EX-99.2 3 a15-8307_1ex99d2.htm EX-99.2

Exhibit 99.2

 

 

GRAVITY CO., LTD.

AND ITS SUBSIDIARY

 

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

 

 

Consolidated Financial Statements

 

 

 

Consolidated Statements of Financial Position

4

 

 

Consolidated Statements of Operations

6

 

 

Consolidated Statements of Changes in Equity

7

 

 

Consolidated Statements of Cash Flows

8

 

 

Notes to 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.deloitteanjin.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 consolidated financial statements of GRAVITY Co., Ltd. (the “Company”) and its subsidiary, which comprise the consolidated statement of financial position as of December 31, 2014, and the consolidated statement of operations, consolidated statement of changes in equity, and 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 Consolidated Financial statements

Management is responsible for the preparation and fair presentation of these 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 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 consolidated financial statements present fairly, in all material respects, the financial position of GRAVITY Co., Ltd. and its subsidiary 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 consolidated financial statements of GRAVITY Co., Ltd. and its subsidiary 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 consolidated financial statements and may result in modification to the auditors’ report.

 



 

Consolidated Financial Statements

 

GRAVITY CO., LTD AND ITS SUBSIDIARY

 

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2014 AND 2013

 

The accompanying 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. AND ITS SUBSIDIARY

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)

 

27,846,927

 

29,724,748

 

Short-term financial instruments (Note 3)

 

14,500,000

 

18,000,000

 

Trade receivables, net (Note 19)

 

5,178,252

 

6,102,538

 

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

 

6,667

 

32,778

 

Other receivables, net (Note 19)

 

472,009

 

372,438

 

Advanced payments, net (Note 19)

 

302,516

 

522,317

 

Current portion of deferred tax assets (Note 12)

 

94,153

 

474,018

 

Prepaid income taxes

 

578,741

 

699,858

 

Other current assets

 

1,242,422

 

1,096,277

 

 

 

 

 

 

 

Total current assets

 

50,221,687

 

57,024,972

 

 

 

 

 

 

 

NON-CURRENT ASSETS:

 

 

 

 

 

Equity-method investments (Note 4)

 

1,650,636

 

1,657,756

 

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

 

2,222

 

13,750

 

Property and equipment, net (Notes 6 and 7)

 

708,120

 

912,195

 

Intangible assets, net (Note 9)

 

9,163,595

 

13,668,811

 

Leasehold deposits paid (Note 8)

 

910,268

 

1,250,166

 

Deferred tax assets, net (Note 12)

 

846,847

 

8,095,544

 

Other non-current assets

 

229,437

 

4,349,041

 

 

 

 

 

 

 

Total non-current assets

 

13,511,125

 

29,947,263

 

 

 

 

 

 

 

TOTAL ASSETS

 

63,732,812

 

86,972,235

 

 

(Continued)

 

4



 

GRAVITY CO., LTD. AND ITS SUBSIDIARY

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 SHAREHOLDER’S EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable (Notes 19 and 20)

 

3,157,803

 

4,417,582

 

Advance receipts (Notes 11 and 19)

 

1,551,233

 

1,921,398

 

Withholdings

 

193,135

 

201,799

 

Deferred income (Notes 11 and 19)

 

4,305,766

 

4,277,475

 

Income tax payable

 

112,742

 

146,384

 

 

 

 

 

 

 

Total current liabilities

 

9,320,679

 

10,964,638

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

Long-term deferred income (Notes 11 and 19)

 

5,268,274

 

6,715,567

 

Asset retirement obligations

 

210,290

 

99,000

 

Leasehold deposits received (Notes 19 and 20)

 

 

33,180

 

 

 

 

 

 

 

Total non-current liabilities

 

5,478,564

 

6,847,747

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

14,799,243

 

17,812,385

 

 

 

 

 

 

 

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 comprehensive income of equity method investment (Notes 4 and 15)

 

1,528,484

 

1,532,202

 

Accumulated comprehensive loss of equity method investment (Notes 4 and 15)

 

(194,930

)

(160,336

)

Accumulated deficit

 

 

 

 

 

Undisposed accumulated deficit (Note 14)

 

(20,029,833

)

(11,419,602

)

Non-Controlling interest in consolidated subsidiary

 

194,792

 

352,927

 

 

 

 

 

 

 

TOTAL EQUITY

 

48,933,569

 

69,159,850

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

 

63,732,812

 

86,972,235

 

 

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

 

5



 

GRAVITY CO., LTD. AND ITS SUBSIDIARY

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)

 

35,364,655

 

42,437,955

 

Cost of revenues (Notes 14 and 19)

 

30,618,529

 

30,924,396

 

Gross profit

 

4,746,126

 

11,513,559

 

Selling and administrative expenses (Notes 14 and 19)

 

15,869,010

 

20,241,905

 

Operating loss

 

(11,122,884

)

(8,728,346

)

 

 

 

 

 

 

Non-operating income

 

 

 

 

 

Interest income (Note 19)

 

1,199,661

 

1,526,498

 

Gain on foreign currency translation

 

87,570

 

22,694

 

Gain on foreign currency transactions

 

283,186

 

509,829

 

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

 

5,155

 

1,483

 

Other income

 

90,331

 

230,647

 

 

 

1,792,925

 

2,291,151

 

Non-operating expenses

 

 

 

 

 

Other bad debt expenses(Notes 5 and 19)

 

39,792

 

2,087,152

 

Loss on foreign currency translation

 

262,482

 

207,760

 

Loss on foreign currency transactions

 

263,477

 

741,851

 

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

 

1,097,953

 

1,369,897

 

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)

 

643

 

1,741,855

 

Other losses

 

32,523

 

21,646

 

 

 

1,696,891

 

6,308,789

 

 

 

 

 

 

 

Loss before income taxes

 

(11,026,850

)

(12,745,984

)

Income tax expense (Note 12)

 

9,161,119

 

5,238,348

 

 

 

 

 

 

 

Net loss

 

(20,187,969

)

(17,984,332

)

 

 

 

 

 

 

Net loss attributed to owners of the parent

 

(20,029,833

)

(17,954,694

)

Non-controlling interests

 

(158,136

)

(29,638

)

 

 

 

 

 

 

Loss per share (Note 16)

 

 

 

 

 

Basic loss per share (in Korean won)

 

(2,882

)

(2,584

)

 

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

 

6



 

GRAVITY CO., LTD. AND ITS SUBSIDIARY

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)

 

Non-controlling
interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

3,474,450

 

75,380,209

 

1,433,326

 

6,535,091

 

382,566

 

87,205,642

 

Net loss

 

 

 

 

(17,954,693

)

(29,639

)

(17,984,332

)

Changes in equity-method investee with accumulated comprehensive Income (Notes 4 and 15)

 

 

 

47,296

 

 

 

47,296

 

Changes in equity-method investee with accumulated comprehensive loss (Notes 4 and 15)

 

 

 

(108,756

)

 

 

(108,756

)

Balance at December 31, 2013

 

3,474,450

 

75,380,209

 

1,371,866

 

(11,419,602

)

352,927

 

69,159,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

 

3,474,450

 

75,380,209

 

1,371,866

 

(11,419,602

)

352,927

 

69,159,850

 

Net loss

 

 

 

 

(20,029,833

)

(158,136

)

(20,187,969

)

Disposition of accumulated deficit

 

 

(11,419,602

)

 

11,419,602

 

 

 

 

Changes in equity-method investee with accumulated comprehensive income (Notes 4 and 15)

 

 

 

(3,719

)

 

 

(3,719

)

Changes in equity-method investee with accumulated comprehensive loss (Notes 4 and 15)

 

 

 

(34,593

)

 

 

(34,593

)

Balance at December 31, 2014

 

3,474,450

 

63,960,607

 

1,333,554

 

(20,029,833

)

194,791

 

48,933,569

 

 

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

 

7



 

GRAVITY CO., LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS EMDED DECEMBER 31, 2014 AND 2013

 

 

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

(20,187,969

)

(17,984,332

)

Adjustments to reconcile net loss to net used in operating activities

 

 

 

 

 

Depreciation

 

567,646

 

647,791

 

Amortization of intangible assets

 

4,885,979

 

6,061,642

 

Bad debt expenses

 

248,473

 

87,960

 

Other bad debt expenses

 

39,792

 

2,087,152

 

Loss on foreign currency translation

 

18,473

 

88,228

 

Loss on valuation of equity-method investments

 

1,097,953

 

1,369,897

 

Loss on disposal of equity-method investments

 

 

70,793

 

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

 

 

67,834

 

Loss on disposal of property and equipment

 

21

 

 

Loss on impairment of intangible assets

 

643

 

1,741,855

 

Gain on foreign currency translation

 

(87,570

)

(22,694

)

Gain on valuation of equity-method investments

 

(4,317

)

 

Gain on disposal of property and equipment

 

(5,155

)

(1,483

)

Gain on disposal of equity-method investments

 

(122,705

)

 

 

 

6,639,233

 

12,198,975

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease (increase) in trade receivables

 

(56,949

)

765,216

 

Increase in other receivables

 

(191,991

)

(198,647

)

Decrease (increase) in accrued income

 

75,206

 

(12,495

)

Decrease in advanced payments

 

189,041

 

562,733

 

Decrease (increase) in prepaid expenses

 

(233,981

)

92,533

 

Decrease in current portion of deferred tax assets

 

379,865

 

951,978

 

Decrease in prepaid income taxes

 

121,116

 

263,288

 

Decrease in other current assets

 

41,629

 

70,510

 

Increase in long-term prepaid expenses

 

(181,770

)

(1,166

)

Decrease in deferred tax assets

 

7,316,697

 

1,749,249

 

Decrease (increase) in other non-current assets

 

4,269,654

 

(130,000

)

Increase (decrease) in accounts payable

 

(1,259,819

)

55,396

 

Decrease in withholdings

 

(8,664

)

(123,295

)

Increase (decrease) in deferred income

 

(1,053,909

)

551,362

 

Decrease in income tax payables

 

(33,642

)

(98,302

)

Decrease in long-term deferred income

 

(365,092

)

(771,111

)

Decrease in leasehold deposits received

 

(33,180

)

(42,065

)

Increase (decrease) in advanced receipts

 

(370,165

)

167

 

Decrease in asset retirement obligation

 

(28,710

)

 

 

 

8,575,336

 

3,685,351

 

 

 

 

 

 

 

Net cash used in operating activities

 

(4,973,400

)

(2,100,006

)

 

(Continued)

 

8



 

GRAVITY CO., LTD. AND ITS SUBSIDIARY

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

 

23,055

 

Disposal of property and equipment

 

24,984

 

2,772

 

Decrease in leasehold deposits

 

342,619

 

162,622

 

Decrease in other non-current liabilities

 

 

202,720

 

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

 

(242,528

)

(241,572

)

Acquisition of intangible assets

 

(350,646

)

(2,245,928

)

Increase in other non-current assets

 

 

(38,557

)

Net cash used in investing activities

 

3,095,579

 

(3,643,007

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(1,877,821

)

(5,743,013

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Beginning of the year

 

29,724,748

 

35,467,761

 

 

 

 

 

 

 

End of the year

 

27,846,927

 

29,724,748

 

 

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

 

9



 

GRAVITY CO., LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.                 The Company

 

Below is the general overview of GRAVITY CO., LTD. (the “Company) and its subsidiary, NeoCyon, Inc. (the “Consolidated Subsidiary”), which is subject to consolidation by the Company in accordance with the Korean Accounting Standards for Non-Public Entities (“KAS-NPEs”) No. 4 Consolidated Financial Statements, and non-consolidated subsidiaries, Gravity Interactive, Inc. and other three subsidiaries, which are accounted for as equity method investments.

 

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

%

 

Details of the consolidated subsidiary as of December 31, 2014 and 2013 are as follows:

 

 

 

2014

 

 

 

Equity
(in thousand won)

 

Number of Shares
owned

 

Percentage of
Ownership (%)

 

Date of the statement
of financial position

 

NeoCyon, Inc.

 

5,007,506

 

185,301

 

96.11

%

December 31

 

 

 

 

2013

 

 

 

Equity
(in thousand won)

 

Number of Shares
owned

 

Percentage of
Ownership (%)

 

Date of the statement
of financial position

 

NeoCyon, Inc.

 

9,072,688

 

185,301

 

96.11

%

December 31

 

 

10



 

Summarized financial information of the consolidated subsidiary, Neocyon, Inc., as of December 31, 2014 and 2013 is as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

 

 

Total Assets

 

Total Liabilities

 

Total Revenues

 

Net Loss

 

NeoCyon, Inc.

 

8,920,428

 

3,912,922

 

19,315,572

 

(4,065,182

)

 

(in thousands of Korean won)

 

 

 

2013

 

 

 

Total Assets

 

Total Liabilities

 

Total Revenues

 

Net Loss

 

NeoCyon, Inc.

 

12,754,479

 

3,681,791

 

18,284,264

 

(885,668

)

 

The subsidiaries which are not consolidated as of December 31, 2014 are as follows:

 

Company

 

Total equity
(in thousands of
Korean won)

 

Percentage of
Ownership (%)

 

Date of the statement
of Financial Position

 

Gravity Interactive, lnc.

 

(4,441,863

)

100.00

 

December 31

 

Gravity Entertainment Corp.

 

374,033

 

100.00

 

December 31

 

Gravity Middle East&Africa FZ-LLC

 

1,276,603

 

100.00

 

December 31

 

Gravity Games Corp.

 

(789,739

)

85.50

 

December 31

 

 

2.                 SIGNIFICANT ACCOUNTING POLICIES:

 

The principal accounting policies applied in the preparation of these 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 and its subsidiary (the “Consolidated 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 Consolidated 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 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.

 

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

 

11



 

2.2 Accounting Treatment for Business Combination

 

The Consolidated Company applies the acquisition method to account for business combination and accounts acquisition-related costs as expenses when incurred. The consideration paid for the acquisition is measured at the aggregate of fair values of the assets transferred, the liabilities assumed or recognized and the equity securities issued by the Consolidated Company. The consideration transferred includes the fair value of any assets or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities arising from business combination are measured initially at their fair values at the acquisition date. The Consolidated Company measures non-controlling interest that provides proportionate share in the event of liquidation at proportionate interest of the acquirees’ net assets. Other non-controlling interest is measured at its fair value unless another measurement method is required KAS-NPEs.

 

In a business combination achieved in stages, the acquirer’s previously held equity interest in the acquiree is recognized at fair value at the acquisition date. Changes are recognized as profit or loss.

 

Any contingent consideration to be transferred by the Consolidated Company is recognized at fair value at the acquisition date. The amount of the contingent consideration is classified as liabilities or equity in accordance KAS-NPEs No. 6, Financial Asset and liabilities, and KAS-NPEs No. 15 Equity.

 

The Consolidated Company recognizes a gain from a bargain purchases as the excess of (a) over (b) below.

 

a)               The identifiable net asset

 

b)               The fair value at the acquisition date of aggregate of non-controlling interest in the acquiree, the consideration transferred and the acquirer’s previously held equity interest in the acquiree in the income statement.

 

The Consolidated Company recognizes goodwill as the excess of (b) over (a) and amortization is calculated using the straight-line method (Refer to Note 2.13).

 

2.3 Basis of Presentation for Consolidated Financial Statements

 

The Consolidated Company prepares consolidated financial statements in conformity with KAS-NPEs No. 4 Consolidated Financial Statements.

 

(a) Subsidiaries

 

Subsidiaries are all entities (including special purpose entities) over which is the Consolidated Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Consolidated Company controls another entity.

 

However, companies that meet the applicable scale, according to the Act and Enforcement Decree of External Audit for Stock Companies, are deconsolidated.

 

(b) Elimination of investment and capital accounts

 

In preparation of the consolidated financial statements, the investment of the Company is offset and eliminated against the capital accounts of the consolidated subsidiaries based on closing date closest to the acquisition of the subsidiary.

 

12



 

(c) Accounting treatment of investment in excess of book value of the investee

 

To eliminate the investment account of the controlling company and corresponding capital accounts of the subsidiary, the Company records differences between the initial investment accounts and corresponding capital accounts of subsidiary as goodwill or negative goodwill, which is amortized over 20 years, using the straight-line method.  However, any investment in excess of the book value of the investee created as result of subsequent acquisition of shares from minority shareholders is recorded as reduction of consolidated capital surplus rather than goodwill. If there is no consolidated capital surplus available, the amount is recorded as capital adjustment. Furthermore, any subsequent changes in the investment in excess of book value of the investee as result of the subsidiary’s issuance of new shares, share dividends, and etc. are also recorded as adjustment to capital surplus.

 

(d) Consolidated capital surplus, consolidated capital adjustment, consolidated accumulated other comprehensive income and consolidated retained earnings

 

Adjustments to capital surplus, capital adjustment, accumulated other comprehensive income and retained earnings of the consolidated and non-consolidated subsidiaries of the Company subsequent to acquisition dates are recorded as adjustments to consolidated capital surplus, consolidated capital adjustment, consolidated accumulated other comprehensive income and consolidated retained earnings, respectively.

 

(e) Unrealized profits and losses

 

Unrealized profits and losses included in inventories, property, plant and equipment and other assets are calculated based on the average gross margin of the respective year.

 

Unrealized profits and losses included in inventories, property, plant and equipment and other assets, as a result of intercompany transactions, are eliminated.  Unrealized profit, arising from sales by the controlling company to consolidated subsidiaries is fully eliminated and charged to the equity of the controlling company. Unrealized profit, arising from sales by the consolidated subsidiaries to the controlling company is fully eliminated, and charged to the equity of the controlling company and minority interest, based on the percentage of ownership.

 

(f) Fiscal year end of consolidated financial statements

 

The Company and its consolidated subsidiary follow the same fiscal year end. Differences in accounting policy between the Company and its consolidated subsidiary are adjusted during consolidation.

 

2.4 Foreign Currency Translation

 

(a) Functional and presentation currency

 

Items included in the Consolidated 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.

 

13



 

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.

 

(c) Translation to presentation currency

 

The financial performance and financial position of companies whose financial currency is different from the presentation currency are translated into the presentation currency as follows:

 

·             Assets and liabilities are translated at the closing rate as of the reporting date.

·             Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and

·             All resulting exchange differences are recognized in consolidated other comprehensive income.

 

Exchange differences arising from borrowings designated for hedging the investment and other currency instruments are recognized in consolidated other comprehensive income. When the foreign operations are wholly or partially sold, exchange differences recognized in consolidated other comprehensive income are recognized in the income statements as part of the gain or loss on sale.

 

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.

 

(d) Foreign currency translations of foreign subsidiaries under equity-method

 

The Consolidated 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.

 

2.5 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.

 

2.6 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 Consolidated 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.

 

14



 

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.

 

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 Consolidated Company considers the necessity to recognize impairment losses. The Consolidated 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.

 

2.7 Allowance for Doubtful Accounts

 

The Consolidated 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 receivable 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.

 

2.8 Equity-method Investments

 

The Consolidated 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 Consolidated 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 Consolidated Company are directly deducted from the Consolidated 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.

 

15



 

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.

 

2.9 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.

 

2.10 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.

 

2.11 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 Consolidated 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.

 

16



 

2.12 Government Grants

 

Government grants are not recognized until there is reasonable assurance that the Consolidated 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 Consolidated 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.

 

2.13 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.

 

2.14 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.

 

2.15 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.

 

17



 

2.16 Employee Benefits

 

(a) Defined contribution pension plan

 

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

 

2.17 Revenue Recognition

 

Prepaid online game subscriptions are recognized as revenue upon their actual usage. The Consolidated 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 Consolidated 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 Consolidated 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.

 

2.18 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.

 

18



 

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.

 

When measuring the present value of financial instruments, the Consolidated 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 Consolidated Company applies the financing costs which are reasonably estimated using the distribution rate of corporate bonds, reflecting the Consolidated 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).

 

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)

 

 

 

Percentage

 

2014

 

Investee

 

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

 

374,033

 

374,033

 

Gravity EU SAS (*1)

 

 

 

 

 

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

 

100.00%

 

1,979,640

 

1,276,603

 

1,276,603

 

Gravity Games Corp.

 

85.50%

 

12,488,520

 

(675,213

)

 

 

 

 

 

20,868,938

 

(3,466,439

)

1,650,636

 

 


(*1) The Company owns no share of Gravity EU SAS which is 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.

 

19



 

(in thousands of Korean won)

 

 

 

Percentage

 

2013

 

Investee

 

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

 

Gravity Games Corp.(*1)

 

85.50%

 

12,488,520

 

(1,264,645

)

 

 

 

 

 

23,388,301

 

(2,523,766

)

1,657,756

 

 


(*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 investee.

 

20



 

Changes in equity-method investments in subsidiaries 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

)

(34,595

)

374,033

 

Gravity EU SAS(*3)

 

 

(122,705

)

 

122,705

 

 

Gravity Middle East &Africa FZ-LLC

 

1,221,300

 

 

4,317

 

50,986

 

1,276,603

 

Gravity Games Corp.

 

 

 

 

 

 

 

 

1,657,756

 

(122,705

)

(1,093,635

)

1,209,220

 

1,650,636

 

 


(*1) Equity-method of accounting has been suspended in 2011 for Gravity Interactive, Inc., due to its accumulated losses. The Consolidated 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 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 (ownership: 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 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 for the year ended 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

 

Gravity Games Corp.(*3)

 

320,724

 

800,040

 

(1,049,971

)

(70,793

)

 

 

 

2,359,866

 

800,040

 

(1,369,896

)

(132,254

)

1,657,756

 

 


(*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.

 

21



 

(*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 from 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

 

(68,000

)

 

 

(68,000

)

 

 

1,433,326

 

60,547

 

122,008

 

1,371,865

 

 


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

 

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 Consolidated Company has concluded that any difference between the audited and unaudited financial statements is not material.

 

22



 

Summary of financial information of equity-method investees as of and 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

 

3,255

 

16

 

(27,828

)

Gravity Middle East&Africa FZ-LLC

 

1,276,603

 

 

 

4,317

 

Gravity Games Corp.

 

3,297,595

 

4,087,334

 

928,502

 

689,407

 

 

(in thousands of Korean won)

 

 

 

2013

 

Investees

 

Assets

 

Liabilities

 

Revenue

 

Net 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

)

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 Consolidated 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(*1,2)

 

 

 

(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).

 

(*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.

 

23



 

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

 

6,279,237

 

(6,010,756

)

 

268,481

 

Vehicles

 

28,111

 

(28,111

)

 

 

Furniture and fixtures

 

1,478,227

 

(1,250,579

)

 

227,648

 

Leasehold improvement

 

963,697

 

(751,706

)

 

211,991

 

 

 

8,749,272

 

(8,041,152

)

 

708,120

 

 

(in thousands of Korean won)

 

 

 

2013

 

 

 

Cost

 

Accumulated
depreciation

 

Accumulated
impairment losses

 

Carrying
value

 

Computer and other equipment

 

6,682,674

 

 (6,011,840

)

 —

 

 670,834

 

Vehicles

 

28,111

 

(28,111

)

 

 

Furniture and fixtures

 

1,826,252

 

(1,584,891

)

 

241,361

 

Leasehold improvement

 

745,967

 

(745,967

)

 

 

 

 

9,283,004

 

 (8,370,809

)

 —

 

 912,195

 

 

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

 

670,834

 

11,548

 

(18,056

)

 

(395,845

)

268,481

 

Vehicles

 

 

 

 

 

 

 

Furniture and fixtures

 

241,361

 

153,250

 

(1,794

)

893

 

(166,062

)

227,648

 

Leasehold improvement

 

 

217,730

 

 

 

(5,739

)

211,991

 

 

 

912,195

 

382,528

 

(19,850

)

893

 

(567,646

)

708,120

 

 

(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

 

1,002,429

 

120,603

 

(343

)

 

(451,855

)

670,834

 

Vehicles

 

 

 

 

 

 

 

Furniture and fixtures

 

310,183

 

126,356

 

(613

)

 

(194,565

)

241,361

 

Leasehold improvement

 

1,371

 

 

 

 

(1,371

)

 

 

 

1,313,983

 

246,959

 

(956

)

 

(647,791

)

912,195

 

 

24



 

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 Consolidated 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

 

1,541,521

 

2,037,602

 

One year to three years

 

1,508,631

 

 

 

 

3,050,152

 

2,037,602

 

 

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.

 

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

 

2,133,907

 

2,111,157

 

 

25



 

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

 

29,596,681

 

(20,225,786

)

(817,911

)

8,552,984

 

Software

 

9,818,462

 

(9,556,963

)

 

261,499

 

Others

 

4,263,712

 

(1,385,522

)

(2,529,078

)

349,112

 

 

 

43,678,855

 

(31,168,271

)

(3,346,989

)

9,163,595

 

 

(in thousands of Korean won)                                                                    

 

 

 

2013

 

 

 

Cost

 

Accumulated
amortization

 

Accumulated
impairment
losses

 

Book Value

 

Development Cost

 

29,596,680

 

(16,236,400

)

(817,911

)

12,542,369

 

Software

 

11,447,435

 

(10,487,353

)

 

960,082

 

Others

 

3,970,102

 

(1,275,307

)

(2,528,435

)

166,360

 

 

 

45,014,217

 

(27,999,060

)

(3,346,346

)

13,668,811

 

 

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 (*3)

 

Ending
balance

 

Development Cost

 

12,542,369

 

 

 

(3,989,385

)

 

8,552,984

 

Software

 

960,082

 

87,797

 

 

(786,380

)

 

261,499

 

Others

 

166,360

 

262,849

 

30,760

 

(110,214

)

(643

)

349,112

 

 

 

13,668,811

 

350,646

 

30,760

 

(4,885,979

)

(643

)

9,163,595

 

 

(in thousands of Korean won)

 

 

 

2013

 

 

 

Beginning
Balance

 

Additions

 

Transfer

 

Amortization

 

Impairment (*3)

 

Ending
balance

 

Development Cost (*1)

 

17,387,029

 

547,638

 

 

(4,613,400

)

(778,898

)

12,542,369

 

Software

 

1,428,794

 

361,543

 

 

(830,255

)

 

960,082

 

Others (*2)

 

843,723

 

903,581

 

 

(617,987

)

(962,957

)

166,360

 

 

 

19,659,546

 

1,812,762

 

 

(6,061,642

)

(1,741,855

)

13,668,811

 

 


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

 

26



 

(*2) The Consolidated 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 Consolidated 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

 

4,642,561

 

5,903,407

 

Selling and administrative expenses

 

93,258

 

104,820

 

Research and development expenses

 

150,160

 

53,415

 

 

 

4,885,979

 

6,061,642

 

 

The Consolidated Company recognized research and development costs amounting to 5,022,755 thousand and 6,223,319 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.

 

According to the defined contribution pension plan, the subsidiaries entered into the retirement pension insurance contract with Kookmin Bank. The Consolidated Subsidiary to be paid during the current year for charges of retirement benefits recognized as an expenses. The Consolidated Subsidiary is paid amounting to 569,165 thousand and 467,078 thousand in 2014 and 2013, respectively.

 

11.          Commitments

 

The Consolidated Subsidiary is provided \400 million guarantee by Seoul Guarantee Insurance Company regarding performing contracts as of December 31, 2014.

 

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.

 

27



 

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

 

1,464,557

 

2,537,121

 

Changes in deferred tax assets from temporary differences

 

1,524,025

 

708,391

 

Deferred income tax due to tax loss carryforwards

 

6,104,537

 

1,992,836

 

Deferred income tax charged directly to equity

 

68,000

 

 

Income tax expenses

 

9,161,119

 

5,238,348

 

 

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 net loss before tax and income tax expenses for the years ended December 31, 2014 and 2013 are as follows:

 

(in thousands of Korean won)

 

 

 

2014

 

2013

 

Net loss before taxes (A)

 

(11,026,850

)

(12,745,984

)

Income tax based on statutory rates

 

(2,425,907

)

(2,826,117

)

Add (deduct)

 

 

 

 

 

Non-taxable income

 

 

(357

)

Non-deductible expenses

 

91,932

 

14,813

 

Changes in tax credits

 

5,011,695

 

3,300,277

 

Foreign withholding tax (deduction)

 

1,030,650

 

 

Changes in valuation allowances

 

5,309,536

 

4,809,548

 

Others (difference in tax rates, etc.)

 

143,213

 

(59,816

)

Income tax expenses (B)

 

9,161,119

 

5,238,348

 

Effective tax rates (B/A)

 

 

 

 


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

 

28



 

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

 

(355,043

)

191,105

 

(163,938

)

(78,109

)

(36,066

)

Property and equipment

 

248,635

 

7,924

 

256,559

 

54,700

 

56,443

 

Intangible assets

 

3,245,550

 

(1,804,798

)

1,440,752

 

714,021

 

316,965

 

Equity-method investments

 

23,016,922

 

2,415,516

 

25,432,438

 

5,063,723

 

5,595,136

 

Accrued expense

 

1,058,624

 

(12,783

)

1,045,841

 

232,897

 

230,085

 

Gain(loss) on foreign currency translation

 

8,771