			43,184		670
POSCO SeAH Steel Wire(Nantong) Co., Ltd.		66,097		38,572		27,525			80,059		2,636
Roy Hill Holdings Pty Ltd		6,809,416		3,431,438		3,377,978			—		(118,264	)
POSCO-NPS Niobium LLC		715,546		—		715,546			—		32,741
CSP - Compania Siderurgica do Pecem		3,060,008		1,467,004		1,593,004			—		(90,649	)
DMSA/AMSA		8,938,860		5,918,665		3,020,195			695,505		(544,837	)
KOBRASCO		234,595		35,021		199,574			99,677		60,712
BX STEEL POSCO Cold Rolled Sheet Co., Ltd.		816,813		448,854		367,959			1,290,490		3,771

F-61

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

12.

Joint Operations

Details of significant joint operations that the Company is participating in as a party to a joint arrangement as of December 31, 2014 are as follows:

Joint operations

Operation

Ownership (%)

Location

Myanmar A-1/A-3 mine

Mine development

51.00

Myanmar

Offshore midstream

Mine development

51.00

Myanmar

Greenhills mine

Mine development

20.00

Canada

Actos Anthracite coal project

Mine development

20.00

Canada

Mt. Thorley J/V

Mine development

20.00

Australia

POSMAC J/V

Mine development

20.00

Australia

CD J/V

Mine development

5.00

Australia

Intergra Coal J/V

Mine development

2.35

Australia

RUM J/V

Mine development

10.00

Australia

Camberwell Coal J/V

Mine development

8.39

Australia

13.

Investment Property, Net

(a) Investment property as of December 31, 2013 and 2014 are as follows:


	2013							2014
	Acquisition cost		Accumulated depreciation and impairment loss			Book value		Acquisition cost		Accumulated depreciation and impairment loss			Book value
	(in millions of Won)
Land	￦	200,468		(38,966	)		161,502		447,350		(31,838	)		415,512
Buildings		399,998		(160,805	)		239,193		681,924		(90,277	)		591,647
Structures		6,836		(3,237	)		3,599		4,058		(1,998	)		2,060
Construction-in-progress		20,935		—			20,935		46,373		—			46,373

	￦	628,237		(203,008	)		425,229		1,179,705		(124,113	)		1,055,592

As of December 31, 2014, the fair value of investment property is ￦1,288,080 million, among which the Company evaluated the investment property of 6 subsidiaries, including DONG FANG JIN HONG, as its book value since it is believed that the book value of ￦812,591 million approximates fair value. Also, the Company used the prior year’s fair value for some of the investment property since it is believed to be approximately the same.

(b) Changes in the carrying value of investment property for the years ended December 31, 2013 and 2014 were as follows:

1) For the year ended December 31, 2013


	Beginning		Acquisitions		Business combination		Disposals			Depreciation			*Others^(1)**			Ending
	(in millions of Won)
Land	￦	211,382		—		12,625		(4,410	)		—			(58,095	)		161,502
Buildings		304,503		10		8,432		(3,129	)		(12,008	)		(58,615	)		239,193
Structures		5,306		—		—		—			(314	)		(1,393	)		3,599
Construction-in-progress		—		20,935		—		—			—			—			20,935

	￦	521,191		20,945		21,057		(7,539	)		(12,322	)		(118,103	)		425,229

(*1)	Includes reclassification resulting from changing purpose of use, adjustment of foreign currency translation difference and others.

F-62

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) For the year ended December 31, 2014


	Beginning		Acquisitions		Business combination		Disposals			*Depreciation^(1)**			*Others^(2)**			Ending
	(in millions of Won)
Land	￦	161,502		97,883		13		(20,500	)		—			176,614			415,512
Buildings		239,193		195,722		208		(19,212	)		(12,858	)		188,594			591,647
Structures		3,599		—		—		—			(413	)		(1,126	)		2,060
Construction-in-progress		20,935		112,998		—		—			—			(87,560	)		46,373

	￦	425,229		406,603		221		(39,712	)		(13,271	)		276,522			1,055,592

(*1)	Impairment losses of investment property amounting to ￦23 million are included.

(*2)	Includes reclassification resulting from changing purpose of use, adjustment of foreign currency translation difference and others.

14.

Property, Plant and Equipment, Net

(a) Property, plant and equipment as of December 31, 2013 and 2014 are as follows:


	2013										2014
	Acquisition cost		Accumulated depreciation and impairment loss			Government grants			Book value		Acquisition cost		Accumulated depreciation and impairment loss			Government grants			Book value
	(in millions of Won)
Land	￦	2,719,989		(11,979	)		—			2,708,010		2,801,288		—			—			2,801,288
Buildings		8,112,980		(3,223,992	)		(153	)		4,888,835		8,824,462		(3,460,858	)		(4,280	)		5,359,324
Structures		4,649,271		(1,864,574	)		(110	)		2,784,587		5,106,863		(2,076,499	)		(201	)		3,030,163
Machinery and equipment		40,685,986		(21,242,212	)		(938	)		19,442,836		43,972,182		(22,771,455	)		(842	)		21,199,885
Vehicles		284,113		(233,080	)		—			51,033		304,346		(247,611	)		(40	)		56,695
Tools		346,018		(283,120	)		(45	)		62,853		360,625		(296,517	)		(39	)		64,069
Furniture and fixtures		568,313		(394,958	)		(203	)		173,152		577,126		(433,330	)		(14	)		143,782
Finance lease assets		151,219		(50,695	)		—			100,524		162,154		(82,073	)		—			80,081
Construction-in-progress		5,553,322		—			(5,033	)		5,548,289		2,511,009		—			(5,101	)		2,505,908

	￦	63,071,211		(27,304,610	)		(6,482	)		35,760,119		64,620,055		(29,368,343	)		(10,517	)		35,241,195

F-63

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) Changes in the carrying value of property, plant and equipment for the years ended December 31, 2013 and 2014 were as follows:

1) For the year ended December 31, 2013


	Beginning		Acquisitions		Business combination		Disposals			*Depreciation ^(1)**			*Others ^(2)**			Ending
	(in millions of Won)
Land	￦	2,646,422		23,404		23,108		(24,548	)		—			39,624			2,708,010
Buildings		4,168,802		72,168		7,352		(48,278	)		(308,084	)		996,875			4,888,835
Structures		2,320,181		29,338		18,568		(7,633	)		(189,740	)		613,873			2,784,587
Machinery and equipment		16,532,204		740,682		9,634		(88,565	)		(1,867,408	)		4,116,289			19,442,836
Vehicles		60,154		10,326		700		(2,356	)		(19,402	)		1,611			51,033
Tools		69,851		20,638		304		(1,811	)		(33,494	)		7,365			62,853
Furniture and fixtures		183,380		31,578		1,087		(4,837	)		(72,062	)		34,006			173,152
Finance lease assets		57,224		670		—		(712	)		(12,766	)		56,108			100,524
Construction-in-progress		6,238,161		5,931,141		—		(10,369	)		—			(6,610,644	)		5,548,289

	￦	32,276,379		6,859,945		60,753		(189,109	)		(2,502,956	)		(744,893	)		35,760,119

(*1)	Impairment losses of property, plant and equipment amounting to ￦9,742 million are included.

(*2)	Includes reclassification for changing purpose of use, adjustments of foreign currency translation differences and others.

2) For the year ended December 31, 2014


	Beginning		Acquisitions		Business combination		Disposals			*Depreciation ^(1)**			*Others ^(2)**			Ending
	(in millions of Won)
Land	￦	2,708,010		92,645		146,755		(10,410	)		(1,839	)		(133,873	)		2,801,288
Buildings		4,888,835		97,701		72,483		(18,968	)		(372,445	)		691,718			5,359,324
Structures		2,784,587		42,341		15,525		(3,517	)		(223,487	)		414,714			3,030,163
Machinery and equipment		19,442,836		372,448		26,998		(45,777	)		(2,194,014	)		3,597,394			21,199,885
Vehicles		51,033		17,665		614		(2,136	)		(20,166	)		9,685			56,695
Tools		62,853		29,351		4,210		(578	)		(33,480	)		1,713			64,069
Furniture and fixtures		173,152		41,113		1,599		(2,291	)		(70,938	)		1,147			143,782
Finance lease assets		100,524		2,710		—		(31	)		(29,825	)		6,703			80,081
Construction-in-progress		5,548,289		2,804,568		19,156		(14,088	)		—			(5,852,017	)		2,505,908

	￦	35,760,119		3,500,542		287,340		(97,796	)		(2,946,194	)		(1,262,816	)		35,241,195

(*1)	Impairment losses of property, plant and equipment amounting to ￦64,833 million are included.

(*2)	Includes reclassification for changing purpose of use, adjustment of foreign currency translation differences and others.

(c) Borrowing costs capitalized and the capitalized interest rate for the years ended December 31, 2013 and 2014 were as follows:


	2013			2014
	(in millions of Won)
Weighted average expenditure	￦	6,442,564			1,772,492
Borrowing costs capitalized		290,117			76,566
Capitalization rate		4.50	%		4.32	%

F-64

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(d) Property, plant and equipment and investment property pledged as collateral as of December 31, 2013 and 2014 are as follows:


	Collateral right holder	2013		2014
		(in millions of Won)
Land ^(*1)	Korean Development Bank and others	￦	767,004		1,040,850
Buildings and structures ^(*1)	Korean Development Bank and others		1,112,855		1,324,597
Machinery and equipment	Korean Development Bank and others		3,343,747		3,594,331
Tools	Korean Development Bank		7,300		104
Construction-in-progress	The Export-Import Bank of Korea		382,339		—

		￦	5,613,245		5,959,882

(*1)	Investment property is included.

15.

Goodwill and Other Intangible Assets, Net

(a) Goodwill and other intangible assets as of December 31, 2013 and 2014 are as follows:


	2013										2014
	Acquisition cost		Accumulated amortization and impairment			Government grants			Book value		Acquisition cost		Accumulated amortization and impairment			Government grants			Book value
	(in millions of Won)
Goodwill	￦	1,741,562		(125,624	)		—			1,615,938		1,932,065		(136,921	)		—			1,795,144
Intellectual property rights		1,551,898		(76,026	)		(1,013	)		1,474,859		2,910,143		(146,544	)		(920	)		2,762,679
Premium in rental		148,295		(17,028	)		—			131,267		150,438		(19,496	)		—			130,942
Development expense		158,228		(95,780	)		(1,346	)		61,102		330,365		(161,263	)		(356	)		168,746
Port facilities usage rights		504,331		(337,220	)		—			167,111		506,125		(349,681	)		—			156,444
Exploration and evaluation assets		389,601		(29,853	)		—			359,748		123,025		(30,566	)		—			92,459
Mining development assets		968,191		—			—			968,191		—		—			—			—
Customer relationships		856,308		(163,428	)		—			692,880		859,023		(217,398	)		—			641,625
Power generation permit		—		—			—			—		539,405		—			—			539,405
Other intangible assets		843,705		(384,960	)		(1	)		458,744		1,159,574		(562,014	)		(15	)		597,545

	￦	7,162,119		(1,229,919	)		(2,360	)		5,929,840		8,510,163		(1,623,883	)		(1,291	)		6,884,989

F-65

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(2) The changes in carrying value of goodwill and other intangible assets for the years ended December 31, 2013 and 2014 were as follows:

1) For the year ended December 31, 2013


	Beginning		Acquisitions		Business combination		Disposals			Amortization			Impairment loss			*Others^(3)**			Ending
	(in millions of Won)
Goodwill^(*1)	￦	1,713,691		—		2,668		—			—			(103,436	)		3,015			1,615,938
Intellectual property rights		275,146		54,182		—		(291	)		(35,532	)		(10,313	)		1,191,667			1,474,859
Premium in rental^(*2)		137,733		4,089		1,605		(4,382	)		(211	)		(4,457	)		(3,110	)		131,267
Development expense		60,931		13,717		2,032		—			(23,166	)		(5,675	)		13,263			61,102
Port facilities usage rights		83,122		—		—		—			(10,318	)		—			94,307			167,111
Exploration and evaluation assets		479,728		4,669		—		—			—			—			(124,649	)		359,748
Mining development assets		1,643,306		289,016		—		—			—			—			(964,131	)		968,191
Customer relationships		750,732		—		—		—			(51,944	)		—			(5,908	)		692,880
Other intangible assets		517,971		211,627		684		(1,102	)		(58,843	)		(1,435	)		(210,158	)		458,744

	￦	5,662,360		577,300		6,989		(5,775	)		(180,014	)		(125,316	)		(5,704	)		5,929,840

(*1)	Business combination amounts include goodwill amounting to ￦2,668 million related to the acquisition of POSCO YongXin Rare Earth Metal Co., Ltd.

(*2)	Premium in rental includes memberships with indefinite useful lives.

(*3)	Includes translation adjustment and reclassification.

2) For the year ended December 31, 2014


	Beginning		Acquisitions		Business combination (note 41)		Disposals			Amortization			Impairment loss			*Others^(3)**			Ending
	(in millions of Won)
Goodwill^(*1)	￦	1,615,938		—		187,285		—			—			(11,297	)		3,218			1,795,144
Intellectual property rights		1,474,859		199,850		32		(218	)		(143,548	)		(27,720	)		1,259,424			2,762,679
Premium in rental^(*2)		131,267		8,775		1,661		(4,484	)		(265	)		(2,609	)		(3,403	)		130,942
Development expense		61,102		18,032		2,659		(3,484	)		(56,453	)		(9,366	)		156,256			168,746
Port facilities usage rights		167,111		433		—		—			(12,462	)		—			1,362			156,444
Exploration and evaluation assets		359,748		32,191		—		—			—			(718	)		(298,762	)		92,459
Mining development assets		968,191		1,484		—		—			—			—			(969,675	)		—
Customer relationships		692,880		—		—		—			(53,969	)		—			2,714			641,625
Power generation permit^(*4)		—		—		539,405		—			—			—			—			539,405
Other intangible assets^(*5)		458,744		262,076		88,808		(665	)		(77,243	)		(717	)		(133,458	)		597,545

	￦	5,929,840		522,841		819,850		(8,851	)		(343,940	)		(52,427	)		17,676			6,884,989

(*1)	Business combination amounts include goodwill amounting to ￦180,418 million related to the acquisition of POSCO PLANTEC Co., Ltd.

(*2)	Premium in rental includes memberships with indefinite useful lives.

(*3)	Includes translation adjustment and reclassification.

(*4)	POSCO ENERGY CO., LTD. recognized other intangible assets amounting to ￦539,405 million in relation to operation permit for electricity business when acquiring POSPOWER CO., Ltd.

(*5)	For the year ended December 31, 2014, POSCO ENGINEERING & CONSTRUCT ION., LTD. recognized other intangible assets and other provisions amounting to ￦169,000 million in relation to project financing agreements on the Urban Development Project in Gaepo-dong, Seoul.

F-66

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(c) For the purpose of impairment testing, goodwill is allocated to individually operating entities which are determined to be CGUs. The goodwill amounts as of December 31, 2013 and 2014 are as follows:


Reporting segments	Total number of CGUs
Reporting segments	2013		2014		CGUs	2013		2014
	(in millions of Won)
Steel		10		10	POSCO Thainox Public Company Limited	￦	18,624		16,206
					POSCO VST CO., LTD.		36,955		36,955
					Others		14,084		13,623
Trading		3		3	Daewoo International Corporation^(*1)		1,163,922		1,163,922
					Others		9,711		9,918
E&C		4		5	POSCO Engineering Co., Ltd.^(*2)		194,637		194,637
					EPC EQUITIES LLP		44,412		44,719
					POSCO PLANTEC Co., Ltd.^(*3)		—		180,418
					Others		11,119		14,802
Others		10		9	PONUTech Co., Ltd		77,298		77,298
					POSCO ENERGY Co., LTD.		26,471		26,471
					Others		18,705		16,175

Total		27		27		￦	1,615,938		1,795,144

(*1)

Recoverable amounts of Daewoo International Corporation are determined based on its value-in-use. As of December 31, 2014, value-in-use is estimated by applying 7.17% discount rate and 2.5% terminal growth rate with 5 years, the period for the estimated future cash flows, based on management’s business plan. The key assumption for the estimated future cash flow projections for the next 5 years is the revenue growth rate. The average annual growth rate of 7.86% is used based on the average growth rate of revenue in the past 5 years ( 2010 through 2014) and the Company’s business plan for next 5 years. No impairment loss of goodwill recognized during the year ended December 31, 2014 as the recoverable amount exceeded the carrying value of the CGU.

The estimated recoverable amount of CGU exceeded the carrying value by ￦212,085 million. Value-in-use of the CGU was affected by the assumption such as discount rate and terminal growth used in discount cash flow model. When the discount rate increases by 1%, value-in-use will be decreased by 9.17% and when the terminal growth rate decreases by 1%, value-in-use will be decreased by 5.36%.

Management believes that any reasonably possible change in the key assumption on which the recoverable amount is based would cause a change in impairment loss of goodwill.

(*2)

Recoverable amounts of POSCO Engineering Company are determined based on its value-in-use. As of December 31, 2014, value-in-use is estimated by applying 9.17% discount rate and 1% terminal growth rate with 5 years. The estimated future cash flows for the next 5 years are based on management’s approved business plan. The most significant assumption on the cash flow projections for the next 5 years is the cash flows from construction projects based on the business plan. No impairment loss of goodwill was recognized during the year ended December 31, 2014 as the recoverable amount exceeded the carrying value of the CGU.

The estimated recoverable amounts of CGU exceeded the carrying value by ￦13,837 million. Value-in-use of the CGU was affected by the assumption such as discount rate and terminal growth used in discount cash flow model. When the discount rate increases by 0.25%, value-in-use will be decreased by 3.38% and when the terminal growth rate decreases by 0.25%, value-in-use will be decreased by 2.55%. The change has no effect on the impairment loss of the goodwill.

Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the CGU.

(*3)	Recoverable amount of POSCO PLANTEC Co., Ltd. was determined based on fair value less cost to sell. No impairment loss of goodwill was recognized during the year ended December 31, 2014 as the recoverable amount exceeded the carrying value of the CGU.

F-67

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

16.

Other Assets

Other current assets and other long-term assets as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Current
Advance payments	￦	1,138,976		845,114
Prepaid expenses		130,272		129,914
Others		1,420		1,397

		1,270,668		976,425

Non-current
Long-term advance payments		3,090		3,454
Long-term prepaid expenses		204,449		243,933
Others^(*1)		157,659		260,162

	￦	365,198		507,549

(*1)

As of December 31, 2014, the Company recognized assets amounting to ￦132,060 million in connection with the additional income tax payment for prior years as a result of tax audits that were finalized in 2014 based on the Company’s best estimate of the tax amounts to be paid when the result of the Company’s appeal is finalized.

17.

Borrowings

(a) Short-term borrowings and current portion of long-term borrowings as of December 31, 2013 and 2014 are as follows:

Bank

Issuance date

Maturity date

Interest
rate (%)

2013

2014

(in millions of Won)

Short-term borrowings

Bank overdrafts

Bank of America and others

January, 2014~ December, 2014

January, 2015~ December, 2015

0.1~6.0

￦

100,211

105,673

Short-term borrowings

HSBC and others

January, 2014~ December, 2014

January, 2015~ December, 2015

0.4~12.3

7,256,486

9,138,804

7,356,697

9,244,477

Current portion of long-term liabilities

Current portion of long-term borrowings

Export-Import Bank of Korea and others

June, 2003~
December, 2014

January, 2015~ December, 2015

0.5~9.0

856,188

1,159,090

Less: Present value discount

(59

)

—

Current portion of foreign loan

NATIXIS

March, 1986

September, 2015

2.0

927

418

Current portion of debentures

Korean Development Bank and others

August, 2009~

March, 2014

February, 2015~ December, 2015

1.3~6.0

2,502,246

1,793,252

Less: Current portion of discount on debentures issued

(2,353

)

(1,753

)

3,356,949

2,951,007

￦

10,713,646

12,195,484

F-68

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) Long-term borrowings, excluding current portion as of December 31, 2013 and 2014 are as follows:


	Bank	Issuance date	Maturity date	Interest rate (%)		2013			2014
	(in millions of Won)
Long-term borrowings	Export-Import Bank of Korea and others	January, 1983~ December, 2014	January, 2016~ December, 2099		0.5~10.0	￦	7,017,532			7,359,773
Less: Present value discount							(43,897	)		(109,949	)
Foreign loan^(*1)	NATIXIS	March, 1986	March, 2017		2.0		1,140			627
Bonds	Korean Development Bank and others	August, 2006~ December, 2014	February, 2016~ October, 2023		0.9~6.3		8,590,965			8,009,547
Less: Discount on debentures issued							(45,372	)		(27,225	)
Add: Premium on debentures redemption							12,591			—

						￦	15,532,959			15,232,773

(*1)	Korea Development Bank has provided guarantees related to the foreign loan.

(c) Property, plant and equipment, trade accounts and notes receivable, financial assets, available-for-sale financial assets and inventories amounting to ￦5,950,260 million, ￦27,621 million (three hundred eleven sheets of notes receivable), ￦15,156 million, ￦6,726 million and ￦344,146 million, respectively, are provided as collateral related to short-term borrowings, long-term borrowings and debentures.

18.

Other Payables

Other payables as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Current
Accounts payable	￦	914,288		1,082,676
Accrued expenses		873,613		740,250
Dividend payable		11,709		12,077
Finance lease liabilities		14,218		21,888
Withholdings		315,026		337,822

		2,128,854		2,194,713

Non-current
Accounts payable		116,160		81,344
Accrued expenses		25,358		25,886
Finance lease liabilities		39,257		24,815
Long-term withholdings		25,859		37,941

	￦	206,634		169,986

F-69

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

19.

Other Financial Liabilities

Other financial liabilities as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Current
Derivatives liabilities	￦	128,370		84,146
Financial guarantee liabilities		7,534		27,491

		135,904		111,637

Non-current
Derivatives liabilities		229,096		64,926
Financial guarantee liabilities		30,925		26,169

	￦	260,021		91,095

20. Provisions

(a) Provisions as of December 31, 2013 and 2014 are as follows:


	2013				2014
	Current		Non-current		Current		Non-current
	(in millions of Won)
Provision for bonus payments	￦	52,377		—		49,505		—
Provision for construction warranties		35,027		20,669		16,352		63,996
Provision for legal contingencies and claims ^(*1)		—		30,330		—		50,424
Provisons for the restoration ^(*2)		—		4,385		39,336		35,462
Others ^(*3)		19,925		90,888		44,837		73,357

	￦	107,329		146,272		150,030		223,239

(*1)	The Company recognized probable outflow of resources amounting to ￦17,549 million and ￦44,309 million as provisions for legal contingencies and asserted claims in relation to lawsuits against the Company as of December 31, 2013 and 2014, respectively.

(*2)

Due to contamination of land near the Company’s magnesium plant located in Gangneung, the Company recognized a provision of ￦89,433 million related to restoration costs. When estimating related costs, the Company has assumed that it would use all of technologies and materials available to restore the land. In addition, the Company has applied a discount rate of 3.04% to measure the present value of these costs.

(*3)	As of December 31, 2013 and 2014, the amount includes a provision of ￦74,888 million and ￦23,600 million, respectively, for expected outflows of resources in connection with the subrogation and financial joint guarantee for the construction projects of POSCO ENGINEERING & CONSTRUCTION Co., LTD.

(b) The following are the key assumptions concerning the future and other key sources of estimation uncertainties at the end of the reporting period.


		Key assumptions for the estimation
Provision for bonus payments		Estimations based on financial performance
Provision for construction warranties		Estimations based on historical warranty data
Provision for legal contingencies and claims		Estimations based on the degree of probability of an unfavorable outcome and the ability to make a sufficient reliable estimate of the amount of loss

F-70

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

1) For the year ended December 31, 2013


	Beginning		Increase		Utilization			Reversal			*Others ^(1)**			Ending
	(in millions of Won)
Provision for bonus payments	￦	42,904		48,362		(36,126	)		(2,058	)		(705	)		52,377
Provision for construction warranties		50,716		27,008		(15,356	)		(3,887	)		(2,785	)		55,696
Provision for legal contingencies and claims		30,920		5,090		(4,353	)		(1,327	)		—			30,330
Provisons for the restoration		4,371		130		—			—			(116	)		4,385
Others		49,018		85,947		(23,576	)		(1,597	)		1,021			110,813

	￦	177,929		166,537		(79,411	)		(8,869	)		(2,585	)		253,601

(*1)	Includes adjustments of foreign currency translation differences and others.

2) For the year ended December 31, 2014


	Beginning		Increase		Utilization			Reversal			*Others ^(1)**		Ending
	(in millions of Won)
Provision for bonus payments	￦	52,377		45,071		(46,761	)		(1,646	)		464		49,505
Provision for construction warranties		55,696		34,410		(15,719	)		(4,677	)		10,638		80,348
Provision for legal contingencies and claims		30,330		15,289		—			(7,716	)		12,521		50,424
Provisons for the restoration		4,385		89,565		(19,328	)		—			176		74,798
Others		110,813		282,406		(258,571	)		(19,523	)		3,069		118,194

	￦	253,601		466,741		(340,379	)		(33,562	)		26,868		373,269

(*1)	Includes adjustments of foreign currency translation differences and others.

21.

Employee Benefits

(a) Defined contribution plans

The expenses related to post-employment benefit plans under defined contribution plans for the years ended December 31, 2012, 2013 and 2014 were as follows:

2012

2013

2014

(in millions of Won)

Expense related to post-employment benefit under defined contribution plans

￦

16,520

19,126

23,414

(b) Defined benefit plans

1) The amounts recognized in relation to net defined benefit liabilities in the statements of financial position as of December 31, 2013 and 2014 are as follows:


	2013			2014
	(in millions of Won)
Present value of funded obligations	￦	1,515,426			1,713,074
Fair value of plan assets		(1,247,483	)		(1,427,918	)
Present value of non-funded obligations		5,217			5,169

Net defined benefit liabilities	￦	273,160			290,325

F-71

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) Changes in present value of defined benefit obligations for the years ended December 31, 2013 and 2014 were as follows:


	2013			2014
	(in millions of Won)
Defined benefit obligation at the beginning of period	￦	1,410,399			1,520,643
Current service costs		238,386			230,445
Interest costs		47,039			54,737
Remeasurements :		(12,615	)		85,166
— Loss(Gain) from change in demograhpic assumptions		(5,624	)		18,911
— Loss from change in financial assumptions		7,667			54,131
— Others		(14,658	)		12,124
Business combinations		11,379			48,695
Benefits paid		(129,038	)		(160,792	)
Others		(44,907	)		(60,651	)

Defined benefit obligation at the end of period	￦	1,520,643			1,718,243

3) Changes in fair value of plan assets for the years ended December 31, 2013 and 2014 were as follows:


	2013			2014
	(in millions of Won)
Fair value of plan assets at the beginning of period	￦	1,064,711			1,247,483
Interest on plan assets		37,677			47,296
Remeasurement of plan assets		(1,482	)		(11,236	)
Contributions to plan assets ^(*1)		254,771			273,867
Business combinations		9,372			30,863
Benefits paid		(82,624	)		(109,352	)
Others		(34,942	)		(51,003	)

Fair value of plan assets at the end of period	￦	1,247,483			1,427,918

(*1)	The Company expects to make an estimated contribution of ￦272,767 million to the defined benefit plan assets in 2015.

4) The fair value of plan assets as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Equity instruments	￦	35,364		43,010
Debt instruments		98,686		236,665
Deposits		958,509		997,414
Others		154,924		150,829

	￦	1,247,483		1,427,918

5) The amounts recognized in consolidated statements of comprehensive income for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012		2013		2014
	(in millions of Won)
Current service costs	￦	212,450		238,386		230,445
Net interest costs ^(*1)		13,682		9,362		7,441

	￦	226,132		247,748		237,886

(*1)	The actual return on plan assets amounted to ￦39,826 million, ￦36,195 million and ￦36,060 million for the years ended December 31, 2012, 2013 and 2014, respectively.

F-72

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

The above expenses by function were as follows:


	2012		2013		2014
	(in millions of Won)
Cost of sales	￦	164,763		180,090		172,668
Selling and administrative expenses		60,457		66,327		64,960
Others		912		1,331		258

	￦	226,132		247,748		237,886

6) Accumulated actuarial gains (losses), net of tax recognized in other comprehensive income for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012			2013			2014
	(in millions of Won)
Beginning	￦	(182,702	)		(245,229	)		(239,005	)
Current actuarial gains (losses)		(62,527	)		6,224			(75,101	)

Ending	￦	(245,229	)		(239,005	)		(314,106	)

7) The principal actuarial assumptions as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(%)
Discount rate		3.47~4.91		2.58~8.58
Expected future increase in salaries ^(*1)		1.07~5.75		1.00~10.22

(*1)	The expected future increase in salaries is based on the average salary increase rate for the past three years.

All assumptions are reviewed at the end of the reporting period. Additionally, the total estimated defined benefit obligation includes actuarial assumptions associated with the long-term characteristics of the defined benefit plan.

8) Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below:


	1% Increase						1% Decrease
	Amount			Percentage (%)			Amount			Percentage (%)
	(in millions of Won)
Discount rate	￦	(126,866	)		(7.4	)		143,406			8.3
Expected future increases in salaries		143,117			8.3			(107,206	)		(6.2	)

9) As of December 31, 2014 the maturity of the expected benefit payments are as follows:


	Within 1 year		1 year- 5 years		5 years- 10 years		10 years- 20 years		After 20 years		Total
	(in millions of Won)
Benefits paid	￦	49,514		292,921		747,429		959,413		283,963		2,333,240

The maturity analysis of the defined benefit obligation was nominal amounts of defined benefit obligations using expected remaining working lives of employees.

F-73

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

22.

Other Liabilities

Other liabilities as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Current
Due to customers for contract work	￦	806,818		992,249
Advances received		1,384,793		1,310,894
Unearned revenue		29,217		21,627
Withholdings		192,497		167,002
Deferred revenue		202		—
Others ^(*1)		268,032		236,021

	￦	2,681,559		2,727,793

Non-current
Advances received	￦	512,096		235,825
Unearned revenue		1,465		1,170
Others ^(*1)		57,954		45,987

	￦	571,515		282,982

(*1)

Includes other current liabilities amounting to ￦261,855 million, ￦214,731 million and other long-term liabilities amounting to ￦8,935 million and ￦8,819 million as of December 31, 2013 and 2014, respectively, due to proportionate consolidation of joint operations which are owned by POSCO’s subsidiaries including MT. Thorley.

23.

Financial Instruments

(a) Classification of financial instruments

1) Financial assets as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Financial assets at fair value through profit or loss
Derivatives assets held for trading	￦	78,222		96,266
Available-for-sale financial assets		4,166,384		2,420,241
Held-to-maturity financial assets		3,834		17,093
Loans and receivables		21,226,369		19,380,295

	￦	25,474,809		21,913,895

2) Financial liabilities as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Financial liabilities at fair value through profit or loss
Derivatives liabilities held for trading	￦	357,466		149,072
Financial liabilities evaluated as amortized cost
Trade accounts and notes payable		4,231,881		4,039,255
Borrowings		26,246,605		27,428,257
Financial guarantee liabilities		38,459		53,660
Others		2,253,989		2,101,354

		32,770,934		33,622,526

	￦	33,128,400		33,771,598

F-74

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

3) Finance income and costs by category of financial instrument for the years ended December 31, 2012, 2013 and 2014 were as follows:

December 31, 2012


	Finance income and costs
	Interest income (cost)			Gain and loss on valuation			Gain and loss on foreign currency			Gain and loss on disposal			Impairment loss			Others			Total			Other comprehensive income (loss)
	(in millions of Won)
Financial assets at fair value through profit or loss	￦	130			77,907			—			407,505			—			—			485,542			—
Available-for-sale financial assets		1,046			—			—			75,809			(224,171	)		124,475			(22,841	)		(81,471	)
Held-to-maturity financial assets		1,664			—			—			(224	)		—			79			1,519			—
Loans and receivables		275,967			—			(414,421	)		(33,786	)		—			(406	)		(172,646	)		—
Financial liabilities at fair value through profit or loss		—			(143,754	)		—			(308,350	)		—			—			(452,104	)		—
Financial liabilities at amortized cost		(871,457	)		—			1,204,286			—			—			(72,874	)		259,955			—

	￦	(592,650	)		(65,847	)		789,865			140,954			(224,171	)		51,274			99,425			(81,471	)

‚ December 31, 2013


	Finance income and costs
	Interest income (cost)			Gain and loss on valuation			Gain and loss on foreign currency			Gain and loss on disposal			Impairment loss			Others			Total			Other comprehensive income (loss)
	(in millions of Won)
Financial assets at fair value through profit or loss	￦	549			67,951			—			348,126			—			—			416,626			—
Available-for-sale financial assets		4,010			—			—			101,842			(280,237	)		59,181			(115,204	)		412,346
Held-to-maturity financial assets		480			—			—			—			—			84			564			—
Loans and receivables		255,359			—			(49,541	)		(20,009	)		—			(145	)		185,664			—
Financial liabilities at fair value through profit or loss		—			(287,864	)		—			(264,739	)		—			—			(552,603	)		—
Financial liabilities at amortized cost		(657,681	)		—			285,922			—			—			(11,703	)		(383,462	)		—

		￦(397,283	)		(219,913	)		236,381			165,220			(280,237	)		47,417			(448,415	)		412,346

F-75

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

ƒ December 31, 2014


	Finance income and costs
	Interest income (cost)			Gain and loss on valuation			Gain and loss on foreign currency			Gain and loss on disposal			Impairment loss			Others			Total			Other comprehensive income (loss)
	(in millions of Won)
Financial assets at fair value through profit or loss	￦	—			72,466			—			256,941			—			—			329,407			—
Available-for-sale financial assets		309			—			—			181,774			(369,723	)		47,825			(139,815	)		(333,891	)
Held-to-maturity financial assets		260			—			—			—			—			(244	)		16			—
Loans and receivables		227,685			—			301,623			(20,912	)		—			(255	)		508,141			—
Financial liabilities at fair value through profit or loss		—			(98,003	)		—			(282,638	)		—			—			(380,641	)		—
Financial liabilities at amortized cost		(795,585	)		—			(288,513	)		(38,594	)		—			(19,641	)		(1,142,333	)		—

		￦(567,331	)		(25,537	)		13,110			96,571			(369,723	)		27,685			(825,225	)		(333,891	)

(b) Credit risk

1) Credit risk exposure

The carrying amount of financial assets represents the Company’s maximum exposure to credit risk. The maximum exposure to credit risk as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Cash and cash equivalents	￦	4,208,562		3,811,202
Financial assets at fair value through profit or loss		78,222		96,266
Available-for-sale financial assets		97,618		125,486
Held-to-maturity financial assets		3,834		17,093
Loans and other receivables		5,408,163		3,825,170
Trade accounts and notes receivable, net		11,512,644		11,664,587
Long-term trade accounts and notes receivable, net		97,000		79,336

	￦	21,406,043		19,619,140

The Company provided financial guarantees for the repayment of loans of associates, joint ventures and third parties. As of December 31, 2013 and 2014, the maximum exposure to credit risk related to the financial guarantees amounted to ￦4,520,052 million and ￦4,780,700 million, respectively.

F-76

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) Impairment losses on financial assets

Allowance for doubtful accounts as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Trade accounts and notes receivable	￦	439,073		605,470
Other accounts receivable		81,470		94,579
Loans		127,990		234,107
Other assets		13,118		19,997

	￦	661,651		954,153

‚ Impairment losses on financial assets for the years ended December 31, 2013 and 2014 were as follows:


	2013			2014
	(in millions of Won)
Bad debt expenses on trade receivables	￦	90,119			108,933
Impairment of available-for-sale financial assets		280,237			369,723
Other bad debt expenses ^(*1)		111,065			96,373
Impairment of held-to-maturity financial assets		—			319
Less: Recovery of impairment of held-to-maturity financial assets		(84	)		(75	)

	￦	481,337			575,273

(*1)	Other bad debt expenses are mainly related to other receivables and loans.

ƒ The aging and impairment losses of trade accounts and notes receivable as of December 31, 2013 and 2014 are as follows:


	2013				2014
	Trade accounts and notes receivable		Impairment		Trade accounts and notes receivable		Impairment
	(in millions of Won)
Not due	￦	8,485,935		48,147		8,599,898		53,093
Over due less than 1 month		1,849,829		12,675		1,867,838		7,171
1 month – 3 months		239,498		3,124		273,981		3,323
3 months – 12 months		503,171		10,681		201,213		16,893
Over 12 months		970,284		364,446		1,406,463		524,990

	￦	12,048,717		439,073		12,349,393		605,470

„ The aging and impairment losses of loans and other receivables as of December 31, 2013 and 2014 are as follows:


	2013				2014
	Loans and other receivables		Impairment		Loans and other receivables		Impairment
	(in millions of Won)
Not due		5,186,745		11,176		3,523,546		97,043
Over due less than 1 month		28,501		19,138		28,806		136
1 month – 3 months		13,293		30		97,165		19,571
3 months – 12 months		92,022		820		77,119		7,264
Over 12 months		310,180		191,414		447,217		224,669

		5,630,741		222,578		4,173,853		348,683

F-77

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

… Changes in the allowance for doubtful accounts for the years ended December 31, 2013 and 2014 were as follows:


	2012			2013			2014
	(in millions of Won)
Beginning	￦	406,721			474,877			661,651
Bad debt expenses		79,258			90,119			108,933
Other bad debt expenses		44,115			111,065			96,373
Others		(55,217	)		(14,410	)		87,196

Ending	￦	474,877			661,651			954,153

1) Contractual maturities for non-derivative financial liabilities, including estimated interest, are as follows:


	Book value		Contractual cash flow		Within 1 year		1 year - 5 years		After 5 years
	(in millions of Won)
Trade accounts and notes payable	￦	4,039,255		4,039,255		3,950,786		88,469		—
Financial guarantee liabilities^(*1)		53,660		4,780,700		4,780,700		—		—
Other financial liabilities		2,101,354		2,101,354		1,931,368		169,986		—
Borrowings		27,428,257		30,185,854		13,231,111		11,066,493		5,888,250

	￦	33,622,526		41,107,163		23,893,965		11,324,948		5,888,250

(*1)	For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.

2) The maturity analysis of derivative financial liabilities is as follows:


	Within 1 year		1 year- 5 years		After 5 years		Total
	(in millions of Won)
Currency forward	￦	29,080		13,115		—		42,195
Currency futures		54,102		—		—		54,102
Currency swaps		—		48,581		3,230		51,811
Interest swaps		349		—		—		349
Other forwards		615		—		—		615

	￦	84,146		61,696		3,230		149,072

(d) Currency risk

1) The Company has exposure to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of the changes in foreign exchange rates. The exposure to currency risk as of December 31, 2013 and 2014 are as follows:


	2013				2014
	Assets		Liabilities		Assets		Liabilities
	(in millions of Won)
USD	￦	3,929,623		8,953,287		4,771,164		8,328,804
EUR		365,021		408,542		387,102		683,685
JPY		482,691		1,727,946		185,891		1,145,643
Others		372,715		212,287		140,699		45,414

F-78

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) As of December 31, 2013 and 2014, provided that functional currency against foreign currencies other than functional currency hypothetically strengthens or weakens by 10%, the changes in gain or loss during the years ended December 31, 2013 and 2014 were as follows:


	2013					2014
	10% increase			10% decrease		10% increase			10% decrease
	(in millions of Won)
USD		￦(502,366	)		502,366		(355,764	)		355,764
EUR		(4,352	)		4,352		(29,658	)		29,658
JPY		(124,526	)		124,526		(95,975	)		95,975

(e) Interest rate risk

1) The carrying amount of interest-bearing financial instruments as of December 31, 2013 and 2014 are as follows:


	2013			2014
	(in millions of Won)
Fixed rate
Financial assets	￦	8,195,153			6,250,418
Financial liabilities		(15,633,891	)		(17,258,183	)

		(7,438,738	)		(11,007,765	)

Variable rate
Financial liabilities		￦(10,612,712)			(10,170,074	)

2) Sensitivity analysis on the fair value of financial instruments with fixed interest rate

The Company does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, and the Company does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore, a change in interest rates at the reporting date would not affect profit or loss.

3) Sensitivity analysis on the fair value of financial instruments with variable interest rate

As of December 31, 2013 and 2014, provided that other factors remain the same and the interest rate of borrowings with floating rates increases or decreases by 1%, the changes in interest expense for the years ended December 31, 2013 and 2014 were as follows:


	2013					2014
	1% increase			1% decrease		1% increase			1% decrease
	(in millions of Won)
Variable rate financial instruments	￦	(106,127	)		106,127		(101,701	)		101,701

F-79

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(f) Fair value

1) Fair value and book value

The carrying amount and the fair value of financial instruments as of December 31, 2013 and 2014 are as follows:


	2013				2014
	Book value		Fair value		Book value		Fair value
	(in millions of Won)
Assets measured at fair value
Available-for-sale financial assets ^(*1)	￦	3,560,515		3,560,515		1,963,289		1,963,289
Derivatives assets held for trading ^(*2)		78,222		78,222		96,266		96,266

		3,638,737		3,638,737		2,059,555		2,059,555

Assets measured amortized cost ^(*3)
Cash and cash equivalents		4,208,562		4,208,562		3,811,202		3,811,202
Trade accounts and notes receivable, net		11,609,644		11,609,644		11,743,923		11,743,923
Loans and other receivables, net		5,408,163		5,408,163		3,825,170		3,825,170
Held-to-maturity financial assets		3,834		3,834		17,093		17,093

		21,230,203		21,230,203		19,397,388		19,397,388

Liabilities measured at fair value
Derivatives liabilities held for trading ^(*2)		357,466		357,466		149,072		149,072

Liabilities measured amortized cost ^(*3)
Trade accounts and notes payable		4,231,881		4,231,881		4,039,255		4,039,255
Borrowings		26,246,605		26,550,721		27,428,257		27,756,615
Financial guarantee liabilities		38,459		38,459		53,660		53,660
Others		2,253,989		2,253,989		2,101,354		2,101,354

	￦	32,770,934		33,075,050		33,622,526		33,950,884

(*1)

The fair value of available-for-sale financial assets publicly traded is measured at the closing bid price quoted at the end of the reporting period. Meanwhile, the fair value of unquoted available-for-sale financial assets is calculated using the valuation results from an external pricing service in which weighted average cost of capital of evaluated companies is used as a discount rate. Available-for-sale financial assets which are not measured at fair value are excluded.

(*2)	The fair value of derivatives is measured using valuation models such as Black-Scholes model and others in which the market yields on government bonds are used as a discount rate.

(*3)

The fair value of financial assets and liabilities measured at amortized cost is determined at the present value of estimated future cash flows discounted at the current market interest rate. The fair value is calculated for the disclosures in the notes. On the other hand, the Company has not performed fair value measurement for the financial assets and liabilities measured at amortized cost except borrowings since their carrying amounts approximate fair value.

2) Interest rates used for determining fair value

Interest rates used to discount estimated cash flows as of December 31, 2013 and 2014 are as follows:


	2013		2014
Interest rate of borrowings (%)		0.76~5.18		0.22~4.92

F-80

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

3) The fair value hierarchy

The fair values of financial instruments by fair value hierarchy as of December 31, 2013 and 2014 are as follows:

a. December 31, 2013


	Level 1		Level 2		Level 3		Total
	(in millions of Won)
Financial assets
Available-for-sale financial assets	￦	2,816,484		—		744,031		3,560,515
Derivatives assets held for trading		—		78,222		—		78,222

		2,816,484		78,222		744,031		3,638,737

Financial liabilities
Derivatives liabilities held for trading	￦	—		357,466		—		357,466

b. December 31, 2014


	Level 1		Level 2		Level 3		Total
	(in millions of Won)
Financial assets
Available-for-sale financial assets	￦	1,808,384		—		154,905		1,963,289
Derivatives assets held for trading		—		96,266		—		96,266

		1,808,384		96,266		154,905		2,059,555

Financial liabilities
Derivatives liabilities held for trading	￦	—		149,072		—		149,072

‚

Changes in fair value of financial instruments classified as Level 3 for the years ended December 31, 2013 and 2014 were as follows:


	2013			2014
	(in millions of Won)
Beginning	￦	758,673			744,031
Valuation		(15,423	)		(60,445	)
Acquisition and others^(*1)		19,766			65,232
Disposal and others^(*2)		(18,985	)		(593,913	)

Ending	￦	744,031			154,905

(*1)	Included transferred amount due to change in fair value hierarchy.

(*2)	Included ￦580,062 million transferred to assets held for sale for the year ended December 31, 2014.

F-81

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(g) Offsetting financial assets and financial liabilities

As of December 31, 2013 and 2014, financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements are as follows:

1) December 31, 2013


	Gross amounts of recognized financial instruments		Gross amounts of recognized financial instruments set off in the statement of financial position		Net amounts of financial instruments presented in the statement of financial position		Related amounts not set off in the statement of financial position						Net amount
	Gross amounts of recognized financial instruments						Financial instruments			Cash collateral received or pledged			Net amount
	(in millions of Won)
Financial assets
Trade accounts and notes receivable	￦	73,956		—		73,956		(73,956	)		—			—
Derivatives		64,408		—		64,408		(64,408	)		—			—

Total		138,364		—		138,364		(138,364	)		—			—

Financial liabilities
Short-term borrowings		73,956		—		73,956		(73,956	)		—			—
Derivatives		108,405		—		108,405		(64,408	)		(3,410	)		40,587

Total	￦	182,361		—		182,361		(138,364	)		(3,410	)		40,587

2) December 31, 2014


	Gross amounts of recognized financial instruments		Gross amounts of recognized financial instruments set off in the statement of financial position		Net amounts of financial instruments presented in the statement of financial position		Related amounts not set off in the statement of financial position						Net amount
	Gross amounts of recognized financial instruments						Financial instruments			Cash collateral received or pledged			Net amount
	(in millions of Won)
Financial assets
Trade accounts and notes receivable	￦	106,985		—		106,985		(106,985	)		—			—
Derivatives^(*1)		79,286		—		79,286		(79,286	)		—			—

Total		186,271		—		186,271		(186,271	)		—			—

Financial liabilities
Short-term borrowings		106,985		—		106,985		(106,985	)		—			—
Derivatives^(*1)		128,980		—		128,980		(79,286	)		(6,912	)		42,782

Total	￦	235,965		—		235,965		(186,271	)		(6,912	)		42,782

(*1)

Some of the derivative contracts are made under International Swaps and Derivatives Association (ISDA) master netting agreements. In general, under such agreements the amounts owed by each counter party on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other. In certain circumstances (i.e. when a default occurs), all standing transactions under the agreement are terminated, the termination value is assessed and only a single amount is payable in settlement of all transactions.

F-82

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

24.

Share Capital and Capital Surplus

(a) Share capital as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(Share, in Won)
Authorized shares		200,000,000		200,000,000
Par value	￦	5,000		5,000
Issued shares ^(*1)		87,186,835		87,186,835
Shared capital ^(*2)	￦	482,403,125,000		482,403,125,000

(*1)	As of December 31, 2014, total shares of ADRs of 51,622,460 are equivalent to 12,905,615 of common stock.

(*2)	As of December 31, 2014, the difference between the ending balance of common stock and the par value of issued common stock is ￦46,469 million due to retirement of 9,293,790 treasury stocks.

(b) The changes in issued common stock for the years ended December 31, 2013 and 2014 were as follows:


	2013							2014
	Issued shares		Treasury shares			Number of outstanding shares		Issued shares		Treasury shares			Number of outstanding shares
	(share)
Beginning		87,186,835		(9,942,391	)		77,244,444		87,186,835		(7,403,211	)		79,783,624
Disposal of treasury shares		—		2,539,180			2,539,180		—		209,404			209,404
Ending		87,186,835		(7,403,211	)		79,783,624		87,186,835		(7,193,807	)		79,993,028


	2013			2014
	(in millions of Won)
Share premium	￦	463,825			463,825
Gain on disposal of treasury shares		769,215			783,791
Other capital deficit		(154,774	)		(163,898	)

	￦	1,078,266			1,083,718

25.

Hybrid Bonds

(a) Hybrid bonds classified as equity as of December 31, 2013 and 2014 are as follows:


	Date of issue		Date of maturity		Interest rate (%)		2013			2014
	(in millions of Won)
Hybrid bond 1-1 ^(*1)		2013-06-13		2043-06-13		4.30	￦	800,000			800,000
Hybrid bond 1-2 ^(*1)		2013-06-13		2043-06-13		4.60		200,000			200,000
Issuance cost								(3,081	)		(3,081	)

							￦	996,919			996,919

F-83

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(*1)	Details of hybrid bonds as of December 31, 2014 are as follows:


	Hybrid bond 1-1	Hybrid bond 1-2
	(in millions of Won)
Issue price	800,000	200,000

Maturity date	30 years (The Company has a right to extend the maturity date) Issue date ~ 2018-06-12 : 4.3% reset every 5 years as follows;	30 years (The Company has a right to extend the maturity date) Issue date ~ 2023-06-12 : 4.6% reset every 10 years as follows;
Interest rate	· After 5 years : return on government bond (5 years) + 1.3% . After 10 years : additionally +0.25% according to Step-up clauses · After 25 years : additionally +0.75%	· After 10 years : return on government bond (10 years) + 1.4% · After 10 years : additionally +0.25% according to Step-up clauses · After 30 years : additionally +0.75%
Interest payments	Quarterly	Quarterly
condition	(Optional deferral of interest payment is available to the Company) The Company can call the hybrid bond at year 5 and interest payment date afterwards	(Optional deferral of interest payment is available to the Company) The Company can call the hybrid bond at year 10 and interest payment date afterwards
Others

The Company holds the right to extend the maturity dates of the hybrid bonds and to defer interest payments for the hybrid bonds. If interest payments for the hybrid bonds are deferred, the Company cannot declare or pay dividends attributable to common stock. Since the Company has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the hybrid bonds have been classified as equity instruments. The hybrid bond holders’ preference in the event of liquidation is higher than the common stock holders, but lower than other creditors. The interest accumulated but not paid on the hybrid bonds as of December 31, 2014 amounts to ￦2,301 million.

(b) POSCO ENERGY Co., Ltd., a subsidiary of the Company, issued hybrid bonds, which are classified as non-controlling interests in the consolidated financial statements. Hybrid bonds as of December 31, 2013 and 2014 are as follows:


	Date of issue		Date of maturity		Interest rate (%)		2013			2014
	(in millions of Won)
Hybrid bond 1-1 ^(*1)		2013-08-29		2043-08-29		4.66	￦	165,000			165,000
Hybrid bond 1-2 ^(*1)		2013-08-29		2043-08-29		4.72		165,000			165,000
Hybrid bond 1-3 ^(*1)		2013-08-29		2043-08-29		4.72		30,000			30,000
Hybrid bond 1-4 ^(*1)		2013-08-29		2043-08-29		5.21		140,000			140,000
Issuance cost								(1,532	)		(1,532	)

							￦	498,468			498,468

F-84

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(*1)	Details of hybrid bonds of POSCO ENERGY Co., Ltd .as of December 31, 2014 are as follows:


	Hybrid bond 1-1	Hybrid bond 1-2 and 1-3	Hybrid bond 1-4
	(in millions of Won)
Issue price	165,000	195,000	140,000
Maturity date	30 years (The Company has a right to extend the maturity date) Issue date ~ 2018-08-29 : 4.66% reset every 5 years as follows; · After 5 years : return on	30 years (The Company has a right to extend the maturity date) Issue date ~ 2018-08-29 : 4.72% reset every 5 years as follows; · After 5 years : return on	30 years (The Company has a right to extend the maturity date) Issue date ~ 2018-08-29 : 5.21% reset every 5 years as follows; · After 5 years : return on
Interest rate	government bond (5 years) + 1.39% · After 10 years : additionally +0.25% according to Step-up clauses · After 30 years : additionally +0.75% Quarterly	government bond (5 years) + 1.45% · After 10 years : additionally +0.25% according to Step-up clauses · After 30 years : additionally +0.75% Quarterly	government bond (5 years) + 1.55% · After 10 years : additionally +0.25% according to Step-up clauses · After 30 years : additionally +0.75% Quarterly
Interest payments condition	(Optional deferral of interest payment is available to the Company)	(Optional deferral of interest payment is available to the Company)	(Optional deferral of interest payment is available to the Company)

Others	The Company can call the hybrid bond at year 5 and interest payment date afterwards	The Company can call the hybrid bond at year 5 and interest payment date afterwards	The Company can call the hybrid bond at year 5 and interest payment date afterwards

POSCO ENERGY CO., LTD., a subsidiary, holds the right to extend the maturity dates of the hybrid bonds and to defer interest payments for the hybrid bonds. If interest payments for the hybrid bonds are deferred, POSCO ENERGY CO., LTD. cannot declare or pay dividends attributable to common stock. Since the subsidiary has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the hybrid bonds have been classified as equity (non-controlling interests) in the Company’s consolidated financial statements. The hybrid bond holders’ preference in the event of liquidation is higher than the common stock holders, but lower than other creditors. The interest accumulated but not paid on the hybrid bonds as of December 31, 2014 amounts to ￦2,063 million.

26.

Reserves

(a) Reserves as of December 31, 2013 and 2014 are as follows:


	2013			2014
	(in millions of Won)
Accumulated comprehensive loss of investments in associates and joint ventures	￦	(295,946	)		(344,942	)
Changes in the unrealized fair value of available-for-sale investments		480,409			144,783
Currency translation differences		(189,085	)		(187,740	)
Others		(18,454	)		(20,874	)

	￦	(23,076	)		(408,773	)

F-85

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) Changes in fair value of available-for-sale investments for the years ended December 31, 2013 and 2014 were as follows:


	2013			2014
	(in millions of Won)
Beginning balance	￦	67,956			480,409
Changes in the unrealized fair value of available-for-sale investments		312,196			(411,671	)
Reclassification to profit of loss upon disposal		(73,848	)		(176,124	)
Impairment of avaible-for-sale investments		170,892			267,920
Others		3,213			(15,751	)

Ending balance	￦	480,409			144,783

27.

Treasury Shares

Based on the Board of Directors’ resolution, the Company holds treasury shares for business purposes including price stabilization. The changes in treasury shares for the years ended December 31, 2013 and 2014 were as follows:


	2013						2014
	Number of shares			Amount			Number of shares			Amount
	(shares, in millions of Won)
Beginning		9,942,391		￦	2,391,406			7,403,211		￦	1,579,124
Disposal of treasury shares		(2,539,180	)		(812,282	)		(209,404	)		(44,667	)

Ending		7,403,211		￦	1,579,124			7,193,807		￦	1,534,457

28.

Revenue

Details of revenue for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012		2013		2014
	(in millions of Won)
Sales of goods	￦	55,123,774		50,921,090		53,636,957
Service sales		3,488,562		3,614,227		2,962,404
Construction sales		4,401,918		6,787,100		7,797,953
Rental income		32,056		24,735		18,876
Others		298,948		418,591		342,435

	￦	63,345,258		61,765,743		64,758,625

29.

Construction Contracts

(a) Construction contracts in progress as of December 31, 2013 and 2014 were as follows:


	2013			2014
	(in millions of Won)
Aggregate amount of costs incurred	￦	9,738,267			10,972,880
Add: Recognized profits		844,097			617,771
Less: Recognized losses		(467,023	)		(449,227	)
Cumulative construction revenue		10,115,341			11,141,424
Less: Progress billing		(9,325,078	)		(10,665,962	)
Foreign currency gains and losses		(1,379	)		(5,721	)
Others		(39,795	)		(55,312	)

	￦	749,089			414,429

F-86

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) Unbilled amount due from customers and due to customers for contract work as of December 31, 2013 and 2014 are as follows:


	2013			2014
	(in millions of Won)
Unbilled due from customers for contract work	￦	1,555,907			1,406,678
Due to customers for contract work		(806,818	)		(992,249	)

	￦	749,089			414,429

(c) When the outcome of a construction contract can be estimated reliably, contract revenue is recognized in profit or loss in proportion to the stage of completion of the contract. The Company estimates the stage of completion of the contract based on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.

The estimated total contract costs are based on the nature and characteristics of an individual contract, historical costs of similar projects, and current circumstances. Only those contract costs that reflect work performed are included in costs incurred to date.

The following are the key assumptions for the estimated contract cost.


		Key assumptions for the estimation
Material		Estimations based on recent purchasing contracts, market price and quoted price
Labor cost		Estimations based on standard monthly and daily labor cost
Outsourcing cost		Estimations based on the historical costs of similar projects, market price and quoted price

Management continually reviews all estimates involved in such construction contracts and adjusts them as necessary.

F-87

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

30.

Selling and Administrative Expenses

(a) Administrative expenses

Administrative expenses for years ended December 31, 2012, 2013 and 2014 were as follows:


	2012		2013		2014
	(in millions of Won)
Wages and salaries	￦	694,682		754,819		781,433
Expenses related to post-employment benefits		61,261		67,482		66,744
Other employee benefits		170,734		165,751		174,131
Travel		52,817		53,003		50,257
Depreciation and amortization		218,747		228,496		273,220
Communication		15,088		14,601		9,579
Electricity expenses		11,305		13,389		11,746
Taxes and public dues		59,664		55,177		55,647
Rental		93,268		110,191		137,366
Repairs		11,769		5,708		13,924
Entertainment		18,239		17,295		17,633
Advertising		55,777		105,663		104,485
Research & development		192,321		192,805		175,195
Service fees		264,439		240,034		215,974
Supplies		10,166		15,031		10,856
Vehicles maintenance		22,442		12,109		12,685
Industry association fee		11,487		11,924		11,856
Training		17,772		12,056		9,979
Conference		17,745		17,004		17,620
Contribution to provisions		13,148		19,075		16,056
Bad debt allowance		79,258		90,119		108,933
Others		37,334		30,073		34,437

	￦	2,129,463		2,231,805		2,309,756

(b) Selling expenses

Selling expenses for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012		2013		2014
	(in millions of Won)
Freight and custody expenses	￦	1,472,817		1,432,935		1,551,705
Operating expenses for distribution center		9,327		9,838		10,782
Sales commissions		74,308		73,922		66,359
Sales advertising		4,575		3,228		4,615
Sales promotion		17,525		27,129		25,777
Sample		7,489		4,751		3,477
Sales insurance premium		32,065		27,031		39,538
Contract cost		52,176		37,323		49,891
Others		8,406		15,963		7,974

	￦	1,678,688		1,632,120		1,760,118

F-88

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

31.

Research and Development Expenditures Recognized as Expenses

Research and development expenditures recognized as expenses for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012		2013		2014
	(in millions of Won)
Selling and administrative expenses	￦	192,321		192,805		175,195
Cost of sales		385,128		369,842		353,149

	￦	577,449		562,647		528,344

32.

Other Operating Income and Expenses

Details of other operating income and expenses for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012			2013			2014
	(in millions of Won)
Other operating income
Gains on disposals of assets held for sale	￦	193,333			101,611			48,232
Gains on disposals of investments in associates		39,441			7,668			41,258
Gains on disposals of property, plant and equipment		42,290			14,177			15,039
Reversal of impairment loss on intangible assets		530			122			2,793
Reversal of other provision expenses		16,037			2,924			19,769
Retal revenues		1,898			1,588			1,743
Outsourcing income		29,136			25,428			14,200
Gain on disposals of wastes		38,597			16,541			11,357
Gain from claim compensation		31,613			14,525			29,171
Penalty income from early termination of contracts		15,054			16,477			34,606
Grant income		3,198			2,287			1,441
Others		36,993			25,725			49,797

	￦	448,120			229,073			269,406

Other operating expenses
Other bad debt expenses	￦	(44,115	)		(111,065	)		(96,373	)
Losses on disposals of assets held for sale		(9,510	)		(26,498	)		(14	)
Impairment losses on assets held for sale		(258,451	)		(1,814	)		(17,205	)
Losses on disposals of property, plant and equipment		(65,486	)		(121,133	)		(50,006	)
Impairment losses on property, plant and equipment		(12,977	)		(9,742	)		(64,833	)
Impairment losses on intangible assets		(21,776	)		(125,316	)		(55,220	)
Idle tangible assets expenses		(31,297	)		(17,624	)		(12,214	)
Impariment losses on other non-current assets		(36,453	)		(9,000	)		(38,137	)
Other provision expenses		—			(65,896	)		(126,601	)
Donations		(73,963	)		(60,940	)		(69,544	)
Loss on disposals of investment in associates		(15,119	)		(19,404	)		(2,556	)
Loss on disposals of wastes		(45,480	)		(15,231	)		(16,386	)
Penalty and additional tax payments^(*1)		(149,437	)		(19,340	)		(352,173	)
Others		(45,401	)		(47,803	)		(78,412	)

	￦	(809,465	)		(650,806	)		(979,674	)

(*1)	As a result of Korea National Tax Service’s periodic audit of tax payments and refunds of the Company, the Company recognized additional tax payments amounting to ￦271,646 million, primarily related to VAT, during the year ended December 31, 2014.

F-89

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

33.

Finance Income and Costs

Details of finance income and costs for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012			2013			2014
	(in millions of Won)
Finance income
Interest income	￦	278,807			260,398			228,254
Dividend income		124,475			59,181			47,825
Gain on foreign currency transactions		935,457			997,591			1,022,253
Gain on foreign currency translations		936,740			511,143			453,471
Gain on derivatives transactions		407,791			370,343			327,738
Gain on valuations of derivatives		94,492			72,297			73,279
Gain on disposals of available-for-sale financial assets		112,095			105,563			236,484
Others		7,206			4,322			7,458

	￦	2,897,063			2,380,838			2,396,762

Finance costs
Interest expenses	￦	(871,457	)		(657,681	)		(795,585	)
Loss on foreign currency transactions		(839,241	)		(927,453	)		(1,033,723	)
Loss on foreign currency translations		(243,091	)		(344,900	)		(428,891	)
Loss on derivatives transactions		(309,067	)		(286,574	)		(353,435	)
Loss on valuation of derivatives		(159,604	)		(291,465	)		(101,330	)
Impairment loss on available-for-sale financial assets		(224,171	)		(280,237	)		(369,723	)
Loss on disposals of available-for-sale financial assets		(36,286	)		(3,721	)		(54,710	)
Loss on financial guarantee		(38,442	)		(5,880	)		(10,077	)
Others		(76,279	)		(31,342	)		(74,513	)

		￦ (2,797,638	)		(2,829,253	)		(3,221,987	)

34.

Expenses by Nature

Expenses that are recorded by nature as cost of sales, selling, general and administrative expenses and other operating expenses in the statements of comprehensive income for the years ended December 31, 2012, 2013 and 2014 were as follows (excluding finance costs and income tax expense):


	2012		2013		2014
	(in millions of Won)
Changes in inventories	￦	13,939,002		12,072,361		9,090,004
Cost of merchandises sold		25,997,220		25,909,164		30,899,849
Employee benefits expenses ^(*2)		2,889,829		3,174,316		3,197,902
Outsourced processing cost		8,896,642		9,462,946		9,294,977
Electricity expenses		837,507		1,109,765		1,370,390
Depreciation expenses ^(*1)		2,405,769		2,505,536		2,894,609
Amortization expenses		157,991		180,014		343,940
Freight and custody expenses		1,472,817		1,432,935		1,551,705
Sales commisions		74,308		73,922		66,359
Loss on disposals of property, plant and equipment		65,486		121,133		50,006
Donations		73,963		60,940		69,544
Other expenses		3,727,705		3,325,515		3,685,748

	￦	60,538,239		59,428,547		62,515,033

(*1)	Includes depreciation expense of investment property.

F-90

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(*2)	The details of employee benefits expenses for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012		2013		2014
	(in millions of Won)
Wages and salaries	￦	2,647,177		2,907,442		2,936,602
Expenses related to post-employment benefits		242,652		266,874		261,300

	￦	2,889,829		3,174,316		3,197,902

35.

Income Taxes

(a) Income tax expense for the years ended December 31, 2012, 2013 and 2014 was as follows:


	2012		2013			2014
	(in millions of Won)
Current income taxes	￦	795,601		615,771			790,055
Deferred income tax due to temporary differences		145,461		106,066			(79,719	)
Items recorded directly in equity		32,954		(132,808	)		113,505

Income tax expense	￦	974,016		589,029			823,841

(b) The following table reconciles the calculated income tax expense based on POSCO’s statutory rates (24.2%) to the actual amount of taxes recorded by the Company for the years ended December 31, 2012, 2013 and 2014.


	2012			2013			2014
	(in millions of Won)
Profit before income tax expense	￦	3,331,862			1,938,045			1,387,880
Income tax expense computed at statutory rate		806,311			469,007			335,405
Adjustments:
Tax credits		(188,713	)		(169,166	)		(49,615	)
Adjustments on prior year tax from tax audit		—			—			56,257
Under(over) provision from prior years		1,776			(1,178	)		(463	)
Tax effects due to amendments to local income tax law		—			—			39,890
Investment in subsidiaries, associates and joint ventures		281,437			251,014			371,876
Tax effects due to permanent differences		48,220			7,703			69,998
Others		24,985			31,649			493

		167,705			120,022			488,436

Income tax expense	￦	974,016			589,029			823,841

Effective tax rate (%)		29.23	%		30.39	%		59.36	%

(c) The income taxes credited (charged) directly to equity during the years ended December 31, 2013 and 2014 were as follows:


	2013			2014
	(in millions of Won)
Net changes in the unrealized fair value of available-for-sale securities	￦	(139,679	)		105,639
Gain on sale of treasury stock		(1,707	)		(4,654	)
Others		8,578			12,520

	￦	(132,808	)		113,505

F-91

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(d) The movements in deferred tax assets (liabilities) for the years ended December 31, 2013 and 2014 were as follows:


	2013									2014
	Beginning			Inc. (Dec.)			Ending			Beginning			Inc. (Dec.)			Ending
	(in millions of Won)
Deferred income tax due to temporary differences
Reserve for special repairs	￦	(29,013	)		551			(28,462	)		(28,462	)		16,049			(12,413	)
Allowance for doubtful accounts		112,428			37,175			149,603			149,603			46,132			195,735
Reserve for technology developments		(375,930	)		(4,735	)		(380,665	)		(380,665	)		121,632			(259,033	)
PPE — Depreciation		(46,574	)		13,232			(33,342	)		(33,342	)		26,667			(6,675	)
Share of profit or loss of equity-accounted investees		(96,374	)		7,069			(89,305	)		(89,305	)		(7,388	)		(96,693	)
Reserve for inventory valuation		(4,082	)		2,560			(1,522	)		(1,522	)		3,513			1,991
PPE — Revaluation		(799,932	)		(211,661	)		(1,011,593	)		(1,011,593	)		(211,006	)		(1,222,599	)
Prepaid expenses		31,240			(2,855	)		28,385			28,385			(10,924	)		17,461
PPE — Impairment loss		28,755			(3,237	)		25,518			25,518			(3,556	)		21,962
Loss on foreign currency translation		(63,345	)		(125,857	)		(189,202	)		(189,202	)		120,090			(69,112	)
Defined benefit obligations		70,624			29,732			100,356			100,356			20,328			120,684
Plan assets		(46,421	)		(12,245	)		(58,666	)		(58,666	)		5,631			(53,035	)
Provision for construction losses		2,227			2,046			4,273			4,273			680			4,953
Provision for construction warranty		14,841			1,833			16,674			16,674			3,697			20,371
Accrued income		(3,197	)		282			(2,915	)		(2,915	)		(776	)		(3,691	)
Impairment loss on AFS		66,722			66,367			133,089			133,089			38,912			172,001
Difference in acquisition costs of treasury stocks		20,378			43,835			64,213			64,213			(2,074	)		62,139
Others		233,704			59,813			295,486			295,486			(148,968	)		144,161

		(883,949	)		(96,095	)		(978,075	)		(978,075	)		18,639			(961,793	)

Deferred income taxes recognized directly to equity
Loss (gain) on valuation of available-for-sale investments		24,006			(139,679	)		(115,673	)		(115,673	)		105,639			(10,034	)
Others		46,138			8,578			54,716			54,716			12,520			67,236

		70,144			(131,101	)		(60,957	)		(60,957	)		118,159			57,202

Deferred tax from tax credit
Tax credit carryforward and others		339,108			98,534			437,642			437,642			(137,276	)		300,366
Investments in subsidiaries and associates
Investments in subsidiaries and associates		19,095			23,666			42,761			42,761			(64,388	)		(21,627	)

	￦	(455,602	)		(104,996	)		(558,629	)		(558,629	)		(64,866	)		(625,852	)

F-92

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(e) Deferred tax assets and liabilities as of December 31, 2013 and 2014 are as follows:


	2013								2014
	Assets		Liabilities			Net			Assets		Liabilities			Net
	(in millions of Won)
Deferred income tax due to temporary differences
Reserve for special repairs	￦	—		(28,462	)		(28,462	)		—		(12,413	)		(12,413	)
Allowance for doubtful accounts		149,695		(92	)		149,603			197,159		(1,424	)		195,735
Reserve for technology developments		—		(380,665	)		(380,665	)		—		(259,033	)		(259,033	)
PPE — Depreciation		23,265		(56,607	)		(33,342	)		39,412		(46,087	)		(6,675	)
Share of profit or loss of equity-accounted investees		—		(89,305	)		(89,305	)		—		(96,693	)		(96,693	)
Reserve for inventory valuation		4,392		(5,914	)		(1,522	)		7,294		(5,303	)		1,991
PPE — Revaluation		—		(1,011,593	)		(1,011,593	)		—		(1,222,599	)		(1,222,599	)
Prepaid expenses		28,385		—			28,385			17,461		—			17,461
PPE — Impairment loss		25,518		—			25,518			23,489		(1,527	)		21,962
Loss on foreign currency translation		243,772		(432,974	)		(189,202	)		83,521		(152,633	)		(69,112	)
Defined benefit obligations		110,891		(10,535	)		100,356			125,758		(5,074	)		120,684
Plan assets		22		(58,688	)		(58,666	)		—		(53,035	)		(53,035	)
Provision for construction losses		4,273		—			4,273			4,953		—			4,953
Provision for construction warranty		16,674		—			16,674			20,371		—			20,371
Accrued income		5		(2,920	)		(2,915	)		—		(3,691	)		(3,691	)
Impairment loss on AFS		133,089		—			133,089			172,001		—			172,001
Difference in acquisition costs of treasury stocks		64,213		—			64,213			62,139		—			62,139
Others		322,191		(26,705	)		295,486			283,655		(139,494	)		144,161

		1,126,385		(2,104,460	)		(978,075	)		1,037,213		(1,999,006	)		(961,793	)

Deferred income taxes recognized directly to equity
Loss (gain) on valuation of available-for-sale investments		128,938		(244,611	)		(115,673	)		238,489		(248,523	)		(10,034	)
Others		70,441		(15,725	)		54,716			91,636		(24,400	)		67,236

		199,379		(260,336	)		(60,957	)		330,125		(272,923	)		57,202

Deferred tax from tax credit
Tax credit carryforward and others		481,256		(43,614	)		437,642			339,959		(39,593	)		300,366
Investments in subsidiaries and associates
Investments in subsidiaries and associates		530,823		(488,062	)		42,761			601,265		(622,892	)		(21,627	)

	￦	2,337,843		(2,896,472	)		(558,629	)		2,308,562		(2,934,414	)		(625,852	)

(f) As of December 31, 2014, the Company did not recognize income tax effects associated with taxable temporary differences of ￦3,104,205 million (deferred tax liabilities of ￦751,218 million) mainly relating to increase in retained earnings of subsidiaries since it is probable that the temporary difference will not reverse in the foreseeable future.

F-93

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

36.

Earnings per Share

(a) Basic and diluted earnings per share for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012		2013			2014
	(Won, except per share information)
Profit attribute to controlling interest	￦	2,437,227,818,749		1,370,877,921,262			632,706,233,938
Interests of hybrid bonds		—		(18,313,914,551	)		(33,048,799,997	)
Weighted-average number of common shares outstanding ^(*1)		77,244,444		78,009,654			79,801,539

Basic and diluted earnings per share	￦	31,552		17,338			7,514

(*1)	The weighted-average number of common shares used to calculate basic and diluted earnings per share are as follows:


	2012			2013			2014
	(shares)
Total number of common shares issued		87,186,835			87,186,835			87,186,835
Weighted-average number of treasury shares		(9,942,391	)		(9,177,181	)		(7,385,296	)

Weighted-average number of common shares outstanding		77,244,444			78,009,654			79,801,539

As of December 31, 2012, 2013 and 2014, the Company has no potential dilutive common shares. Accordingly, diluted earnings per share is identical to basic earnings per share.

F-94

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

37.

Related Party Transactions

(a) Significant transactions with related parties for the years ended December 31, 2012, 2013 and 2014 were as follows:

1) For the year ended December 31, 2012


	Sales and others						Purchase and others
	Sales		Others		Total		Purchase of material		Purchase of fixed assets		Outsourced processing cost		Others		Total
	(in millions of Won)
Subsidiaries
POSCO ENGINEERING & CONSTRUCTION., LTD.	￦	27,401		709		28,110		46		1,408,787		7		42,246		1,451,086
POSCO Processing & Service		897,017		34		897,051		1,392,988		—		—		2,903		1,395,891
POSCO COATED & COLOR STEEL Co., Ltd.		489,507		38		489,545		—		—		5,574		922		6,496
POSCO PLANTEC Co., Ltd.		3,253		63		3,316		3,331		233,788		23,372		17,455		277,946
POSCO ICT		1,330		217		1,547		1,151		285,093		31,050		151,621		468,915
eNtoB Corporation		—		11		11		211,449		3,490		225		20,978		236,142
POSCO CHEMTECH		492,720		19,197		511,917		507,215		10,153		279,507		1,275		798,150
POSCO M-TECH		27,770		136		27,906		130,363		9,018		176,263		2,904		318,548
POSCO ENERGY CO., LTD.		87,387		820		88,207		—		482		—		1,772		2,254
POSCO TMC Co., Ltd.		230,215		20		230,235		25		—		995		12		1,032
POSCO AST		278,446		17		278,463		8,114		—		50,320		213		58,647
POSHIMETAL Co., Ltd.		23,882		130		24,012		149,809		180		—		5		149,994
Daewoo International Corporation		4,271,317		133		4,271,450		10,562		—		389		4,780		15,731
POSCO NST Co., Ltd.		212,534		2		212,536		1,229		—		2,147		242		3,618
POSCO America Corporation		726,450		—		726,450		—		—		—		733		733
POSCO Canada Ltd.		—		—		—		205,129		—		—		—		205,129
POSCO Asia Co., Ltd.		1,928,881		627		1,929,508		105,392		592		—		1,329		107,313
POSCO (Thailand) Company Limited		119,031		247		119,278		—		—		—		182		182
Qingdao Pohang Stainless Steel Co., Ltd.		62,347		2		62,349		—		—		—		—		—
POSCO (Suzhou) Automotive Processing Center Co., Ltd.		128,974		—		128,974		—		—		—		—		—
POSCO JAPAN Co., Ltd.		1,439,580		—		1,439,580		20,472		2,857		—		5,381		28,710
POSCO-India Pune Processing Center. Pvt. Ltd.		164,450		33		164,483		—		—		—		15		15
POSCO MEXICO S.A. DE C.V.		337,921		724		338,645		—		—		—		492		492
POSCO Maharashtra Steel Private		154,055		1,587		155,642		—		—		—		—		—
DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.		—		—		—		73,471		—		—		—		73,471
Others		569,076		2,787		571,863		81,411		56,570		17,673		132,115		287,769

		12,673,544		27,534		12,701,078		2,902,157		2,011,010		587,522		387,575		5,888,264

Associates and joint ventures
POSMATE		951		21,093		22,044		1,058		21		14,947		30,032		46,058
SNNC		2,162		349		2,511		379,050		—		—		—		379,050
POSCO PLANTEC Co., Ltd. (formerly, Sungjin Geotec Co., Ltd.)		27,697		—		27,697		—		—		—		—		—
Dongbang Special Steel Co., Ltd.		89,094		—		89,094		—		—		—		—		—
POSCHROME (PROPRIETARY) LIMITED		—		58		58		68,079		—		—		—		68,079
PT. POSMI Steel Indonesia		9,696		—		9,696		—		—		—		—		—
POSK(Pinghu) Steel Processing Center Co., Ltd.		3,889		—		3,889		—		—		—		—		—
POSCO-SAMSUNG-Slovakia Processing Center		16,309		—		16,309		—		—		—		—		—
POSCO China Suzhou Processing Center Co., Ltd. (formerly, POSCO-SAMSUNG Suzhou Steel Processing Center Co., Ltd.)		26,280		—		26,280		—		—		—		—		—
Others		7,774		117		7,891		5,303		—		6,579		2,530		14,412

		183,852		21,617		205,469		453,490		21		21,526		32,562		507,599

	￦	12,857,396		49,151		12,906,547		3,355,647		2,011,031		609,048		420,137		6,395,863

F-95

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) For the year ended December 31, 2013


	Sales and others						Purchase and others
	Sales		Others		Total		Purchase of material		Purchase of fixed assets		Outsourced processing cost		Others		Total
	(in millions of Won)
Subsidiaries
POSCO ENGINEERING & CONSTRUCTION., LTD.	￦	16,439		3,421		19,860		3,042		2,235,798		5,855		9,242		2,253,937
POSCO Processing & Service		987,424		8		987,432		1,215,510		—		—		805		1,216,315
POSCO COATED & COLOR STEEL Co., Ltd.		472,353		25		472,378		—		—		10,648		98		10,746
POSCO PLANTEC Co., Ltd. ^(*1)		2,324		19		2,343		1,499		67,081		13,733		2,492		84,805
POSCO ICT		1,210		195		1,405		679		279,660		31,231		157,126		468,696
POSMATE		1,419		85		1,504		805		1,041		15,732		32,894		50,472
eNtoB Corporation		—		10		10		234,352		13,241		149		20,079		267,821
POSCO CHEMTECH		512,139		25,868		538,007		491,562		21,832		287,584		1,223		802,201
POSCO M-TECH		11,122		94		11,216		158,709		2,336		220,986		141		382,172
POSCO ENERGY CO., LTD.		104,209		915		105,124		—		5,178		—		7		5,185
POSCO TMC Co., Ltd.		188,915		15		188,930		—		—		1,051		1,298		2,349
POSCO AST		500,193		10		500,203		6,985		—		56,520		2,029		65,534
POSHIMETAL Co., Ltd.		18,922		137		19,059		166,042		—		—		5		166,047
Daewoo International Corporation		3,522,678		65		3,522,743		16,297		—		—		2,843		19,140
POSCO America Corporation		596,681		1		596,682		—		—		—		339		339
POSCO Canada Ltd.		—		—		—		144,329		—		—		—		144,329
POSCO Asia Co., Ltd.		2,068,965		221		2,069,186		64,434		182		—		1,673		66,289
POSCO (Thailand) Company Limited		56,210		56		56,266		—		—		—		85		85
Qingdao Pohang Stainless Steel Co., Ltd.		58,502		—		58,502		—		—		—		14		14
POSCO (Suzhou) Automotive Processing Center Co., Ltd.		129,345		1		129,346		—		—		—		—		—
POSCO JAPAN Co., Ltd.		1,270,325		—		1,270,325		19,978		2		—		2,972		22,952
POSCO-India Pune Processing Center. Pvt. Ltd.		119,503		7		119,510		—		—		—		—		—
POSCO MEXICO S.A. DE C.V.		256,014		693		256,707		—		—		—		621		621
POSCO Maharashtra Steel Private		176,425		3,157		179,582		—		—		—		236		236
DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.		—		—		—		108,179		—		—		—		108,179
Others		558,923		7,569		566,492		92,527		38,843		18,782		77,101		227,253

		11,630,240		42,572		11,672,812		2,724,929		2,665,194		662,271		313,323		6,365,717

Associates and joint ventures
SNNC		1,532		458		1,990		402,639		—		—		—		402,639
POSCO PLANTEC Co., Ltd. (formerly, Sungjin Geotec Co., Ltd.) ^(*1)		15,028		48		15,076		1,735		65,802		9,781		6,883		84,201
POSCHROME (PROPRIETARY) LIMITED		—		—		—		66,762		—		—		—		66,762
PT. POSMI Steel Indonesia		6,538		—		6,538		—		—		—		—		—
POSK (Pinghu) Steel Processing Center Co., Ltd.		3,786		—		3,786		—		—		—		—		—
POSCO-SAMSUNG-Slovakia Processing Center Co., Ltd.		19,906		—		19,906		—		—		—		—		—
POSCO China Suzhou Processing Center Co., Ltd. (formerly, POSCO-SAMSUNG Suzhou Steel Processing Center Co., Ltd.)		6,429		—		6,429		—		—		—		—		—
Others		546		165		711		3,937		—		—		176		4,113

		53,765		671		54,436		475,073		65,802		9,781		7,059		557,715

	￦	11,684,005		43,243		11,727,248		3,200,002		2,730,996		672,052		320,382		6,923,432

(*1)	Sungjin Geotec Co., Ltd. merged with POSCO Plant Engineering Co., Ltd. and changed its name to POSCO PLANTEC Co., Ltd. in 2013.

F-96

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

3) For the year ended December 31, 2014


	*Sales and others^(1)**						*Purchase and others^(2)**
	Sales		Others		Total		Purchase of material		Purchase of fixed assets		Outsourced processing cost		Others		Total
	(in millions of Won)
*Subsidiaries^(3)**
POSCO ENGINEERING & CONSTRUCTION., LTD.	￦	22,659		16,789		39,448		544,202		247,286		3,689		30,852		826,029
POSCO Processing & Service		1,075,567		8,649		1,084,216		785,943		—		—		1,681		787,624
POSCO COATED & COLOR STEEL Co., Ltd.		444,513		12		444,525		—		—		12,313		195		12,508
POSCO ICT^(*5)		929		2,593		3,522		356		209,893		26,231		161,173		397,653
POSMATE		520		2,178		2,698		411		28		16,475		34,188		51,102
eNtoB Corporation		—		3		3		297,119		10,433		137		21,073		328,762
POSCO CHEMTECH		532,973		26,537		559,510		513,759		5,449		301,149		923		821,280
POSCO M-TECH		180		24		204		117,940		2,385		200,622		6,887		327,834
POSCO ENERGY CO., LTD.		177,517		1,230		178,747		—		2,263		—		20		2,283
POSCO TMC Co., Ltd.		240,318		9		240,327		—		—		1,056		1,611		2,667
POSCO AST		503,452		5		503,457		10,396		—		57,355		2,671		70,422
POSHIMETAL Co., Ltd.		11,261		3,660		14,921		166,442		—		—		—		166,442
Daewoo International Corporation		3,558,652		20,652		3,579,304		90,361		—		—		3,857		94,218
POSCO Specialty Steel Co., Ltd.		5,313		201,927		207,240		40,124		—		1,939		266		42,329
POSCO America Corporation		747,933		2		747,935		—		—		—		1,794		1,794
POSCO Canada Ltd.		—		—		—		141,767		—		—		—		141,767
POSCO Asia Co., Ltd.		2,167,148		89		2,167,237		169,945		—		10,006		1,969		181,920
POSCO (Thailand) Company Limited		55,221		46		55,267		—		—		—		8		8
Qingdao Pohang Stainless Steel Co., Ltd.		79,783		—		79,783		—		—		—		19		19
POSCO (Suzhou) Automotive Processing Center Co., Ltd.		136,836		—		136,836		—		—		—		5		5
POSCO JAPAN Co., Ltd.		1,329,947		4		1,329,951		15,165		2,269		3		2,279		19,716
POSCO-India Pune Processing Center. Pvt. Ltd.		107,587		74		107,661		—		—		—		—		—
POSCO MEXICO S.A. DE C.V.		287,468		929		288,397		—		—		—		—		—
POSCO Maharashtra Steel Private		444,407		6,053		450,460		—		—		—		—		—
DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.		—		—		—		57,742		—		—		11,513		69,255
Others		680,066		1,827		681,893		158,484		63,932		15,585		51,674		289,675

		12,610,250		293,292		12,903,542		3,110,156		543,938		646,560		334,658		4,635,312

*Associates and joint ventures^(3)**
POSCO Plant Engineering Co., Ltd.^(*4)		15,310		64		15,374		3,195		119,369		15,777		22,751		161,092
SNNC		3,077		5,716		8,793		339,991		—		—		5		339,996
POSCHROME (PROPRIETARY) LIMITED		—		—		—		59,241		—		—		—		59,241
PT. POSMI Steel Indonesia		6,061		30		6,091		—		—		—		—		—
POSK (Pinghu) Steel Processing Center Co., Ltd.		2,855		—		2,855		—		—		—		—		—
POSCO-SAMSUNG-Slovakia Processing Center		24,059		—		24,059		—		—		—		—		—
POSCO China Suzhou Processing Center Co., Ltd. (formerly, POSCO-SAMSUNG Suzhou Processing Center Co., Ltd.)		1,132		—		1,132		—		—		—		—		—
Others		737		41,873		42,610		3,668		—		—		—		3,668

		53,231		47,683		100,914		406,095		119,369		15,777		22,756		563,997

	￦	12,663,481		340,975		13,004,456		3,516,251		663,307		662,337		357,414		5,199,309

(*1)	Sales and others mainly consist of sales of steel products to subsidiaries, associates and joint ventures. These are priced on an arm’s length basis.

(*2)	Purchases and others mainly consist of subsidiaries’ purchases of construction services and purchases of raw materials to manufacture steel products. These are priced on an arm’s length basis.

(*3)	As of December 31, 2014, the Company provided guarantees to related parties (Note 38).

(*4)	It is reclassified from associate to subsidiary due to the additional acquisitions of its shares by the Company.

(*5)	Others mainly consist of service fees related to maintenance and repair of ERP System.

F-97

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) The related account balances of significant transactions with related companies as of December 31, 2013 and 2014 are as follows:

1) December 31, 2013


	Receivables						Payables
	Trade accounts and notes receivable		Others		Total		Trade accounts and notes payable		Accounts payable		Others		Total
	(in millions of Won)
Subsidiaries
POSCO ENGINEERING & CONSTRUCTION., LTD.	￦	40		110,955		110,995		—		105,603		—		105,603
POSCO Processing & Service		103,400		73		103,473		17,914		683		—		18,597
POSCO COATED & COLOR STEEL Co., Ltd.		69,260		65		69,325		—		59		1,434		1,493
POSCO ICT		75		123		198		—		51,247		—		51,247
POSMATE		489		1,533		2,022		141		3,274		1,058		4,473
eNtoB Corporation		—		—		—		8,057		10,311		—		18,368
POSCO CHEMTECH		46,943		4,313		51,256		35,829		6,983		8,663		51,475
POSCO M-TECH		18		28		46		12,020		21,326		10,799		44,145
POSCO ENERGY CO., LTD.		14,733		2,894		17,627		—		421		—		421
POSCO TMC Co., Ltd.		20,510		26		20,536		—		16		50		66
POSCO AST		85,501		53		85,554		—		3,004		5,238		8,242
POSHIMETAL Co., Ltd.		1,721		12		1,733		—		12,624		—		12,624
Daewoo International Corporation		148,383		878		149,261		9,319		—		—		9,319
POSCO America Corporation		57,554		—		57,554		—		—		—		—
POSCO Canada Ltd.		—		—		—		12,323		—		—		12,323
POSCO Asia Co., Ltd.		134,602		142		134,744		2,063		—		—		2,063
POSCO (Thailand) Company Limited		6,052		7		6,059		—		—		—		—
Qingdao Pohang Stainless Steel Co., Ltd.		3,329		—		3,329		—		—		—		—
POSCO JAPAN Co., Ltd.		73,992		—		73,992		862		108		1		971
POSCO-India Pune Processing Center. Pvt. Ltd.		8,117		—		8,117		—		—		—		—
POSCO MEXICO S.A. DE C.V.		100,016		76		100,092		—		—		—		—
POSCO Maharashtra Steel Private Limited		55,392		3,218		58,610		—		—		—		—
Others		54,357		8,887		63,244		6,523		15,421		1,647		23,591

		984,484		133,283		1,117,767		105,051		231,080		28,890		365,021

Associates and jointventures
SNNC		140		40		180		16,669		—		—		16,669
POSCO PLANTEC Co., Ltd. (formerly, Sungjin Geotec Co., Ltd.)		879		46		925		353		—		—		353
POSCHROME (PROPRIETARY) LIMITED		—		67		67		—		—		—		—
LLP POSUK Titanium		—		4,066		4,066		—		—		—		—
Others		—		17		17		319		2		—		321

		1,019		4,236		5,255		17,341		2		—		17,343

	￦	985,503		137,519		1,123,022		122,392		231,082		28,890		382,364

F-98

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

2) December 31, 2014


	Receivables						Payables
	Trade accounts and notes receivable		Others		Total		Trade accounts and notes payable		Accounts payable		Others		Total
	(in millions of Won)
Subsidiaries
POSCO ENGINEERING & CONSTRUCTION., LTD.	￦	42		71,967		72,009		—		41,878		—		41,878
POSCO Processing & Service		94,790		92		94,882		15,202		867		—		16,069
POSCO COATED & COLOR STEEL Co., Ltd.		69,314		67		69,381		—		5		1,936		1,941
POSCO ICT		13		103		116		920		70,823		5,425		77,168
POSMATE		—		1,673		1,673		600		2,007		4,828		7,435
eNtoB Corporation		—		—		—		12,564		28,432		43		41,039
POSCO CHEMTECH		49,456		4,283		53,739		57,610		9,890		17,864		85,364
POSCO M-TECH		—		37		37		7,311		12,231		22,703		42,245
POSCO ENERGY CO., LTD.		17,326		2,809		20,135		—		—		1,962		1,962
POSCO TMC Co., Ltd.		27,429		30		27,459		—		117		115		232
POSCO AST		44,281		54		44,335		—		2,458		3,364		5,822
POSHIMETAL Co., Ltd.		1,269		14		1,283		—		12,846		—		12,846
Daewoo International Corporation		164,029		3,178		167,207		8		210		1		219
POSCO Specialty Steel Co., Ltd.		822		201,823		202,645		4,800		140		184		5,124
POSCO America Corporation		57,164		—		57,164		—		1,511		—		1,511
POSCO Canada Ltd.		—		—		—		—		4,534		—		4,534
POSCO Asia Co., Ltd.		197,104		221		197,325		10,995		—		—		10,995
POSCO (Thailand) Company Limited		7,407		266		7,673		—		—		—		—
Qingdao Pohang Stainless Steel Co., Ltd.		14,748		41		14,789		—		—		—		—
POSCO JAPAN Co., Ltd.		42,692		89		42,781		344		1,552		—		1,896
POSCO-India Pune Processing Center. Pvt. Ltd.		6,401		5		6,406		—		—		—		—
POSCO MEXICO S.A. DE C.V.		96,800		—		96,800		—		—		—		—
POSCO Maharashtra Steel Private Limited		364,899		7,714		372,613		—		—		—		—
Others		126,474		56,788		183,262		7,239		54,727		1,545		63,511

		1,382,460		351,254		1,733,714		117,593		244,228		59,970		421,791

Associates and jointventures
SNNC		219		125		344		7,017		—		—		7,017
POSCHROME (PROPRIETARY) LIMITED		—		—		—		1,162		—		—		1,162
LLP POSUK Titanium		—		4,235		4,235		—		—		—		—
Others		258		18		276		234		—		—		234

		477		4,378		4,855		8,413		—		—		8,413

	￦	1,382,937		355,632		1,738,569		126,006		244,228		59,970		430,204

(c) For the years ended December 31, 2012, 2013 and 2014, details of compensation to key management officers were as follows:


	2012		2013		2014
	(in millions of Won)
Short-term benefits	￦	109,614		121,054		116,961
Retirement benefits		25,049		20,713		21,604
Long-term benefits		22,462		23,480		17,242

	￦	157,125		165,247		155,807

Key management officers include directors (including non-standing directors), executive officials and fellow officials who have significant influence and responsibilities in the Company’s business and operations. In addition to the compensation described above, the Company provided stock appreciation rights to its executive officers and recorded stock compensation expenses amounted to ￦436 million for the year ended December 31, 2012 (2013 and 2014 : nil).

F-99

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

38.

Commitments and Contingencies

(a) Contingent liabilities

Contingent liabilities may develop in a way not initially expected. Therefore, management continuously assesses contingent liabilities to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognized in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made).

Management makes estimates and assumptions that affect disclosures of commitments and contingencies. All estimates and assumptions are based on the evaluation of current circumstances and appraisals with the supports of internal specialists or external consultants.

Management regularly analyzes current information about these matters and provides for probable contingent losses including the estimate of legal expense to resolve the matters. Internal and external lawyers are used for these assessments. In making the decision regarding the need for a provision, management considers whether the Company has an obligation as a result of a past event, whether it is probable that an outflow or cash or other resources embodying economic benefits will be required to settle the obligation and the ability to make a reliable estimate of the amount of the obligation.

(b) Details of guarantees

Contingent liabilities on outstanding guarantees provided by the Company as of December 31, 2014, are as follows:

Guarantors

Guarantee beneficiary

Financial institution

Foreign currency

Won equivalent

(in millions of Won)

[The Company]

POSCO

POSCO(Guangdong) Automotive Steel Co., Ltd.

SMBC and others

USD

65,000,000

71,448

POSCO Investment Co., Ltd.

BOA and others

USD

330,000,000

362,736

BOC

CNY

350,000,000

62,031

POSCO Maharashtra Steel Private Limited

Export-Import Bank of Korea and others

USD

566,069,000

622,223

POSCO VST CO., LTD.

ANZ and others

USD

65,000,000

71,448

POSCO MEXICO S.A. DE C.V.

HSBC and others

USD

284,725,000

312,970

POSCO-VIETNAM Co., Ltd.

Export-Import Bank of Korea and others

USD

242,000,000

266,006

Zhangjiagang Pohang Stainless Steel Co., Ltd.

MIZUHO and others

USD

130,000,000

142,896

POSCO ASSAN TST STEEL INDUSTRY

SMBC and others

USD

193,392,500

212,577

POSCO Electrical Steel India Private Limited

ING and others

USD

83,784,000

92,095

PT. KRAKATAU POSCO

Export-Import Bank of Korea and others

USD

1,350,300,000

1,484,249

F-100

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Guarantors

Guarantee beneficiary

Financial institution

Foreign currency

Won equivalent

(in millions of Won)

Daewoo International Corporation

Daewoo Paper Manufacturing Co., Ltd.

HSBC

USD

12,500,000

13,740

DAEWOO TEXTILE BUKHARA LLC

Export-Import Bank of Korea

USD

16,000,000

17,587

DAEWOO INTERNATIONAL MEXICO S.A. DE C.V.

NOVA SCOTIA

USD

30,000,000

32,976

POSCO ASSAN TST STEEL INDUSTRY

ING and others

USD

18,839,300

20,708

Brazil Sao Paulo Steel Processing Center

HSBC and others

USD

52,000,000

57,158

Daewoo International INDIA Private Ltd.

Shinhan Bank

USD

48,772,000

53,610

PT. Bio Inti Agrindo

Export-Import Bank of Korea

USD

56,000,000

61,555

POSCO ENGINEERING & CONSTRUCTION CO.,LTD.

HONG KONG POSCO E&C (CHINA) INVESTMENT Co.,Ltd.

Woori Bank and others

USD

135,000,000

148,392

POSCO E&C Vietnam Co., Ltd.

Export-Import Bank of Korea

USD

16,500,000

18,137

SANTOSCMI S.A.

CITI Equador and others

USD

46,000,000

50,563

POSCO Engineering and Construction India Private Limited

Shinhan Bank

INR

383,201,941

6,645

POSCO Processing&Service

POSCO Canada Ltd.

Hana Bank

USD

12,484,500

13,723

POSCO Gulf SFC LLC

KEB Bank and others

USD

27,000,000

29,678

POSCO COATED & COLOR STEEL Co., Ltd.

Myanmar POSCO C&C Company, Limited.

POSCO Investment

USD

7,986,947

8,779

POSCO ICT

PT.POSCO ICT INDONESIA

POSCO Investment

USD

2,700,000

2,968

POSCO Investment

USD

4,000,000

4,397

VECTUS LIMITED

KEB Bank

GBP

3,500,000

5,987

POSCO ENERGY CO., LTD.

PT. KRAKATAU POSCO ENERGY

Export-Import Bank of Korea and others

USD

193,900,000

213,135

POSCO Engineering CO.,Ltd

PT PEN INDONESIA

KEB Bank and others

USD

12,818,876

14,091

KEB Bank and others

IDR

145,244,014,735

12,825

POSCO ENGINEERING

CITI Bank

USD

15,300,000

16,818

(THAILAND) CO., LTD.

Woori Bank and others

THB

6,347,013,800

212,244

POSCO-Japan Co., Ltd.

POSCO-JEPC Co., Ltd.

MIZUHO and others

JPY

1,021,811,730

9,402

POSCO-JKPC Co., Ltd.

Higo Bank and others

JPY

974,000,000

8,962

Xenesys Inc.

Aozora Bank

JPY

250,000,000

2,300

DAEWOO TEXTILE FERGANA LLC

DAEWOO TEXTILE BUKHARA LLC

Bukhara TEX

USD

2,691,513

2,959

DAEWOO TEXTILE BUKHARA LLC

DAEWOO TEXTILE FERGANA LLC

NBU

USD

6,127,060

6,735

POSCO E&C CHINA Co.,Ltd.

HONG KONG POSCO E&C (CHINA) INVESTMENT Co., Ltd.

Woori Bank

USD

33,000,000

36,274

POSCO-China Holding Corp.

POSCO YongXin Rare Earth Metal Co., Ltd.

KEB Bank and others

CNY

71,820,000

12,729

DONG FANG JIN HONG

Bank of Communications and others

CNY

1,300,000,000

230,399

F-101

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Guarantors

Guarantee beneficiary

Financial institution

Foreign currency

Won equivalent

(in millions of Won)

POSCO CHEMTECH

PT.Krakatau Posco Chemtech Calcination

KEB Bank

USD

42,000,000

46,166

KRAKATAU POS-CHEM DONG-SUH CHEMICAL

Hana Bank

USD

13,075,000

14,372

POSCO PLANTEC Co., Ltd.

POSCO PLANTEC Thailand CO. LTD

Woori Bank

THB

45,000,000

1,505

POSCO Specialty Steel Co., Ltd.

POSCO SS-VINA

Export-Import Bank of Korea

USD

354,409,800

389,567

SANTOSCMI S.A.

COMPANIADEAUTO- MATIZACION & CONTROL, GENESYS S.A.

Banco de Guayaquil and others

USD

1,550,000

1,704

[Associates and joint ventures]

POSCO

LLP POSUK Titanium

KB Bank

USD

15,000,000

16,488

CSP — Compania Siderurgica do Pecem

KDB Bank

USD

56,666,667

62,288

Daewoo International Corporation

DMSA/AMSA

Export-Import Bank of Korea and others

USD

165,133,333

181,515

GLOBAL KOMSCO Daewoo LLC

Export-Import Bank of Korea and others

USD

11,112,500

12,214

POSCO ENGINEERING & CONSTRUCTION CO.,LTD.

Posco e&c Songdo International Building

Others

KRW

356,600

New Songdo City Development, LLC

Others

KRW

340,000

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co.,Ltd

Others

KRW

28,226

POSCO Processing&Service

Sebang Steel

Shinhan Bank

JPY

245,000,000

2,254

POSCO ICT

UITrans LRT Co., Ltd.

KB Bank

KRW

76,000

Incheon-Gimpo Expressway Co., Ltd.

KDB Bank

KRW

100,000

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co.,Ltd

NH Bank

KRW

2,528

POSCO Engineering CO., Ltd

PT. Wampu Electric Power

Woori Bank

USD

7,996,848

8,790

Daewoo (China) Co., Ltd.

SHANGHAI LANSHENG DAEWOO CORP.

Bank of Communications and others

CNY

100,000,000

17,723

POSCO CHEMTECH

PT.INDONESIA POS CHEMTECH CHOSUN Ref

KEB Bank

USD

6,000,000

6,595

[Others]

Daewoo International Corporation

Ambatovy Project Investments Limited

Export-Import Bank of korea

USD

65,454,545

71,948

Sherritt International Corporation

Export-Import Bank of korea

USD

21,818,182

23,983

F-102

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

Guarantors

Guarantee beneficiary

Financial institution

Foreign currency

Won equivalent

(in millions of Won)

POSCO ENGINEERING & CONSTRUCTION CO.,LTD.

The union of City environment improvement for Kukje building and others

Others

KRW

745,350

Gale International Korea, LLC

Others

USD

50,000,000

54,960

INTERNATIONAL BUSINESS CENTER CORPORATION

Export-Import Bank of korea

USD

20,000,000

21,984

POSCO ICT

BTL business and others

Kyobo Life Insurance Co.,Ltd and others

KRW

2,055,936

SMS Energy and others

Hana Bank and others

KRW

158,860

POSCO Engineering CO., Ltd

Shinhan Bank

KRW

3,500

Kwanma Solar Co., Ltd. and others

Hana Bank

KRW

53,930

Beomeo Saint Western Hotel

Meritz Insurance and others

KRW

6,600

Hyundai ENG Co., Ltd.

Engineering Financial Cooperative

KRW

28,173

POSCO M-TECH

JMTECH CO.,LTD and others

Seoul Guarantee Insurance Co., Ltd.

KRW

15,239

POSCO PLANTEC Co., Ltd.

JGC

Export-Import Bank of korea

KRW

855

AKER and others

USD

4,301,517

4,728

Alstom Power Inc. and others

KDB Bank

USD

24,258,546

26,668

Court and others

KRW

16,417

GS Engineering & Construction Corp and others

Seoul Guarantee Insurance Co., Ltd.

USD

9,985,137

10,977

SK Engineering & Construction co., ltd

CAD

889,882

843

GYEONGSANGBUK-DO

KRW

535

DEVELOPMENT CORPORATION

GS Engineering & Construction Corp

KEB Bank

USD

10,064,925

11,065

AKER

EUR

133,550

178

Taipei Port Terminal Company Ltd

TWD

342,500,000

11,882

Gyopo Wind Power Co., Ltd.

KB Bank

KRW

7,476

Goam Sun energy Korea Co., Ltd. and others

Shinhan Bank

KRW

26,509

HANWHA E&C

USD

240,000

264

JAESAN ENERGY

KRW

3,890

POSCO PLANTEC Taiwan Branch

Hana Bank

TWD

90,000,000

3,122

HANJIN HEAVY INDUSTRIES & CONSTRUCTION CO.,LTD

Gwangju Bank

KRW

F-103

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014


Guarantors	Guarantee beneficiary	Financial institution	Foreign currency		Won equivalent
	(in millions of Won)
	CAMERON JAPAN and others		USD	9,679,904		10,639
	Astara	Busan Bank	EUR	9,260		12
	NIHON		JPY	5,483,800		50
	SKY Calabria Co., Ltd.	NH Investment & Securities Co., Ltd.	KRW	149,922		149,922
	Incheon International Airport Corporation	Engineering Financial Cooperative	KRW	31,413		31,413
POSCO AUSTRALIA PTY LTD	Department of Trade and Investment (NSW Government)	Woori Bank	AUD	8,023,765		7,214
POSCO SS-VINA	EVN SPC	Shinhan Bank	VND	35,525,413,000		1,826
POS-NP PTY LTD	Regional Infrastructure and Service	Woori Bank	AUD	539,496		485
HUME COAL PTY LTD	Department of Trade and Investment (NSW Government)	Woori Bank	AUD	804,000		723
Plant Engineering service Technology Co., Ltd.	Future Environmental Energy CO., Ltd	Seoul Guarantee Insurance Co., Ltd.	KRW	1,213		1,213
POS-HiAL	Kumho Rent-a-car Co., Ltd.	Seoul Guarantee Insurance Co., Ltd.	KRW	11		11

			USD	4,948,637,600		5,439,546
			KRW	4,209,282		4,209,282
			CNY	1,821,820,000		322,882
			THB	6,392,013,800		213,749
			JPY	2,496,295,530		22,968
			TWD	432,500,000		15,004
			IDR	145,244,014,735		12,825
			AUD	9,367,261		8,422
			INR	383,201,941		6,645
			GBP	3,500,000		5,987
			VND	35,525,413,000		1,826
			CAD	889,882		843
			EUR	142,810		190

(c) POSCO ENGINEERING & CONSTRUCTION Co., Ltd. has provided the completion guarantees for Samsung C&T Corporation amounting to ￦1,150,814 million while Samsung C&T Corporation has provided the construction guarantees or payment guarantees on customers’ borrowings on behalf of POSCO ENGINEERING & CONSTRUCTION Co., Ltd. amounting to ￦556,385 million as of December 31, 2014.

F-104

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(d) Other commitments

Details of other commitments of the Company as of December 31, 2014, are as follows:


POSCO		POSCO entered into long-term contracts to purchase iron ore, coal, nickel and others. The contracts of iron ore and coal generally have terms of more than three years and the contracts of nickel have terms of more than one year. These contracts provide for periodic price adjustments based on the market price. As of December 31, 2014, 137 million tons of iron ore and 32 million tons of coal remained to be purchased under such long-term contracts. POSCO entered into an agreement with Tangguh Liquefied Natural Gas (LNG) Consortium in Indonesia to purchase 550 thousand tons of LNG annually for 20 years commencing in August 2005. The purchase price is subject to change, based on changes of the monthly standard oil price (JCC) and with a price ceiling. As of December 31, 2014, POSCO entered into commitments with Korea National Oil Corporation for long-term foreign currency borrowings, which enable the Company to borrow up to the amount of USD 6.86 million, USD 6.58 million and USD 4.12 million. The borrowings are related to the Company’s exploration of gas hydrates in Aral Sea, Uzbekistan, the exploration of gas hydrates in Namangan-Chust and the exploration of gas hydrates in Western Fergana-Chenavard, respectively. The repayment of the borrowings depends on the success of the projects. POSCO is not liable for the repayment of full or part of the amount borrowed if the respective projects fail. POSCO has agreed to pay a certain portion of its profits under certain conditions, as defined by the borrowing agreements.
		POSCO has provided a supplemental funding agreement, as the largest shareholder, as requested from the creditors, including Norddeutsche Landesbank, for seamless funding to POSCO ENERGY Co., Ltd. under construction of new power plant.

POSCO ENGINEERING & CONSTRUCTION CO., LTD.		As of December 31, 2014, POSCO ENGINEERING & CONSTRUCTION CO., LTD. has comprehensive loan agreements of up to ￦283.5 billion and USD 268 million with Woori Bank and ￦98 billion and USD 843 million with KEB Bank. Also, POSCO ENGINEERING & CONSTRUCTION CO., LTD. has bank overdraft agreements of up to ￦20 billion with Woori Bank which is included in the limit of billion comprehensive loan agreements and 3 billion with Korea Exchange Bank. Comprehensive loan agreements include bank overdraft up to ￦20 billion and ￦30 billion of loans on checking account during the day with Woori Bank.
POSCO ICT		As of December 31, 2014, in relation to contract enforcement, POSCO ICT was provided with ￦62,164 million and ￦35,735 million guaranties from Korea Software Financial Cooperative and Seoul Guarantee Insurance, respectively.
POSCO Specialty Steel Co., Ltd.		As of December 31, 2014, POSCO Specialty Steel Co., Ltd. has agreements for a loan and import letter of credit with Korea Exchange Bank and others.

(e) Litigation in progress

As of December 31, 2014, POSCO and certain subsidiaries are defendants in legal actions arising from the normal course of business.

1) Civil lawsuits with Nippon Steel & Sumitomo Metal Corporation

During the year ended December 31, 2012, Nippon Steel & Sumitomo Metal Corporation filed a civil lawsuit in the Tokyo District Court of Japan against POSCO and POSCO Japan Co., Ltd., a subsidiary of POSCO, to prohibit production and sales of grain oriented electrical steel sheets using improperly acquired trade secrets and seeking compensation from the Company of ￦907.3 billion. Through trials up to December 31, 2014, the Company submitted its responses that the Japan court

F-105

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

did not have jurisdiction on this lawsuit as it should be judged by Korean law and the Company developed grain oriented electrical steel sheets using the Company’s own technologies. As of December 31, 2014, the Japan court has not made any judgments on this matter. Since the Company does not believe that it has any present obligation, the Company has not recorded any provision for this lawsuit as of December 31, 2014.

2) Other lawsuits and claims


Company	Legal actions		Claim amount		Korean won equivalent		Description
	(In millions of Won, in thousands of foreign currencies)
POSCO		38	KRW	87,167		87,167	Lawsuit on claim for damages^(*1)
Daewoo International Corporation		9	USD	47,788		52,529	Lawsuit on claim for payment^(*1)
		5	KRW	2,312		2,312	Lawsuit on claim for payment
		1	INR	4,458,849		77,316	Lawsuit on claim for payment on guarantees^(*1)
		1	EUR	3,270		4,370	Lawsuit on claim for payment
POSCO ENGINEERING & CONSTRUCTION CO., LTD.		72	KRW	118,567		118,567	Lawsuit on claim for payment on rent fees by PSIB
POSCO Processing&Service		3	KRW	770		770	Lawsuit on claim for payment
POSCO Engineering CO.,Ltd		12	KRW	4,662		4,662	Lawsuit on claim for payment on construction by Samyanginnochem
POSCO COATED & COLOR STEEL Co., Ltd.		2	KRW	350		350	Lawsuit on claim for payment
POSCO ICT		19	KRW	15,287		15,287	Lawsuit on claim for payment on construction
POSCO America Corporation		2	USD	—		—	Lawsuit on claim for anti-trust
POSCO M-TECH		4	KRW	1,039		1,039	Lawsuit on claim for payment
POSCO PLANTEC Co., Ltd.		6	KRW	2,671		2,671	Lawsuit on claim for payment
		1	USD	4,304		4,730	Lawsuit on claim for payment on agent fees
		1	EUR	5,492		7,340	Lawsuit on claim for payment
POSCO E&C CHINA Co., Ltd.		1	CNY	37,000		6,558	Lawsuit on claim for failure to obtain PF
Daewoo International (America) Corp.		2	USD	10,442		11,478	Lawsuit on claim clam for indemnification damages
POSPOWER Co., Ltd.		1	KRW	9,667		9,667	Lawsuit on claim for payment
POSCO RUS LLC		2	RUB	11,206		223	Lawsuit on claim for payment
SPFC Co, LTD.		1	KRW	150		150	Lawsuit on claim for payment
IT Engineering		1	KRW	21		21	Lawsuit on claim for payment

(*1)	The Company made a reliable estimate in 4 lawsuits by considering the possibility and amount of outflow of resources and recognized ￦44,309 million as provision for legal contingencies and claims.

For all the other lawsuits and claims, management does not believe the Company has any present obligations and therefore, the Company has not recognized any provisions as of December 31, 2014 for the matters.

F-106

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

39.

Cash Flows from Operating Activities

Adjustments for operating cash flows for the years ended December 31, 2012, 2013 and 2014 were as follows:


	2012			2013			2014
	(in millions of Won)
Trade accounts and notes receivable	￦	49,917			(643,715	)		(97,703	)
Other financial assets		(392,090	)		(98,420	)		(27,601	)
Inventories		1,228,162			491,512			(1,130,138	)
Other current assets		(198,157	)		181,755			242,170
Other long-term assets		(141,037	)		(23,412	)		(53,225	)
Trade accounts and notes payable		225,086			47,323			(385,914	)
Other financial liabilities		357,502			194,419			271,117
Other current liabilities		631,749			81,317			(20,930	)
Provisions		17,108			(42,052	)		(63,884	)
Payments severance benefits		(116,846	)		(129,038	)		(160,792	)
Plan assets		(191,696	)		(172,147	)		(164,515	)
Other long-term liabilities		500,284			4,158			(262,367	)

	￦	1,969,982			(108,300	)		(1,853,782	)

40.

Non-Cash Transactions

Significant non-cash transactions for the years ended December 31, 2013 and 2014 were as follows:


	2013		2014
	(in millions of Won)
Construction-in-progress transferred to other accounts	￦	6,610,644		5,852,017
Reclassification as asset held for sale		—		2,213,673
Reclassification as liabilities of disposal group held for sale		—		621,303
Acquisition of short-term financial instruments through issuance of treasury stock		804,496		—

41.

Business combination

(a) On December 24, 2014, POSCO participated in a capital increase in POSCO PLANTEC Co., Ltd., an associate of the Company, to improve the financial structure and assist in investment funding of the associate to expand and strengthen its competencies in the plant engineering business. The Company has obtained control as its ownership of POSCO PLANTEC Co., Ltd. increased from 41.95% to 73.94% upon the capital increase.

F-107

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(b) Goodwill recognized in this business combination is as follows:


	Amount
	(in millions of Won)
I. Consideration transferred
Fair value of existing equity interest ^(*1)	￦	106,423
Cash		290,000

Total		396,423

II. Non-controlling interests ^(*2)		76,183

Total		472,606

III. Acquired identified assets and liabilities
Assets
Cash and cash equivalents		4,623
Trade accounts and notes receivable		260,910
Other receivables and other financial assets		171,723
Inventories		20,570
Property, plant and equipment and intangible assets		360,576
Other assets		23,783

Total		842,185

Liabilities
Trade accounts and notes payable		77,063
Borrowings		342,279
Other payables and other financial liabilities		44,495
Other liabilities		86,160

Total		549,997

Total acquired net assets		292,188

IV. Goodwill recognized	￦	180,418

(*1)

Upon the acquisition of the business, a ￦57,480 million disposal gain on the Company’s existing investment in the acquiree prior to acquisition date (acquisition cost: ￦48,943 million) was recognized as finance income. The fair value of this existing investment was determined using quoted market price of shares on the acquisition date.

(*2)	The non-controlling interests at the acquisition date were measured using their proportionate shares in the recognized amounts of POSCO PLANTEC Co., Ltd’s identifiable net assets and preferred shares issued by POSCO PLANTEC Co., Ltd.

(c) If the Company had acquired POSCO PLANTEC Co., Ltd. as of January 1, 2014, pro-forma consolidated revenues and pro-forma consolidated net profit for the year ended December 31, 2014 would have been ￦65,053,917 million and ￦560,443 million, respectively. There have been no revenues and net profit incurred by POSCO PLANTEC Co., Ltd. from the acquisition date to December 31, 2014.

42.

Operating Segments and Geographic Information

(a) The Company’s operating businesses are organized based on the nature of markets and customers. The Company has four reportable operating segments — steel, construction, trading and others. The steel segment includes production of steel products and revenue of such products. The construction segment includes planning, designing and construction of industrial plants, civil engineering projects and commercial and residential buildings, both in Korea and overseas. The trading segment consists of exporting and importing a wide range of steel products and raw materials

F-108

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

that are both obtained from and supplied to POSCO, as well as between other suppliers and purchasers in Korea and overseas. Other segments include power generation, liquefied natural gas production, network and system integration and logistics.

(b) Information about reportable segments as of and for the years ended December 31, 2012, 2013 and 2014 was as follows:

1) As of and for the year ended December 31, 2012


	Steel			Trading			Construction			Others			Total
	(in millions of Won)
External revenues	￦	35,258,970			18,945,642			4,675,596			4,723,943			63,604,151
Internal revenues		17,609,789			7,467,872			5,050,287			2,857,139			32,985,087
Including inter segment revenue		10,148,377			3,748,375			4,559,761			2,754,134			21,210,647
Total revenues		52,868,759			26,413,514			9,725,883			7,581,082			96,589,238
Interest income		176,229			50,907			43,815			21,811			292,762
Interest expenses		(553,508	)		(174,607	)		(48,975	)		(116,499	)		(893,589	)
Depreciation and amortization		(2,334,357	)		(35,788	)		(35,323	)		(218,515	)		(2,623,983	)
Impairment loss of property, plant and equipment and others		(46,951	)		(30,073	)		(7,734	)		(16,257	)		(101,015	)
Impairment loss of available-for-sale financial assets		(201,850	)		(254	)		(1,713	)		(20,354	)		(224,171	)
Share of profit or loss of investment in associates and JVs		(39,806	)		(5,579	)		(27	)		(2,764	)		(48,176	)
Income tax expense		(658,307	)		(184,318	)		(135,469	)		(77,139	)		(1,055,233	)
Segment profit		2,245,977			325,197			345,295			301,670			3,218,139
Segment assets		69,920,261			10,904,747			10,775,895			7,723,374			99,324,277
Investment in associates		15,802,052			1,043,018			1,130,216			435,980			18,411,266
Acquisition of non-current assets		7,629,767			395,081			167,818			781,087			8,973,753
Segment liabilities		23,105,008			7,865,399			7,008,996			4,836,641			42,816,044

2) As of and for the year ended December 31, 2013


	Steel			Trading			Construction			Others			Total
	(in millions of Won)
External revenues	￦	31,794,574			18,307,888			6,896,838			4,865,350			61,864,650
Internal revenues		16,229,002			7,611,372			3,885,190			3,019,246			30,744,810
Including inter segment revenue		9,223,276			3,817,644			3,539,891			2,881,039			19,461,850
Total revenues		48,023,576			25,919,260			10,782,028			7,884,596			92,609,460
Interest income		162,149			46,064			47,070			19,892			275,175
Interest expenses		(412,142	)		(77,375	)		(48,030	)		(106,824	)		(644,371	)
Depreciation and amortization		(2,383,010	)		(43,775	)		(36,614	)		(235,365	)		(2,698,764	)
Impairment loss of property, plant and equipment and others		(34,153	)		(975	)		(4,058	)		(11,875	)		(51,061	)
Impairment loss of available-for-sale financial assets		(203,468	)		(435	)		(97,919	)		(10,172	)		(311,994	)
Share of profit or loss of investment in associates and JVs		(250,084	)		(131,534	)		(71,068	)		(26,326	)		(479,012	)
Income tax expense		(466,756	)		(27,549	)		(87,660	)		(73,371	)		(655,336	)
Segment profit		1,449,446			9,516			147,177			197,449			1,803,588
Segment assets		73,860,997			11,640,931			9,888,590			8,843,652			104,234,170
Investment in associates		16,863,991			1,019,252			1,090,089			598,775			19,572,107
Acquisition of non-current assets		5,955,799			242,413			150,469			1,191,243			7,539,924
Segment liabilities		23,774,850			8,649,557			6,068,059			5,059,440			43,551,906

F-109

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

3) As of and for the year ended December 31, 2014


	Steel			Trading			Construction			Others			Total
	(in millions of Won)
External revenues	￦	31,841,748			21,165,806			8,119,207			3,971,684			65,098,445
Internal revenues		17,755,182			10,095,123			2,184,519			3,094,647			33,129,471
Including inter segment revenue		10,159,110			5,180,926			1,679,443			2,920,354			19,939,833
Total revenues		49,596,930			31,260,929			10,303,726			7,066,331			98,227,916
Interest income		148,288			47,905			27,297			18,694			242,184
Interest expenses		(524,735	)		(92,855	)		(61,954	)		(127,843	)		(807,387	)
Depreciation and amortization		(2,779,723	)		(121,163	)		(52,268	)		(331,444	)		(3,284,598	)
Impairment loss of property, plant and equipment and others		(137,708	)		(35,131	)		756			(50,085	)		(222,168	)
Impairment loss of available-for-sale financial assets		(352,830	)		(1,097	)		(24,588	)		(14,444	)		(392,959	)
Share of profit or loss of investment in associates and JVs		(217,491	)		(29,263	)		(53,226	)		(23,559	)		(323,539	)
Income tax expense		(691,030	)		(114,587	)		(45,147	)		(21,415	)		(872,179	)
Segment profit		857,148			181,243			13,085			8,536			1,060,012
Segment assets		74,138,707			13,597,301			10,396,691			10,742,877			108,875,576
Investment in associates		18,227,743			1,076,373			1,091,402			1,154,187			21,549,705
Acquisition of non-current assets		2,348,979			399,273			701,019			906,685			4,355,956
Segment liabilities		23,750,464			10,384,329			6,345,852			6,139,971			46,620,616

(c) Reconciliations of total segment revenues, profit or loss, assets and liabilities, and other significant items to their respective consolidated financial statement line items are as follows:

1) Revenues


	2012			2013			2014
	(in millions of Won)
Total revenue for reportable segments	￦	96,589,238			92,609,460			98,227,916
Elimination of inter-segment revenue		(32,985,087	)		(30,744,810	)		(33,129,471	)
Basis difference^(*2)		(258,893	)		(98,907	)		(339,820	)

	￦	63,345,258			61,765,743			64,758,625

2) Profit


	2012			2013			2014
	(in millions of Won)
Total profit for reportable segments	￦	3,218,139			1,803,588			1,060,012
Goodwill and Corporate FV adjustments		(58,486	)		(91,718	)		(122,015	)
Elimination of inter-segment profits		(774,046	)		(356,690	)		(381,338	)
Income tax expense		982,879			590,997			821,485
Basis difference^(*2)		(36,624	)		(8,132	)		9,736

Profit before income tax expense	￦	3,331,862			1,938,045			1,387,880

F-110

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

3) Assets


	2013			2014
	(in millions of Won)
Total assets for reportable segments^(*1)	￦	104,234,170			108,875,576
Equity-accounted investees		(15,758,936	)		(17,487,024	)
Goodwill and Corporate FV adjustments		3,560,873			4,282,455
Elimination of inter-segment assets		(7,580,700	)		(10,418,834	)
Basis difference^(*2)		385,701			591,390

	￦	84,841,108			85,843,563

(*1)

As segment assets and liabilities are determined based on separate financial statements, for subsidiaries which are in a different segment from that of its immediate parent company, their carrying amount in separate financial statements is eliminated upon consolidation. In addition, adjustments are made to adjust the amount of investment in associates and joint ventures from the amount reflected in segment assets to that determined using equity method in consolidated financial statements.

4) Liabilities


	2013			2014
	(in millions of Won)
Total liabilites for reportable segments	￦	43,551,906			46,620,616
Corporate FV adjustments		337,442			507,073
Elimination of inter-segment liabilites		(5,255,971	)		(7,166,880	)
Basis difference^(*2)		427,049			625,358

	￦	39,060,426			40,586,167

5) Other significant items

a) December 31, 2012


	Total Segment			Corporate FV adjustments			Elimination of inter-segment transactions			Basis difference ^(*2)		Consolidated
	(in millions of Won)
Interest income	￦	292,762			—			(13,955	)		—		278,807
Interest expenses		(893,589	)		1,372			20,760			—		(871,457	)
Depreciation and amortization		(2,623,983	)		(77,496	)		137,719			—		(2,563,760	)
Share of profit or loss of investment in associates		(48,176	)		—			25,474			—		(22,702	)
Income tax expense		(1,055,233	)		15,150			57,204			8,863		(974,016	)
Impairment loss of property, plant and equipment and others		(101,015	)		(258,451	)		24,070			—		(335,396	)
Impairment loss of available-for-sale financial assets		(224,171	)		—			—			—		(224,171	)

	￦	(4,653,405	)		(319,425	)		251,272			8,863		(4,712,695	)

F-111

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

b) December 31, 2013


	Total Segment			Corporate FV adjustments			Elimination of inter-segment transactions			Basis difference^(*2)		Consolidated
	(in millions of Won)
Interest income	￦	275,175			—			(14,777	)		—		260,398
Interest expenses		(644,371	)		(34,814	)		21,504			—		(657,681	)
Depreciation and amortization		(2,698,764	)		(84,223	)		97,437			—		(2,685,550	)
Share of profit or loss ofinvestment in associates		(479,012	)		—			299,203			—		(179,809	)
Income tax expense		(655,336	)		25,074			39,265			1,968		(589,029	)
Impairment loss ofproperty, plant and equipment and others		(51,061	)		—			(97,424	)		—		(148,485	)
Impairment loss of available-for-sale financial assets		(311,994	)		—			31,757			—		(280,237	)

	￦	(4,565,363	)		(93,963	)		376,965			1,968		(4,280,393	)

c) December 31, 2014


	Total Segment			Corporate FV adjustments			Elimination of inter-segment transactions			Basis difference^(*2)			Consolidated
	(in millions of Won)
Interest income		￦ 242,184			—			(13,930	)		—			228,254
Interest expenses		(807,387	)		(45,668	)		57,470			—			(795,585	)
Depreciation and amortization		(3,284,598	)		(111,263	)		157,312			—			(3,238,549	)
Share of profit or loss of investment in associates		(323,539	)		—			23,646			—			(299,893	)
Income tax expense		(872,179	)		33,473			17,221			(2,356	)		(823,841	)
Impairment loss of property, plant and equipment and others		(222,168	)		—			47,838			—			(174,330	)
Impairment loss of available-for-sale financial assets		(392,959	)		—			23,236			—			(369,723	)

		￦ (5,660,646	)		(123,458	)		312,793			(2,356	)		(5,473,667	)

(*2)	Basis difference is related to the difference in recognizing revenue and expenses in connection with development and sale of certain residential real estate between the report reviewed by the CEO and the consolidated financial statements (see note 3).

(d) Revenue by geographic area for years ended December 31, 2012, 2013 and 2014 was as follows:


	2012		2013		2014
	(in millions of Won)
Domestic	￦	47,433,132		45,854,919		45,465,347
Japan		2,380,651		1,920,253		2,047,686
China		6,022,875		6,493,119		6,319,101
Asia-other		3,157,469		3,011,980		5,055,373
North America		1,792,706		1,720,895		2,199,418
Others		2,558,425		2,764,577		3,671,700

	￦	63,345,258		61,765,743		64,758,625

In presenting information on the basis of geography, segment revenue is based on the geographical location of customers.

F-112

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2012, 2013 and 2014

(e) Non-current assets by geographic area as of December 31, 2013 and 2014 are as follows:


	2013		2014
	(in millions of Won)
Domestic	￦	33,116,006		33,837,971
Japan		203,241		177,322
China		1,632,490		1,745,125
Asia-other		4,703,943		4,867,569
North America		167,468		186,753
Others		2,292,040		2,367,036

	￦	42,115,188		43,181,776

Non-current assets by geographic area include investment property, property, plant and equipment, goodwill and other intangible assets.

(f) There are no customers whose revenue is 10% or more of consolidated revenue.

F-113

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


POSCO
(Registrant)

/s/ Kwon, Oh-Joon
Name:		Kwon, Oh-Joon
Title:		Chief Executive Officer and Representative Director
Date:		April 29, 2015

Exhibit Index


1.1	—	Articles of incorporation of POSCO (English translation) (incorporated by reference to Exhibit 1.1 to the Registrant’s filing on Form 20-F (File No. 001-13368), filed on May 12, 2014)*
2.1	—	Form of Common Stock Certificate (including English translation) (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement No. 33-81554)*
2.2	—	Form of Deposit Agreement (including Form of American Depositary Receipts) (incorporated by reference to the Registrant’s Registration Statement (File No. 333-189473) on Form F-6)*
8.1	—	List of consolidated subsidiaries
12.1	—	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2	—	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1	—	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed previously