POSCO : Consolidated FY 2021 Audit Report

POSCO HOLDINGS INC.

(Formerly, POSCO)

and Subsidiaries

Consolidated Financial Statements December 31, 2021 and 2020

(With Independent Auditors' Report Thereon)

Table of Contents
	Page
Independent Auditors' Report ............................................................................................	1
Consolidated Financial Statements
Consolidated Statements of Financial Position.................................................................	7
Consolidated Statements of Comprehensive Income ......................................................	9
Consolidated Statements of Changes in Equity .............................................................	10
Consolidated Statements of Cash Flows .......................................................................	12
Notes to the Consolidated Financial Statements ...........................................................	14

Independent Auditors' Report

Based on a report originally issued in Korean

The Board of Directors and Shareholders

POSCO HOLDINGS INC.:

Opinion

We have audited the consolidated financial statements of POSCO HOLDINGS INC. (formerly, POSCO) and its subsidiaries (the "Company"), which comprise the consolidated statements of financial position as of December 31, 2021 and 2020, the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising significant accounting policies and other explanatory information.

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

Basis for Opinion

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

Emphasis of Matter

We draw attention to Note 1 and Note 41 to the consolidated financial statements, which describes the spin-off by the former POSCO, the controlling company on March 1, 2022. Upon completion of the spin-off, the surviving company was renamed as POSCO HOLDINGS INC., and a new subsidiary, POSCO, was established. Our opinion is not modified in respect of this matter.

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 as of and for the year ended December 31, 2021. 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.

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1. Assessment of goodwill impairment in the POSCO INTERNATIONAL Corporation cash generating unit

As described in note 15(c) to the consolidated financial statements, goodwill amounted to W735,969 million as of December 31, 2021, which includes goodwill allocated to the cash generating unit ("CGU") of POSCO INTERNATIONAL Corporation in the amount of W578,046 million. The Company recognized impairment loss on goodwill allocated to the CGU of POSCO INTERNATIONAL Corporation of W184,770 million during the year ended December 31, 2021.

The Company performed goodwill impairment test for POSCO INTERNATIONAL Corporation CGU by estimating its value-in-use. In estimating the value-in-use, management's judgment is involved in determining the key assumptions such as estimated sales, discount rate and terminal growth rate that have significant impacts on the estimated value-in-use. Considering significant degree of judgment in estimating value-in-use and the likelihood of existence of management bias, we identified assessment of goodwill impairment related to POSCO INTERNATIONAL Corporation CGU as a key audit matter.

The primary procedures we performed to address this key audit matter included the following:

• Testing certain internal controls over the Company's goodwill impairment assessment process;
• Evaluating the key assumptions (including estimated sales) used to determine the value-in-use by comparison with the latest financial budgets approved by the Board of Directors, historical performance and industry reports;
• Comparing the estimated sales prepared in prior year with the current year's performance to assess the Company's ability to accurately forecast;
• Assessing the terminal growth rate by comparison with observable market information
• Performing sensitivity analysis on the discount rate, terminal growth rate and estimated sales applied to assess the impact of changes in these key assumptions on the results of management's impairment assessment; and
• Engaging our valuation specialists to assist us in evaluating the discount rate used in the valuation by comparing it against a discount rate that was independently developed using observable information.

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(b) Estimation of percentage-of-completion by the input method

As described in notes 3 ("Construction work in progress" and "Revenue from contracts with customers"), 28 and 29 to the consolidated financial statements, revenue from construction contract amounted to W6,263,778 million, which was approximately 8.2% of consolidated sales for the year ended December 31, 2021. Such revenue is primarily related to POSCO ENGINEERING & CONSTRUCTION CO., LTD., a subsidiary of the Company. In connection with the Company's production-to-order revenue transactions, when the outcome of a construction contract can be estimated reliably, the Company recognizes contract revenues and contract costs over time based on the percentage-of-completion method. The percentage-of-completion is calculated based on the ratio of contract costs incurred for work performed to date excluding costs incurred that do not contribute to the progress in satisfying the Company's performance obligation over the estimated total contract costs.

Construction contracts generally have a long-term duration, and the total contract costs are estimated based on estimated future expenditures for materials, labor, outsourced services and others which are expected to be incurred during the construction period. Considering the impact on revenue recognition from the uncertainty in connection with the long-term contracts and changes in estimated costs, we identified estimation of percentage-of- completion by the input method as a key audit matter.

The primary procedures we performed to address this key audit matter included the following:

• Testing certain internal controls over the Company's estimation and review on the estimated total contract costs, and review on construction costs incurred and cost allocation to the projects;
• Inspecting the documents prepared by the person in charge of construction field regarding rationale and reliability of the estimated total contract costs for major construction projects;
• Inquiring and inspecting the documents regarding rationale and reliability of the estimates such as material costs, labor costs and outsourcing costs included in the estimated total contract costs on the new major-construction projects;
• Inquiring the person in charge of construction field and inspecting documents as to the cause of significant changes in total contract cost for contracts with such changes;
• Inquiring the person in charge of construction field and inspecting documents as to the cause of significant differences between estimated total cost and the actual total cost for completed projects; and
• For selected samples, testing the cut-off and assessing whether contract costs incurred that are used for calculation of percentage-of-completion through inspection of supporting documentation.

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