EX-99.1 2 a15-8307_1ex99d1.htm EX-99.1

Exhibit 99.1

 

 

GRAVITY CO., LTD.

 

NON-CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2014 AND 2013

 

 

ATTACHMENT: INDEPENDENT AUDITOR’S REPORT

 

GRAVITY CO., LTD.

 



 

 

Page(s)

 

 

Independent Auditor’s Report

1

 

 

Non-Consolidated Financial Statements

 

 

 

Non-Consolidated Statements of Financial Position

4

 

 

Non-Consolidated Statements of Operations

6

 

 

Non-Consolidated Statements of Changes in Equity

7

 

 

Non-Consolidated Statements of Cash Flows

8

 

 

Notes to Non-consolidated Financial Statements

10

 



 

 

 

 

 

Deloitte Anjin LLC
9F., One IFC,

10, Gukjegeumyung-ro,

Youngdeungpo-gu, Seoul

150-945, Korea

 

Tel: +82 (2) 6676 1000
Fax: +
82 (26674 2114
www.deloitte
anjin.co.kr

 

Independent Auditor’s Report

 

English Translation of Independent Auditors’ Report Originally Issued in Korean on March 18, 2015

 

To the Shareholders and the Board of Directors of
GRAVITY Co., Ltd.

 

Report on the Financial Statements

We have audited the accompanying non-consolidated financial statements of GRAVITY Co., Ltd. (the “Company”), which comprise the non-consolidated statement of financial position as of December 31, 2014, and the non-consolidated statement of operations, non-consolidated statement of changes in equity and non-consolidated statement of cash flows, for the year then ended, and a summary of significant accounting policies and other explanatory information.

 

Management’s Responsibility for the Non-Consolidated Financial statements

Management is responsible for the preparation and fair presentation of these non-consolidated financial statements in accordance with Accounting Standards for Non-Public Entities in the Republic of Korea (“KAS - NPEs”) and for such internal control as management determines is necessary to enable the preparation of non-consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

Our responsibility is to express an audit opinion on these financial statements based on our audit. We conducted our audit in accordance with Korean Standards on Auditing (“KSAs”). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”),

its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities.

 

DTTL (also referred to as “Deloitte Global”) does not provide services to clients.

 

Please see www.deloitte.com/kr/about for a more detailed description of DTTL and its member firms.

 

Member of Deloitte Touche Tohmatsu Limited

 



 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the non-consolidated financial statements present fairly, in all material respects, the financial position of the GRAVITY Co., Ltd. as of December 31, 2014, and its financial performance and its cash flows for the year then ended in accordance with KAS - NPEs.

 

Others

The non-consolidated financial statements of GRAVITY Co., Ltd. as of and for the year ended December 31, 2013, were audited in accordance with the former KSAs, known as auditing standards generally accepted in Korea by other auditor whose report dated March 17, 2014, expressed an unqualified opinion on those statements.

 

March 18, 2015

 

Notice to Readers

 

This report is effective as of March 18, 2015, the auditors’ report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significantly affect the accompanying separate financial statements and may result in modification to the auditors’ report.

 



 

Non-Consolidated Financial Statements

 

GRAVITY CO., LTD.

 

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2014 AND 2013

 

The accompanying non-consolidated financial statements including all footnote disclosures were prepared by and are the responsibility of Gravity Co., Ltd. (the “Company”)

 

Park, Hyun Cheol

Chief Executive Officer

 

15F, 396 World Cup buk-ro, Mapo-gu, Seoul 121-795, Korea

02-2132-7000

 



 

GRAVITY CO., LTD.

NON-CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2014 AND 2013

 

 

 

(In thousands of Korean won)

 

 

 

December 31,
2014

 

December 31,
2013

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents (Note 3)

 

24,095,204

 

23,402,392

 

Short-term financial instruments (Note 3)

 

14,500,000

 

18,000,000

 

Trade receivables, net (Notes 4 and 19)

 

2,621,893

 

3,759,344

 

Short-term loans receivable, net (Notes 4, 5 and 19)

 

6,667

 

32,778

 

Other receivables, net (Note 19)

 

489,811

 

230,569

 

Advanced payments, net (Note 19)

 

17,756

 

313,278

 

Current portion of deferred tax assets (Note 12)

 

 

366,000

 

Prepaid income taxes

 

576,092

 

694,559

 

Other current assets

 

818,048

 

706,713

 

 

 

 

 

 

 

Total current assets

 

43,125,471

 

47,505,633

 

 

 

 

 

 

 

NON-CURRENT ASSETS:

 

 

 

 

 

Equity-method investments (Note 4)

 

6,463,350

 

10,377,516

 

Long-term loans receivable, net (Notes 4,5 and 19)

 

2,222

 

13,750

 

Property and equipment, net (Notes 6 and 7)

 

474,923

 

651,535

 

Intangible assets, net (Note 9)

 

8,906,510

 

13,573,211

 

Leasehold deposits paid (Note 8)

 

907,548

 

1,250,167

 

Deferred tax assets, net (Note 12)

 

 

5,728,000

 

Other non-current assets

 

229,827

 

4,346,711

 

 

 

 

 

 

 

Total non-current assets

 

16,984,380

 

35,940,890

 

 

 

 

 

 

 

TOTAL ASSETS

 

60,109,851

 

83,446,523

 

 

(Continued)

4



 

GRAVITY CO., LTD.

NON-CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED)

AS OF DECEMBER 31, 2014 AND 2013

 

 

 

(In thousands of Korean won)

 

 

 

December 31,
2014

 

December 31,
2013

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable (Notes 19 and 20)

 

1,681,818

 

2,747,370

 

Advance receipts (Note 19)

 

1,550,367

 

1,920,366

 

Withholdings

 

109,907

 

131,308

 

Deferred income (Note 19)

 

2,380,805

 

2,968,960

 

Income tax payable

 

112,742

 

146,384

 

 

 

 

 

 

 

Total current liabilities

 

5,835,639

 

7,914,388

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

Long-term deferred income (Note 19)

 

5,207,345

 

6,475,232

 

Asset retirement obligations

 

210,290

 

99,000

 

Leasehold deposits received (Notes 19 and 20)

 

117,800

 

150,980

 

 

 

 

 

 

 

Total non-current liabilities

 

5,535,435

 

6,725,212

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

11,371,074

 

14,639,600

 

 

 

 

 

 

 

SHAREHOLDERS EQUITY:

 

 

 

 

 

Capital stock

 

 

 

 

 

Common stock (Notes 1 and 13)

 

3,474,450

 

3,474,450

 

Capital surplus

 

 

 

 

 

Paid in capital in excess of par value (Note 13)

 

61,835,470

 

73,255,073

 

Other capital surplus

 

2,125,136

 

2,125,136

 

Accumulated other comprehensive income and expenses

 

 

 

 

 

Accumulated other comprehensive income of equity method investment (Notes 4 and 16)

 

1,528,484

 

1,532,202

 

Accumulated other comprehensive expense of equity method investment (Notes 4 and 16)

 

(194,930

)

(160,336

)

Accumulated deficit

 

 

 

 

 

Undisposed accumulated deficit (Note 14)

 

(20,029,833

)

(11,419,602

)

 

 

 

 

 

 

TOTAL EQUITY

 

48,738,777

 

68,806,923

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

 

60,109,851

 

83,446,523

 

 

The accompanying notes are an integral part of these non-consolidated financial statements.

 

5



 

GRAVITY CO., LTD.

NON-CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

 

 

(In thousands of Korean won,
except for per share data)

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Revenues (Notes 11 and 19)

 

17,339,523

 

26,257,395

 

Cost of revenues (Notes 15 and 19)

 

15,385,861

 

20,046,866

 

Gross profit

 

1,953,662

 

6,210,529

 

Selling and administrative expenses (Notes 15 and 19)

 

10,953,787

 

14,163,089

 

Operating loss

 

(9,000,125

)

(7,952,560

)

 

 

 

 

 

 

Non-operating income

 

 

 

 

 

Interest income (Note 19)

 

1,077,732

 

1,380,337

 

Gain on foreign currency translation

 

78,584

 

19,784

 

Gain on foreign currency transactions

 

237,037

 

465,240

 

Gain on valuation of equity-method investments (Note 4)

 

4,317

 

 

Gain on disposal of equity-method investments (Note 4)

 

122,705

 

 

Gain on disposal of property and equipment

 

4,875

 

1,483

 

Other income

 

369,088

 

376,404

 

 

 

 

 

 

 

 

 

1,894,338

 

2,243,248

 

Non-operating expenses

 

 

 

 

 

Other bad debt expenses (Notes 4,5 and 19)

 

 

2,087,151

 

Loss on foreign currency translation

 

260,698

 

205,682

 

Loss on foreign currency transactions

 

193,904

 

577,647

 

Loss on valuation of equity-method investments (Note 4)

 

5,004,999

 

2,102,173

 

Loss on impairment of equity-method investments (Note 4)

 

 

70,793

 

Loss on disposal of long-term available-for-sale securities

 

 

67,835

 

Loss on disposal of property and equipment

 

21

 

 

Loss on impairment of intangible assets (Note 9)

 

 

1,344,120

 

Other losses

 

6,898

 

10,775

 

 

 

 

 

 

 

 

 

5,466,520

 

6,466,176

 

 

 

 

 

 

 

Loss before income taxes

 

(12,572,307

)

(12,175,488

)

Income tax expense (Note 12)

 

(7,457,526

)

(5,779,205

)

 

 

 

 

 

 

Net loss

 

(20,029,833

)

(17,954,693

)

 

 

 

 

 

 

Loss per share (in Korean won)

 

 

 

 

 

Basic loss per share (Note 17)

 

(2,882

)

(2,584

)

 

The accompanying notes are an integral part of these non-consolidated financial statements.

 

6


 


 

GRAVITY CO., LTD.

NON-CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

(in thousands of Korean won)

 

Capital
Stock

 

Capital
Surplus

 

Accumulated
other comprehensive
income and loss

 

Retained earnings
(Accumulated deficit)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

3,474,450

 

75,380,209

 

1,433,326

 

6,535,091

 

86,823,076

 

Net loss

 

 

 

 

(17,954,693

)

(17,954,693

)

Changes in equity-method investee with accumulated other comprehensive Income (Notes 4 and 16)

 

 

 

47,296

 

 

47,296

 

Changes in equity-method investee with accumulated other comprehensive expense (Notes 4 and 16)

 

 

 

(108,756

)

 

(108,756

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

3,474,450

 

75,380,209

 

1,371,866

 

(11,419,602

)

68,806,923

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

 

3,474,450

 

75,380,209

 

1,371,866

 

(11,419,602

)

68,806,923

 

Net loss

 

 

 

 

(20,029,833

)

(20,029,833

)

Disposition of accumulated deficit (Note 14)

 

 

(11,419,602

)

 

11,419,602

 

 

Changes in equity-method investee with accumulated other comprehensive income (Notes 4 and 16)

 

 

 

(3,719

)

 

(3,719

)

Changes in equity-method investee with accumulated other comprehensive expense (Notes 4 and 16)

 

 

 

(34,594

)

 

(34,594

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

3,474,450

 

63,960,607

 

1,333,553

 

(20,029,833

)

48,738,777

 

 

The accompanying notes are an integral part of these non-consolidated financial statements.

 

7



 

GRAVITY CO., LTD.

NON-CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

 

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

(20,029,833

)

(17,954,693

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

Depreciation

 

411,252

 

478,006

 

Amortization of intangible assets

 

4,743,950

 

5,988,101

 

Bad debt expenses

 

248,473

 

87,960

 

Other bad debt expenses

 

 

2,087,152

 

Loss on foreign currency translation

 

16,688

 

87,022

 

Loss on valuation of equity-method investments

 

5,004,999

 

2,102,173

 

Loss on impairment of equity-method investments

 

 

70,793

 

Loss on disposal of long-term available-for-sale securities

 

 

67,835

 

Loss on disposal of property and equipment

 

21

 

 

Loss on impairment of intangible assets

 

 

1,344,120

 

Gain on foreign currency translation

 

(78,584

)

(19,784

)

Gain on valuation of equity-method investments

 

(4,317

)

 

Gain on disposal of property and equipment

 

(4,875

)

(1,483

)

Gain on disposal of equity-method investments

 

(122,705

)

 

 

 

 

 

 

 

 

 

10,214,902

 

12,291,895

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in trade receivables

 

147,395

 

780,689

 

Increase in other receivables

 

(311,871

)

(58,152

)

Decrease (increase) in accrued income

 

72,208

 

(16,805

)

Decrease in advanced payments

 

264,761

 

740,900

 

Decrease (increase) in prepaid expenses

 

(192,598

)

164,685

 

Decrease in current portion of deferred tax assets

 

366,000

 

267,000

 

Decrease in prepaid income taxes

 

118,467

 

268,586

 

Decrease in other current assets

 

38,055

 

58,474

 

Increase in long-term prepaid expenses

 

(181,770

)

(1,334

)

Decrease in deferred tax assets

 

5,796,000

 

3,177,000

 

Decrease (increase) in other non-current assets

 

4,269,654

 

(130,000

)

Decrease in accounts payable

 

(1,063,079

)

(383,466

)

Decrease in withholdings

 

(21,401

)

(17,428

)

Decrease in deferred income

 

(1,388,119

)

(215,300

)

Decrease in income tax payable

 

(33,642

)

(98,302

)

Decrease in long-term deferred income

 

(467,922

)

(1,039,511

)

Decrease in leasehold deposits received

 

(33,180

)

(3,508

)

Decrease in advanced receipts

 

(369,998

)

 

Decrease in asset retirement obligation

 

(28,710

)

 

 

 

 

 

 

 

 

 

6,980,250

 

3,493,528

 

 

 

 

 

 

 

Net cash used in operating activities

 

(2,834,681

)

(2,169,270

)

 

(Continued)

 

8



 

GRAVITY CO., LTD.

NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

 

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Decrease in short-term financial instruments

 

45,000,000

 

39,500,000

 

Collection of short-term loans receivable

 

36,250

 

870,694

 

Disposal of equity-method investments

 

1

 

 

Disposal of long-term available-for-sale securities

 

 

579,227

 

Collection of long-term loans receivable

 

1,389

 

23,056

 

Disposal of property and equipment

 

10,805

 

2,772

 

Decrease in leasehold deposits

 

342,619

 

124,065

 

Increase in short-term financial instruments

 

(41,500,000

)

(40,000,000

)

Increase in short-term loans receivable

 

(216,490

)

(800,000

)

Acquisition of equity-method investments

 

 

(800,040

)

Increase in long-term loans receivable

 

 

(858,000

)

Acquisition of property and equipment

 

(100,592

)

(121,731

)

Acquisition of intangible assets

 

(46,489

)

(2,026,612

)

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

3,527,493

 

(3,506,569

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

692,812

 

(5,675,839

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

 

 

 

Beginning of the year

 

23,402,392

 

29,078,231

 

 

 

 

 

 

 

End of the year

 

24,095,204

 

23,402,392

 

 

The accompanying notes are an integral part of these non-consolidated financial statements.

 

9



 

GRAVITY CO., LTD.

NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

1.                 The Company

 

GRAVITY Co., Ltd. (the “Company”) was incorporated on April 4, 2000, to engage in developing and distributing online games and other related business. The Company maintains a single business segment engaged in developing online games, software licensing and other related services. The Company’s principal game product, “Ragnarok”, a massive multi-player online role-playing game, was commercially launched in August 2002, and currently operated internationally over the 60 markets through three subsidiaries, including Gravity Interactive, Inc. In addition, the Company has another subsidiary, NeoCyon, Inc., which operates in mobile service business in Republic of Korea. The Company also has 85.50% ownership of Gravity Games Corp., the developer of “Dragonica”, a massive multi-player online role playing game.

 

On February 8, 2005, the Company listed its shares on NASDAQ in the United States, and issued 1,400,000 shares of common stock by means of American Depositary Shares.

 

As of December 31, 2014, the total paid-in capital amounts to 3,474,450 thousand. The Company’s major shareholders and their respective percentage of ownership as of December 31, 2014, are as follows:

 

Shareholder

 

Number of shares

 

Ownership (%)

 

GungHo Online Entertainment, Inc.

 

4,121,739

 

59.31

%

Others

 

2,827,161

 

40.69

%

 

 

 

 

 

 

 

 

6,948,900

 

100.00

%

 

2.                 SIGNIFICANT ACCOUNTING POLICIES:

 

The principal accounting policies applied in the preparation of these non-consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

 

2.1 Basis of Presentation

 

The Company maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with the Korean Accounting Standards for Non-Public Entities (“KAS-NPEs”), which apply to those companies which are subject to the Act on External Audit of Stock Companies but do not prepare their financial statements in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (“Korean IFRS”).

 

Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying non-consolidated financial statements have been condensed, restructured and translated into English from the Korean language financial statements.

 

Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, financial performance or cash flows, is not presented in the accompanying financial statements.

 

10



 

The following is a summary of significant accounting policies followed by the Company in the preparation of its non-consolidated financial statements.

 

2.2 Foreign Currency Translation

 

(a) Functional and presentation currency

 

Items included in the Company’s financial statements are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in Korean won, which is the Company’s functional and presentation currency.

 

(b) Foreign currency transactions and translations

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at each reporting date of monetary assets and liabilities denominated in foreign currencies are recognized in the statements of operations, except when deferred in other comprehensive income as qualifying cash flow hedges or available-for-sale debt securities.

 

Translation differences on non-monetary financial assets and liabilities, such as equities held at fair value through profit or loss, are recognized in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as available-for-sale, are included in other comprehensive income.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

 

2.3 Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash without significant transaction costs which are subject to an insignificant risk of changes in value.

 

2.4 Investments in Securities

 

Costs of securities are determined using the moving average method. Investments in equity securities or debt securities are classified into trading securities, available-for-sale securities and held-to-maturity securities, depending on the acquisition and holding purpose. Investments in equity securities of companies, over which the Company exercises a significant control or influence, are recorded using the equity-method of accounting. Trading securities are classified as short-term investments while available-for-sale securities and held-to-maturity securities are classified as long-term investments, excluding those securities that mature or are certain to be disposed of within one year, which are then classified as short-term investments.

 

Held-to-maturity securities are measured at amortized cost while available-for-sale and trading securities are measured at fair value. However, non-marketable securities, classified as available-for-sale securities, are carried at cost when the fair values are not readily determinable.

 

Gains and losses related to trading securities are recognized in the statements of operations, while unrealized gains and losses of available-for-sale securities are recognized under other comprehensive income and expense. Realized gains and losses on available-for-sale securities are recognized in the statements of operations.

 

11



 

In case that the estimated amount recoverable from the securities (“recoverable amount”) is less than the amortized cost of the debt security or the acquisition cost of the equity security, the Company considers the necessity to recognize impairment losses. The Company assesses at the end of each reporting period whether there is objective evidence for impairment. If there is objective evidence for impairment, in the absence of evidence to the contrary, the recoverable amount is estimated and impairment losses are recognized in profit and losses.

 

If, in a subsequent period, the reversal of impairment loss can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the statement of income for held-to-maturity securities and available-for-sale securities valued at cost, and the revised book value does not exceed the amortized cost (acquisition cost for available-for-sale securities) that would have been recorded without the impairment. The reversal for available-for-sale securities measured at fair value is recognized in the profit and losses only to the extent of the amount recognized as impairment losses.

 

2.5 Allowance for Doubtful Accounts

 

The Company provides an allowance for doubtful accounts for trade receivables. Allowances are calculated based on the estimates made through a reasonable and objective method. Bad debts expense is recorded as the difference between the estimated loss on doubtful accounts and the balance of allowance for doubtful accounts, if the estimated loss on doubtful accounts is larger than the balance of the allowance. Bad debts expense for trade receivables from commercial transactions is accounted for as selling and administrative expenses, while bad debts expense from other receivables is accounted for as non-operating expense. Uncollectible receivables are offset against allowance for doubtful accounts and in case of insufficient amount of allowance, bad debts expense is recognized.

 

2.6 Equity-method Investments

 

The Company reflects any changes in the book value of its equity-method investments on which it has significant influence after the initial purchase date. Under the equity-method, the Company records changes in its proportionate ownership in the book value of the investee in current operations, as capital adjustments or as adjustments to retained earnings, depending on the nature of the underlying change in the book value of the investee. Changes in the Company’s proportionate ownership in the book value of the investee incurred by major error corrections to the investee’s retained earnings are recognized in the profit and losses if there is no significant effect to the Company’s financial statements. All other changes in equity are accounted for under other comprehensive income and expense (changes in equity due to equity-method investments). Dividends paid by the investee to the Company are directly deducted from the Company’s equity-method investments at the moment the dividend payment is declared.

 

Except when the Company or its investee applies the KAS-NPEs No. 31, Special Accounting for Small and Medium-sized Companies, or when an investee prepares its financial statements in accordance with Korean IFRS, which are different from the accounting policies the Company applies for like transactions and events with similar circumstances, adjustments are made to conform the investee’s accounting policies to those of the Company when the investee’s financial statements are used by the Company in applying the equity-method.

 

In case the investee is also a subsidiary of the Company, net income and net assets of the investee in its non-consolidated financial statements should be equal to the corresponding share of the Company presented in the financial statements, unless the equity-method of accounting has been discontinued on the said investee.

 

12



 

2.7 Property and Equipment

 

Property and equipment are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. It also includes the present value of the estimated cost of dismantling and removing the asset, and restoring the site after the termination of the asset’s useful life, provided it meets the criteria for recognition of provisions.

 

Property and equipment are stated net of accumulated depreciation calculated based on the following depreciation method and estimated useful lives:

 

 

 

Estimated Useful Lives

 

Depreciation Method

 

Computer and other equipment

 

4 years

 

Straight-line method

 

Vehicles

 

4 years

 

Straight-line method

 

Furniture and fixture

 

4 years

 

Straight-line method

 

Leasehold Improvements

 

4 years

 

Straight-line method

 

 

Expenditures incurred after the acquisition or completion of assets are capitalized only when it is probable that future economic benefits associated with the item will flow to the Company, which includes the enhancement of the value of the related assets over their recently appraised value or extension of the useful life of the related assets, and the fair value for the related cost can be reliably measured. All other routine maintenance and repairs are charged to expense as incurred.

 

2.8 Operating Leases

 

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statements of operations on a straight-line basis over the period of the lease.

 

2.9 Intangible Assets

 

Intangible assets are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. Intangible assets are stated net of accumulated amortization calculated based on the following depreciation methods and estimated useful lives:

 

 

 

Estimated Useful Lives

 

Amortization Method

 

Development costs

 

2 ~ 5 years

 

Straight-line method

 

Software

 

3 years

 

Straight-line method

 

Other intangible assets

 

2 ~ 10 years

 

Straight-line method

 

 

New product and new technology related development costs, which are individually identifiable and it is probable that the expected future economic benefits will flow to the Company, are capitalized as intangible assets. Amortization of development costs begins when the related product or technology are available for sale or use, over 2 to 5 years using straight-line method.

 

In addition, costs for exclusive rights to distribute online games which are being developed with probable future benefits are capitalized as other intangible assets. Such intangible assets are amortized on a straight-line basis over the term of the agreement from the point of commercialization.

 

13



 

2.10 Government Grants

 

Government grants are not recognized until there is reasonable assurance that the Company will comply with the conditions attached to it and that the grants will be received.

 

Government grants related to assets, including non-monetary grants at fair value, are accounted for by deducting the grant in arriving at the carrying amount of the asset. The grant is recognized in profit or loss over the life of the depreciation asset, as a reduced depreciation expense, and the remaining balance upon disposal is recognized in gain or loss on disposal.

 

When government grants are paid to compensate specific expenses, they are deducted in the related expenses. When there are no expenses to be deducted, they are accounted for as operating revenue if they are directly related to the Company’s main operation activities and non-operating income if not. If specific requirements have to be met in order to use the grants related to income, grants received before meeting those requirements are accounted for as unearned revenue.

 

2.11 Impairment of Non-financial Assets

 

Intangible assets not yet available for use are tested annually for impairment. Goodwill acquired in a business combination is tested for impairment at the end of each reporting period by assessing its recoverable amount. Assets that are subject to amortization or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Property and equipment are reviewed for impairment under the above circumstances and when gross estimated future cash flows expected from the use and disposal of property and equipment (individual assets or cash-generating units) is less than the carrying amount. Impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels (cash-generating units) for which there are separate and identifiable cash flows.

 

For the purpose of impairment testing, goodwill acquired in a business combination, from the acquisition date, should be allocated to each of the acquirer’s cash-generating units that are expected to benefit from the synergies of the combination. If the recoverable amount of the unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.

 

Non-financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Reversal of impairment of goodwill is not allowed.

 

2.12 Provisions and Contingent Liabilities

 

Provisions are recognized when it is probable that an outflow of resources will occur due to a present obligation resulting from a past event, and the amount can be reliably estimated. However, when such outflow is dependent upon a future event, is not certain to occur, or cannot be reliably estimated, a disclosure regarding the contingent liability is made in the notes to the financial statements.

 

2.13 Income Tax and Deferred Income Tax

 

Income tax expense (benefit) includes the current income tax under the relevant income tax law and the changes in deferred tax assets or liabilities. Deferred tax assets and liabilities represent temporary differences between financial reporting and the tax bases of assets and liabilities. Deferred tax assets are recognized for temporary differences which will decrease future taxable income or operating loss to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. Deferred tax effects applicable to items in the equity are directly reflected in the equity.

 

14



 

2.14 Employee Benefits

 

(a) Defined contribution pension plan

 

The Company has a defined contribution pension plan with the related contribution to the pension plan recorded as severance benefit expenses.

 

(b) Annual paid leave obligations

 

The Company recognizes expenses and liabilities related to annual paid leave during an accounting period when an employee has rendered service that gives rise to employee’s entitlement to future annual paid leave.

 

The Company recognized expenses and liabilities for the entire annual paid leave resulting from the rendered service as the Company compensates for unused annual leaves.

 

2.15 Revenue Recognition

 

Prepaid online game subscriptions are recognized as revenue upon their actual usage. The Company licenses the right to sell and distribute its games in exchange for an initial prepaid license fees and guarantee minimum royalty payments. The prepaid license fee revenues are deferred and recognized on a straight-line method over the license period. The guarantee minimum royalty payments are deferred and recognized as the royalties are earned. In addition, the Company receives royalty payments based on a specified percentage of the licensees’ sales. These royalties are recognized on a monthly basis as the related revenues are earned by the licensees. Revenues from other sales are recognized when goods are transferred or by the reference to the stage of completion.

 

Interest income is recognized using the effective interest method. When receivables are impaired, the Company reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired receivables is recognized using the original effective interest rate.

 

Dividend income is recognized when the rights to receive payment is established.

 

2.16 Measurement of Financial Assets and Financial Liabilities

 

(a) Initial measurement

 

Financial assets and financial liabilities are measured at the fair value at the initial recognition. Generally, the transaction price (i.e. the fair value of the consideration paid for financial assets and received for financial liabilities) is treated as fair value. In addition, if there is any significant difference between the fair value and the nominal amount of receivable and payable from long-term lending and borrowing transactions or sales transactions with long-term deferred payment conditions, total amount of receivable and payable is carried at fair value.

 

If the consideration paid (or received) includes any amount for other than financial instruments, fair value of the financial instrument is carried at the market price. When market price is not available, fair value is estimated using valuation techniques (including present value based techniques). However, although the consideration consists of the amount for other than financial instrument, the whole amount is initially recognized if a benefit in return from using the funds is imposed or there is a certain relationship between raising and using funds. Also for lease deposits, the whole transaction price is recognized at the initial recognition. Trading securities and derivatives (except when designated as a hedging instrument in a cash flow hedge accounting) are subsequently measured at fair value after initial recognition, and changes in fair value are recognized in profit and loss. In case of other financial assets and liabilities, any transaction costs related to acquisition of financial assets or issuance of financial liabilities are added to or deducted from initially recognized fair value.

 

15



 

When measuring the present value of financial instruments, the Company uses the internal interest rate of transactions that occurred in the current period. If internal interest rate is not available or the difference from the market interest rate is material, market interest rate is applied. If the market interest rate cannot be calculated, then the weighted average interest rate which is calculated by reasonable and objective standards is used. If reasonable and objective standards are unavailable, the Company applies the financing costs which are reasonably estimated using the distribution rate of corporate bonds, reflecting the Company’s credit rating.

 

(b) Subsequent measurement

 

Financial assets and financial liabilities other than securities (note 2.4), derivatives, financial instruments at fair value through profit or loss, and financial guarantee contracts are measured at amortized cost using the effective interest method. Financial assets at fair value through profit or loss are subsequently measured using subsequent measurement method of trading securities (note 2.4).

 

2.17 Foreign currency translations of foreign subsidiaries under equity-method

 

The Company translates assets and liabilities at closing rate as of the reporting date, equity at exchange rate prevailing on the date of transaction, and income and expenses at average exchange rate of foreign subsidiaries under equity-method of accounting. Gains and losses arising from such translations are recognized in other comprehensive income and expense. When the foreign subsidiaries under equity-method of accounting are sold or liquidated, exchange differences recognized in other comprehensive income or expenses are recognized in the statement of operations.

 

3.                   Cash and Cash Equivalents and Short & Long-term Financial Instruments

 

As of December 31, 2014 and 2013, there are no restrictions for use of time deposits.

 

4.                   Equity-method Investments

 

Equity-method investments as of December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

 

 

2014

 

Investee

 

Percentage
of ownership (%)

 

Acquisition
Cost

 

Net Asset
Value

 

Book
Value

 

Gravity Interactive, lnc.

 

100.00%

 

4,636,784

 

(4,441,862

)

 

Gravity Entertainment Corp.

 

100.00%

 

1,763,994

 

374,034

 

374,034

 

Gravity EU SAS(*1)

 

 

 

 

 

Gravity Middle East&Africa FZ-LLC(*2)

 

100.00%

 

1,979,640

 

1,276,603

 

1,276,603

 

NeoCyon, Inc.

 

96.11%

 

7,715,763

 

4,812,713

 

4,812,713

 

Gravity Games Corp.

 

85.50%

 

12,488,520

 

(675,213

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,584,701

 

1,346,275

 

6,463,350

 

 


(*1)            The Company doesn’t own any shares of Gravity EU SAS, which had been sold in November 3, 2014.

 

(*2)            On May 7, 2007, the Company founded a wholly owned subsidiary in the United Arab Emirates, which is in process of liquidation as of December 31, 2014.

 

16



 

(in thousands of Korean won)

 

 

 

 

 

2013

 

Investee

 

Percentage
of ownership (%)

 

Acquisition
Cost

 

Net Asset
Value

 

Book
Value

 

Gravity Interactive, lnc.

 

100.00%

 

4,636,784

 

(2,659,058

)

 

Gravity Entertainment Corp.

 

100.00%

 

1,763,994

 

436,456

 

436,456

 

Gravity EU SAS

 

25.00%

 

2,519,363

 

(257,819

)

 

Gravity Middle East&Africa  FZ-LLC

 

100.00%

 

1,979,640

 

1,221,300

 

1,221,300

 

NeoCyon, Inc.

 

96.11%

 

7,715,763

 

8,719,760

 

8,719,760

 

Gravity Games Corp. (*1)

 

85.50%

 

12,488,520

 

(1,264,645

)

 

 

 

 

 

31,104,064

 

6,195,994

 

10,377,516

 

 


(*1) The Company obtained additional 34.67% of the share capital of Gravity Games Corp. for 800,040 thousand through additional paid-in capital in 2013.

 

Details of changes in the differences between the acquisition cost and the Company’s share of the net fair value of the equity-method investee’s identifiable asset and liability for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

Investee

 

Beginning

 

Increase

 

Decrease

 

Ending

 

Gravity Games Corp.

 

 

 

 

 

 

(in thousands of Korean won)

 

 

 

2013

 

Investee

 

Beginning

 

Increase

 

Decrease(*1)

 

Ending

 

Gravity Games Corp.

 

1,024,031

 

815,870

 

1,839,901

 

 

 

Differences between cost of investment and the underlying net book value of the investee consist of intangible assets and goodwill. Amortization is calculated using the straight-line method over three to five years for intangible assets and goodwill, recorded as loss on valuation of equity-method investments.

 


(*1) Loss on impairment of equity-method investment amounting to 70,793 thousand and unrecognized changes in equity interest as a result of suspending equity-method amounting to 1,264,645 thousand are included.

 

As of December 31, 2014 and 2013 there is no unrealized gain or loss arising from inter-company transactions with the equity-method investees.

 

17



 

Changes in equity-method investments for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

Investees

 

Beginning
Balance

 

Acquisition
(Disposition)

 

Valuation
Income (Loss)

 

Others(*4)

 

Ending
Balance

 

Gravity Interactive, lnc.(*1)

 

 

 

(1,070,124

)

1,070,124

 

 

Gravity Entertainment Corp.

 

436,456

 

 

(27,828

)

(34,594

)

374,034

 

Gravity EU SAS(*2)

 

 

(122,705

)

 

122,705

 

 

Gravity Middle East &Africa FZ-LLC

 

1,221,300

 

 

4,317

 

50,986

 

1,276,603

 

NeoCyon, Inc.

 

8,719,760

 

 

(3,907,047

)

 

4,812,713

 

Gravity Games Corp.(*3)

 

 

 

 

 

 

 

 

10,377,516

 

(122,705

)

(5,000,682

)

1,209,221

 

6,463,350

 

 


(*1) Equity-method of accounting has been suspended in 2011 for Gravity Interactive, Inc., due to its accumulated losses. The Company recognized additional valuation loss on equity-method investment of 1,070,124 thousand for the year ended December 31, 2014, which is resulted from recognition of allowance for doubtful accounts in trade receivables and loans receivable to Gravity Interactive, Inc. The amount of unrecognized changes in equity as of December 31, 2014 is 1,765,088 thousand.

 

(*2) The company sold all equity of Gravity EU SAS of 25% and recognized the gain from disposal of equity-method investment of 122,705 thousand.

 

(*3) As estimated recoverable amount from equity-method investments for Gravity Games Corp. is less than its book value, the difference is recognized as a loss on impairment of equity investments. This resulted in suspension of equity-method accounting in 2013. In relation to this, amount of unrecognized changes in equity as of December 31, 2014 is 675,213 thousand.

 

(*4) Others consist of changes in accumulated other comprehensive income (expense) of equity-method investments.

 

(in thousands of Korean won)

 

 

 

2013

 

Investees

 

Beginning
Balance

 

Acquisition
(Disposition)

 

Valuation
Income (Loss)

 

Others (*4)

 

Ending
Balance

 

Gravity Interactive, lnc. (*1)

 

 

 

(60,547

)

60,547

 

 

Gravity Entertainment Corp.

 

574,719

 

 

(29,507

)

(108,756

)

436,456

 

Gravity EU SAS(*2)

 

 

 

 

 

 

Gravity Middle East &Africa FZ-LLC

 

1,464,423

 

 

(229,871

)

(13,252

)

1,221,300

 

NeoCyon, Inc.

 

9,452,037

 

 

(732,277

)

 

8,719,760

 

Gravity Games Corp. (*3, 4)

 

320,724

 

800,040

 

(1,049,971

)

(70,793

)

 

 

 

11,811,903

 

800,040

 

(2,102,173

)

(132,254

)

10,377,516

 

 

18



 


(*1) Equity-method of accounting has been suspended in 2011 for Gravity Interactive, Inc., due to its accumulated losses. In relation to this, amount of unrecognized changes in equity as of December 31, 2013 is 1,052,408 thousand.

 

(*2) Equity-method of accounting has been suspended in 2012 for Gravity EU SAS, due to its accumulated losses. In relation to this, amount of unrecognized changes in equity as of December 31, 2013 is 257,819 thousand.

 

(*3) As estimated recoverable amount from equity-method investments for Gravity Games Corp. is less than its book value, the difference is recognized as a loss on impairment of equity investments. This resulted in suspension of equity-method accounting in 2013. In relation to this, amount of unrecognized changes in equity as of December 31, 2013 is 1,264,645 thousand.

 

(*4) Others consist of changes in accumulated other comprehensive income (expense) and a loss on impairment of equity-method investments.

 

Changes in accumulated other comprehensive income and expense of equity-method investments for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

Investees

 

Beginning
Balance

 

Increase

 

Decrease

 

Ending
Balance

 

Gravity Interactive, lnc.

 

1,180,434

 

 

 

1,180,434

 

Gravity Entertainment Corp.

 

(160,336

)

 

34,593

 

(194,929

)

Gravity EU SAS

 

122,705

 

 

122,705

 

 

Gravity Middle East&Africa FZ-LLC

 

297,062

 

50,987

 

 

348,049

 

 

 

1,439,865

 

50,987

 

157,298

 

1,333,554

 

Deferred income tax charged directly to equity(*1)

 

(68,000

)

 

(68,000

)

 

 

 

1,371,865

 

50,987

 

89,298

 

1,333,554

 

 

(in thousands of Korean won)

 

 

 

2013

 

Investees

 

Beginning
Balance

 

Increase

 

Decrease

 

Ending
Balance

 

Gravity Interactive, lnc.

 

1,119,887

 

60,547

 

 

1,180,434

 

Gravity Entertainment Corp.

 

(51,580

)

 

108,756

 

(160,336

)

Gravity EU SAS

 

122,705

 

 

 

122,705

 

Gravity Middle East&Africa FZ-LLC

 

310,314

 

 

13,252

 

297,062

 

 

 

1,501,326

 

60,547

 

122,008

 

1,439,865

 

Deferred income tax charged directly to equity(*1)

 

(68,000

)

 

 

(68,000

)

 

 

1,433,326

 

60,547

 

122,008

 

1,371,865

 

 


(*1) The Company charged deferred income taxes from the temporary differences related to equity accounts directly to equity as of December 31, 2014 and 2013 (Refer to Note 12).

 

Except for NeoCyon, Inc., the unaudited financial statements of the Company’s subsidiaries for the years ended December 31, 2014 and 2013 were used in the valuation of these equity-method investments. The Company has concluded that any difference between the audited and unaudited financial statements is not material.

 

19



 

Summary of financial information of equity-method investees as of and for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

Investees

 

Assets

 

Liabilities

 

Revenue

 

Net Profit
(Loss)

 

Gravity Interactive, lnc.

 

980,790

 

5,422,653

 

4,990,297

 

(1,602,240

)

Gravity Entertainment Corp.

 

377,288

 

3,254

 

16

 

(27,828

)

Gravity Middle East&Africa FZ-LLC

 

1,276,603

 

 

 

4,317

 

NeoCyon, Inc.

 

8,920,428

 

3,912,923

 

19,315,572

 

(4,065,182

)

Gravity Games Corp.

 

3,297,595

 

4,087,334

 

928,502

 

689,407

 

 

(in thousands of Korean won)

 

 

 

2013

 

Investees

 

Assets

 

Liabilities

 

Revenue

 

Net Profit
(Loss)

 

Gravity Interactive, lnc.

 

2,062,734

 

4,721,792

 

5,965,724

 

(948,478

)

Gravity Entertainment Corp.

 

439,525

 

3,069

 

23

 

(29,507

)

Gravity EU SAS

 

902,903

 

1,934,181

 

1,313,602

 

(948,338

)

Gravity Middle East&Africa FZ-LLC

 

1,455,041

 

233,741

 

 

(229,871

)

NeoCyon, Inc.

 

12,754,479

 

3,681,791

 

18,284,264

 

(885,668

)

Gravity Games Corp.

 

3,454,080

 

4,933,226

 

1,285,460

 

(890,674

)

 

5.                 Short-term and Long-term Loans Receivable

 

Short-term and long-term loans receivable of the Company as of December 31, 2014 and 2013 consist of the following:

 

(in thousands of Korean won)

 

 

 

Annual
Interest Rate (%)

 

2014

 

2013

 

Loans for employee housing

 

2.0~3.0

 

8,889

 

46,528

 

Loans for Naru entertainment, Co., Ltd.(*1)

 

8.0

 

1,200,000

 

1,200,000

 

Loans for Gravity Interactive, Inc.(*2)

 

4.0

 

1,823,140

 

1,606,650

 

Loans for Gravity Games Corp.(*3)

 

6.9

 

1,972,000

 

1,972,000

 

Total

 

 

 

5,004,029

 

4,825,178

 

Less short-term portion (maturity of less than a year)

 

 

 

(223,157

)

(893,274

)

Long-term loans receivable

 

 

 

4,780,872

 

3,931,904

 

Allowance for doubtful accounts(*1 and *2)

 

 

 

(4,995,140

)

(4,778,650

)

 


(*1) In 2012, with respect to loans receivable from Naru Entertainment Co., Ltd., the estimated recoverable amount is less than the carrying value of the receivable. The Company recognized the difference as other bad debt expense.

 

(*2) Equity-method of accounting has been suspended in 2011 for Gravity Interactive, Inc., due to its accumulated losses. The loss on valuation of equity-method investment of 1,606,650 thousand in 2012 and 216,490 thousand in 2014 were reflected in the allowance for doubtful loans receivable (Refer to Note 4).

 

20



 

(*3) The intellectual property rights and shares of Gravity Games Corp. held by the former CEO of Gravity Games Corp. are provided to the Company as collaterals for the loans receivable from the Gravity Games Corp.

 

6.                 Property and Equipment

 

Details of property and equipment as of December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

 

 

Cost

 

Accumulated
depreciation

 

Accumulated
impairment losses

 

Carrying
value

 

Computer and other equipment

 

6,211,357

 

(5,963,376

)

 

247,981

 

Vehicles

 

28,111

 

(28,111

)

 

 

Furniture and fixtures

 

623,971

 

(609,020

)

 

14,951

 

Leasehold improvement

 

963,697

 

(751,706

)

 

211,991

 

 

 

7,827,136

 

(7,352,213

)

 

474,923

 

 

(in thousands of Korean won)

 

 

 

2013

 

 

 

Cost

 

Accumulated
depreciation

 

Accumulated
impairment losses

 

Carrying
value

 

Computer and other equipment

 

6,454,420

 

(5,819,517

)

 

634,903

 

Vehicles

 

28,111

 

(28,111

)

 

 

Furniture and fixtures

 

843,767

 

(827,135

)

 

16,632

 

Leasehold improvement

 

745,967

 

(745,967

)

 

 

 

 

8,072,265

 

(7,420,730

)

 

651,535

 

 

Changes in the carrying value of property and equipment for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

 

 

Balance at
beginning of
the period

 

Additions

 

Disposals

 

Others

 

Depreciation

 

Balance at
end of the
period

 

Computer and other equipment

 

634,903

 

11,548

 

(5,931

)

 

(392,539

)

247,981

 

Vehicles

 

 

 

 

 

 

 

Furniture and fixtures

 

16,632

 

11,314

 

(21

)

 

(12,974

)

14,951

 

Leasehold improvement

 

 

217,730

 

 

 

(5,739

)

211,991

 

 

 

651,535

 

240,592

 

(5,952

)

 

(411,252

)

474,923

 

 

21



 

(in thousands of Korean won)

 

 

 

2013

 

 

 

Balance at
beginning of
the period

 

Additions

 

Disposals

 

Others

 

Depreciation

 

Balance at
end of the
period

 

Computer and other equipment

 

962,613

 

118,453

 

(676

)

 

(445,487

)

634,903

 

Vehicles

 

 

 

 

 

 

 

Furniture and fixtures

 

43,552

 

4,841

 

(613

)

 

(31,148

)

16,632

 

Leasehold improvement

 

1,371

 

 

 

 

(1,371

)

 

 

 

1,007,536

 

123,294

 

(1,289

)

 

(478,006

)

651,535

 

 

7.                 Insurance

 

Property and equipment covered by insurance policies as of December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

 

 

Amount Insured

 

 

 

Type of Insurance

 

Properties

 

2014

 

2013

 

Insurance company

 

Fire Insurance

 

Buildings (leased)

 

5,000,000

 

5,000,000

 

Heungkuk Fire & Marine Insurance Co., Ltd.

 

General Insurance

 

Equipment, furniture and fixtures

 

477,346

 

887,620

 

Heungkuk Fire & Marine Insurance Co., Ltd.

 

 

All vehicles, not included in the table above, are insured under liability insurance and general insurance. The Company maintains accident insurance for officers and employees with Hyundai Marine & Fire Insurance Co., Ltd. and Hanwha Life Insurance Co., Ltd. In addition, the Company carries directors’ and officers’ liability insurance with indemnities of US $10 million per litigation with Hyundai Marine & Fire Insurance Co., Ltd.

 

8.                 Operating Lease

 

The Company entered into leasehold agreements with National IT Industry Promotion Agency and SH Corp. and has paid leasehold deposits of 904,644 thousand to National IT Industry Promotion Agency and 2,904 thousand to SH Corp. as of December 31, 2014.

 

Future leasehold payments under operating lease as of December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

Less than one year

 

1,341,248

 

1,843,604

 

One year to three years

 

1,308,358

 

 

 

 

2,649,606

 

1,843,604

 

 

The term of leasehold agreement with National IT Industry Promotion Agency is to December 31, 2016. The term of leasehold agreement with SH Corp. is to December 1, 2015.

 

22


 


 

Leasehold payments recognized in statement of operations for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Lease payments

 

1,932,279

 

1,923,876

 

 

9.                 Intangible Assets

 

Details of intangible assets as of December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

 

 

Cost

 

Accumulated
amortization

 

Accumulated
impairment losses

 

Book Value

 

Development Cost

 

28,984,528

 

(20,011,369

)

(420,176

)

8,552,983

 

Software

 

9,164,969

 

(8,977,728

)

 

187,241

 

Others

 

4,000,863

 

(1,306,142

)

(2,528,435

)

166,286

 

 

 

 

 

 

 

 

 

 

 

 

 

42,150,360

 

(30,295,239

)

(2,948,611

)

8,906,510

 

 

(in thousands of Korean won)

 

 

 

2013

 

 

 

Cost

 

Accumulated
amortization

 

Accumulated
impairment losses

 

Book Value

 

Development Cost

 

28,984,528

 

(16,021,983

)

(420,176

)

12,542,369

 

Software

 

10,835,250

 

(9,970,768

)

 

864,482

 

Others

 

3,970,102

 

(1,275,307

)

(2,528,435

)

166,360

 

 

 

 

 

 

 

 

 

 

 

 

 

43,789,880

 

(27,268,058

)

(2,948,611

)

13,573,211

 

 

Changes in the carrying value of intangible for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

 

 

Beginning
Balance

 

Additions

 

Transfer

 

Amortization

 

Impairment

 

Ending
balance

 

Development Cost

 

12,542,369

 

 

 

(3,989,386

)

 

8,552,983

 

Software

 

864,482

 

46,489

 

 

(723,730

)

 

187,241

 

Others

 

166,360

 

 

30,760

 

(30,834

)

 

166,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,573,211

 

46,489

 

30,760

 

(4,743,950

)

 

8,906,510

 

 

23



 

(in thousands of Korean won)

 

 

 

2013

 

 

 

Beginning
Balance

 

Additions

 

Transfer

 

Amortization

 

Impairment(*3)

 

Ending
balance

 

Development Cost(*1)

 

16,992,155

 

457,396

 

 

(4,526,019

)

(381,163

)

12,542,369

 

Software

 

1,375,034

 

257,942

 

 

(768,494

)

 

864,482

 

Others(*2)

 

919,324

 

903,581

 

 

(693,588

)

(962,957

)

166,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,286,513

 

1,618,919

 

 

(5,988,101

)

(1,344,120

)

13,573,211

 

 


(*1) The Company developed and commenced commercialization of the game named “Ragnarok Odyssey ACE” during 2013. The Company recorded costs incurred to develop “Ragnarok Odyssey ACE” as a development cost.

 

(*2) The Company acquired exclusive distribution right of “Steal Fighter” game within Korea and exclusive distribution right of “Requiem Returns” globally except for Korea, in 2012. Both games were commercialized in 2013. The Company recognized the amount paid for acquiring distribution rights as other intangible assets.

 

(*3) When the book value of an asset exceeds its recoverable value due to obsolescence or an abrupt decline in the market value of the asset, the said decline in value is deducted from the book value to correspond with the recoverable amount and recognized as a loss on impairment of intangible assets.

 

The amortization expenses of intangible assets for the years ended December 31, 2014 and 2013 are charged to the following accounts:

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

Cost of sales

 

4,629,550

 

5,750,419

 

Selling and administrative expenses

 

87,887

 

215,274

 

Research and development expenses

 

26,513

 

22,408

 

 

 

 

 

 

 

 

 

4,743,950

 

5,988,101

 

 

The Company recognized research and development costs amounting to 2,137,844 thousand and 2,798,864 thousand as selling and administrative expenses in 2014 and 2013, respectively.

 

10.          Employee Benefit

 

On December 26, 2005, the Company implemented a defined contribution pension plan in accordance with the Employee Retirement Benefit Security Act and entered into an agreement for a defined contribution insurance contract with Samsung Life Insurance Company. The insurance premiums paid in 2014 and 2013 amounted to 1,226,579 thousand and 1,114,428 thousand, respectively.

 

11.          Commitments

 

The Company has provided exclusive license agreement with foreign licensees, such as the foreign subsidiaries, GungHo Entertainment, Inc., SoftWorld International Corp. and Level up! Interactive S.A., etc., to distribute and sell online games and receives royalty fee of 20% to 40% of revenues from the online games.

 

24



 

12.          Deferred Income Taxes

 

Income tax expenses for the years ended December 31, 2014 and 2013 consist of the followings:

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

Current income tax

 

1,295,526

 

2,335,205

 

Changes in deferred tax assets from temporary differences

 

1,471,623

 

852,092

 

Deferred income tax due to tax loss carryforwards

 

4,622,377

 

2,591,908

 

Deferred income tax charged to equity

 

68,000

 

 

 

 

 

 

 

 

Income tax expenses

 

7,457,526

 

5,779,205

 

 

Deferred income tax charged directly to equity for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Accumulated other comprehensive income of equity method investment

 

68,000

 

 

 

Reconciliation between loss before income taxes and income tax expense for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

Loss before income taxes (A)

 

(12,572,307

)

(12,175,489

)

Income tax based on statutory rates

 

(2,765,908

)

(2,678,608

)

Add (deduct)

 

 

 

 

 

Non-deductible expenses

 

76,826

 

3,078

 

Changes in tax credits

 

5,121,589

 

3,702,557

 

Foreign withholding tax

 

1,030,650

 

 

Changes in valuation allowances

 

3,994,366

 

4,809,548

 

Others (difference in tax rates, etc.)

 

3

 

(57,370

)

 

 

 

 

 

 

Income tax expenses (B)

 

7,457,526

 

5,779,205

 

Effective tax rates (B/A)

 

 

 

 


Because of net loss before tax, effective tax rates are not calculated.

 

25



 

Changes in the temporary differences and related deferred tax assets and liabilities for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

 

 

Temporary differences

 

Deferred tax assets (liabilities)

 

 

 

Beginning

 

Change

 

Ending

 

Beginning

 

Ending

 

Accrued income

 

(340,313

)

188,107

 

(152,206

)

(74,869

)

(33,485

)

Property and equipment

 

248,635

 

7,924

 

256,559

 

54,700

 

56,443

 

Intangible assets

 

2,933,011

 

(1,629,632

)

1,303,379

 

645,262

 

286,743

 

Equity-method investments

 

23,016,922

 

2,415,516

 

25,432,438

 

5,063,723

 

5,595,136

 

Accounts payable

 

853,105

 

(27,617

)

825,488

 

187,683

 

181,607

 

Gain (loss) on foreign currency translation

 

8,771

 

 

8,771

 

1,930

 

1,930

 

Deferred income

 

2,097,846

 

(1,187,788

)

910,058

 

461,527

 

200,213

 

Allowance for doubtable accounts

 

5,066,861

 

230,958

 

5,297,819

 

1,114,710

 

1,165,520

 

Asset retirement obligations

 

99,000

 

(25,793

)

73,207

 

21,780

 

16,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,983,838

 

(28,325

)

33,955,513

 

7,476,446

 

7,470,212

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax loss carryforwards

 

8,998,690

 

13,764,495

 

22,763,185

 

1,979,712

 

5,007,901

 

Tax credit carryforwards

 

17,991,177

 

(3,322,472

)

14,668,705

 

19,790,294

 

14,668,705

 

Valuation allowance(*1)

 

 

 

 

 

 

 

(23,152,452

)

(27,146,818

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,094,000