6-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of April 2023

Commission File Number 000-51138

GRAVITY Co., Ltd.
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(Translation of registrant’s name into English)

15F, 396 World Cup buk-ro, Mapo-gu, Seoul 03925, Korea

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(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:  [x] Form 20-F    [ ] Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  [ ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  [ ]

Samil PricewaterhouseCoopers, our independent auditor for the fiscal year ended December 31, 2022 (KPMG Samjong was our independent auditor for the fiscal year ended December 31, 2021) for our consolidated financial statements in conformity with International Financial Reporting Standards as adopted by the Republic of Korea, or Korean IFRS, have conducted audits and expressed opinions with regards to the consolidated statements of financial position of Gravity Co., Ltd. (the “Company”) and its subsidiaries as of December 31, 2022 and the related consolidated statements of comprehensive income, changes in equity, and cash flows for the year ended at December 31, 2022, expressed in Korean Won.

Samil PricewaterhouseCoopers, our independent auditor for the fiscal year ended December 31, 2022 (KPMG Samjong was our independent auditor for the fiscal year ended December 31, 2021) has also conducted audits and expressed opinions with regards to the separate statements of financial position of the Company as of December 31, 2022 and the related separate statements of comprehensive income, changes in equity, and cash flows for the year then ended at December 31, 2022, expressed in Korean Won.

The audited consolidated financial statements and the audited separate financial statements are attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively, and are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GRAVITY CO., LTD.
By:	/s/ Heung Gon Kim
Name:	Heung Gon Kim
Title:	Chief Financial Officer

Date: April 13, 2023

Exhibit Index

Exhibit No.	Description
99. 1	The Company’s Korean IFRS Consolidated financial statements as of and for the years ended December 31, 2022 and December 31, 2021 and the independent auditor’s report
99. 2	The Company’s Korean IFRS Separate financial statements as of and for the years ended December 31, 2022 and December 31, 2021 and the independent auditor’s report

EX-99.1

GRAVITY CO., LTD. and Subsidiaries

Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

(With Independent Auditors’ Report Thereon)

Contents

Page

Independent Auditors’ Report    1

Consolidated Financial Statements

Consolidated Statements of Financial Position    3

Consolidated Statements of Comprehensive Income    5

Consolidated Statements of Changes in Equity    6

Consolidated Statements of Cash Flows    7

Notes to the Consolidated Financial Statements    8

Independent Auditors’ Report

English Translation of a Report Originally Issued in Korean

To the Board of Directors and Shareholders of Gravity Co., Ltd.:

Opinion

We have audited the accompanying consolidated financial statement of Gravity Co., Ltd. and its subsidiaries (collectively referred to as the ”Group”), which comprise the consolidated statement of financial position as of December 31, 2022, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statement, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Gravity Co., Ltd. and its subsidiaries as of December 31, 2022, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).

Basis for Opinion

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

Other Matter

The consolidated financial statements of the Group for the year ended December 31, 2021 were audited by KPMG Samjong Accounting Corp. who expressed an unqualified opinion on those statements on March 23, 2022.

Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Korean IFRS, 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.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with KSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

1

As part of an audit in accordance with KSAs we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

•Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

•Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.

•Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

•Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.

•Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

•Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Samil PricewaterhouseCoopers

Seoul, Korea

March 23, 2023

This report is effective as of March 23, 2023, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

2

GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2022 and 2021

(In thousands of won)		Notes		December 31, 2022	December 31, 2021
Assets
Current assets
	Cash and cash equivalents	5,6,22	W	169,877,341	99,104,943
	Short-term financial instruments	6,22		167,000,000	148,000,000
	Accounts receivable, net	6,7,13,22		77,256,816	52,614,595
	Other receivables, net	6,7,22		139,785	1,080,516
	Prepaid expenses	13		3,332,317	3,164,075
	Other current financial assets	6,22		3,370,146	598,099
	Other current assets			790,833	1,572,692
				421,767,238	306,134,920
Non-current assets
	Property and equipment, net	8,21		8,140,129	11,337,999
	Intangible assets, net	9		3,869,478	3,342,028
	Other non-current financial assets	6,22		2,175,769	3,018,823
	Other non-current assets			2,481,845	1,973,064
	Deferred tax assets	18		5,659,521	1,719,489
				22,326,742	21,391,403
Total assets			W	444,093,980	327,526,323

See accompanying notes to the consolidated financial statements.

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GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position, Continued

As of December 31, 2022 and 2021

(In thousands of won)			Notes		December 31, 2022	December 31, 2021
Liabilities
Current liabilities
	Accounts payable		6,22	W	73,549,144	41,199,401
	Deferred revenue		13		18,543,037	13,480,518
	Withholdings				3,201,011	3,596,403
	Accrued expenses		6,22		2,040,357	1,484,019
	Income tax payable				5,469,061	10,628,981
	Other current liabilities		6,21,22		2,907,298	3,608,153
					105,709,908	73,997,475
Non-current liabilities
		Long-term accounts payable	6,22		373,989	729,173
		Long-term deferred revenue	13		30,239	98,226
		Other non-current liabilities	6,21,22		4,968,325	5,860,591
		Deferred tax liabilities	18		2,831,698	-
					8,204,251	6,687,990
Total liabilities				W	113,914,159	80,685,465
Equity
Equity attributable to owners of the Parent Company
Share capital			1,12		3,474,450	3,474,450
Capital surplus			12		27,098,264	27,098,264
Other components of equity			12		2,475,675	2,180,388
Retained earnings			12		296,479,528	213,317,805
Non-controlling interest					651,904	769,951
Total equity					330,179,821	246,840,858
Total liabilities and equity				W	444,093,980	327,526,323

See accompanying notes to the consolidated financial statements.

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GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2022 and 2021

(In thousands of won, except per share amounts)	Notes		2022	2021
Revenues	13,23,24
Online games		W	89,256,406	75,370,395
Mobile games			358,771,544	320,163,555
Other revenue			15,589,922	18,404,024
			463,617,872	413,937,974
Cost of revenues	14		267,365,143	224,172,902
Gross profit			196,252,729	189,765,072
Selling, general and administrative expenses	14,15		91,410,933	92,201,177
Operating profit	23		104,841,796	97,563,895
Non-operating income and expenses
Finance income	6,16		15,953,466	5,268,535
Finance costs	6,16		(10,779,361)	(2,686,170)
Other non-operating income	17		605,316	606,731
Other non-operating expenses	17		(739,440)	(1,452,459)
Profit before income tax expense			109,881,777	99,300,532
Income tax expense	18		26,824,189	33,420,741
Profit for the year		W	83,057,588	65,879,791
Profit (loss) attributable to:
Owners of the Parent Company		W	83,161,723	65,946,650
Non-controlling interests			(104,135)	(66,859)
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss
Foreign currency translation adjustments			285,034	3,273,897
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit liabilities			(3,659)	(2,761)
Total comprehensive income for the year		W	83,338,963	69,150,927
Total comprehensive income (loss) attributable to:
Owners of the Parent Company		W	83,457,010	69,171,571
Non-controlling interests			(118,047)	(20,644)
Earnings per share attributable to the equity holders of the Parent Company
Basic earnings per share (in won)	19	W	11,968	9,490
Diluted earnings per share (in won)	19	W	11,968	9,490

See accompanying notes to the consolidated financial statements.

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GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2022 and 2021

(In thousands of won)			Equity attributable to owners of the Parent Company
	Notes		Share capital	Capital surplus	Other components of equity	Retained earnings	Sub total	Non-controlling interests	Total equity
Balance at January 1, 2021		W	3,474,450	27,109,803	(1,044,533)	147,371,155	176,910,875	437,141	177,348,016
Profit for the year			-	-	-	65,946,650	65,946,650	(66,859)	65,879,791
Transactions with owners			-	(11,539)	-	-	(11,539)	353,454	341,915
Remeasurements of defined benefit liabilities			-	-	(1,933)	-	(1,933)	(828)	(2,761)
Foreign currency translation adjustments			-	-	3,226,854	-	3,226,854	47,043	3,273,897
Balance at December 31, 2021		W	3,474,450	27,098,264	2,180,388	213,317,805	246,070,907	769,951	246,840,858
Balance at January 1, 2022		W	3,474,450	27,098,264	2,180,388	213,317,805	246,070,907	769,951	246,840,858
Profit for the year			-	-	-	83,161,723	83,161,723	(104,135)	83,057,588
Remeasurements of defined benefit liabilities			-	-	(2,561)	-	(2,561)	(1,098)	(3,659)
Foreign currency translation adjustments			-	-	297,848	-	297,848	(12,814)	285,034
Balance at December 31, 2022		W	3,474,450	27,098,264	2,475,675	296,479,528	329,527,917	651,904	330,179,821

See accompanying notes to the consolidated financial statements.

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GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Cash Flow

For the years ended December 31, 2022 and 2021

(In thousands of won)	Notes		2022	2021
Cash flows from operating activities
Profit for the year		W	83,057,588		65,879,791
Adjustments	20		31,362,848		40,575,779
Changes in operating assets and liabilities	20		10,254,125		(2,883,876)
Interest received			3,032,676		995,149
Interest paid			(121,724)		(111,416)
Income taxes paid			(29,306,861)		(30,272,469)
Net cash provided by operating activities			98,278,652		74,182,958
Cash flows from investing activities
Decrease in other current financial asset			5,099		-
Proceeds from disposal of property and equipment	8		14,609		13,850
Proceeds from disposal of intangible assets	9		-		14,861
Decrease in other non-current financial assets			-		594,774
Increase in short-term financial instruments			(19,000,000)		(77,000,000)
Purchase of property and equipment	8		(739,413)		(1,747,427)
Purchase of intangible assets	9		(2,055,632)		(2,463,914)
Increase in other current financial assets			(200)		-
Increase in other non-current financial assets			(564,908)		(1,883,900)
Net cash used in investing activities			(22,340,445)		(82,471,756)
Cash flows from financing activities
Proceeds from capital contribution from non-controlling interests			-		353,454
Payment of share issuance costs			-		(11,539)
Repayment of lease liabilities	21		(3,917,977)		(3,647,934)
Net cash used in financing activities			(3,917,977)		(3,306,019)
Effects of exchange rate changes on cash and cash equivalents			(1,247,832)		67,278
Net increase (decrease) in cash and cash equivalents			70,772,398		(11,527,539)
Cash and cash equivalents at beginning of the year			99,104,943		110,632,482
Cash and cash equivalents at end of the year		W	169,877,341		99,104,943

See accompanying notes to the consolidated financial statements.

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GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

1. General Information

(1) The Parent Company

GRAVITY CO., LTD. (“the Parent Company”) was incorporated on April 4, 2000, to engage in developing and publishing online and mobile games, and other related business. The Parent Company’s headquarter is located at 15F, 396 World Cup buk-ro, Mapo-gu, Seoul, Korea. The Parent Company’s principal game product, “Ragnarok”, a massive multi-player online role-playing game, was commercially launched in August 2002, and currently operated internationally in 91 markets. The Parent Company also operates many other games.

On February 8, 2005, the Parent Company listed its shares on the Nasdaq Stock Market in the United States, and issued 1,400,000 shares of common stocks in the form of American Depositary shares (“ADSs”) under the symbol “GRVY”.

As of December 31, 2022, the Parent Company’s total paid-in capital amounts to W3,474,450 thousand. The Parent Company’s major shareholders and their respective percentage of ownership as of December 31, 2022 are as follows:

	Number of shares	Ownership (%)
GungHo Online Entertainment, Inc.	4,121,737	59.31
Others	2,827,163	40.69
	6,948,900	100.00

(2) Consolidated subsidiaries

Details of the consolidated subsidiaries as of December 31, 2022 and 2021 are as follows:

				Percentage of ownership (%)
Subsidiaries	Location	Main business	Fiscal year end	December 31, 2022	December 31, 2021
Gravity Interactive, Inc.	USA	Online and mobile game services	December	100	100
Gravity NeoCyon, Inc.	Korea	Mobile Game Development and Service	December	99.53	99.53
Gravity Communications Co., Ltd.	Taiwan	Online and mobile game services	December	100	100
PT. Gravity Game Link	Indonesia	Online and mobile game services	December	70	70
Gravity Game Tech Co., Ltd.	Thailand	Online and mobile game services	December	100	100
Gravity Game Arise Co., Ltd.	Japan	Online and mobile game services	December	100	100
Gravity Game Hub PTE., Ltd.	Singapore	Online and mobile game services	December	100	100
Gravity Game Vision Limited(*)	Hong Kong	Online and mobile game services	December	100	-

(*) Gravity Game Vision Limited was established during 2022 and has been included in subsidiary since then.

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GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

1. General Information, Continued

(3) Condensed financial information of subsidiaries as of and for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022
Subsidiaries		Total assets(*1)	Total liabilities(*1)	Revenues(*1)	Profit (loss) for the period(*1)
Gravity Interactive, Inc.	W	32,142,913	23,616,795	62,745,252	(2,448,061)
Gravity NeoCyon, Inc.		15,586,693	8,352,788	24,638,854	1,709,739
Gravity Communications Co., Ltd.		39,437,891	11,161,240	50,610,968	14,185,767
PT. Gravity Game Link		3,268,158	1,090,349	3,372,227	(373,901)
Gravity Game Tech Co., Ltd.		40,204,476	9,740,080	34,990,048	9,974,512
Gravity Game Arise Co., Ltd.		3,066,904	988,401	3,451,554	(504,862)
Gravity Game Hub PTE., Ltd.		4,846,247	2,726,020	4,351,866	(3,081,397)
Gravity Game Vision Limited (*2)		63,608,043	46,145,974	116,550,222	17,090,044

(*1) Amounts before eliminating intercompany transactions.

(*2) Gravity Game Vision Limited was established during 2022 and has been included from subsidiary since then.

(In thousands of won)			2021
Subsidiaries		Total assets(*1)		Total liabilities(*1)	Revenues(*1)	Profit (loss) for the period(*1)
Gravity Interactive, Inc.	W	26,385,056		16,162,917	79,241,593	986,634
Gravity NeoCyon, Inc.		14,902,641		9,378,474	25,443,458	(110,799)
Gravity Communications Co., Ltd.		33,120,691		9,236,188	33,342,145	9,096,285
PT. Gravity Game Link		2,916,316		318,233	2,461,680	(221,131)
Gravity Game Tech Co., Ltd.		25,591,172		5,665,835	28,345,984	5,495,689
Gravity Game Arise Co., Ltd.		3,912,442		2,167,254	3,258,230	158,563
Gravity Game Hub PTE., Ltd. (*2)		2,538,395		722,377	116,791	(1,109,627)

(*1) Amounts before eliminating intercompany transactions.

(*2) Gravity Game Hub PTE., Ltd. was established during 2021 and has been included from subsidiary since then.

2. Basis of Presentation

These consolidated financial statements have been prepared in accordance with Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Stock Companies, Etc. in the Republic of Korea. The accompanying consolidated financial statements have been restructured and translated into English from the Korean language financial statements.

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GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

2. Basis of Presentation, Continued

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

These consolidated financial statements were authorized for issuance by the Board of Directors on March 8, 2023, and are expected to be submitted for approval at the shareholders’ meeting to be held on March 31, 2023.

(1) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis.

(2) Use of judgments and estimates

The preparation of the consolidated financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:

(a) Deferred revenue

The Group sells virtual currency and items that can be used in mobile games to game users. For each game in each country, the Group estimates and applies the game user's life cycle in order to recognize revenue generated by micro-transactions. The game user's life cycle is estimated based on the average period from the game user's first payment date to the last access date for active paying game users. The Group considers a game user as an active user if the period between the time of the user’s most recent access of the game and the end of reporting period equals or is shorter than the estimated game users’ life cycle. For remaining amounts of virtual currency and items that active users own at period-end, the related revenue is deferred considering the items’ attributes. The Group estimates the user’s life cycle by analyzing game users’ activity patterns such as payment and access and it periodically reviews if there is any change of these estimates.

3. New Standards and Interpretations Adopted During the Year and Resulting Changes in Accounting Policies

The Group has applied the following standards and amendments for the first time for the annual reporting period commencing on January 1, 2022.

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GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

3. New Standards and Interpretations Adopted During the Year and Resulting Changes in Accounting Policies, Continued

(1)Amendment to K-IFRS No. 1103 ‘Business Combinations’ - Reference to the Conceptual Framework

The amendments update a reference of definition of assets and liabilities to be recognized in a business combination in revised Conceptual Framework for Financial Reporting. However, the amendments add an exception for the recognition of liabilities and contingent liabilities within the scope of Korea IFRS 1037 Provisions, Contingent Liabilities and Contingent Assets, and Korean IFRS 2121 Levies. The amendments also clarify that contingent assets should not be recognized at the acquisition date. The amendment does not have a significant impact on the financial statements.

(2)Amendments to K-IFRS No. 1016 ‘Property, Plant and Equipment’ - Proceeds before intended use

The amendments prohibit an entity from deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while the entity is preparing the asset for its intended use. Instead, the entity will recognize the proceeds from selling such items, and the costs of producing those items, in profit or loss. The amendment does not have a significant impact on the financial statements.

(3)Amendments to K-IFRS No. 1037 ‘Provisions, Contingent Liabilities and Contingent Assets’ – Onerous Contracts : Cost of Fulfilling a Contract

The amendments clarify that the direct costs of fulfilling a contract include both the incremental costs of fulfilling the contract and an allocation of other costs directly related to fulfilling contracts when assessing whether the contract is onerous. The amendment does not have a significant impact on the financial statements.

4. Significant Accounting Policies

The principal accounting policies applied in the preparation of these consolidated financial statements in accordance with the K-IFRS are set out below. These policies have been consistently applied to all years presented, except if mentioned otherwise in Note 3.

(1) Consolidation

The Group has prepared the consolidated financial statements in accordance with K-IFRS No. 1110 Consolidated Financial Statements.

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are consolidated from the date on which control is obtained by the Group. They are deconsolidated from the date on which control ceases.

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GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. Acquisition-related costs are expensed as incurred.

The excess of consideration transferred, amount of any non-controlling interest in the acquired entity and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognized directly in the profit as a bargain purchase.

Intercompany transactions, balances and unrealized gains on transactions between consolidated companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(2) Segment reporting

Information of each operating segment is reported in a manner consistent with the internal business segment reporting provided to the chief operating decision-maker (Note 23). The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments.

(3) Cash and Cash equivalents

Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, and other short-term investments with original maturities of three months or less that are readily convertible to known amounts of cash.

(4) Financial Assets

(a) Classification

At initial recognition, the Group classifies its financial assets in the following measurement categories:

•measured at fair value through profit or loss;

•measured at fair value through other comprehensive income (“FVOCI”); and

•measured at amortized cost.

The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.

12

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(4) Financial Assets, Continued

(a) Classification, Continued

For financial assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. The Group reclassifies debt investments when, and only when, its business model for managing those assets changes.

For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income. Changes in fair value of equity instruments not elected as equity investment at fair value through other comprehensive income will be recognized in profit or loss.

(b) Measurement

At initial recognition, the Group measures a financial asset at its fair value plus, in case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

(i) Debt instruments

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. The Group classifies its debt instruments into one of the following three measurement categories:

•Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method.

13

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(4) Financial Assets, Continued

(b) Measurement, Continued

(i) Debt instruments, Continued

•Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment loss (reversal of impairment loss), interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Foreign exchange gains and losses are presented in ‘finance income or costs’ and impairment losses are presented in ‘other non-operating expenses’.

•Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented net in the statement of profit or loss within ‘finance income or costs’ in the year in which it arises.

(ii) Equity instruments

The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losseson equity investments, which are held for long-term investment or strategic purpose, in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment.

Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘other non-operating income or expenses’ in the statement of profit or loss as applicable. Impairment loss (reversal of impairment loss) on equity investments measured at fair value through other comprehensive income are not reported separately from other changes in fair value.

14

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(4) Financial Assets, Continued

(c) Impairment

The Group recognizes loss allowances for expected credit losses(“ECLs”) on:

•financial assets measured at amortized cost;

•debt investments measured at fair value through other comprehensive income; and

•contract assets under K-IFRS No. 1115.

The Group measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at 12-month ECLs:

•debt securities that are determined to have low credit risk at the reporting date; and

•other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition.

Loss allowances for accounts and other receivables (including lease receivables) and contract assets are always measured at an amount equal to lifetime ECLs.

When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and informed credit assessment, that includes forward-looking information.

The Group considers a financial asset to be in default when:

•the debtor is unlikely to pay its obligations to the Group in full, without recourse by the Group to actions such as realizing security (if any is held); or

•the financial asset is more than 90 days past due.

Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument.12-month ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is less than 12 months).The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk.

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the effective interest rate of the financial asset.

15

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(4) Financial Assets, Continued

(c) Impairment, Continued

At each reporting date, the Group assesses whether financial assets carried at amortized cost and debt securities at fair value through other comprehensive income are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Loss allowances for financial assets measured at amortized cost are deducted from the gross carrying amount of the assets. For debt securities at fair value through other comprehensive income, the loss allowance is charged to profit or loss.

(d) Recognition and Derecognition

Regular way purchases and sales of financial assets are recognized or derecognized on trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

If a transfer does not result in derecognition because the Group has retained substantially all the risks and rewards of ownership of the transferred asset, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received.

(e) Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the consolidated statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.

(5) Account receivables

Account receivables are recognized initially at the amount of consideration that is unconditional, unless they contain significant financing components in which case they are recognized at fair value. Account receivables are subsequently measured at amortized cost using the effective interest method, less loss allowance.

(6) Property and Equipment

Property and equipment are initially measured at cost. The cost of property and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable

16

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Property and equipment, subsequently, are carried at cost less accumulated depreciation and accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of property and equipment at cost or, if appropriate, as a separate item if it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be reliably measured.

Depreciation of all property and equipment, except for land, is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives as follows:

	Estimated Useful Lives
Computer and other equipment	4 years
Furniture and fixture	4 years
Vehicles	4 years
Leasehold improvements	(*)
Right-of-use assets	(*)

(*) The Group depreciates the Leasehold improvements and Right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term using the straight-line method.

Depreciation methods, useful lives, and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

17

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(7) Intangible Assets

Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses.

The Group amortizes intangible assets with a limited useful life using the straight-line method over the following periods:

	Estimated Useful Lives
Software	1~3 years
Industrial property rights	10 years
Other intangible assets	3 years

Expenditure on research activities is recognized in profit or loss as incurred. Development expenditure is capitalized only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditure is recognized in profit or loss as incurred.

The Group entered into a game licensing agreement with a number of third parties to gain exclusive rights to the games developed by those companies. The license fee payments are recognized as other intangible assets and amortized over the term of the contract using the straight-line method.

18

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(8) Impairment of Non-financial Assets

At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than contract assets, incremental costs of obtaining a contract, costs to fulfil a contract, employee benefit related assets and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amounts to their carrying amounts.

The recoverable amount of an asset or cash generating unit (“CGU”) is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using an adjusted discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

An impairment loss is recognized in profit or loss if the carrying amount of an asset or CGU exceeds its recoverable amount.

(9) Leases

At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group uses the definition of a lease in K-IFRS No. 1116.

(a) As a lessee

At commencement or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices. However, the Group has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component by class of underlying asset.

The Group determines the lease term as the non-cancellable period of a lease, together with both (a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and (b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. When the lessee and the lessor each has the right to terminate the lease without permission from the other party, the Group should consider a termination penalty in determining the period for which the contract is enforceable.

19

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(9) Leases, Continued

The Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rates.

The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased.

Lease payments included in the measurement of the lease liability comprise the following:

•fixed payments, including in-substance fixed payments;

•variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

•amounts expected to be payable under a residual value guarantee; and

•the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment.

20

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Group presents right-of-use assets that do not meet the definition of investment property in ‘Property and equipment’ and lease liabilities in ‘Other current liabilities’ and ‘Other non-current liabilities’ in the consolidated statement of financial position.

The Group has elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Group recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

(b) As a lessor

At inception or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.

When the Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease.

To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset.

When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the Group applies the exemption described above, then it classifies the sub-lease as an operating lease.

If an arrangement contains lease and non-lease components, then the Group applies K-IFRS No. 1115 to allocate the consideration in the contract.

The Group applies the derecognition and impairment requirements in K-IFRS No. 1109 to the net investment in the lease. The Group further regularly reviews estimated unguaranteed residual values used in calculating the gross investment in the lease.

The Group recognizes lease payments received under operating leases as income on a straight-line basis over the lease term as part of ‘non-operating income’.

21

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(10) Financial Liabilities

(a) Classification and measurement

The Group’s financial liabilities at fair value through profit or loss are financial instruments held for trading. A financial liability is held for trading if it is incurred principally for the purpose of repurchasing in the near term. A derivative that is not designated as a hedging instrument and an embedded derivative that is separated are also classified as held for trading.

The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and present as ‘accounts payable’, ‘other current liabilities’ and ‘other non-current liabilities’ in the consolidated statement of financial position.

(b)Derecognition

Financial liabilities are removed from the consolidated statement of financial position when it is extinguished; for example, when the obligation specified in the contract is discharged or cancelled or expired or when the terms of an existing financial liability are substantially modified. The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in profit or loss.

(11) Provisions and Contingent Liabilities

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.

Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability.

In addition, when there is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability, a disclosure regarding the contingent liabilities is made in the notes to the financial statements.

22

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(12) Foreign Currency Translation

(a) Functional and presentation currency

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

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the exchange rate at the reporting date are generally recognized in profit or loss. They are recognized in other comprehensive income if they relate to qualifying cash flow hedges and qualifying effective portion of net investment hedges in a foreign operation.

Exchange differences arising on non-monetary financial assets and liabilities such as equity instruments at fair value through profit or loss and equity instruments at fair value through other comprehensive income are recognized in profit or loss and other comprehensive income, respectively, as part of the fair value gain or loss.

(13) Statement of cash flows

The Group has elected to present cash flows from operating activities using the indirect method. Cash flows denominated in a foreign currency are reported using average exchange rate.

(14) Revenues from contracts with customers

The Group engages in game licensing, IP licensing and game publishing businesses.

Revenue is measured at the fair value of the consideration received or receivable for the sale of goods or rendering of services arising from the normal course of the business. Amounts recognized as revenue are net of value added taxes, returns, rebates and discounts.

23

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(14) Revenues from contracts with customers, Continued

(a) Revenue from micro-transaction and subscription

The Group recognizes micro-transaction revenue of online and mobile games when the Group satisfies its performance obligations.

Whether the performance obligations are satisfied depends on the natures of virtual currency and in-game virtual items. Items are categorized into consumable, periodic, and permanent in-game virtual items.

Consumable in-game virtual items are items that are consumed by the specific action of a game user, and periodic in-game virtual items are items that can be used repeatedly during a specified effective period. Permanent in-game virtual items are items that can be used by game users repeatedly without an effective period.

The accounting policy on revenue recognition is described below in relation to micro-transaction revenue from the sales of virtual currency and items.

(i) Online Games

The specific method of recognizing and deferring revenue for virtual currency and consumable, periodic, and permanent items purchased with virtual currency is as follows.

At the end of the reporting period, the Group defers the total amount of remaining virtual currency.

For consumable in-game virtual items, the related revenue is recognized when the in-game virtual item is consumed. The Group defers the revenue for remaining amounts of virtual items owned by active paying users within the estimated user life cycle at the end of the reporting period.

For periodic in-game virtual items, the related revenue is recognized ratably over the effective period. The Group defers the revenue for remaining effective period.

For permanent in-game virtual items, revenue is recognized ratably over the estimated user life cycle. The Group defers the revenue for remaining period of estimated user life cycle at the end of the reporting period.

(ii) Mobile Games

The specific method of recognizing and deferring revenue for virtual currency and consumable, periodic, and permanent items purchased with virtual currency is as follows.

Mobile game users purchase virtual currency that can be used to purchase in-game items. The Group has no refund obligation after the game users purchase virtual currency.

At the end of the reporting period, the Group defers the revenue for the remaining virtual currency possessed by active paying users.

24

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(14) Revenues from contracts with customers, Continued

(a) Revenue from micro-transaction and subscription, Continued

(ii) Mobile Games, Continued

For consumable in-game virtual items, revenue is recognized when the in-game virtual item is consumed. The Group defers the revenue for remaining virtual items possessed by active users within the estimated user life cycle at the end of the reporting period.

For periodic in-game virtual items with effective period, revenue is recognized ratably over the effective period. The Group defers the revenue for remaining effective period.

For permanent in-game virtual items, revenue is recognized ratably over the estimated user life cycle. The Group defers the revenue for remaining period of estimated user life cycle at the end of the reporting period.

(b) Royalties and License Fees

In connection with the Group’s online and mobile games, the Group enters into license agreement in connection with the right to access the intellectual property, such as game character images and stories. The Group believes that the agreement is a promise to provide a right to the customer to access the related IP because the Group will undertake activities that significantly affect the intellectual property to which the customer has rights, the rights granted by the license directly expose the customer to any positive or negative effects of the Group’s activities, and those activities do not result in the transfer of a good or a service to the customer as those activities occur. Therefore, the Group’s performance obligations in connection with these agreements are satisfied over time.

Since the nature of the license promise is to provide customers with access to the intellectual property of the Group during the license period, the Group's performance obligation corresponds to the performance obligation satisfied over time, and revenue is recognized over the license period. The Group recognizes revenue for the license fee through the straight-line method during the contract period, and for the running royalty revenue, the revenue is recognized on an accrual basis at the time the revenue distribution is established in accordance with the terms of the contract. When the running royalty revenue based on the contractual royalty rate and the actual revenue of the licensee exceeds the ratably recognized minimum guarantee, the excess amount is then recognized as revenue and accounts receivable.

(c) Other revenue

Other revenue consists of revenue from sales of console games, game character merchandise, animation and other services, including website development and operation services for third parties. Revenues from development and operation services for third parties are recognized over time by measuring progress towards complete satisfaction of a performance obligation.

(d) Incremental costs of obtaining contract

The Group pays platform processing fees to operate mobile games on third party platforms. These fees are charged based on the game users’ purchases in cash and considered as incremental cost of obtaining contracts with customers and therefore capitalized. The Group presents these costs as prepaid expense and amortizes them to costs of revenue at the same time when the related revenue of the services provided to the game users are recognized.

25

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(15) Current and Deferred Tax

The tax expense for the period consists of current and deferred tax. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. The tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and considers whether it is probable that a taxation authority will accept an uncertain tax treatment. The Group measures its tax balances either based on the most likely amount or the expected value, depending on which method provides a better prediction of the resolution of the uncertainty.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognized only if it is probable that future taxable amounts will be available to utilize those temporary differences andtax credit.

The Group recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint arrangements, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, the Group recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis.

(16) Employee Benefits

(a) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render related services. When an employee has rendered a service to the Group during an accounting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

26

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(b) Post-employment benefits

The Group’s retirement pension plans are divided into defined contribution plans and defined benefit plans.

The Group has a defined contribution pension plan with the related contribution to the pension plan recorded as severance benefit expenses for the employees with service period over a year. The Group recognizes provision for severance benefits for the employees with service period less than a year.

A defined benefit plan is a pension plan that is not a defined contribution plan. Generally, post-employment benefits are payable after the completion of employment, and the benefit amount depended on the employee’s age, periods of service or salary levels. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income. Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs.

(17) Standards issued but not yet effective

A number of new standards are effective for annual periods beginning after January 1, 2022 and earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these consolidated financial statements.

The following new and amended standards and interpretations are not expected to have a significant impact on the Group’s consolidated financial statements.

•Classification of Liabilities as Current or Non-current (Amendment to K-IFRS No. 1001)

•Disclosure of Accounting Policies (Amendment to K-IFRS No. 1001)

•Definition of an Accounting Estimate (Amendment to K-IFRS No. 1008)

•Deferred Income Taxes on Assets and Liabilities Arising from a Single Transaction (amendment to K-IFRS No. 1012)

•K-IFRS No 1117 Insurance Contracts

27

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

5. Cash and cash equivalents

(1) Cash and cash equivalents as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Demand deposits, etc.	W	169,877,341	99,104,943

(2) The Group does not have any restricted cash and cash equivalents as of December 31, 2022 and 2021.

6. Financial Instruments by Category

(1) Carrying amounts of financial instruments by category as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Financial assets at amortized cost
Cash and cash equivalents	W	169,877,341		99,104,943
Short-term financial instruments		167,000,000		143,000,000
Accounts receivable, net		77,256,816		52,614,595
Other receivables, net		11,943		6,085
Other current financial assets(*1)		3,370,146		598,099
Other non-current financial assets(*2)		1,675,769		3,018,823
Financial assets at fair value through profit or loss
Short-term financial instruments		-		5,000,000
Other non-current financial assets		500,000		-
	W	419,692,015		303,342,545

(*1) Other current financial assets consist of accrued income and deposits.

(*2)Other non-current financial assets consist of deposits.

(In thousands of won)		December 31, 2022
Financial liabilities at amortized cost
Accounts payable(*)	W	70,169,830		36,864,256
Long-term accounts payable		373,989		729,173
Accrued expenses(*)		429,132		49,299
Other current liabilities		2,906,064		3,606,965
Other non-current liabilities		3,057,121		5,123,598
	W	76,936,136		46,373,291

(*) Accounts payable and accrued expenses that are not financial liabilities are excluded.

28

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

6. Financial Instruments by Category, Continued

(2) Net income(expenses) from financial instruments for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Financial assets at amortized cost
Interest income	W	4,496,116		1,355,123
Differences in foreign currency		2,100,621		2,135,281
		6,596,737		3,490,404
Financial assets at fair value through profit or loss
Interest income		4,701		28,054
	W	6,601,438		3,518,458

(In thousands of won)		2022		2021
Financial liabilities at amortized cost
Interest expense	W	(126,826)		(115,321)
Differences in foreign currency		(1,300,507)		(820,772)
	W	(1,427,333)		(936,093)

(3) Fair value hierarchy

Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

•Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

•Level 2: all inputs other than quoted prices included in level 1 that are observable (either directly that is, prices, or indirectly that is, derived from prices) for the asset or liability;

•Level 3: unobservable inputs for the asset or liability.

The fair value of financial instruments traded in an active market is determined based on the quoted market price as of the end of the reporting period. If the quoted prices are readily and regularly available through exchanges, sellers, brokers, industry groups, rating agencies or regulators and such prices represent actual market transactions that occur regularly between independent parties, they are considered active markets. These products are included in Level 1.

The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. These valuation techniques use as much market observable information as possible and use the least amount of company-specific information. At this time, if all the significant input variables required to measure the fair value of a good are observable, the good is included in Level 2.

If more than one significant input variable is not based on observable market information, the item is included in Level 3.

29

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

6. Financial Instruments by Category, Continued

(3) Fair value hierarchy, Continued

The valuation techniques used to measure the fair value of a financial instrument include:

- Market price or dealer price of a similar financial instrument

- The fair value of derivative instruments is determined by discounting the amount to present value using the leading exchange rate as of the end of the reporting period

For the other financial instruments, the Group applied other valuation techniques such as discounted cash flow, etc.

7. Accounts and Other Receivables

(1) Accounts and other receivables as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022			December 31, 2021
		Accounts receivables	Other receivables		Accounts receivables	Other receivables
Non-related party	W	74,702,397	144,594		48,050,332	1,085,325
Related party		2,873,954	-		5,253,873	-
Less: Loss allowance		(319,535)	(4,809)		(689,610)	(4,809)
Accounts and other receivables, net	W	77,256,816	139,785		52,614,595	1,080,516

(2) Changes in the loss allowance of accounts and other receivables during the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022			2021
		Accounts receivables	Other receivables		Accounts receivables	Other receivables
Beginning balance	W	689,610	4,809		579,087	4,809
Bad debt expenses		701,609	-		933,226	-
Reversal of allowance for doubtful accounts		-	-		(131,927)	-
Write-off		(1,071,684)	-		(690,776)	-
Ending balance	W	319,535	4,809		689,610	4,809

(3) Expected credit losses (ECLs) and credit risk exposures for accounts receivable as of December 31, 2022 and 2021 are as follows, Continued:

30

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

7. Accounts and Other Receivables, Continued

(a) Accounts receivable

(In thousands of won)	December 31, 2022
	Expected loss rate(%)		Carrying amount	Loss allowance
Not due or overdue for less than 90 days	0.1	W	77,072,945	85,459
More than 90 days ~ Less than 180 days	18.2		318,245	57,955
More than 180 days ~ Less than 270 days	46.6		3,735	1,739
More than 270 days ~ Less than 1 year	82.3		39,783	32,739
More than 1 year	100.0		141,643	141,643
		W	77,576,351	319,535
(In thousands of won)	December 31, 2021
	Expected loss rate(%)		Carrying amount	Loss allowance
Not due or overdue for less than 90 days	0.1	W	52,172,521	63,553
More than 90 days ~ Less than 180 days	0.1		437,979	362
More than 180 days ~ Less than 270 days	73.2		242,765	177,602
More than 270 days ~ Less than 1 year	98.8		237,309	234,462
More than 1 year	100.0		213,631	213,631
		W	53,304,205	689,610

(b) Other receivables

(In thousands of won)	December 31, 2022
	Expected loss rate(%)		Carrying amount	Bad debt allowance
Not due or overdue for less than 90 days	0.0	W	139,785	-
More than 90 days ~ Less than 180 days	0.0		-	-
More than 180 days ~ Less than 270 days	0.0		-	-
More than 270 days ~ Less than 1 year	0.0		-	-
More than 1 year	100		4,809	4,809
		W	144,594	4,809
(In thousands of won)	December 31, 2021
	Expected loss rate(%)		Carrying amount	Bad debt allowance
Not due or overdue for less than 90 days	0.0	W	1,080,516	-
More than 90 days ~ Less than 180 days	0.0		-	-
More than 180 days ~ Less than 270 days	0.0		-	-
More than 270 days ~ Less than 1 year	0.0		-	-
More than 1 year	100		4,809	4,809
		W	1,085,325	4,809

In assessing the recoverability of accounts and other receivables, the Group considers changes in the credit rating of accounts and other receivables from the commencement of the credit to the end of the reporting period.

31

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

7. Accounts and Other Receivables, Continued

The Group applies the simplified approach for accounts and other receivables to measure the loss allowance at an amount equal to lifetime expected credit losses. To measure the expected credit losses, accounts and other receivables are grouped based on credit risk characteristics and the duration of past due balances. ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls. The Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes the Group’s historical experience and informed credit assessment, that includes forward-looking information.

8. Property and Equipment

(1) Details of property and equipment as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022			December 31, 2021
		Acquisition cost	Accumulated depreciation	Carrying amount	Acquisition cost	Accumulated depreciation	Carrying amount
Computer and other equipment	W	6,381,124	(5,268,055)	1,113,069	6,654,286	(5,199,734)	1,454,552
Furniture and fixture		1,786,591	(1,448,530)	338,061	1,793,228	(1,412,770)	380,458
Vehicles		9,101	(5,498)	3,603	9,101	(3,223)	5,878
Leasehold improvements		2,084,175	(1,357,187)	726,988	1,935,005	(1,177,894)	757,111
Right-of-use assets		16,197,337	(10,238,929)	5,958,408	15,860,960	(7,120,960)	8,740,000
	W	26,458,328	(18,318,199)	8,140,129	26,252,580	(14,914,581)	11,337,999

(2) Changes in property and equipment for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022
		Computer and other equipment	Furniture and fixture	Vehicles	Leasehold Improve-ments	Right-of-use assets	Total
Beginning balance	W	1,454,552	380,458	5,878	757,111	8,740,000	11,337,999
Rent Adjustment		-	-	-	-	(64,070)	(64,070)
Acquisitions/Capital expenditure		305,568	181,944	-	251,901	1,209,063	1,948,476
Depreciation		(654,751)	(223,293)	(2,275)	(266,106)	(3,998,390)	(5,144,815)
Disposition/Disposals/ Removals		(914)	(2,119)	-	(10,233)	(45,160)	(58,426)
Reclassification		(5,996)	5,996	-	-	-	-
Foreign exchange differences		14,610	(4,925)	-	(5,685)	116,965	120,965
Ending balance	W	1,113,069	338,061	3,603	726,988	5,958,408	8,140,129

32

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

8. Property and Equipment, Continued

(In thousands of won)		2021
		Computer and other equipment	Furniture and fixture	Constru-ction in progress	Vehicles	Leasehold Improve-ments	Right-of-use assets	Total
Beginning balance	W	1,378,968	310,413	128,163	8,153	132,109	5,737,240	7,695,046
Acquisitions/Capital expenditure		711,660	321,653	-	-	753,223	6,318,561	8,105,097
Depreciation		(646,546)	(249,410)	-	(2,275)	(223,319)	(3,448,318)	(4,569,868)
Disposition/Disposals/ Removals		(15,161)	(2,028)	-	-	(44,303)	(62,827)	(124,319)
Reclassification		-	(80)	(128,163)	-	128,243	-	-
Foreign exchange differences		25,631	(90)	-	-	11,158	195,344	232,043
Ending balance	W	1,454,552	380,458	-	5,878	757,111	8,740,000	11,337,999

(3) Classification of depreciation expenses in the statements of comprehensive income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Cost of revenues	W	2,027,837	2,102,270
Selling, general and administrative expenses(*)		3,116,978	2,467,598
	W	5,144,815	4,569,868

(*) The deprecation expenses recognized as the research and development included in selling, general and administrative expenses was W141,035 thousand and W301,242 thousand, respectively, for the years ended December 31, 2022 and 2021.

(4) As of December 31, 2022 and 2021, there are no property and equipment that are pledged as collateral for the Group’s debts.

9. Intangible Assets

(1) Details of intangible assets as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022			December 31, 2021
		Acquisition cost	Accumulated amortization(*)	Carrying amount		Acquisition cost	Accumulated amortization(*)	Carrying amount
Software	W	16,285,046	(14,345,996)	1,939,050		14,491,146	(13,226,409)	1,264,737
Patents		1,214,696	(670,424)	544,272		1,082,626	(600,313)	482,313
Other intangible assets		6,160,164	(4,774,008)	1,386,156		6,264,360	(4,669,382)	1,594,978
	W	23,659,906	(19,790,428)	3,869,478		21,838,132	(18,496,104)	3,342,028

(*) Accumulated amortization includes the amount of accumulated impairment loss.

33

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

9. Intangible Assets, Continued

(2) Changes in intangible assets for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022
		Software	Patents	Other intangible assets	Total
Beginning balance	W	1,264,737	482,313	1,594,978	3,342,028
Acquisitions/Capital expenditure		1,855,666	137,919	747,040	2,740,625
Amortization		(1,183,820)	(71,457)	(661,366)	(1,916,643)
Disposals		-	(4,503)	(5,132)	(9,635)
Impairment(*)		-	-	(293,239)	(293,239)
Foreign exchange differences		2,467	-	3,875	6,342
Ending balance	W	1,939,050	544,272	1,386,156	3,869,478

(*) The Group recognized W293,239 thousand of impairment loss as carrying amount of the other intangible assets exceeded recoverable amount as of December 31, 2022.

(In thousands of won)		2021
		Software	Patents	Other intangible assets	Total
Beginning balance	W	2,234,385	332,142	796,352	3,362,879
Acquisitions/Capital expenditure		116,210	223,743	1,676,369	2,016,322
Amortization		(1,087,557)	(73,572)	(586,413)	(1,747,542)
Disposals		(14,861)	-	-	(14,861)
Impairment(*)		-	-	(281,008)	(281,008)
Foreign exchange differences		16,560	-	(10,322)	6,238
Ending balance	W	1,264,737	482,313	1,594,978	3,342,028

(*) The Group recognized W281,008 thousand of impairment loss as carrying amount of the other intangible assets exceeded recoverable amount as of December 31, 2021.

(3) Classification of amortization in the statements of comprehensive income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Cost of revenues	W	718,992	737,028
Selling, general and administrative expenses(*)		1,197,651	1,010,514
	W	1,916,643	1,747,542

(*) The amortization recognized as the research and development included in selling, general and administrative expenses was W42,509 thousand and W80,081 thousand, respectively, for the years ended December 31, 2022 and 2021.

34

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

10. Employee Benefit

The expenses recognized in relation to defined contribution plan for the years ended December 31, 2022 and 2021 are W2,180,830 thousand and W2,067,288 thousand, respectively. In addition, expenses related to defined benefit plans amounting to W27,776 thousand are included in other non-current liabilities as of December 31, 2022.

11. Commitments

(1) The Parent Company has entered into exclusive license agreements with foreign licensees, such as GungHo Online Entertainment, Inc., Innova Intellectual Properties S.a.r.l, Shanghai BING KUAI Network Technology Co. Ltd., Relaternity(Hong Kong) Limited and others to provide exclusive license to distribute and sell online and mobile games and receives a certain portion of each licensee’s revenues (20-40%) as royalties.

(2) In July 2021, the Parent Company entered into development agreements with Shanghai TA REN Network Technology Co., Ltd. to grant them the right to develop mobile games based on the contents of Ragnarok IP(ROIP) and distribute such games in China for 3 years from the agreement date.Under the terms of the agreement, the Parent Company is entitled to receive from the licensee a royalty equal to a percentage of the applicable revenue generated.

(3) As of December 31, 2022, the Parent Company has entered into license agreements with various third-party game developers to secure exclusive right to publish the games developed by the third-party developers. Upfront license fees paid are capitalized and recognized as other intangible assets and minimum guaranteed royalties are capitalized and recognized as other non-current assets. Purchase obligations for future payment related to above agreements as of December 31, 2022 and 2021 are W3,242,395 thousand and W2,335,425 thousand, respectively.

(4) As of December 31, 2022, the Group benefited from payment guarantee of USD 658,500 from KB Kookmin Bank regarding overseas IP contracts.

(5) As of December 31, 2022, the Group has been provided with a payment guarantee amounting to W2,105,054 thousand from Seoul Guarantee Insurance Co., Ltd.

12. Share Capital and Capital Surplus

(1) Details of common shares as of December 31, 2022 and 2021 are as follows:

(In won and in number of shares)		December 31, 2022		December 31, 2021
Number of authorized shares		40,000,000		40,000,000
Value per share	W	500		500
Number of shares issued		6,948,900		6,948,900
Common shares	W	3,474,450,000		3,474,450,000

35

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

12. Share Capital and Capital Surplus, continued

(2) Details of capital surplus as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022		December 31, 2021
Additional paid-in capital	W	25,292,211		25,292,211
Other capital surplus		1,806,053		1,806,053
	W	27,098,264		27,098,264

(3) Details of other components of equity as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Foreign currency translation adjustments	W	2,480,169	2,182,321
Remeasurements of defined benefit liability		(4,494)	(1,933)
	W	2,475,675	2,180,388

(4) Details of retained earnings as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Unappropriated retained earnings	W	296,479,528	213,317,805

(5) According to the Parent Company's Articles of Incorporation, the Parent Company may issue 2,000,000 shares of preferred stock without voting rights, and there are no preferred shares issued as of December 31, 2022.

13. Revenue from Contracts with Customers

(1) Details of revenue from contracts with customers based on the service contract type and the timing of satisfaction of performance obligations are as follows:

(In thousands of won)		2022		2021
Service contract
Micro-transaction and subscription revenue	W	341,769,516		229,028,411
- Online Game		80,147,610		64,382,094
- Mobile Game		261,621,906		164,646,317
Royalties and license fees		106,258,433		166,505,539
- Online Game		9,108,796		10,988,301
- Mobile Game		97,149,637		155,517,238
Others		15,589,923		18,404,024
	W	463,617,872		413,937,974
Timing of satisfaction of performance obligations
At a point in time		24,867		7,496
Over time		463,593,005		413,930,478
	W	463,617,872		413,937,974

36

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

13. Revenue from Contracts with Customers, Continued

(2) Accounts receivables, incremental costs of obtaining a contract and contract liabilities related to contracts with customers as of December 31, 2022 and December 31, 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Accounts receivable	W	77,256,816	52,614,595
Incremental costs of obtaining a contract (Prepaid expenses)		1,722,257	860,626
Contact liabilities (Deferred revenue)		18,573,276	13,578,744
Micro-transaction and subscription revenue		16,787,724	12,622,063
Royalties and license fees		100,835	116,281
Website and application development		1,684,717	840,400

(3) The amount of revenue recognized from previous period’s contract liabilities satisfied during the year ended December 31, 2022 is W13,480,518 thousand (W12,622,063 thousand in micro-transaction and subscription revenue, W18,055 thousand in royalties and license fees, andW840,400 thousand in website and application development).

(4) Transaction price allocated to unsatisfied performance obligations as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022		December 31, 2021
Micro transaction and subscription revenue	W	16,787,724		12,622,063
- Online Game		9,917,830		9,374,114
- Mobile Game		6,869,894		3,247,949
Royalties and license fees		100,835		116,281
- Online Game		48,563		95,755
- Mobile Game		52,272		20,526
Website and application development		1,684,717		840,400
	W	18,573,276		13,578,744

The Group’s management expects to recognize 99.8% (W18,543,037 thousand) of the transaction price allocated to contracts that have not been performed as of December 31, 2022 as revenue within 12 months. The remaining 0.2% (W30,239 thousand) is expected to be recognized as revenue thereafter. The amounts disclosed above do not include variable consideration which is constrained.

(5) Details of incremental costs of obtaining a contract recognized as assets as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Incremental costs of obtaining a contract recognized as at the reporting period-end	W	1,722,257	860,626
Incremental costs of obtaining a contract recognized as cost of revenues		860,626	1,276,880

37

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

14. Classification of expenses by nature

Details of classification of expenses by nature for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Fees and commissions	W	259,023,534		215,612,852
Advertising expenses		29,897,515		35,947,806
Salaries		40,315,384		35,532,330
Outsourcing expenses		11,414,715		12,997,334
Rent		1,178,964		1,125,317
Employee benefits		3,895,228		3,389,869
Expenses related to defined contribution plan		2,255,265		2,090,517
Depreciation		5,144,815		4,569,868
Amortization		1,916,643		1,747,542
Others		3,734,013		3,360,644
	W	358,776,076		316,374,079

Total expenses consist of cost of sales, selling, general and administrative expenses.

15. Selling, General and Administrative Expenses

Details of the selling, general and administrative expenses for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Advertising expenses	W	29,897,515		35,947,806
Fees and commissions		15,908,570		13,959,003
Salaries		17,597,803		15,490,971
Research and development		13,797,195		16,569,508
Employee benefits		1,971,902		1,597,984
Rent		645,868		529,623
Expenses related to defined contribution plan		782,814		729,380
Depreciation		2,975,943		2,166,356
Amortization		1,155,142		930,433
Other expenses		6,678,181		4,280,113
	W	91,410,933		92,201,177

38

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

16. Finance Income and Costs

(1) Details of finance income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Finance income
Interest income	W	4,500,817		1,383,177
Unrealized foreign currency gain		688,970		133,980
Gain on foreign currency transactions		10,763,679		3,751,378
	W	15,953,466		5,268,535

(2) Details of finance costs for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Finance costs
Interest expense	W	126,826		115,321
Unrealized foreign currency loss		1,311,650		210,730
Loss on foreign currency transactions		9,340,885		2,360,119
	W	10,779,361		2,686,170

17. Other Non-Operating Income and Expenses

(1) Details of other non-operating income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Gain on disposal of property and equipment		14,557		6,648
Others		590,759		600,083
	W	605,316		606,731

(2) Details of other non-operating expenses for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Loss on disposal of property and equipment		18		56,897
Loss on disposal of intangible assets		4,503		-
Impairment loss on intangible assets		293,239		281,008
Impairment loss on other non-current assets		176,908		1,087,357
Donations		-		1,200
Miscellaneous loss		264,772		25,997
	W	739,440		1,452,459

39

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

18. Income tax expense

(1) Details of income tax expense for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Current tax expense
Current year	W	27,932,523		29,903,384
Adjustments recognized related to prior period income		-		1,646,777
Deferred tax expense
Changes in net deferred tax assets		(1,108,334)		1,870,580
Income tax expense	W	26,824,189		33,420,741

(2) The differences between the tax expense on the Group’s profit before tax and the amount that would arise using the statutory tax rates applicable to profits of the entities are as follows:

(In thousands of won)		2022		2021
Profit before income tax expense	W	109,881,777		99,300,532
Income tax using the statutory tax rate of each country		23,951,343		25,957,358
Adjustments:
Expenses not deductible for tax purposes		7,251		11,096
Foreign tax credits		5,028,180		4,499,964
Utilization of previously unrecognized tax losses		(238,942)		-
Adjustments recognized related to prior period income		-		1,646,777
Tax credit		(2,131,375)		(765,118)
Additional tax for insufficient investments in designated areas		1,085,166		487,118
Changes in deferred tax liabilities related to investment in subsidiaries		(1,100,831)		1,350,956
Others		223,397		232,590
Total Adjustment		2,872,846		7,463,383
Income tax expense	W	26,824,189		33,420,741
Effective tax rate		24%		34%

40

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

18. Income tax expense, Continued

(3) Details of the changes in deferred tax assets (liabilities) for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022			2021
		Beginning balance	Increase (Decrease)	Ending balance	Beginning balance	Increase (Decrease)	Ending balance
Property and equipment	W	33,573	4,921	38,494	11,148	22,425	33,573
Intangible assets		398,062	43,607	441,669	402,613	(4,551)	398,062
Other non-current assets		528,413	(326,429)	201,984	503,856	24,557	528,413
Accounts Payable		1,403,933	296,800	1,700,733	1,468,833	(64,900)	1,403,933
Accrued expenses		192,895	40,043	232,938	177,549	15,346	192,895
Deferred revenue		311,128	(217,548)	93,580	497,185	(186,057)	311,128
Allowance for doubtful account		367,279	(68,251)	299,028	285,002	82,277	367,279
Other non-current liabilities		75,468	5,300	80,768	46,264	29,204	75,468
Lease		(43,203)	13,317	(29,886)	7,932	(51,135)	(43,203)
Investment in subsidiaries		(3,758,889)	967,510	(2,791,379)	(2,576,624)	(1,182,265)	(3,758,889)
Others		(2,925)	(274,977)	(277,902)	42,745	(45,670)	(2,925)
Subtotal		(494,266)	484,293	(9,973)	866,503	(1,360,769)	(494,266)
Deferred tax due to carry-forward deficits		134,931	624,041	758,972	-	134,931	134,931
Deferred tax due to tax credit carry-forward		2,078,824	-	2,078,824	2,723,566	(644,742)	2,078,824
Deferred tax asset(*)	W	1,719,489	3,940,032	5,659,521	3,590,069	(1,870,580)	1,719,489
Deferred tax liability		-	(2,831,698)	(2,831,698)	-	-	-

(*) The future realizability of deferred tax assets is assessed by taking into consideration various factors such as each subsidiaries’ performance, the overall economic environment and industry outlook, expected future earnings, and deductible period of tax credit carry-forward and carry-forward deficits. The Group periodically reviews these matters, and has recognized deferred tax assets related to temporary differences, carry-forward deficits, based on the likelihood of each subsidiaries’ future taxable income as at December 31, 2022. This amount may change if the estimate for future taxable income changes.

(4) Details of unused tax loss carryforwards and unused tax credit carry-forwards that are not recognized as deferred income tax assets as of December 31, 2022 are as follows:

(In thousands of won)
Year of expiration		Unused loss carryforwards	Unused tax credit carryforwards
2024	W	2,585,403	-
2025		1,421,329	159,967
2026		2,002,452	175,371
2027		352,039	162,959
After 2027		9,056,593	1,614,460
Total	W	15,417,816	2,112,757

41

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

18. Income tax expense, Continued

(5)As of December 31, 2022 and 2021, the Group did not recognize deferred income tax assets relating to investments in subsidiaries for the temporary difference of W22,409,140 thousand and W15,507,775 as it is not probable such temporary differences can be utilized in the foreseeable future.

(6)The deferred tax relating to items that are charged or credited directly to equity for the years ended December 31, 2022 and 2021, is as follows:

(In thousands of won)		2022	2021
Deferred tax assets
- Deferred tax assets to be recovered after more than 12 months	W	1,934,909	1,421,732
- Deferred tax assets to be recovered within 12 months		5,074,755	5,294,537
Sub-total		7,009,664	6,716,269
Deferred tax liabilities
- Deferred tax liabilities to be recovered after more than 12 months		(3,123,678)	(3,775,541)
- Deferred tax liabilities to be recovered within 12 months		(1,058,163)	(1,221,239)
Sub-total		(4,181,841)	(4,996,780)
Deferred tax assets (liabilities), net	W	2,827,823	1,719,489

19. Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to owners of the Parent by the weighted average number of common shares outstanding each year.

(1) Basic earnings per share

(In thousands won and in number of shares)		2022		2021
Profit attributable to owners of the Parent	W	83,161,723		65,946,650
Weighted average outstanding shares of common shares		6,948,900		6,948,900
Basic earnings per share(in won)	W	11,968		9,490

(2) Diluted earnings per share

As of and for the years ended December 31, 2022 and 2021, the Parent Company does not have outstanding dilutive potential ordinary shares. Accordingly, the diluted earnings per share for the years ended December 31, 2022 and 2021 are the same as the basic earnings per share.

42

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

20. Cash flow information

(1) Adjustments for calculating cash generated from operations for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Adjustments for:
Depreciation	W	5,144,815		4,569,868
Amortization		1,916,643		1,747,542
Bad debt expense		701,609		933,226
Unrealized foreign currency loss		1,311,650		210,730
Interest expense		126,826		115,321
Loss on disposal of property and plant		18		56,897
Loss on disposal of intangible assets		4,503		-
Impairment loss on intangible asset		293,239		281,008
Impairment loss on other non-current assets		176,908		1,087,357
Retirement benefit expenses		65,051		23,229
Income tax expense		26,824,189		33,420,741
Unrealized foreign currency gain		(688,970)		(133,980)
Gain on disposal of property and plant		(14,557)		(6,648)
Interest income		(4,500,817)		(1,383,177)
Reversal of allowance for doubtful accounts		-		(131,927)
Other		1,741		(214,408)
	W	31,362,848		40,575,779

(2) Changes in assets and liabilities arising from operating activities for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Accounts receivable	W	(38,198,514)		5,529,558
Other receivables		898,995		(1,081,577)
Prepayment		(1,640,590)		2,165,238
Prepaid expense		(104,362)		(3,296,129)
Other current assets		(52,753)		243,483
Other non-current assets		217,785		144,235
Accounts payable		43,899,612		(8,512,361)
Deferred revenue		4,915,259		1,184,816
Withholding		(631,006)		685,623
Accrued expense		546,763		118,271
Other current liabilities		301,121		34,011
Accrued income		86,830		-
Long-term deferred revenue		(12,577)		(99,044)
Other non-current liabilities		27,562		-
	W	10,254,125		(2,883,876)

43

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

20. Cash flow information, Continued

(3) Significant non-cash transactions for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Reclassification of prepayment to intangible assets	W	63,841	219,487
Increase in accounts payable relating to the acquisition of software		608,575	667,078
Acquisition of right-of-use assets		1,209,063	6,055,394

(4) Changes in liabilities arising from financing activities for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)			2022	2021
Beginning of the year		W	8,730,563	5,900,216
Cash flows used in financial activities – payment of lease liabilities			(3,917,977)	(3,647,934)
Cash flows used in operating activities – Interest paid			(121,724)	(111,416)
Non-cash transactions:
Acquisitions – leases			1,209,063	6,055,394
Interest expense			121,724	111,416
Others			(124,245)	-
Translation difference			65,781	422,887
Ending of the year		W	5,963,185	8,730,563

44

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

21. Leases

The Group leases offices, vehicles and others. The leases typically run for a period of 1~ 5 years with an option to renew or terminate the lease after that date. There are no restrictions or covenants imposed to leases, but the lease assets are not be provided as collateral for borrowings.

(1) Details of right-of-use assets and lease liabilities recognized in the consolidated statements of financial position as of December 31, 2022 and 2021 are as follows:

(In thousands of won)			December 31, 2022	December 31, 2021
Right-of-use assets(*1)
Offices		W	5,066,896	6,698,105
Vehicles			64,692	292,432
Others			826,820	1,749,463
		W	5,958,408	8,740,000
Lease liabilities(*2)
Current			2,906,064	3,606,965
Non-current			3,057,121	5,123,598
		W	5,963,185	8,730,563

(*1) Right-of-use assets are included in the 'Property and equipment' in the consolidated statement of financial position.

(*2) Lease liabilities are included in the 'Other current liabilities' and 'Other non-current liabilities' in the consolidated statement of financial position.

(2) Changes in right-of-use assets for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022
		Offices	Vehicles	Others	Total
Balance as of January 1, 2022	W	6,698,105	292,432	1,749,463	8,740,000
Depreciation		(2,549,438)	(231,476)	(1,217,476)	(3,998,390)
Reassessment		1,035	(52,415)	(12,690)	(64,070)
Acquisitions		923,137	55,417	230,509	1,209,063
Disposals		(45,160)	-	-	(45,160)
Translation difference		39,217	734	77,014	116,965
Balance as of December 31, 2022	W	5,066,896	64,692	826,820	5,958,408

45

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

21. Leases, Continued

(2) Changes in right-of-use assets for the years ended December 31, 2022 and 2021 are as follows, Continued:

(In thousands of won)		2021
		Offices	Vehicles	Others	Total
Balance as of January 1, 2021	W	3,904,222	102,149	1,730,869	5,737,240
Depreciation		(2,077,867)	(186,968)	(1,183,483)	(3,448,318)
Reassessment		2,017,711	-	1,355	2,019,066
Acquisitions		2,730,665	377,785	1,191,045	4,299,495
Disposals		(61,020)	(1,807)	-	(62,827)
Translation difference		184,394	1,273	9,677	195,344
Balance as of December 31, 2021	W	6,698,105	292,432	1,749,463	8,740,000

(3) Details of amounts recognized in the consolidated statements of comprehensive income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Interest expense relating to lease liabilities (included in finance cost)	W	121,724	111,416
Expense relating to short-term leases		44,684	117,000
Expense relating to leases of low-value assets excluding short-term leases		22,987	20,547

(4) Details of amounts recognized in the consolidated statement of cash flows for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Total cash outflows of leases	W	4,107,372	3,896,897

22. Financial Risk Management

The Group’s operating activities expose itself to a variety of financial risks: market risk, credit risk and liquidity risk from which the Group’s risk management program focuses on minimizing any adverse effects on its financial performance. The Group operates financial risk management policies and programs that closely monitor and respond to each risk factor.

(1) Capital Risk Management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so the Group can continue to provide returns and benefits for shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Group monitors capital on the basis of the debt ratio. This ratio is calculated as total debt divided by total capital. The debt ratios as of December 31, 2022 and 2021 are as follows:

46

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

22. Financial Risk Management, Continued

(In thousands of won)		December 31, 2022	December 31, 2021
Total Liabilities	W	113,914,159	80,685,465
Total Equity		330,179,821	246,840,858
Debt ratio		35%	33%

(2) Market Risk

(a) Foreign exchange risk

The Group is exposed to foreign exchange risk arising from royalty revenues and commission payment primarily with respect to the US dollar. The Group’s financial assets and liabilities are exposed to foreign currency risk as of December 31, 2022 and 2021 are as follows:

(In thousands of won, in foreign currencies)
	December 31, 2022
	Assets in foreign currency	Liabilities in foreign currency		Assets in Korean Won	Liabilities in Korean Won
USD	50,865,141	8,528,692		64,350,719	10,831,632
JPY	517,431,793	55,296,530		4,932,056	527,075
EUR	25,839	37,607		34,914	50,905
IDR	12,955,000	703,608,946		1,048	57,279
THB	28,510	7,379		1,045	270
VND	9,270,000	3,243,600		498	174
			W	69,320,280	11,467,335

	December 31, 2021
	Assets in foreign currency	Liabilities in foreign currency		Assets in Korean Won	Liabilities in Korean Won
USD	28,112,919	13,921,628		33,327,865	16,504,090
JPY	690,658,516	88,019,006		7,115,440	906,807
EUR	356,541	41,564		478,599	55,792
IDR	12,955,000	3,103,944		1,077	258
THB	28,510	7,379		1,014	262
TWD	9,521,305	-		407,893	-
VND	9,270,000	3,243,600		483	169
			W	41,332,371	17,467,378

The Group measures foreign exchange risk at the exchange rate of 10% for each foreign currency, and the rate of change reflects the management's assessment of the risk of exchange rate fluctuation that can be reasonably experienced. The effects of changes in foreign currency exchange rate on profit before tax for the years ended of December 31, 2022 and 2021 are as follows:

47

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

22. Financial Risk Management, Continued

(In thousands of won)		2022		2021
		Increased by 10%	Decreased by 10%	Increased by 10%	Decreased by 10%
USD	W	5,351,909	(5,351,909)	1,682,378	(1,682,378)
JPY		440,498	(440,498)	620,863	(620,863)
Others		(7,112)	7,112	83,258	(83,258)
	W	5,785,295	(5,785,295)	2,386,499	(2,386,499)

The sensitivity analysis is based on monetary assets and liabilities denominated in foreign currencies other than the functional currency at the end of the reporting period.

(b) Interest rate risk

There are no borrowings under variable interest rate conditions as of December 31, 2022 and 2021.

(c) Price risk

There are no assets and liabilities exposed to price risk as of December 31, 2022 and 2021.

48

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

22. Financial Risk Management, Continued

(3) Credit Risk

Credit risk arises from normal trading and investing activities and occurs when a customer or a counterparty fails to comply with the terms of the contract. In order to manage these credit risks, the Group regularly evaluates the creditworthiness of customers based on their financial condition, past experiences and other factors.

The carrying amounts of financial assets represent their maximum exposure to credit risk. The maximum exposure to credit risk of the Group as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022		December 31, 2021
Cash and cash equivalents	W	169,877,341		99,104,943
Short-term financial instruments		167,000,000		148,000,000
Accounts receivable, net		77,256,816		52,614,595
Other receivables, net		11,943		6,085
Other current financial assets		3,370,146		598,099
Oher non-current financial assets		2,175,769		3,018,823
	W	419,692,015		303,342,545

Cash and cash equivalents and short-term financial instruments are deposited in financial institutions with strong credit ratings. Accounts receivable are mainly due from payment processing companies and platform service providers, which the Group believes have low levels of credit risk.

(4) Liquidity Risk

Liquidity risk management includes the maintenance of sufficient cash and marketable securities, the availability of funds from appropriately committed credit lines, and the ability to settle market positions. The following table summarizes the financial liabilities of the Group by maturity according to the remaining period from the end of the reporting period to the contractual maturity date.

(In thousands of won)		December 31, 2022
		Carrying value	Less than 3 months	3 months to 1 year	1 to 2 years	2 to 4 years	Total
Accounts payable	W	70,543,819	69,803,179	366,651	373,989	-	70,543,819
Accrued expense		429,132	429,132	-	-	-	429,132
Other liabilities (*)		5,963,185	1,015,699	2,022,828	2,475,989	617,724	6,132,240
	W	76,936,136	71,248,010	2,389,479	2,849,978	617,724	77,105,191

(*) Other liabilities as of December 31, 2022 consist of lease liabilities.

49

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

22. Financial Risk Management, Continued

(4) Liquidity Risk, Continued

(In thousands of won)		December 31, 2021
		Carrying value	Less than 3 months	3 months to 1 year	1 to 2 years	2 to 4 years	Total
Accounts payable	W	37,593,429	28,906,524	7,957,732	729,173	-	37,593,429
Accrued expense		49,299	49,299	-	-	-	49,299
Other liabilities (*)		8,730,563	988,045	2,714,866	2,601,211	2,596,488	8,900,610
	W	46,373,291	29,943,868	10,672,598	3,330,384	2,596,488	46,543,338

(*) Other liabilities as of December 31, 2021 consist of lease liabilities.

The cash flows above are not discounted and the amount due within 12 months is the same as the carrying amount since the effect of the discount is not material.

23. Segment information

(1) Operating segments

The Group determines its operating segments by establishing strategic decisions. Chief operating decision maker (“CODM”) reviews operating profit by each segment in order to make decisions regarding the resources to be allocated to the segment and to evaluate the performance of the segment.

The reportable segments of the Group are in line with the organizational structure and CEO’s review of operations, and include mobile, online, and others.

The Group assesses the performance of its operating segments based on its operating profit or loss, which does not differ from operating profit reported on the consolidated statement of comprehensive income except for inter-segment transactions. The segment information for the years ended December 31, 2022 and 2021 are as follows.

(In thousands of won)		2022
		Online	Mobile	Others	Total	Inter-segment eliminations(*1)	Total
Revenue	W	107,325,802	404,363,059	21,739,535	533,428,396
Intersegment Revenue		18,069,396	45,591,515	6,149,613	69,810,524	(69,810,524)	-
External Revenue		89,256,406	358,771,544	15,589,922	463,617,872	-	463,617,872
Depreciation/ amortization		1,348,633	1,873,302	3,839,523	7,061,458	-	7,061,458
Operating profit(*2)		47,450,349	57,437,914	623,417	105,511,680	(669,884)	104,841,796

(*1) The Group reflects inter-segment eliminations as adjustments.

(*2) Other profit or loss items that do not constitute operating profit (loss) are not separately disclosed as they are not reviewed by the chief operating decision maker by operating segment.

50

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

23. Segment information, Continued

(1) Operating segments, Continued

(In thousands of won)		2021
		Online	Mobile	Others	Total	Inter-segment eliminations(*1)	Total
Revenue	W	90,122,650	346,928,640	23,416,966	460,468,256	-
Intersegment Revenue		14,752,255	26,765,085	5,012,942	46,530,282	(46,530,282)	-
External Revenue		75,370,395	320,163,555	18,404,024	413,937,974	-	413,937,974
Depreciation/ amortization		1,974,227	1,875,207	2,467,976	6,317,410	-	6,317,410
Operating profit(*2)		32,084,067	65,144,121	821,701	98,049,889	(485,994)	97,563,895

(*1) The Group reflects inter-segment eliminations as adjustments.

(*2) Other profit or loss items that do not constitute operating profit (loss) are not separately disclosed as they are not reviewed by the chief operating decision maker by operating segment.

(2) Revenue from external customers by country for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022(*)		2021(*)
Korea	W	46,718,924		73,750,935
Taiwan		175,663,666		77,462,311
Japan		26,132,619		40,259,220
United States of America		33,697,091		20,893,708
Thailand		75,498,392		94,475,403
Philippines		26,002,875		20,172,684
Indonesia		5,472,177		10,722,875
Hong Kong		24,397,107		7,648,024
Malaysia		24,829,781		30,422,263
Other		25,205,240		38,130,551
	W	463,617,872		413,937,974

(*) Revenue was attributed to the country based on the customer’s location.

(3) Non-current assets by geographical regions as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022(*)		December 31, 2021(*)
Domestic	W	9,182,784		10,883,766
Overseas		5,308,667		5,769,325
Total	W	14,491,451		16,653,091

(*) The amounts are exclusive of financial assets and deferred tax assets.

51

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

23. Segment information, Continued

(4) 16.5% of consolidated revenue (W76,581,501 thousand) came from one major customer in the mobile segment for the year ended December 31, 2022.

24. Related Party Transactions

(1) Related parties of the Group include entities and individuals capable of exercising control or significant influence over the Group. Related parties include GungHo Online Entertainment, Inc. (the controlling shareholder with 59.31% common shares), its subsidiaries, members of board of directors, executives with strategic responsibilities and their immediate families.

(2) Account balances with related party

Balances of receivables and payables with related party as of December 31, 2022 and 2021 are as follows:

(In thousands of won)			December 31, 2022		December 31, 2021
Related party	Name of entity		Receivables	Payables	Receivables	Payables
Parent Company	GungHo Online Entertainment, Inc.	W	2,873,954	2,804	5,253,873	7,448
Other	Gungho Online Entertainment America		-	29,692
	Total		2,873,954	32,496	5,253,873	7,448

(3) Transactions with related parties

The details of transactions with related party for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)				2022
				Revenues
Related party	Name of entity			Royalty	Commission	Other
Parent company	GungHo Online Entertainment, Inc.	W		24,812,723	928,202	-
Other	GungHo Online Entertainment America			-	-	-
			W	24,812,723	928,202	-

(In thousands of won)				2022
				Purchases
Related party	Name of entity			Royalty	Commission	Other
Parent company	GungHo Online Entertainment, Inc.	W		-	12,671	7,648
Other	GungHo Online Entertainment America			42,479	-	-
			W	42,479	12,671	7,648

52

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2022 and 2021

24. Related Party Transactions, Continued

(In thousands of won)				2021
				Revenues
Related party	Name of entity			Royalty	Commission	Other
Parent company	GungHo Online Entertainment, Inc.	W		36,646,582	-	-
Other	GungHo Online Entertainment America			-	-	-
			W	36,646,582	-	-
(In thousands of won)				2021
				Purchases
Related party	Name of entity			Royalty	Commission	Other
Parent company	GungHo Online Entertainment, Inc.	W		-	55,382	-
Other	GungHo Online Entertainment America			-	-	-
			W	-	55,382	-

(4) Other transactions with related parties

No financing transactions were made with related parties for the years ended December 31, 2022 and 2021.

(5) Key management personnel compensation

The compensation given to key management personnel (registered directors) for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Salaries	W	1,503,280	1,472,348

53

EX-99.2

GRAVITY CO., LTD.

Separate Financial Statements

For the Years Ended December 31, 2022 and 2021

(With Independent Auditors’ Report Thereon)

Contents

Page

Independent Auditors’ Report    1

Separate Statements of Financial Position    3

Separate Statements of Comprehensive Income    5

Separate Statements of Changes in Equity    6

Separate Statements of Cash Flows    7

Notes to the Separate Financial Statements    8

Independent Auditors’ Review Report on Internal Accounting Control System    53

Report on the Effectiveness of the Internal Accounting Control System    55

Independent Auditors’ Report

English Translation of a Report Originally Issued in Korean

To the Board of Directors and Shareholders of Gravity Co., Ltd.:

Opinion

We have audited the accompanying separate financial statements of Gravity Co., Ltd (“the Company”), which comprise the separate statement of financial position as of December 31, 2022, and the separate statement of comprehensive income, separate statement of changes in equity and separate statement of cash flows for the year then ended, and notes to the separate financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the separate financial position of the Company as of December 31, 2022, and its separate financial performance and its separate cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).

Basis for Opinion

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

Other Matter

The separate financial statements of the Company for the year ended December 31, 2021 were audited by KPMG Samjong Accounting Corp. who expressed an unqualified opinion on March 23, 2022.

Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries.

Responsibilities of Management and Those Charged with Governance for the Separate Financial Statements

Management is responsible for the preparation and fair presentation of the separate financial statements in accordance with Korean IFRS, and for such internal control as management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the separate financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Separate Financial Statements

Our objectives are to obtain reasonable assurance about whether the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with KSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these separate financial statements.

1

As part of an audit in accordance with KSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

•Identify and assess the risks of material misstatement of the separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

•Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.

•Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

•Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern.

•Evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Samil PricewaterhouseCoopers

Seoul, Korea

March 23, 2023

This report is effective as of March 23, 2023, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying separate financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

2

GRAVITY CO., LTD.

Separate Statements of Financial Position

As of December 31, 2022 and 2021    

(In thousands of won)		Notes		December 31, 2022	December 31, 2021
Assets
Current assets
	Cash and cash equivalents	5,6,22	W	42,985,625	26,602,122
	Short-term financial instruments	6,22		167,000,000	148,000,000
	Accounts receivable, net	6,7,14,22		35,117,290	40,569,841
	Other receivables, net	6,7,22		961,918	1,677,451
	Prepaid expenses	14		1,556,323	1,823,623
	Other current financial assets	6,22		3,249,537	790,051
	Other current assets			5,573	42,487
				250,876,266	219,505,575
Non-current assets
	Investments in subsidiaries	8		26,732,334	21,679,845
	Property and equipment, net	9,21		3,520,385	5,608,320
	Intangible assets, net	10		3,867,939	3,228,635
	Other non-current financial assets	6,22		2,048,028	2,895,565
	Other non-current assets			1,574,623	1,701,669
	Deferred tax assets	19		3,689,765	4,045,964
				41,433,074	39,159,988
Total assets			W	292,309,340	258,665,573

See accompanying notes to the separate financial statements.

3

GRAVITY CO., LTD.

Separate Statements of Financial Position, Continued

As of December 31, 2022 and 2021

(In thousands of won)			Notes		December 31, 2022	December 31, 2021
Liabilities
Current liabilities
	Accounts payable		6,22	W	17,641,888	29,467,721
	Deferred revenue		14		4,258,298	4,139,025
	Withholdings				1,540,197	2,754,347
	Accrued expenses				881,213	785,358
	Income tax payable				2,406,367	9,403,175
	Other current liabilities		6,21,22		1,607,153	2,254,206
					28,335,116	48,803,832
Non-current liabilities
Long-term accounts payable			6,22		373,989	729,173
Long-term deferred revenue			14		30,239	199,062
Other non-current liabilities			6,21,22		2,978,179	3,256,413
					3,382,407	4,184,648
Total liabilities				W	31,717,523	52,988,480
Equity
		Share capital	1,13		3,474,450	3,474,450
		Capital surplus	13		27,482,683	27,482,683
		Retained earnings	13		229,634,684	174,719,960
Total equity					260,591,817	205,677,093
Total liabilities and equity				W	292,309,340	258,665,573

See accompanying notes to the separate financial statements.

4

GRAVITY CO., LTD.

Separate Statements of Comprehensive Income

For the years ended December 31, 2022 and 2021

(In thousands of won)	Notes		2022		2021
Revenue	14,23
Online games		W	32,969,528	W	30,176,025
Mobile games			198,512,493		256,918,510
Other revenue			1,235,384		1,163,841
			232,717,405		288,258,376
Cost of revenue	15		112,512,407		141,815,263
Gross profit			120,204,998		146,443,113
Selling, general and administrative expenses	15,16		58,060,198		68,268,646
Operating profit			62,144,800		78,174,467
Non-operating income and expenses
Finance income	6,17		13,734,710		4,921,817
Finance costs	6,17		(9,975,732)		(1,989,233)
Other non-operating income	18		9,578,611		11,997,743
Other non-operating expenses	18		(278,780)		(558,730)
Profit before income tax			75,203,609		92,546,064
Income tax expense	19		20,288,885		27,813,231
Profit for the year		W	54,914,724	W	64,732,833
Other comprehensive income
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments			-		-
Total comprehensive income for the year		W	54,914,724	W	64,732,833

See accompanying notes to the separate financial statements.

5

GRAVITY CO., LTD.

Separate Statements of Changes in Equity

For the years ended December 31, 2022 and 2021

(In thousands of won)	Notes		Share capital	Capital surplus	Other components of equity	Retained earnings	Total
Balance at January 1, 2021		W	3,474,450	27,482,683	929	109,987,127	140,945,189
Profit for the year			-	-	-	64,732,833	64,732,833
Foreign currency translation adjustments			-	-	(929)	-	(929)
Balance at December 31, 2021		W	3,474,450	27,482,683	-	174,719,960	205,677,093
Balance at January 1, 2022		W	3,474,450	27,482,683	-	174,719,960	205,677,093
Profit for the year			-	-	-	54,914,724	54,914,724
Balance at December 31, 2022		W	3,474,450	27,482,683	-	229,634,684	260,591,817

See accompanying notes to the separate financial statements.

6

GRAVITY CO., LTD.

Separate Statements of Cash Flow

For the years ended December 31, 2022 and 2021

(In thousands of won)	Notes		2022		2021
Cash flows from operating activities
Profit for the year		W	54,914,724	W	64,732,833
Adjustments	20		12,550,795		18,716,916
Changes in operating assets and liabilities	20		(7,886,555)		(2,637,125)
Interest received			2,964,848		966,070
Dividend received			8,839,924		11,326,984
Interest paid			(61,533)		(68,886)
Income tax paid			(25,807,417)		(22,716,206)
Net cash provided by operating activities			45,514,786		70,320,586
Cash flows from investing activities
Decrease in other current financial assets			901		-
Decrease in other non-current financial assets			-		500,000
Decrease in other non-current financial liabilities			-		89,860
Disposal of property and equipment	9		1,368		235
Purchase of subsidiaries	8		(5,052,489)		(6,721,204)
Increase in short-term financial instruments			(19,000,000)		(77,000,000)
Increase in other current financial assets			(200)		-
Increase in other non-current financial assets			(500,000)		(1,660,952)
Acquisition of property and equipment	9		(291,433)		(1,210,372)
Acquisition of intangible assets	10		(1,601,496)		(2,151,543)
Net cash used in investing activities			(26,443,349)		(88,153,976)
Cash flows from financing activities
Repayment of lease liabilities	21		(2,049,532)		(1,787,171)
Net cash used in financing activities			(2,049,532)		(1,787,171)
Effects of exchange rate changes on cash and cash equivalents			(638,402)		266,438
Net increase (decrease) in cash and cash equivalents			16,383,503		(19,354,123)
Cash and cash equivalents at beginning of the year			26,602,122		45,956,245
Cash and cash equivalents at end of the year		W	42,985,625	W	26,602,122

See accompanying notes to the separate financial statements.

7

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

1. General Information

GRAVITY CO., LTD. (the “Company”) was incorporated on April 4, 2000, to engage in developing and publishing online and mobile games, and other related business. The Company’s headquarter is located at 15F, 396 World Cup buk-ro, Mapo-gu, Seoul, Korea. The Company’s principal game product, “Ragnarok”, a massive multi-player online role-playing game, was commercially launched in August 2002, and is currently operated internationally in 91 markets. The Company also operates many other games.

On February 8, 2005, the Company listed its shares on the Nasdaq Stock Market in the United States and issued 1,400,000 shares of common stocks in the form of American Depositary shares (“ADSs”) under the symbol “GRVY”.

As of December 31, 2022, the total paid-in capital amounts to W3,474,450 thousand. The Company’s major shareholders and their respective percentage of ownership as of December 31, 2021 are as follows:

	Number of shares	Ownership (%)
GungHo Online Entertainment, Inc.	4,121,737	59.31
Others	2,827,163	40.69
	6,948,900	100.00

2. Basis of Presentation

These separate financial statements have been prepared in accordance with Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Stock Companies, Etc. in the Republic of Korea. The accompanying consolidated financial statements have been 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 Group's financial position, financial performance or cash flows, is not presented in the accompanying consolidated financial statements.

These separate financial statements were authorized for issuance by the Board of Directors on March 8, 2023, and are expected to be submitted for approval at the shareholders’ meeting to be held on March 31, 2023.

(1) Basis of measurement

The separate financial statements have been prepared on the historical cost basis.

(2) Use of judgments and estimates

The preparation of the separate financial statements in conformity with K-IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:

8

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

2. Basis of Presentation, Continued

(2) Use of judgments and estimates, Continued

(a) Deferred revenue     

The Company sells virtual currency and in-game items that can be used in mobile games to game users. For each game in each country, the Company estimates and applies the game user's life cycle in order to recognize revenue generated by micro-transactions. The game user's life cycle is estimated based on the average period from the game user's first payment date to the last access date for active paying game users. The Company considers a game user as an active user if the period between the time of the user’s most recent access of the game and the end of reporting period equals or is shorter than the estimated game users’ life cycle. For remaining amounts of virtual currency and items that active users own at period-end, the related revenue is deferred considering the items’ attributes. The Company estimates the user’s life cycle by analyzing game users’ activity patterns such as payment and access and it periodically reviews if there is any change of these estimates.

3. New Standards and Interpretations Adopted During the Year and Resulting Changes in Accounting Policies

The Company has applied the following standards and amendments for the first time for the annual reporting period commencing on January 1, 2022.

(1)Amendment to K-IFRS No. 1103 ‘Business Combinations’ - Reference to the Conceptual Framework

The amendments update a reference of definition of assets and liabilities to be recognized in a business combination in revised Conceptual Framework for Financial Reporting. However, the amendments add an exception for the recognition of liabilities and contingent liabilities within the scope of Korea IFRS 1037 Provisions, Contingent Liabilities and Contingent Assets, and Korean IFRS 2121 Levies. The amendments also clarify that contingent assets should not be recognized at the acquisition date. The amendment does not have a significant impact on the financial statements.

(2)Amendments to K-IFRS No. 1037 ‘Provisions, Contingent Liabilities and Contingent Assets’ - Onerous Contracts : Cost of Fulfilling a Contract

The amendments clarify that the direct costs of fulfilling a contract include both the incremental costs of fulfilling the contract and an allocation of other costs directly related to fulfilling contracts when assessing whether the contract is onerous. The amendment does not have a significant impact on the financial statements.

9

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies

The principal accounting policies applied in the preparation of these separate financial statements in accordance with the K-IFRS are set out below. These policies have been consistently applied to all years presented, except if mentioned otherwise in Note 3.

(1) Investment in subsidiaries, joint ventures, and associates

These separate financial statements are prepared and presented in accordance with K-IFRS No. 1027, Separate Financial Statements. The Company applies the cost method to investments in subsidiaries, associates, and joint ventures in accordance with K-IFRS No. 1027. Dividends from subsidiaries, associates, and joint ventures are recognized in profit or loss when the right to receive the dividends is established.

(2) Cash and Cash equivalents

Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, and other short-term investments with original maturities of three months or less that are readily convertible to known amounts of cash.

(3) Financial Assets

(a) Classification

At initial recognition, the Company classifies its financial assets in the following measurement categories:

•measured at fair value through profit or loss;

•measured at fair value through other comprehensive income (“FVOCI”); and

•measured at amortized cost.

The classification depends on the Company’s business model for managing the financial assets and the contractual terms of the cash flows.

For financial assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. The Company reclassifies debt investments when, and only when, its business model for managing those assets changes.

For investments in equity instruments that are not held for trading, this will depend on whether the Company has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income. Changes in fair value of equity instruments not elected as equity investment at fair value through other comprehensive income will be recognized in profit or loss.

(b) Measurement

At initial recognition, the Company measures a financial asset at its fair value plus, in case of financial asset not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

10

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(3) Financial Assets, Continued

(b) Measurement, Continued

(i) Debt instruments

Subsequent measurement of debt instruments depends on the Company’s business model for managing the asset and the cash flow characteristics of the asset. The Company classifies its debt instruments into one of the following three measurement categories:

•Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method.

•Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment loss (reversal of impairment loss), interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Foreign exchange gains and losses are presented in ‘finance income or costs’ and impairment losses are presented in ‘other non-operating expenses’.

•Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented net in the statement of profit or loss within ‘finance income or costs’ in the year in which it arises.

11

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(3) Financial Assets, Continued

(b) Measurement, Continued

(ii) Equity instruments

The Company subsequently measures all equity investments at fair value. Where the Company’s management has elected to present fair value gains and losses on equity investments, which are held for long-term investment or strategic purpose, in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment.

Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘other non-operating income and expenses’ in the statement of profit or loss as applicable. Impairment loss (reversal of impairment loss) on equity investments measured at fair value through other comprehensive income are not reported separately from other changes in fair value.

(c) Impairment

The Company recognizes loss allowances for expected credit losses(“ECLs”) on:

•financial assets measured at amortized cost;

•debt investments measured at fair value through other comprehensive income; and

•contract assets under K-IFRS No. 1115.

The Company measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at 12-month ECLs:

•debt securities that are determined to have low credit risk at the reporting date; and

•other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition.

Loss allowances for accounts and other receivables (including lease receivables) and contract assets are always measured at an amount equal to lifetime ECLs.

When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Company’s historical experience and informed credit assessment, that includes forward-looking information.

12

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(3) Financial Assets, Continued

(c) Impairment, Continued

The Company considers a financial asset to be in default when:

•the debtor is unlikely to pay its obligations to the Company in full, without recourse by the Company to actions such as realizing security (if any is held); or

•the financial asset is more than 90 days past due.

Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument.

12-month ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is less than 12 months).

The maximum period considered when estimating ECLs is the maximum contractual period over which the Company is exposed to credit risk.

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive). ECLs are discounted at the effective interest rate of the financial asset.

At each reporting date, the Company assesses whether financial assets carried at amortized cost and debt securities at fair value through other comprehensive income are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Loss allowances for financial assets measured at amortized cost are deducted from the gross carrying amount of the assets. For debt securities at fair value through other comprehensive income, the loss allowance is charged to profit or loss.

(d) Recognition and Derecognition

Regular way purchases and sales of financial assets are recognized or derecognized on trade-date, the date on which the Company commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership.

If a transfer does not result in derecognition because the Company has retained substantially all the risks and rewards of ownership of the transferred asset, the Company continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received.

13

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(3) Financial Assets, Continued

(e) Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Company or the counterparty.

(4) Account receivables

Account receivables are recognized initially at the amount of consideration that is unconditional, unless they contain significant financing components when they are recognized at fair value. Account receivables are subsequently measured at amortized cost using the effective interest method, less loss allowance.

(5) Property and Equipment

Property and equipment are initially measured at cost. The cost of property and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Property and equipment, subsequently, are carried at cost less accumulated depreciation and accumulated impairment losses. Subsequent costs are recognized in the carrying amount of property and equipment at cost or, if appropriate, as a separate item if it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be reliably measured.

Depreciation of all property and equipment, except for land, is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives as follows:

	Estimated Useful Lives
Computer and other equipment	4 years
Furniture and fixture	4 years
Vehicles	4 years
Leasehold improvements	(*)
Right-of-use assets	(*)

(*) The Company depreciates the leasehold improvements and right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term using the straight-line method.

Depreciation methods, useful lives, and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

14

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(6) Intangible Assets

Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses.

The Company amortizes intangible assets with a limited useful life using the straight-line method over the following periods:

	Estimated Useful Lives
Software	1~3 years
Industrial property rights	10 years
Other intangible assets	3 years

Expenditure on research activities is recognized in profit or loss as incurred. Development expenditure is capitalized only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditure is recognized in profit or loss as incurred.

The Company entered into a game licensing agreement with a number of third parties to gain exclusive rights to the games developed by those companies. The license fee payments are recognized as other intangible assets and amortized over the term of the contract using the straight-line method.

(7) Impairment of Non-financial Assets

At each reporting date, the Company reviews the carrying amounts of its non-financial assets (other than contract assets, incremental costs of obtaining a contract, costs to fulfil a contract, employee benefit related assets and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amounts to their carrying amounts.

The recoverable amount of an asset or cash generating unit (“CGU”) is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using an adjusted discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

An impairment loss is recognized in profit or loss if the carrying amount of an asset or CGU exceeds its recoverable amount.

15

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(8) Leases

At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company uses the definition of a lease in K-IFRS No. 1116.

(a) As a lessee

At commencement or on modification of a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component on the basis of its relative stand-alone prices. However, the Company has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component by class of underlying asset.

The Company determines the lease term as the non-cancellable period of a lease, together with both (a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and (b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. When the lessee and the lessor each has the right to terminate the lease without permission from the other party, the Company should consider a termination penalty in determining the period for which the contract is enforceable.

The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Company by the end of the lease term or the cost of the right-of-use asset reflects that the Company will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rates.

The Company determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased.

16

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(8) Leases, Continued

(a) As a lessee, Continued

Lease payments included in the measurement of the lease liability comprise the following:

•fixed payments, including in-substance fixed payments;

•variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

•amounts expected to be payable under a residual value guarantee;

•the exercise price under a purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, if the Company changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Company presents right-of-use assets that do not meet the definition of investment property in ‘Property and equipment’ and lease liabilities in ‘Other current liabilities’ and ‘Other non-current liabilities’ in the statement of financial position.

The Company has elected not to recognize right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

(b) As a lessor

At inception or on modification of a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.

When the Company acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease.

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GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(8) Leases, Continued

(b) As a lessor, Continued

To classify each lease, the Company makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Company considers certain indicators such as whether the lease is for the major part of the economic life of the asset.

When the Company is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the Company applies the exemption described above, then it classifies the sub-lease as an operating lease.

If an arrangement contains lease and non-lease components, then the Company applies K-IFRS No.1115 to allocate the consideration in the contract.

The Company applies the derecognition and impairment requirements in K-IFRS No. 1109 to the net investment in the lease. The Company further regularly reviews estimated unguaranteed residual values used in calculating the gross investment in the lease.

The Company recognizes lease payments received under operating leases as income on a straight-line basis over the lease term as part of ‘non-operating income’.

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GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(9) Financial Liabilities

(a) Classification and measurement

The Company’s financial liabilities at fair value through profit or loss are financial instruments held for trading. A financial liability is held for trading if it is incurred principally for the purpose of repurchasing in the near term. A derivative that is not designated as a hedging instrument and an embedded derivative that is separated are also classified as held for trading.

The Company classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and present as ‘accounts payable’, ‘other current liabilities’ and ‘other non-current liabilities’ in the separate statement of financial position.

(b)Derecognition

Financial liabilities are removed from the statement of financial position when it is extinguished; for example, when the obligation specified in the contract is discharged or cancelled or expired or when the terms of an existing financial liability are substantially modified. The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in profit or loss

(10) Provisions and Contingent Liabilities

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.

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GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(10) Provisions and Contingent Liabilities, Continued

Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability.

In addition, when there is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability, a disclosure regarding the contingent liabilities is made in the notes to the financial statements.

(11) Foreign Currency Translation

(a) Functional and presentation currency

Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which it operates (the “functional currency”), which the financial statements in the Company and its branch (Taiwan) are presented in Korean won (KRW) and New Taiwan Dollar (NTD), respectively. The separate financial statements are presented in Korean won, which is the Company’s functional and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the exchange rate at the reporting date are generally recognized in profit or loss. They are recognized in other comprehensive income if they relate to qualifying cash flow hedges and qualifying effective portion of net investment hedges in a foreign operation.

Exchange differences arising on non-monetary financial assets and liabilities such as equity instruments at fair value through profit or loss and equity instruments at fair value through other comprehensive income are recognized in profit or loss and other comprehensive income, respectively, as part of the fair value gain or loss.

20

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(12) Statement of cash flows

The Company has elected to present cash flows from operating activities using the indirect method. Cash flows denominated in a foreign currency are reported using average exchange rate.

(13) Revenues from contracts with customers

The Company engages in game licensing, IP licensing, and game publishing businesses.

Revenue is measured at the fair value of the consideration received or receivable for sale of goods or rendering of services arising from the normal course of the business. Revenue is recognized as net amounts excluding value added taxes, returns, rebates and discounts.

(a) Revenue from micro-transaction and subscription

The Company recognizes micro-transaction revenue of online and mobile games when the Company satisfies its performance obligations.

Whether the performance obligations are satisfied depends on the natures of virtual currency and in-game virtual items. Items are categorized into consumable, periodic, and permanent in-game virtual items.

Consumable in-game virtual items are items that are consumed by the specific action of a game user, and periodic in-game virtual items are items that can be used repeatedly during a specified effective period. Permanent in-game virtual items are items that can be used by game users repeatedly without an effective period.

The accounting policy on revenue recognition is described below in relation to micro-transaction revenue from the sales of virtual currency and items.

(i) Online Games

The specific method of recognizing and deferring revenue for virtual currency and consumable, periodic, and permanent items purchased with virtual currency is as follows.

At the end of the reporting period, the Company defers the total amount of remaining virtual currency.

For consumable in-game virtual items, the related revenue is recognized when the in-game virtual item is consumed. The Company defers the revenue for remaining amounts of virtual items owned by active paying users within the estimated user life cycle at the end of the reporting period.

For periodic in-game virtual items, the related revenue is recognized ratably over the effective period. The Company defers the revenue for remaining effective period.

For permanent in-game virtual items, revenue is recognized ratably over the estimated user life cycle. The Company defers the revenue for remaining period of estimated user life cycle at the end of the reporting period.

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GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(13) Revenues from contracts with customers, Continued

(a) Revenue from micro-transaction and subscription, Continued

(ii) Mobile Games

The specific method of recognizing and deferring revenue for virtual currency and consumable, periodic, and permanent items purchased with virtual currency is as follows.

Mobile game users purchase virtual currency that can be used to purchase in-game items. The Company has no refund obligation after the game user purchases virtual currency. At the end of the reporting period, the Company defers the revenue for the remaining virtual currency possessed by active paying users.

For consumable in-game virtual items, revenue is recognized when the in-game virtual item is consumed. The Company defers the revenue for remaining virtual items possessed by active users within the estimated user life cycle at the end of the reporting period.

For periodic in-game virtual items with effective period, revenue is recognized ratably over the effective period. The Company defers the revenue for remaining effective period.

For permanent in-game virtual items, revenue is recognized ratably over the estimated user life cycle. The Company defers the revenue for remaining period of estimated user life cycle at the end of the reporting period.

(b) Royalties and License Fees

In connection with the Company’s online and mobile games, the Company enters into license agreement in connection with the right to access the intellectual property, such as game character images and stories. The Company believes that the agreement is a promise to provide a right to the customer to access the related IP because the Company will undertake activities that significantly affect the intellectual property to which the customer has rights, the rights granted by the license directly expose the customer to any positive or negative effects of the Company’s activities, and those activities do not result in the transfer of a good or a service to the customer as those activities occur. Therefore, the Company’s performance obligations in connection with these agreements are satisfied over time.

Since the nature of the license promise is to provide customers with access to the intellectual property of the Company during the license period, the Company's performance obligation corresponds to the performance obligation satisfied over the time, and revenue is recognized over the license period. The Company recognizes revenue for the license fee through the straight-line method during the contract period, and for the running royalty revenue, the revenue is recognized on an accrual basis at the time the revenue distribution is established in accordance with the terms of the contract. When the running royalty revenue based on the contractual royalty rate and the actual revenue of the licensee exceeds the ratably recognized minimum guarantee, the excess amount is then recognized as revenue and accounts receivable.

22

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(13) Revenues from contracts with customers, Continued

(c) Incremental costs of obtaining contract

The Company pays platform processing fees to operate mobile games on third party platforms. These fees are charged based on the game users’ purchases in cash and considered as incremental cost of obtaining contracts with customers and therefore capitalized. The Company presents these costs as prepaid expense and amortizes them to costs of revenue at the same time when the related revenue of the services provided to the game users are recognized.

(14) Current and Deferred Tax

The tax expense for the period consists of current and deferred tax. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. The tax expense is measured at the amount expected to be paid to the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and considers whether it is probable that a taxation authority will accept an uncertain tax treatment. The Group measures its tax balances either based on the most likely amount or the expected value, depending on which method provides a better prediction of the resolution of the uncertainty.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the separate financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognized only if it is probable that future taxable amounts will be available to utilize those temporary differences and tax credit

The Company recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint arrangements, except to the extent that the Company is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, the Company recognizes a deferred tax asset for all deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis.

23

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

4. Significant Accounting Policies, Continued

(15) Employee Benefits

(a) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within 12 months after the end of the period in which the employees render related services. When an employee has rendered a service to the Company during an accounting period, the Company recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.

(b) 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 for the employees with service period over a year. The Company recognizes provision for severance benefits for the employees with service period less than a year.

(16) Standards issued but not yet effective

A number of new standards are effective for annual periods beginning after January 1, 2022 and earlier application is permitted; however, the Company has not early adopted the new or amended standards in preparing these separate financial statements.

The following amended standards and interpretations are not expected to have a significant impact on the Company’s separate financial statements.

•Classification of Liabilities as Current or Non-current (Amendment to K-IFRS No. 1001)

•Disclosure of Accounting Policies (Amendment to K-IFRS No. 1001)

•Definition of an Accounting Estimate (Amendment to K-IFRS No. 1008)

•Deferred Income Taxes on Assets and Liabilities Arising from a Single Transaction (amendment to K-IFRS No. 1012)

•K-IFRS No 1117 Insurance Contracts

24

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

5. Cash and cash equivalents

(1) Cash and cash equivalents as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Demand deposits, etc.	W	42,985,625	26,602,122

(2) The Company does not have any restricted cash and cash equivalents as of December 31, 2022 and 2021.

6. Financial Instruments by Category

(1) Carrying amounts of financial instruments by category as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022		December 31, 2021
Financial assets at amortized cost
Cash and cash equivalents	W	42,985,625			26,602,122
Short-term financial instruments		167,000,000			143,000,000
Accounts receivable, net		35,117,290			40,569,841
Other receivables, net		830,176			619,903
Other current financial assets(*1)		3,249,537			790,051
Other non-current financial assets(*2)		1,548,028			2,895,565
Financial assets at fair value through profit or loss
Short-term financial instruments		-			5,000,000
Other non-current financial assets		500,000			-
	W	251,230,656			219,477,482

    (*1) Other current financial assets consist of accrued income, deposits and lease receivable.

    (*2) Other non-current financial assets consist of deposits and lease receivable.

(In thousands of won)		December 31, 2022	December 31, 2021
Financial liabilities at amortized cost
Accounts payable(*)	W	14,734,688		26,738,648
Long-term accounts payable		373,989		729,173
Other current liabilities		1,607,153		2,254,206
Other non-current liabilities		1,362,371		2,761,849
	W	18,078,201		32,483,876

(*) Accounts payable that are not financial liabilities are excluded.

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GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

6. Financial Instruments by Category, Continued

(2) Net income(expenses) from financial instruments for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Financial assets at amortized cost
Interest income	W	4,293,042		1,326,044
Differences in foreign currency		625,044		2,533,854
		4,918,086		3,859,898
Financial assets at fair value through profit or loss
Interest income		4,701		28,054
	W	4,922,787		3,887,952

(In thousands of won)		2022	2021
Financial liabilities at amortized cost
Interest expense	W	(66,635)	(72,790)
Differences in foreign currency		(1,097,174)	(882,578)
	W	(1,163,809)	(955,368)

(3) Fair value hierarchy

Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

•Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

•Level 2: all inputs other than quoted prices included in level 1 that are observable (either directly that is, prices, or indirectly that is, derived from prices) for the asset or liability;

•Level 3: unobservable inputs for the asset or liability.

The fair value of financial instruments traded in an active market is determined based on the quoted market price as of the end of the reporting period. If the quoted prices are readily and regularly available through exchanges, sellers, brokers, industry groups, rating agencies or regulators and such prices represent actual market transactions that occur regularly between independent parties, they are considered active markets. These products are included in Level 1.

The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. These valuation techniques use as much market observable information as possible and use the least amount of company-specific information. At this time, if all the significant input variables required to measure the fair value of a good are observable, the good is included in Level 2.

If more than one significant input variable is not based on observable market information, the item is included in Level 3.

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GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

6. Financial Instruments by Category, Continued

(3) Fair value hierarchy, Continued

The valuation techniques used to measure the fair value of a financial instrument include:

- Market price or dealer price of a similar financial instrument

- The fair value of derivative instruments is determined by discounting the amount to present value using the leading exchange rate as of the end of the reporting period

For the other financial instruments, the company applied other valuation techniques such as discounted cash flow, etc.

7. Accounts and Other Receivables

(1) Accounts and other receivables as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022			December 31, 2021
		Accounts receivables	Other receivables		Accounts receivables	Other receivables
Non-related party	W	17,573,672	132,554		29,466,816	1,059,450
Related party		17,591,492	829,364		11,106,547	618,001
Less: Loss allowance		(47,874)	-		(3,522)	-
	W	35,117,290	961,918		40,569,841	1,677,451

(2) Changes in the loss allowance of accounts receivables during the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		Accounts receivable
		2022		2021
Beginning balance	W	3,522		53,704
(Reversal of) Bad debt expenses		63,492		(50,182)
Write-off		(19,140)		-
Ending balance	W	47,874		3.522

(3) Expected credit losses (ECLs) and credit risk exposures for accounts and other receivables as of December 31, 2022 and 2021 are as follows:

(a) Accounts receivables

(In thousands of won)	December 31, 2022
	Expected loss rate(%)		Carrying amount	Loss allowance
Not due or overdue for less than 90 days	0.0	W	35,063,072	1,104
More than 90 days ~ Less than 180 days	44.2		99,081	43,789
More than 180 days ~ Less than 270 days	58.2		71	41
More than 270 days ~ Less than 1 year	74.5		-	-
More than 1 year	100.0		2,940	2,940
		W	35,165,164	47,874

27

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

7. Accounts and Other Receivables, Continued

(In thousands of won)	December 31, 2021
	Expected loss rate(%)		Carrying amount	Loss allowance
Not due or overdue for less than 90 days	0.0	W	40,569,575	2,721
More than 90 days ~ Less than 180 days	4.3		2,226	95
More than 180 days ~ Less than 270 days	28.3		473	134
More than 270 days~ Less than 1 year	44.7		934	417
More than 1 year	100.0		155	155
		W	40,573,363	3,522

(b) Other receivables

(In thousands of won)	December 31, 2022
	Expected loss rate(%)		Carrying amount		Loss allowance
Not due or overdue for less than 90 days	0.0	W		949,852		-
More than 90 days ~ Less than 180 days	0.0			3,870		-
More than 180 days ~ Less than 270 days	0.0			8,196		-
		W		961,918		-

(In thousands of won)	December 31, 2021
	Expected loss rate(%)		Carrying amount		Loss allowance
Not due or overdue for less than 90 days	0.0	W		1,677,451		-
				1,677,451		-

(3) ECLs and credit risk exposures for accounts and other receivables as of December 31, 2022 and 2021 are as follows, Continued:

In assessing the recoverability of accounts and other receivables, the Company considers changes in the credit rating of accounts and other receivables from the commencement of the credit to the end of the reporting period.

The Company applies the simplified approach for accounts and other receivables to measure the loss allowance at an amount equal to lifetime expected credit losses. To measure the expected credit losses, accounts and other receivables are grouped based on credit risk characteristics and the duration of past due balances. ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls. The Company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes the Company’s historical experience and informed credit assessment, that includes forward-looking information.

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GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

8. Investment in Subsidiaries

(1) Details of investment in subsidiaries as of December 31, 2022 and 2021 are as follows:

				Percentage of ownership (%)
Subsidiary	Location	Main business	Fiscal year end	December 31, 2022	December 31, 2021
Gravity Interactive, Inc.	USA	Online and mobile game services	December	100.00	100.00
Gravity NeoCyon, Inc.	Korea	Mobile Game Development and Service	December	99.53	99.53
Gravity Communications Co., Ltd.	Taiwan	Online and mobile game services	December	100.00	100.00
PT. Gravity Game Link	Indonesia	Online and mobile game services	December	70.00	70.00
Gravity Game Tech Co., Ltd.	Thailand	Online and mobile game services	December	100.00	100.00
Gravity Game Arise Co., Ltd.	Japan	Online and mobile game services	December	100.00	100.00
Gravity Game Hub PTE., Ltd.	Singapore	Online and mobile game services	December	100.00	100.00
Gravity Game Vision Limited.(*)	Hongkong	Online and mobile game services	December	100.00	-

(*) Gravity Game Vision Limited. was established during 2022 and has been included in subsidiary since then.

(2)Changes in investment in subsidiaries for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022
Subsidiary		Beginning balance	Acquisition	Ending balance
Gravity Interactive, Inc. (*1)	W	-	-	-
Gravity NeoCyon, Inc.		5,637,089	-	5,637,089
Gravity Communications Co., Ltd.		5,681,415	-	5,681,415
PT. Gravity Game Link		2,483,407	-	2,483,407
Gravity Game Tech Co., Ltd.		3,407,555	-	3,407,555
Gravity Game Arise Co., Ltd. (*2)		1,563,885	993,080	2,556,965
Gravity Game Hub PTE., Ltd. (*2)		2,906,494	3,426,127	6,332,621
Gravity Game Vision Limited.(*3)		-	633,282	633,282
	W	21,679,845	5,052,489	26,732,334

(*1) Prior to 2022, the Company recognized an impairment loss at its full amount as the recoverable amount was less than its book value.

(*2) During the year ended December 31, 2022, the Company participated in paid-in capital increase of Gravity Game Arise Co., Ltd and Gravity Game Hub PTE. However there were no change in the shareholding ratio.

(*3) Gravity Game Vision Limited. was established during the year ended December 31, 2022 with 100% ownership interest held by the Company.

29

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

8. Investment in Subsidiaries, Continued

(In thousands of won)		2021
Subsidiary		Beginning balance	Acquisition	Ending balance
Gravity Interactive, Inc. (*1)	W	-	-	-
Gravity NeoCyon, Inc.(*2)		3,646,512	1,990,577	5,637,089
Gravity Communications Co., Ltd.		5,681,415	-	5,681,415
PT. Gravity Game Link (*2)		1,683,674	799,733	2,483,407
Gravity Game Tech Co., Ltd.		3,407,555	-	3,407,555
Gravity Game Arise Co., Ltd. (*2)		539,485	1,024,400	1,563,885
Gravity Game Hub PTE., Ltd. (*3)		-	2,906,494	2,906,494
	W	14,958,641	6,721,204	21,679,845

(*1) Prior to 2021, the Company recognized an impairment loss at its full amount as the recoverable amount was less than its book value.

(*2) During the year ended December 31, 2021, the Company participated in paid-in capital increase of Gravity NeoCyon Co., Ltd., PT. Gravity Game Link, and Gravity Game Arise Co., Ltd. however there were no change in the shareholding ratio.

(*3) Gravity Game Hub PTE., Ltd. was established during the year ended December 31, 2021 with 100% ownership interest held by the Company.

(3) Condensed financial information of subsidiaries as of and for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022
Subsidiary			Total assets(*)	Total liabilities(*)	Revenue(*)	Profit (loss) for the year(*)
Gravity Interactive, Inc.	W		32,142,913	23,616,795	62,745,252	(2,448,061)
Gravity NeoCyon, Inc.			15,586,693	8,352,788	24,638,854	1,709,739
Gravity Communications Co., Ltd.			39,437,891	11,161,240	50,610,968	14,185,767
PT. Gravity Game Link			3,268,158	1,090,349	3,372,227	(373,901)
Gravity Game Tech Co., Ltd.			40,204,476	9,740,080	34,990,048	9,974,512
Gravity Game Arise Co., Ltd.			3,066,904	988,401	3,451,554	(504,862)
Gravity Game Hub PTE., Ltd.			4,846,247	2,726,020	4,351,866	(3,081,397)
Gravity Game Vision Limited.			63,608,043	46,145,974	116,550,222	17,090,044
(*) Amount before eliminating the intercompany transactions

(In thousands of won)		2021
Subsidiary			Total assets(*)	Total liabilities(*)	Revenue(*)	Profit (loss) for the year(*)
Gravity Interactive, Inc.	W		26,385,056	16,162,917	79,241,593	987,564
Gravity NeoCyon, Inc.			14,902,641	9,378,474	25,443,458	(110,799)
Gravity Communications Co., Ltd.			33,120,691	9,236,188	33,342,145	9,096,285
PT. Gravity Game Link			2,916,316	318,233	2,461,680	(221,131)
Gravity Game Tech Co., Ltd.			25,591,172	5,665,835	28,345,984	5,495,689
Gravity Game Arise Co., Ltd.			3,912,442	2,167,254	3,258,230	158,563
Gravity Game Hub PTE., Ltd.			2,538,395	722,377	116,791	(1,109,627)
(*) Amount before eliminating the intercompany transactions

30

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

9. Property and Equipment

(1) Details of property and equipment as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022			December 31, 2021
		Acquisition cost	Accumulated depreciation	Carrying amount	Acquisition cost	Accumulated depreciation	Carrying amount
Computer and other equipment	W	3,745,380	(3,310,543)	434,837	4,172,294	(3,716,022)	456,272
Furniture and fixture		836,180	(600,353)	235,827	724,455	(469,552)	254,903
Vehicles		9,101	(5,498)	3,603	9,101	(3,223)	5,878
Leasehold improvements		1,506,967	(1,148,863)	358,104	1,506,967	(993,613)	513,354
Right-of-use assets		7,560,119	(5,072,105)	2,488,014	7,660,610	(3,282,697)	4,377,913
	W	13,657,747	(10,137,362)	3,520,385	14,073,427	(8,465,107)	5,608,320

(2) Changes in property and equipment for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022
		Computer and other equipment	Furniture and fixture	Vehicles	Leasehold improvements	Right-of-use assets	Total
Beginning balance	W	456,272	254,903	5,878	513,354	4,377,913	5,608,320
Acquisitions		175,878	115,557	-	-	76,042	367,477
Depreciation		(197,313)	(134,633)	(2,275)	(155,250)	(1,892,899)	(2,382,370)
Disposition		-	-	-	-	(73,042)	(73,042)
Ending balance	W	434,837	235,827	3,603	358,104	2,488,014	3,520,385

(In thousands of won)		2021
		Computer and other equipment	Furniture and fixture	Vehicles	Leasehold improvements	Right-of-use assets	Total
Beginning balance	W	332,943	154,328	8,153	46,149	2,635,285	3,176,858
Acquisitions		362,508	226,865	-	621,000	3,354,809	4,565,182
Depreciation		(239,179)	(126,290)	(2,275)	(110,074)	(1,612,181)	(2,089,999)
Disposition		-	-	-	(43,721)	-	(43,721)
Ending balance	W	456,272	254,903	5,878	513,354	4,377,913	5,608,320

(3) Classification of depreciation expenses in the statements of comprehensive income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Cost of revenues	W	671,873	925,788
Selling, general and administrative expenses(*)		1,710,497	1,164,211
	W	2,382,370	2,089,999

(*) The deprecation expenses recognized as the research and development included in selling, general and administrative expenses was W41,713 thousand and W143,599 thousand, respectively, for the years ended December 31, 2022 and 2021.

(4) As of December 31, 2022 and 2021, there are no property and equipment that are pledged as collateral for the Company’s debts.

31

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

10. Intangible Assets

(1) Details of intangible assets as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022			December 31, 2021
		Acquisition cost	Accumulated amortization(*)	Carrying amount	Acquisition cost	Accumulated amortization (*)	Carrying amount
Software	W	13,647,727	(11,938,905)	1,708,822	12,099,601	(10,994,260)	1,105,341
Patents		1,194,935	(666,157)	528,778	1,069,591	(597,999)	471,592
Other intangible assets		5,769,884	(4,139,545)	1,630,339	5,742,439	(4,090,737)	1,651,702
	W	20,612,546	(16,744,607)	3,867,939	18,911,631	(15,682,996)	3,228,635

(*) Accumulated amortization includes the amount of accumulated impairment loss.

(2) Changes in intangible assets for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022
		Software	Patents	Other intangible assets	Total
Beginning balance	W	1,105,341	471,592	1,651,702	3,228,635
Acquisitions		1,551,118	131,195	604,177	2,286,490
Amortization		(947,637)	(69,506)	(413,161)	(1,430,304)
Disposals		-	(4,503)	(5,132)	(9,635)
Impairment loss(*)		-	-	(207,247)	(207,247)
Ending balance	W	1,708,822	528,778	1,630,339	3,867,939

(*) The Company recognized W207,247 thousand of impairment loss as carrying amount of other intangible assets exceeded recoverable amount as of December 31, 2022.

(In thousands of won)		2021
		Software	Patents	Other intangible assets	Total
Beginning balance	W	1,701,906	324,463	637,488	2,663,857
Acquisitions		54,465	219,487	1,430,000	1,703,952
Amortization		(651,030)	(72,358)	(415,786)	(1,139,174)
Ending balance	W	1,105,341	471,592	1,651,702	3,228,635

(3) Classification of amortization in the statements of comprehensive income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Cost of revenues	W	410,543	360,661
Selling, general and administrative expenses(*)		1,019,761	778,513
Total	W	1,430,304	1,139,174

(*) The amortization recognized as the research and development included in selling, general and administrative expenses was W28,759 thousand and W65,857 thousand, respectively, for the years ended December 31, 2022 and 2021.

32

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

11. Employee Benefit

The expenses recognized in relation to defined contribution plan for the years ended December 31, 2022 and 2021 are W1,397,941 thousand and W1,270,511 thousand, respectively.

12. Commitments

(1) The Company has entered into exclusive license agreements with foreign licensees, such as GungHo Online Entertainment, Inc., Innova Intellectual Properties S.a.r.l, Shanghai BING KUAI Network Technology Co., Ltd., Relaternity(Hong Kong) Limited and others to provide exclusive license to distribute and sell online and mobile games and receives a certain portion of each licensee’s revenues (20-40%) as royalties.

(2) In July 2021, the Company entered into development agreements with Shanghai TA REN Network Technology Co., Ltd. to grant them the right to develop mobile games based on the contents of Ragnarok IP(ROIP) and distribute such games in China for 3 years from the agreement date. Under the terms of the agreement, the Company is entitled to receive from the licensee a royalty equal to a percentage of the applicable revenue generated.

(3) As of December 31, 2022, the Company has entered into a contract with Gravity NeoCyon, Inc. for the exclusive rights of developing, publishing and distributing mobile games, respectively. The Company also has entered into a contract with Gravity Game Vision Limited for the exclusive rights of publishing and distributing mobile games, and has entered into contracts with Gravity Interactive, Inc., Gravity Communications Co., Ltd., Gravity Game Tech Co., Ltd., PT. Gravity Game Link and Gravity Game Hub PTE., Ltd. for the exclusive rights of publishing and distributing online and for the exclusive rights of developing, publishing and distributing mobile games (Note 23).

(4) As of December 31, 2022, the Company has entered into license agreements with various third-party game developers to secure exclusive rights to publish the games developed by the third-party developers. Upfront license fees paid are capitalized and recognized as other intangible assets and minimum guaranteed royalties are capitalized and recognized as other non-current assets. Purchase obligations for future payment related to above agreements as of December 31, 2022 and 2021 are W3,242,395 thousand and W2,335,425 thousand, respectively.

(5) As of December 31, 2022, the Company benefited from payment guarantee of USD 658,500 from KB Kookmin Bank regarding overseas IP contracts.

33

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

13. Share Capital and Capital Surplus

(1) Details of common shares as of December 31, 2022 and 2021 are as follows:

(In won and in number of shares)		December 31, 2022	December 31, 2021
Number of authorized shares		40,000,000	40,000,000
Value per share	W	500	500
Number of shares issued		6,948,900	6,948,900
Common shares	W	3,474,450,000	3,474,450,000

(2) Details of capital surplus as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022		December 31, 2021
Additional paid-in capital	W	25,357,547		25,357,547
Other capital surplus		2,125,136		2,125,136
	W	27,482,683		27,482,683

(3) Details of retained earnings as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Unappropriated retained earnings	W	229,634,684	174,719,960

(4) According to the Company's Articles of Incorporation, the Company may issue 2,000,000 shares of preferred stock without voting rights, and there are no preferred shares issued as of December 31, 2021.

(5) Statements of appropriation of retained earnings as of December 31, 2022 and 2021 are as follows:

Date of appropriation for 2022: March 31, 2023
Date of appropriation for 2021: March 31, 2022
(In thousands of won)		2022		2021
Retained earnings available for appropriation
Unappropriated retained earnings carried over from prior year	W	174,719,960		109,987,127
Profit for the year		54,914,724		64,732,833
		229,634,684		174,719,960
Appropriation of retained earnings		-		-
Unappropriated retained earnings to be carried forward	W	229,634,684		174,719,960

34

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

14. Revenue from Contracts with Customers

(1) Details of revenue from contracts with customers based on the service contract type and the timing of satisfaction of performance obligations are as follows:

(In thousands of won)		2022		2021
Service contract
Micro transaction & Subscription revenue	W	80,679,602		92,578,768
Online games		5,849,555		4,464,078
Mobile games		74,830,047		88,114,690
Royalties & License fees		150,802,419		194,515,767
Online games		27,119,973		25,711,947
Mobile games		123,682,446		168,803,820
Others		1,235,384		1,163,841
		232,717,405		288,258,376
Major geographic market
Taiwan		60,547,345		57,133,716
Korea		31,060,135		55,387,538
Thailand		28,836,790		61,245,032
Japan		25,781,650		39,934,979
United States of America		24,254,826		12,053,184
Philippines		14,439,380		6,835,992
Indonesia		2,232,554		5,496,618
Malaysia		19,910,558		11,063,200
Others		25,654,137		39,108,117
		232,717,405		288,258,376
Timing of satisfaction of performance obligations
At a point in time		1,765		6,003
Over time		232,715,640		288,252,373
	W	232,717,405		288,258,376

(2) Accounts receivables, incremental costs of obtaining a contract and contract liabilities related to contracts with customers as of December 31, 2022 and December 31, 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Accounts receivable	W	35,117,290	40,569,841
Incremental costs of obtaining a contract (Prepaid expenses)		319,451	508,007
Contact liabilities (Deferred revenue)		4,010,583	4,054,633
Micro transaction & Subscription revenue		3,909,748	3,755,190
Royalties and License fees		100,835	299,443

35

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

14. Revenue from Contracts with Customers, Continued

(3) The amount of revenue recognized from previous period’s contract liabilities satisfied during the year ended December 31, 2022 is W3,855,572 thousand (W3,755,191 thousand in micro transaction and subscription revenue and W 100,381 thousand in royalties and license fees).

(4) Transaction price allocated to unsatisfied performance obligations as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022		December 31, 2021
Micro transaction & Subscription revenue	W	3,909,748		3,755,190
Online games		2,728,347		1,835,824
Mobile games		1,181,401		1,919,366
Royalties and License fees		100,835		299,443
Online games		48,563		95,755
Mobile games		52,272		203,688
	W	4,010,583		4,054,633

The Company’s management expects to recognize 99.2% (W3,980,344 thousands) of the transaction price allocated to contracts that have not been performed as of December 31, 2022 as revenue within 12 months. The remaining 0.8% (W30,239 thousands) is expected to be recognized as revenue thereafter. The amounts disclosed above do not include variable consideration which is constrained.

(5) Details of incremental costs of obtaining a contract recognized as assets as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Incremental costs of obtaining a contract recognized as assets as at the reporting period-end	W	319,451	508,007
Amortization costs recognized as cost of revenue		508,007	722,231

36

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

15. Classification of expenses by nature

Details of classification of expenses by nature for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Fees and commissions	W	107,938,551		142,578,338
Advertising expenses		14,471,166		24,112,161
Salaries		21,626,298		18,821,721
Outsourcing expenses		16,710,468		16,226,357
Rent		889,866		811,038
Employee benefits		1,892,672		1,448,393
Expenses related to defined contribution plan		1,428,917		1,289,470
Depreciation		2,382,370		2,089,999
Amortization		1,430,304		1,139,174
Bad debt expenses		63,492		-
Reversal of allowance for doubtful accounts		-		(50,182)
Other expenses		1,738,501		1,617,440
	W	170,572,605		210,083,909

Total expenses consist of cost of sales, selling, general and administrative expenses.

16. Selling, general and administrative expenses

Details of selling, general and administrative expenses for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Advertising expenses	W	14,471,166	W	24,112,161
Fees and commissions		9,583,131		9,233,447
Research and development		12,160,829		18,101,978
Salaries		11,458,469		10,185,539
Employee benefits		1,289,362		967,471
Rent		536,110		457,640
Expenses related to defined contribution plan		697,190		657,869
Depreciation		1,668,784		1,020,612
Amortization		991,002		712,656
Bad debt expenses		63,492		-
Reversal of allowance for doubtful accounts		-		(50,182)
Other expenses		5,140,663		2,869,455
	W	58,060,198	W	68,268,646

37

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

17. Finance Income and Costs

(1) Details of finance income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Finance income
Interest income	W	4,297,743		1,354,098
Unrealized foreign currency gain		144,857		98,602
Gain on foreign currency transactions		9,292,110		3,469,117
	W	13,734,710		4,921,817

(2) Details of finance costs for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Finance costs
Interest expense	W	66,635		72,790
Unrealized foreign currency loss		1,302,961		73,257
Loss on foreign currency transactions		8,606,136		1,843,186
	W	9,975,732		1,989,233

18. Other Non-Operating Income and Expenses

(1) Details of other non-operating income for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Gain on disposal of property and equipment	W	1,368	235
Dividend income		8,839,924	11,326,984
Others		737,319	670,524
	W	9,578,611	11,997,743

(2) Details of other non-operating expenses for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Loss on disposal of property and equipment	W	-	43,721
Loss on disposal of intangible assets		4,503	-
Impairment loss on intangible assets		207,247	-
Impairment loss on other non-current assets		55,582	510,293
Others		11,448	4,716
	W	278,780	558,730

38

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

19. Income tax expense

(1) Details of income tax expense for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Current tax expense
Current year	W	19,932,686		25,493,700
Adjustments recognized related to prior period income		-		1,646,777
Deferred tax expense
Changes in net deferred tax assets related to temporary differences		356,199		672,754
Income tax expense	W	20,288,885		27,813,231

(2) The differences between the tax expense on the Company’s profit before tax and the amount that would arise using the statutory tax rates applicable to profits of the entities are as follows:

(In thousands of won)		2022		2021
Profit before income tax expense	W	75,203,609		92,546,064
Income tax using the statutory tax rate		17,737,273		21,934,147
Adjustments:
Expenses not deductible for tax purposes		5,044		7,832
Tax amounts paid in a foreign country		3,155,047		4,446,429
Tax credit		(2,006,562)		(765,118)
Additional tax for insufficient investments in designated areas		1,085,166		487,118
Adjustments recognized related to prior period income		-		1,646,777
Others		312,917		56,046
		2,551,612		5,879,084
Income tax expense	W	20,288,885		27,813,231
Effective tax rate		27%		30%

39

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

19. Income tax expense, Continued

(3)Details of the changes in deferred tax assets(liabilities) for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022			2021
		Beginning balance	Increase (Decrease)	Ending balance		Beginning balance	Increase (Decrease)	Ending balance
Unearned revenue	W	(124,497)	(305,295)	(429,792)		(43,184)	(81,313)	(124,497)
Property and equipment		50,225	(1,314)	48,911		39,527	10,698	50,225
Intangible assets		388,412	28,572	416,984		399,894	(11,482)	388,412
Prepaid expenses		502,703	(317,103)	185,600		503,856	(1,153)	502,703
Accounts Payable		623,975	105,208	729,183		613,984	9,991	623,975
Accrued expenses		172,779	31,662	204,441		134,201	38,578	172,779
Retirement benefit provision liabilities		33,336	9,005	42,341		28,684	4,652	33,336
Allowance for doubtful accounts		264,484	14,426	278,910		264,484	-	264,484
Asset retirement obligation		75,468	5,300	80,768		46,264	29,204	75,468
Others		(19,745)	73,340	53,595		7,442	(27,187)	(19,745)
Sub-total	W	1,967,140	(356,199)	1,610,941		1,995,152	(28,012)	1,967,140
Deferred tax due to tax credit carry-forward		2,078,824	-	2,078,824		2,723,566	(644,742)	2,078,824
Deferred tax assets (*)	W	4,045,964	(356,199)	3,689,765		4,718,718	(672,754)	4,045,964

(*) The future realizability of deferred tax assets is assessed by taking into consideration various factors such as the Company's performance, the overall economic environment and industry outlook, expected future earnings, and deductible period of tax credit carry-forward and carry-forward deficit. The Company periodically monitors those factors in assessing the realizability of the deferred tax assets. As of December 31, 2022, the Company has recognized deferred tax assets related to temporary differences and tax credit carry-forward, which can be utilized based on the likelihood of future taxable income. This amount may change if the estimate for future taxable income changes.

(4)The deferred tax relating to items that are charged or credited directly to equity for the years ended December 31, 2022 and 2021, is as follows:

(In thousands of won)		2022	2021
Deferred tax assets
- Deferred tax assets to be recovered after more than 12 months	W	1,161,687	1,390,528
- Deferred tax assets to be recovered within 12 months		3,624,324	3,876,147
Sub-total		4,786,011	5,266,675
Deferred tax liabilities
- Deferred tax liabilities to be recovered after more than 12 months		(323,004)	(631,982)
- Deferred tax liabilities to be recovered within 12 months		(773,242)	(588,729)
Sub-total		(1,096,246)	(1,220,711)
Deferred tax assets (liabilities), net	W	3,689,765	4,045,964

(5) As of December 31, 2022, the Company did not recognize deferred income tax asset for the temporary difference of W33,632,252 thousand as it is not probable such temporary differences can be utilized in the foreseeable future.

40

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

20. Cash flow information

(1) Adjustments for calculating cash generated from operations for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2021		2020
Adjustments for:
Depreciation	W	2,382,370		2,089,999
Amortization		1,430,304		1,139,174
Bad debt expense		63,492		-
Interest expense		66,635		72,790
Unrealized foreign currency loss		1,302,961		73,257
Loss on disposal of on intangible assets		4,503		-
Impairment loss on intangible asset		207,247		-
Impairment loss on other non-current assets		55,582		510,293
Retirement benefit expenses		30,976		18,959
Income tax expense		20,288,885		27,813,231
Unrealized foreign currency gain		(144,857)		(98,602)
Gain on disposal of property and plant		(1,368)		(235)
Loss on disposal of property and plant		-		43,721
Interest income		(4,297,743)		(1,354,098)
Dividend income		(8,839,924)		(11,326,984)
Reversal of allowance for doubtful accounts		-		(50,182)
Others		1,732		(214,407)
	W	12,550,795		18,716,916

41

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

20. Cash flow information, Continued

(2) Changes in assets and liabilities arising from operating activities for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022		2021
Accounts receivable	W	2,674,556		3,736,094
Other receivable		700,914		(1,195,818)
Prepayment		-		557,898
Long-term Prepayments		(160,936)		-
Other non-current assets		217,785		-
Prepaid expense		267,300		(530,278)
Lease receivable		220,246		198,682
Cryptocurrencies		(12,577)		-
Long-term prepaid expense		(50,959)		(478,318)
Accounts payable		(9,907,961)		(5,281,785)
Long-term Accounts payable		(667,078)		-
Deferred revenue		119,273		(476,504)
Long-term Deferred revenue		(168,823)		-
Withholdings		(1,214,150)		657,642
Accrued expenses		95,855		175,354
Advanced receipt		-		(92)
	W	(7,886,555)		(2,637,125)

(3) Significant non-cash transactions for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Reclassification of Prepayment to intangible assets	W	63,841	219,487
Acquisition of right-of-use assets		55,416	3,354,809
Increase(Decrease) in accounts payable relating to the acquisition of software		608,575	667,078

(4) Changes in liabilities arising from financing activities for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Beginning of the year	W	4,776,187	2,971,638
Cash flows used in financial activities–payment of lease liabilities		(2,049,532)	(1,787,171)
Cash flows used in operating activities – Interest paid		(61,533)	(68,886)
Non-cash transactions:
Acquisitions – right-of-use asset		55,416	3,090,682
Acquisitions – leases receivables		-	501,038
Interest expense		61,533	68,886
Others		(52,414)	-
Ending of the year	W	2,729,657	4,776,187

42

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

21. Leases

The Company leases offices, vehicles and others. The leases typically run for a period of 1 to 5 years with an option to renew or terminate the lease after that date. There are no restrictions or covenants imposed to leases, but the lease assets are not to be provided as collateral for borrowings.

The Company has a sublease for a portion of the existing lease contract. The head lease and its sub-lease terminates in 2024.

1) As a lessee

(a) Details of right-of-use assets and lease liabilities recognized in the separate statements of financial position as of December 31, 2022 and December 31, 2021 are as follows:

(In thousands of won)			December 31, 2022	December 31, 2021
Right-of-use assets(*1)
Offices		W	2,297,504	3,366,358
Vehicles			61,534	283,570
Others			128,976	727,985
		W	2,488,014	4,377,913
Lease liabilities(*2)
Current			1,367,286	2,014,338
Non-current			1,362,371	2,761,849
		W	2,729,657	4,776,187

(*1) Right-of-use assets are included in the 'Property and equipment' in the separate statement of financial position.

(*2) Lease liabilities are included in the 'Other current liabilities' and 'Other non-current liabilities' in the separate statement of financial position.

b) Changes in right-of-use assets for the years ended December 31, 2022 and December 31, 2021 are as follows:

(In thousands of won)			2022
		Offices		Vehicles	Others	Total
Balance as of January 1, 2022	W	3,366,359		283,570	727,984	4,377,913
Depreciation		(1,068,854)		(225,037)	(599,008)	(1,892,899)
Reassessment		-		(52,415)	-	(52,415)
Acquisitions		-		55,416	-	55,416
Balance as of December 31, 2022	W	2,297,505		61,534	128,976	2,488,015

43

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

21. Leases, Continued

(In thousands of won)			2021
		Offices		Vehicles	Others	Total
Balance as of January 1, 2021	W	1,237,963		84,723	1,312,599	2,635,285
Depreciation		(848,628)		(178,938)	(584,615)	(1,612,181)
Reassessment		1,516,018		-	-	1,516,018
Acquisitions		1,461,006		377,785	-	1,838,791
Balance as of December 31, 2021	W	3,366,359		283,570	727,984	4,377,913

(c) Details of amounts recognized in the separate statements of comprehensive income for the years ended December 31, 2022 and December 31, 2021are as follows:

(In thousands of won)		2022	2021
Interest expense relating to lease liabilities (included in finance cost)	W	61,533	68,886
Revenue from sub-lease of right-of-use asset		7,014	10,007
Expense relating to short-term leases		2,423	105,197
Expense relating to leases of low-value assets excluding short-term leases		4,968	2,454

(d) Details of amounts recognized in the separate statement of cash flows for the years ended December 31, 2022 and December 31, 2021 are as follows:

(In thousands of won)		2022	2021
Total cash outflows of leases	W	2,118,456	1,963,708

(2) As a lessor

The Company has sub-leased part of its right-of-use assets. The Company recognized interest income related to the lease receivable amounting to W7,014 thousand for the year ended December 31, 2022.

The aging analysis with the amounts expressed in undiscounted lease receivables after the reporting date are as follows. The Company does not have any sublease as finance lease in accordance with K-IFRS No. 1017.

(In thousands of won)
	Less than 1 Year	1 to 2 Years	2 to 5 Years	Contractual cash flow	Unrealized financial income	Net investment in the lease
W	197,789	191,895	-	389,684	5,047	384,637

44

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

22. Financial Risk Management

The Company’s operating activities expose itself to a variety of financial risks: market risk, credit risk and liquidity risk from which the Company’s risk management program focuses on minimizing any adverse effects on its financial performance. The Company operates financial risk management policies and programs that closely monitor and respond to each risk factor.

(1) Capital Risk Management

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern, so the Company can continue to provide returns and benefits for shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Company monitors capital on the basis of the debt ratio. This ratio is calculated as total debt divided by total capital. The debt ratios as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022	December 31, 2021
Total liabilities	W	31,717,523	52,988,480
Total equity		260,591,817	205,677,093
Debt ratio		12%	26%

(2) Market Risk

(a) Foreign exchange risk

The Company is exposed to foreign exchange risk arising from royalty revenues and commission payment primarily with respect to the US dollar. The Company’s financial assets and liabilities are exposed to foreign currency risk as of December 31, 2022 and 2021 are as follows:

(In thousands of won, in foreign currencies)
	December 31, 2022
	Assets in foreign currency	Liabilities in foreign currency			Assets in Korean Won		Liabilities in Korean Won
USD	35,631,845	8,342,485			45,156,237		10,572,431
JPY	512,348,069	136,209,457			4,883,599		1,298,321
EUR	25,839	30,472			34,914		41,174
IDR	12,955,000	3,103,944			1,048		251
THB	28,510	7,379			1,045		270
VND	9,270,000	3,243,600			498		174
			W	50,077,341		11,912,621

45

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

22. Financial Risk Management, Continued

(2) Market Risk, Continued

(a) Foreign exchange risk, Continued

(In thousands of won, in foreign currencies)
	December 31, 2021
	Assets in foreign currency		Liabilities in  foreign currency		Assets in Korean Won	Liabilities in Korean Won
USD	28,396,198		15,031,444		33,663,693	17,819,777
JPY	684,204,339		195,446,852		7,048,947	2,013,572
EUR	356,541		33,944		478,599	45,564
IDR	12,955,000		3,103,944		1,077	258
THB	28,510		7,379		1,014	262
TWD	9,521,305		-		407,893	-
VND	9,270,000		3,243,600		483	169
				W	41,601,706	19,879,602

The Company measures foreign exchange risk at the exchange rate of 10% for each foreign currency, and the rate of change reflects the management's assessment of the risk of exchange rate fluctuation that can be reasonably experienced. The effects of changes in foreign currency exchange rate on profit before tax for the years ended of December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022			2021
		Increased by 10%	Decreased by 10%	Increased by 10%		Decreased by 10%
USD	W	3,456,381	(3,458,381)	1,584,392		(1,584,392)
JPY		358,528	(358,528)	503,538		(503,538)
Others		(436)	436	84,281		(84,281)
	W	3,816,473	(3,816,473)	2,172,211		(2,172,211)

The sensitivity analysis is based on monetary assets and liabilities denominated in foreign currencies other than the functional currency at the end of the reporting period.

(b) Interest rate risk

There are no borrowings under variable interest rate conditions as of December 31, 2022 and 2021.

(c) Price risk

There are no assets and liabilities exposed to price risk as of December 31, 2022 and 2021.

46

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

22. Financial Risk Management, Continued

(3) Credit Risk

Credit risk arises from normal trading and investing activities and occurs when a customer or a counterparty fails to comply with the terms of the contract. In order to manage these credit risks, the Company regularly evaluates the creditworthiness of customers based on their financial condition, past experiences and other factors.

The carrying amounts of financial assets represent their maximum exposure to credit risk.

The maximum exposure to credit risk of the Company as of December 31, 2022 and 2021 are as follows:

(In thousands of won)		December 31, 2022		December 31, 2021
Cash and cash equivalents	W	42,985,625		26,602,122
Short-term financial instruments		167,000,000		148,000,000
Accounts receivables, net		35,117,290		40,569,841
Other receivables, net		830,176		619,903
Other current financial assets		3,249,537		790,051
Oher non-current financial assets		2,048,028		2,895,565
	W	251,230,656		219,477,482

Cash and cash equivalents and short-term financial instruments are deposited in financial institutions with strong credit ratings. Accounts receivable are mainly due from payment processing companies and platform service providers, which the Company believes have low levels of credit risk.

(4) Liquidity Risk

Liquidity risk management includes the maintenance of sufficient cash and marketable securities, the availability of funds from appropriately committed credit lines, and the ability to settle market positions. The following table summarizes the financial liabilities of the Company by maturity according to the remaining period from the end of the reporting period to the contractual maturity date.

(In thousands of won)	December 31, 2022
		Carrying value	Less than 3 months	3 months to 1 year	1 to 2 years	2 to 4 years	Total
Accounts payable	W	15,108,676	14,358,036	376,651	373,989	-	15,108,676
Other liabilities (*)		2,969,525	519,582	931,919	1,417,449	197,844	3,066,794
	W	18,078,201	14,877,618	1,308,570	1,791,438	197,844	18,175,470

(*) Other liabilities as of December 31, 2022 consist of lease deposits received and lease liabilities.

47

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

22. Financial Risk Management, Continued

(4) Liquidity Risk, Continued

(In thousands of won)	December 31, 2021
		Carrying value	Less than 3 months	3 months to 1 year	1 to 2 years	2 to 3 years	Total
Accounts payable	W	27,467,821	26,673,446	65,203	729,172	-	27,467,821
Other liabilities (*)		5,016,055	510,225	1,564,539	1,431,702	1,615,293	5,121,759
	W	32,483,876	27,183,671	1,629,742	2,160,874	1,615,293	32,589,580

(*) Other liabilities as of December 31, 2021 consist of lease deposits received and lease liabilities.

The cash flows above are not discounted and the amount due within 12 months is the same as the carrying amount since the effect of the discount is not material.

23. Related Party Transactions

(1) Related parties of the Company include entities and individuals capable of exercising control or significant influence over the Company and its subsidiaries. Related parties include GungHo Online Entertainment, Inc., its subsidiaries, members of board of directors, executives with strategic responsibilities and their immediate families.

Ownership interests in subsidiaries as of December 31, 2022 and 2021 are as follows:

Name of entity	Percentage of ownership (%)
	December 31, 2022	December 31, 2021
Gravity Interactive, Inc.	100.00	100.00
Gravity NeoCyon, Inc.	99.53	99.53
Gravity Communications Co., Ltd.	100.00	100.00
PT. Gravity Game Link	70.00	70.00
Gravity Game Tech Co., Ltd.	100.00	100.00
Gravity Game Arise Co., Ltd.	100.00	100.00
Gravity Game Hub PTE., Ltd.	100.00	100.00
Gravity Game Vision Limited(*)	100.00	-

(*) Gravity Game Vision Limited., was established during 2022 and has been included in subsidiary since then.

48

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

23. Related Party Transactions, Continued

(2) Account balances with related parties

Balances of receivables and payables with related parties as of December 31, 2022 and 2021 are as follows:

(In thousands of won)			December 31, 2022		December 31, 2021
Related party	Name of entity		Receivables	Payables	Receivables	Payables
Parent company	GungHo Online Entertainment, Inc.	W	2,707,640	2,804	5,051,013	7,448
Other	GungHo Online Entertainment America		-	29,692	-	-
Subsidiaries	Gravity Interactive, Inc.		3,591,765	540,346	3,538,932	405,359
	Gravity NeoCyon, Inc.		460,846	904,356	822,009	1,550,411
	Gravity Communications Co., Ltd.		1,581,356	1,696,212	1,179,228	1,283,908
	PT. Gravity Game Link		412,174	270,362	35,824	9,411
	Gravity Game Tech Co., Ltd.		1,848,604	158,370	1,439,384	181,043
	Gravity Game Arise Co., Ltd.		135,588	775,877	310,412	1,106,765
	Gravity Game Hub PTE., Ltd.		707,855	-	96,628	-
	Gravity Game Vision Limited		7,359,665	-	-	-
		W	18,805,493	4,378,019	12,473,430	4,544,345

(3) Transactions with related parties

The details of transactions with related parties for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)				2022
				Revenues
Related party	Name of entity			Royalty	Commission	Other
Parent company	GungHo Online Entertainment, Inc.	W		24,812,723	-	-
Other	GungHo Online Entertainment America			-	-	-
Subsidiaries	Gravity Interactive, Inc.			13,131,855	-	49,089
	Gravity NeoCyon, Inc.			252,129	-	255,648
	Gravity Communications Co., Ltd. (*1)			10,234,910	-	9,021,934
	PT. Gravity Game Link			350,953	-	9,108
	Gravity Game Tech Co., Ltd.			7,395,549	-	188,368
	Gravity Game Arise Co., Ltd.			-	-	27,928
	Gravity Game Hub PTE., Ltd.			868,645	-	23,680
	Gravity Game Vision Limited			13,252,829	-	4,602
			W	70,299,593	-	9,580,357

49

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

23. Related Party Transactions, Continued

(In thousands of won)				2022
				Purchases
Related party	Name of entity			Royalty	Commission	Other
Parent company	GungHo Online Entertainment, Inc.	W		-	12,671	7,648
Other	GungHo Online Entertainment America			42,479	-	-
Subsidiaries	Gravity Interactive, Inc.			-	1,415,119	47,248
	Gravity NeoCyon, Inc.			23,515	7,032,473	8,211
	Gravity Communications Co., Ltd.			-	6,326,904	-
	PT. Gravity Game Link			-	205,573	278,705
	Gravity Game Tech Co., Ltd.			-	56,087	-
	Gravity Game Arise Co., Ltd.			-	2,813,005	588,731
	Gravity Game Hub PTE., Ltd.			-	-	-
	Gravity Game Vision Limited			-	-	-
			W	65,994	17,861,832	930,543

(In thousands of won)				2021
				Revenues
Related party	Name of entity			Royalty	Commission	Other
Parent company	GungHo Online Entertainment, Inc.	W		35,489,010	-	-
Subsidiaries	Gravity Interactive, Inc.			14,836,435	-	2,181
	Gravity NeoCyon, Inc.			37,962	-	289,367
	Gravity Communications Co., Ltd. (*1)			7,265,161	-	11,417,430
	PT. Gravity Game Link			298,864	-	-
	Gravity Game Tech Co., Ltd.			6,757,989	-	11,785
	Gravity Game Arise Co., Ltd.			-	-	-
	Gravity Game Hub PTE., Ltd.			-	-	-
			W	64,685,421	-	11,720,763
(In thousands of won)				2021
				Purchases
Related party	Name of entity			Royalty	Commission	Other
Parent company	GungHo Online Entertainment, Inc.	W		-	55,382	1,762
Subsidiaries	Gravity Interactive, Inc.			-	643,324	-
	Gravity NeoCyon, Inc.			-	6,732,162	2,405
	Gravity Communications Co., Ltd.			-	5,676,890	-
	PT. Gravity Game Link			-	148,296	9,304
	Gravity Game Tech Co., Ltd.			-	29,534	-
	Gravity Game Arise Co., Ltd.			-	3,246,517	-
	Gravity Game Hub PTE., Ltd.			-	-	-
			W	-	16,532,105	13,471

(*1) Revenues – Other includes dividend income of W8,839,924 thousand and W11,326,984 received in 2022 and 2021 respectively.

50

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2022 and 2021

23. Related Party Transactions, Continued

(4) Other transactions with related parties

Other transactions with related parties for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)			Contribution
Related party	Name of entity		2022	2021
Subsidiaries	Gravity NeoCyon, Inc.	W	-	1,990,577
	PT. Gravity Game Link		-	799,733
	Gravity Game Arise Co., Ltd.		993,080	1,024,400
	Gravity Game Hub PTE., LTD		3,426,127	2,906,494
	Gravity Game Vision Limited		633,282	-

No financing transactions were made with related parties for the years ended December 31, 2022 and 2021.

(5) Key management personnel compensation

The compensation given to key management personnel (registered directors) for the years ended December 31, 2022 and 2021 are as follows:

(In thousands of won)		2022	2021
Salaries	W	1,423,280	1,224,617

51

Independent Auditors’ Review Report on Internal Control over Financial Reporting

(English translation of a Report Originally Issued in Korean)

To the Chief Executive Officer of

Gravity Co., Ltd.

We have reviewed the accompanying management’s report on the effectiveness of the Internal Control over Financial Reporting (“ICFR”) of Gravity Co., Ltd. (the “Company”) as of December 31, 2022. The Company’s management, including the Chief Executive Officer and ICFR Officer is responsible for designing and operating ICFR and for its assessment of the effectiveness of ICFR. Our responsibility is to review the management’s report on the effectiveness of the ICFR and issue a report based on our review. The management’s report on the effectiveness of the ICFR of the Company states that “Based on the assessment results, Chief Executive Officer and ICFR Officer believe that the Company’s ICFR, as at December 31, 2022, is designed and operating effectively, in all material respects, in conformity with the Conceptual Framework for designing and operating ICFR.”

Our review was conducted in accordance with the ICFR review standards established by the Korean Institute of Certified Public Accountants. Those standards require that we plan and perform, in all material respects, the review of management’s report on the effectiveness of the ICFR to obtain a lower level of assurance than an audit. A review is to obtain an understanding of a company’s ICFR and consists principally of inquiries of management and, when deemed necessary, a limited inspection of underlying documents, which is substantially less in scope than an audit. However, in accordance with Chapter 4, ‘Application to small & medium sized companies’ of the Conceptual Framework for designing and operating ICFR and Chapter 4, ‘Application to small & medium sized companies’ of the Best Practice Guideline, the design, operation and assessment of its ICFR are limited compared with those of public large sized companies as the Company is a non-public large sized company (or a public small & medium sized company). As such, we performed our review in accordance with Chapter 14, ‘Review standards for small & medium sized companies’.

A company’s ICFR is a system to monitor and operate those policies and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as adopted by the Republic of Korea. Because of its inherent limitations, ICFR may not prevent or detect a material misstatement of the financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our review, nothing has come to our attention that causes us to believe that management’s report on the effectiveness of the ICFR, referred to above, is not presented fairly, in all material respects, in accordance with Chapter 4, ‘Application to small & medium sized companies’ of the Best Practice Guideline, the design, operation and assessment of its ICFR.

52

Our review is based on the Company’s ICFR as of December 31, 2022, and we did not review management’s assessment of its ICFR subsequent to December 31, 2022. This report has been prepared pursuant to the Acts on External Audit for Stock Companies, etc. in Korea and may not be appropriate for other purposes or for other users.

Samil PricewaterhouseCoopers

March 23, 2023

This report is effective as at March 23, 2023, the review report date. Certain subsequent events or circumstances, which may occur between the review report date and the time of reading this report, could have a material impact on the Company’s internal control over financial reporting thereto. Accordingly, the readers of the review report should understand that there is a possibility that the above review report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

53

Report on the Effectiveness of Internal Control over FinancialReporting

(English translation of a Report Originally Issued in Korean)

To Gravity Co., Ltd Shareholders, the Board of Directors, and the Audit Committee,

We, as the Chief Executive Officer(“CEO”) and Internal Control over Financial Reporting(“ICFR”) Officer of Gravity (“the Company”), assessed the status of the design and operation of the Company’s ICFR for the year ending December 31, 2022.

Design and operation of ICFR is the responsibility of the Company’s management, including the Chief Executive Officer and the ICFR Officer. We evaluated whether the Company effectively designed and operated its ICFR to prevent and detect errors or frauds which may cause a misstatement in financial statements to ensure preparation and disclosure of reliable financial information. The CEO and ICFR Officer followed Chapter 4, (Application to Small-and-Medium sized Companies) of the Conceptual Framework for designing and operating ICFR design and operation.

Based on our assessment of ICFR operation, we concluded that the Company’s ICFR has been appropriately designed and is operating effectively in all material respects as of December 31, 2022, in accordance with the ‘Conceptual Framework for Designing and Operating Internal Control over Financial Reporting’

The CEO and ICFR Officer of the Company have confirmed that the report contents are not falsely stated or indicated, and that there are no omissions to be stated or indicated. In addition, the CEO and ICFR Officer of the Company confirmed that the contents of the report did not contain or indicate what could cause serious misunderstanding, and they directly checked and reviewed the contents of the report with due care.

March 8, 2023

Chief Executive Officer Park Hyun Chul (signature)

ICFR Officer Kim Heung Gon (signature)

54