Hanon : 2021 Audit Report

Hanon Systems and Subsidiaries

Consolidated Financial Statements

December 31, 2021 and 2020

(With Independent Auditor's Report Thereon)

Table of Contents

Page

Independent Auditor's Report .................................................................................. 1 - 6

Consolidated Financial Statements

Consolidated Statements of Financial Position ...................................................... 7 - 8

Consolidated Statements of Profit or Loss .................................................................. 9

Consolidated Statements of Comprehensive Income ................................................ 10

Consolidated Statements of Changes in Equity .................................................. 11 -12

Consolidated Statements of Cash Flows ............................................................ 13 - 14

Notes to the Consolidated Financial Statements ................................................ 15 - 95

Independent Auditor's Report

(English Translation of a Report Originally Issued in Korean)

To the Shareholders and Board of Directors of

Hanon Systems

Opinion

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

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

Basis for Opinion

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

Key Audit Matters

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

(a) Capitalization of internal development costs

As set out in Notes 2.12 and 14, the Group recognizes the internal development costs incurred from the vehicle development phase to the pre-production stage as assets. As at December 31, 2021, theGroup recognized internal development costs capitalized amounting to 718,945 million (equal to 8.7 % of the total consolidated assets).

We focused on this area due to the fact that there is the management's judgement involved in assessing the size of the capitalized internal development costs and whether capitalized development expenditures have satisfied with the requirement of capitalization in the accounting standards.

In particular, we identified the capitalization of internal development costs as our key audit matter, in consideration of the fact that the management's assumption and judgements are required in the accounting treatment of development costs, including 1) commencement and termination of capitalization, 2) the aggregation of expenses incurred and 3) the determination of whether the capitalized internal development costs are impaired, while the development costs are expected to increase due to the Group's expansion in development of eco-friendly, high-efficiency and high-value products.

In order to address the key audit matter identified, we performed the following audit procedures:

• - We evaluated whether the accounting policies in relation to internally generated development costs of the Group were in compliance with the requirements for the recognition of Korean IFRS 1038 Intangible Assets.

• - We obtained an understanding and evaluated the Group's internal control in relation to internally generated development costs.

• - We obtained a detailed statement of internal development costs capitalization project and reconciled with the amounts recorded in general ledger.

• - We inspected documents forming the basis for determination of capitalization, including the notice of bidding results for specific projects, through audit sampling.

• - We tested the accuracy of labor time aggregation by project and by personnel, which is used in calculation of capitalized internal development costs, through audit sampling.

• - We tested the accuracy of aggregation and allocation, and occurrence of capitalized expenditure, through audit sampling.

• - We recalculated to test capitalized development cost for a specific month that is selected through audit sampling.

• - We recalculated to test depreciation expenses of development cost.

• - We reviewed the independence of external sources of information for the impairment test of development cost in the process of mass production and reviewed the internal sources of information applied to the Company's impairment test.

• - We tested key assumptions and actual data for (the expected) sales quantity and (the expected) sales gains and losses by project, which are applied to the impairment test of development cost, through audit sampling.

(b) Impairment test of goodwill

As set out in Note 14, the carrying amount of the Group's goodwill amounts to 862,741 million (10.5 % of the total consolidated assets) as at December 31, 2021.

For impairment test of goodwill, the Group estimated the recoverable amount of cash-generating units by applying a value-in-use model, which reflects the financial forecasts for the next 4.25 years and theresidual value. Key assumptions used in this model include revenue growth, operating profit margin, long-term growth and discount rate. The Group's management used independent external experts to measure recoverable amount.

We focused on impairment test of goodwill, in consideration of the fact that test result may differ depending on management's assumptions and judgements in sales growth rate and discount rate, and the fact that the testing process is complicated. In particular, we identified impairment test of goodwill allocated to four cash-generating unit (Hanon System headquarters, HASI (India), Hanon Beijing

(China), and Hanon Systems EFP Corporation as our key audit matter, in consideration of recent performance and the significance in amounts.

In order to address the key audit matter identified, we performed the following audit procedures:

• - We obtained an understanding and evaluated the Group's procedures and internal controls in relation to the impairment test of goodwill.

• - We tested the mathematical accuracy of the valuation model applied to the estimation of value-in-use of the cash-generating unit.

• - We tested the consistency of future cash flow estimated with the business plan reported to and approved by the management.

• - We compared the current year actual data with the prior period estimates to assess whether the estimates included optimistic assumptions.

• - We evaluated the qualification and independence of management's expert to estimate the value-in-use.

• - We tested the reasonableness of key assumptions used in the estimation of value-in-use.

  • Ÿ We assessed the consistency of the sales growth rate, operating profit margin and investment forecasts of cash-generating unit with the past performance and market conditions.

  • Ÿ We compared economic and industrial forecasts with long-term growth rates.

  • Ÿ We compared the discount rate computed independently using the observable information with the discount rate applied by the Group.

• - We tested the impairment of goodwill based on the computations by independently computing the value-in-use of cash-generating unit and making adjustments for the irrational assumptions identified in our evaluation process on reasonableness of key assumptions.

• - We evaluated the results of a sensitivity analysis on discount rate, operating profit margin and permanent growth rate presented by the Group in order to assess the impact of changes in key assumptions on the impairment test.

(c) Purchase price allocation by the business combination

As set out in Note 36, for the year ended December 31, 2021, the Group comprehensively acquired 100% shares of Hanon Thermal Technology (formerly, Keihin Thermal Technology Czech, s.r.o.), Powertrain Cooling Mexico. (formerly, Keihin AC de Mexico, S.A. de C.V.) for 6,199 million (total purchase price including contingent consideration: 11,007 million). The Group obtained control of the companies and accounted for in accordance with Korean IFRS 1103 Business Combination.

The Group performed the purchase price allocation based on fair value estimation of the assets acquired and liabilities assumed in accordance with Korean-IFRS 1103 Business Combinations. The Group engaged an independent external expert in valuation. The net of identifiable acquired assets and