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 2019

Commission File Number 000-51138

 

GRAVITY Co., Ltd.
———————————————————————————————————————

(Translation of registrant’s name into English)

 

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

———————————————————————————————————————
(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, 2018 and December 31, 2017 for our separate 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 separate statements of financial position of Gravity Co., Ltd. (the “Company”) as of December 31, 2018 and December 31, 2017 and the related separate statements of comprehensive income, changes in equity and cash flows for the years then ended at December 31, 2018 and 2017, expressed in Korean Won.

Samil PricewaterhouseCoopers, our independent auditor for the fiscal year ended December 31, 2018 and December 31, 2017 has also conducted audits and expressed opinions with regards to the consolidated statements of financial position of the Company and its subsidiaries as of December 31, 2018 and December 31, 2017 and the related consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended at December 31, 2018 and 2017 expressed in Korean Won. The consolidated subsidiaries as of December 31, 2018 are NeoCyon, Inc., Gravity Interactive, Inc., Gravity Entertainment Corporation and Gravity Communications Co.,Ltd.

The audited separate financial statements and the audited consolidated financial statements are attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively, and are incorporated herein by reference.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 12, 2019


 

Exhibit Index

 

Exhibit No.

 

Description

99. 1

 

The Company’s Korean IFRS separate financial statements as of and for the years ended December 31, 2018 and December 31, 2017 and the independent auditor’s report

99. 2

 

The Company’s Korean IFRS consolidated financial statements as of and for the years ended December 31, 2018 and December 31, 2017 and the independent auditor’s report

 

grvy-ex991_6.htm

 

Exhibit 99.1

 

GRAVITY CO., LTD.

 

 

Separate Financial Statements

December 31, 2018 and 2017

 

 

 

 

 


GRAVITY CO., LTD.

Index

December 31, 2018 and 2017

 

 

 

Page(s)

 

 

 

Independent Auditor’s Report

 

1-3

 

 

 

Separate Financial Statements

 

 

 

 

 

Separate Statements of Financial Position

 

4-5

 

 

 

Separate Statements of Comprehensive Income

 

6

 

 

 

Separate Statements of Changes in Equity

 

7

 

 

 

Separate Statements of Cash Flows

 

8

 

 

 

Notes to the Separate Financial Statements

 

9-47

 

 

 

Report on Independent Auditor’s Review of Internal Control over Financial Reporting

 

48-51

 

 

 

 

 


Independent Auditor’s 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 statements of financial position as at December 31, 2018 and 2017, and the separate statements of comprehensive income, separate statements of changes in equity and separate statements of cash flows for the years then ended, and notes to the separate financial statements, including a summary of significant accounting policies.

 

In our opinion, the accompanying separate financial statements present fairly, in all material respects, the separate financial position of the Company as at December 31, 2018 and 2017, and its separate financial performance and its separate cash flows for the years then ended in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS).

 

Basis for Opinion

We conducted our audits in accordance with Korean Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the 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 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

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 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 financial statements that are free from material misstatement, whether due to fraud or error.

 

 

Samil PricewaterhouseCoopers, 100 Hangang-daero, Yongsan-gu, Seoul 04386, Korea, www.samil.com


1

 


 

In preparing the 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.

 

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the 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 Korean Standards on Auditing 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 financial statements.

 

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

Identify and assess the risks of material misstatement of the 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 entity'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 auditor’s report to the related disclosures in the 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 auditor’s 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 financial statements, including the disclosures, and whether the 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.

2

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seoul, Korea

March 25, 2019

This report is effective as of March 25, 2019, 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 there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

3

 


GRAVITY CO., LTD.

Separate Statements of Financial Position

December 31, 2018 and 2017

(In thousands of Korean won)

Notes

 

December 31,

2018

 

December 31,

2017

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

4,5

 

46,598,874

 

34,990,206

 

 

Short-term financial instruments

5

 

 

9,500,000

 

 

22,500,000

 

 

Accounts receivables, net

5,6

 

 

24,659,595

 

 

38,890,644

 

 

Other receivables, net

5,6

 

 

469,710

 

 

704,664

 

 

Prepaid expenses

12

 

 

618,219

 

 

2,753,700

 

 

Other current assets

5

 

 

1,539,476

 

 

1,858,280

 

 

 

 

 

 

83,385,874

 

 

101,697,494

 

Non-current assets

 

 

 

 

 

 

 

 

 

Investments in subsidiaries

7

 

 

9,464,638

 

 

1,783,228

 

 

Property and equipment, net

8

 

 

882,089

 

 

476,027

 

 

Intangible assets, net

9

 

 

1,572,714

 

 

988,855

 

 

Deferred tax assets

18

 

 

7,413,106

 

 

3,036,165

 

 

Other non-current financial assets

5

 

 

1,405,988

 

 

1,357,272

 

 

Other non-current assets

11

 

 

1,880,367

 

 

2,078,575

 

 

 

 

 

22,618,902

 

 

9,720,122

 

Total assets

 

 

106,004,776

 

111,417,616

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Account payables

5

 

14,440,762

 

42,150,983

 

 

Deferred revenue

12

 

 

6,751,978

 

 

14,141,070

 

 

Withholdings

 

 

 

1,240,957

 

 

1,348,968

 

 

Accrued expenses

 

 

 

564,621

 

 

343,690

 

 

Income tax payable

18

 

 

1,390,798

 

 

1,628,368

 

 

Other current liabilities

5

 

 

159,151

 

 

140,470

 

 

 

 

 

24,548,267

 

 

59,753,549

 

Non-current liabilities

 

 

 

 

 

 

 

 

Long-term deferred revenue

12

 

 

3,362,537

 

 

6,335,827

 

Other non-current liabilities

 

 

 

305,853

 

 

294,809

 

 

 

 

 

3,668,390

 

 

6,630,636

 

Total liabilities

 

 

28,216,657

 

66,384,185

 

 

 

 

 

 

 

 

 

 

(Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The above separate statements of financial position should be read in conjunction with the accompanying notes.

4


GRAVITY CO., LTD.

Separate Statements of Financial Position

December 31, 2018 and 2017

 

 

 

 

(In thousands of Korean won)

Notes

 

December 31,

2018

 

December 31,

2017

 

 

 

 

 

 

 

 

 

Equity

 

13

 

 

 

 

 

 

 

Equity attributable to owners of

the Parent Company

 

 

 

 

 

 

 

 

 

Share capital

 

 

 

 

 

 

 

 

 

Common shares

 

 

3,474,450

 

3,474,450

 

 

Capital surplus

13

 

 

27,482,683

 

 

27,482,683

 

 

Other components of equity

13

 

 

(270,936)

 

 

(348,479)

 

 

Retained earnings

13

 

 

47,101,922

 

 

14,424,777

 

Total equity

 

 

 

77,788,119

 

 

45,033,431

 

Total liabilities and equity

 

 

106,004,776

 

111,417,616

 

 

 

 

 

 

 

 

 

 

 

 

The above separate statements of financial position should be read in conjunction with the accompanying notes.

5


GRAVITY CO., LTD.

Separate Statements of Comprehensive Income

Years Ended December 31, 2018 and 2017

 

 

(in thousands of Korean won)

Notes

2018

 

2017

 

 

 

 

 

Revenue

21

 

 

 

 

 

  Online games – subscription revenue

 

18,891,718

 

31,533,084

  Online games – royalties and license fees

 

 

15,378,752

 

 

17,069,208

  Mobile games

 

 

164,303,242

 

 

70,634,135

  Other revenue

 

 

123,799

 

 

186,127

 

 

 

198,697,511

 

 

119,422,554

Cost of revenue

14

 

123,500,203

 

 

75,972,759

Gross profit

 

 

75,197,308

 

 

43,449,795

Selling, general and administrative expenses

14,15

 

34,746,608

 

 

29,774,222

Operating profit

 

 

40,450,700

 

 

13,675,573

Non-operating income and expenses

 

 

 

 

 

 

Finance income

5,16

 

1,075,820

 

 

556,997

Finance costs

5,16

 

(79,822)

 

 

(186,723)

Other non-operating income

5,17

 

5,803,645

 

 

1,601,880

Other non-operating expenses

5,7,17

 

(12,110,993)

 

 

(1,725,488)

Profit before income tax

 

 

35,139,350

 

 

13,922,239

Income tax expense

18

 

2,462,205

 

 

939,752

Profit for the year

 

32,677,145

 

12,982,487

Other comprehensive income

 

 

 

 

 

 

Items that may be subsequently reclassified to profit or loss

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

77,543

 

 

(373,554)

Total comprehensive income for the year

 

32,754,688

 

12,608,933

 

 

 

The above separate statements of comprehensive income should be read in conjunction with the accompanying notes.

6


GRAVITY CO., LTD.

Separate Statements of Changes in Equity

Years Ended December 31, 2018 and 2017

(in thousands of Korean won)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

Share

capital

 

 

Capital

surplus

 

 

Other components

of equity

 

 

Retained earnings

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

3,474,450

 

28,219,282

 

25,075

 

705,691

 

32,424,498

Profit for the year

 

 

-

 

 

-

 

 

 

 

 

12,982,487

 

 

12,982,487

Disposition of deficit with capital surplus

13

 

-

 

 

(736,599)

 

 

-

 

 

736,599

 

 

-

Foreign currency translation adjustments

13

 

-

 

 

-

 

 

(373,554)

 

 

-

 

 

(373,554)

Balance at December 31, 2017

 

3,474,450

 

27,482,683

 

(348,479)

 

14,424,777

 

45,033,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

3,474,450

 

27,482,683

 

(348,479)

 

14,424,777

 

45,033,431

Profit for the year

 

 

-

 

 

-

 

 

 

 

 

32,677,145

 

 

32,677,145

Foreign currency translation adjustments

13

 

-

 

 

-

 

 

77,543

 

 

-

 

 

77,543

Balance at December 31, 2018

 

3,474,450

 

27,482,683

 

(270,936)

 

47,101,922

 

77,788,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The above separate statements of changes in equity should be read in conjunction with the accompanying notes.

7


GRAVITY CO., LTD.

Separate Statements of Cash Flow

Years Ended December 31, 2018 and 2017

 

(in thousands of Korean won)

Notes

2018

 

2017

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

Profit for the year

 

32,677,145

 

12,982,487

Adjustments

19

 

6,558,769

 

 

2,392,360

Changes in operating assets and liabilities

19

 

(19,018,839)

 

 

11,274,302

Interest received

 

 

1,161,390

 

 

539,635

Income tax paid

18

 

(7,133,795)

 

 

(2,437,390)

Net cash inflow from operating activities

 

 

14,244,670

 

 

24,751,394

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

  Decrease in short term financial instruments

 

 

13,000,000

 

 

 

  Decrease in other non-current financial assets

 

 

3,772,670

 

 

7,014

  Decrease in other current assets

 

 

3,333

 

 

3,333

  Disposal of property and equipment

8

 

68,285

 

 

1,656

  Disposal of intangible assets

9

 

2,434

 

 

13,063

  Acquisition of subsidiaries

7

 

(18,261,560)

 

 

 

  Increase in short-term financial instruments, net

 

 

-

 

 

(1,000,000)

  Increase in other non-current financial assets

 

 

-

 

 

(660,667)

  Acquisition of property and equipment

8

 

(797,791)

 

 

(383,267)

  Acquisition of intangible assets

9

 

(450,832)

 

 

(1,141,276)

Net cash outflows from investing activities

 

 

(2,663,461)

 

 

(3,160,144)

 

 

 

 

 

 

 

Net cash inflow from financing activities

 

 

-

 

 

-

 

 

 

 

 

 

 

Effects of exchange rate changes on cash and cash equivalents

 

 

27,459

 

 

(596,309)

Net increase in cash and cash equivalents

 

 

11,608,668

 

 

20,994,941

Cash and cash equivalents at beginning of the year

 

 

34,990,206

 

 

13,995,265

Cash and cash equivalents at end of the year

 

46,598,874

 

34,990,206

 

The above separate statements of cash flows in should be read in conjunction with the accompanying notes.

8


 

1. General Information

GRAVITY CO., LTD. (the “Company”) was incorporated on April 4, 2000, to engage in developing and distributing online games and other related business. The Company’s headquarters is located at 15F, 396 World Cup buk‑ro, Mapo‑gu, Seoul, Korea. On November 17, 2016, the Company has established a Gravity Taiwan Branch in Taipei City, Taiwan. 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 81 markets. The Company also operates many other games.

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

The Company started with total paid-in capital amount of 500,000 thousand, and as at December 31, 2018, the total paid-in capital amounts to 3,474,450 thousand. The Company’s major shareholders and their respective percentage of ownership as at December 31, 2018, are as follows:

Shareholder

 

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. Significant Accounting Polices

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

2.1 Basis of Presentation

The Company has first adopted International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS). Korean IFRS are the standards, subsequent amendments and related interpretations issued by the International Accounting Standards Board (IASB) that have been adopted by the Republic of Korea.

The preparation of the separate financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Company's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the separate financial statements are disclosed in Note 3.

2.2 Changes in Accounting Policies and Disclosures

(a) New and amended standards adopted by the Company

The Company has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2018. The amendment does not have a significant impact on the financial statements.

9


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

- Amendment to Korean IFRS 1028 Investments in Associates and Joint Ventures

When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organization, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure each investment separately at fair value through profit or loss in accordance with Korean IFRS 1109. The amendment does not have a significant impact on the financial statements because the Company is not a venture capital organization.

- Amendment to Korean IFRS 1040 Transfers of Investment Property

The amendment to Korean IFRS 1040 clarifies that a transfer to, or from, investment property, including property under construction, can only be made if there has been a change in use that is supported by evidence, and the list of evidence for a change of use in the standard was re-characterized as a non-exclusive list of example. The amendment does not have a significant impact on the financial statements.

- Amendment to Korean IFRS 1102 Share-based Payment

Amendments to Korean IFRS 1102 clarify accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. Amendments also clarify that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award. The amendment does not have a significant impact on the financial statements.

- Enactment of Interpretation 2122 Foreign Currency Transaction and Advance Consideration

According to the enactment, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. The enactment does not have a significant impact on the financial statements.

- Korean IFRS 1109 Financial Instruments

The Company has applied Korean IFRS 1109 Financial Instruments on January 1, 2018, the date of initial application. In accordance with the transitional provisions in Korean IFRS 1109, comparative figures have not been restated, and the differences between previous book amounts and book amounts at the date of initial application are recognized to retained earnings (or equity). Application of IFRS 1109 does not have a significant impact on the financial statements.

- Korean IFRS 1115 Revenue from Contracts with Customers

10


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The Company has applied to apply Korean IFRS 1115 Revenue from Contracts with Customers. In accordance with the transition provisions in Korean IFRS 1115, comparative figures have not been restated. The Company elected the modified retrospective approach, and recognized the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings (or equity) as at January 1, 2018, the period of initial application. Application of IFRS 1115 does not have a significant impact on the financial statements.

(b) New and amended standards not yet adopted by the Company

Certain new accounting standards and interpretations that have been published that are not mandatory for annual reporting period commencing January 1, 2018 and have not been early adopted by the Company are set out below.

- Korean IFRS 1116 Leases

Korean IFRS 1116 Leases issued on May 22, 2017 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. This standard will replace Korean IFRS 1017 Leases, Interpretation 2104 Determining whether an Arrangement contains a Lease, Interpretation 2015 Operating Leases-Incentives, and Interpretation 2027 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

At inception of a contract, the entity shall assess whether the contract is, or contains, a lease. Also, at the date of initial application, the entity shall assess whether the contract is, or contains, a lease in accordance with the standard. However, the entity will not need to reassess all contracts with applying the practical expedient because the entity elected to apply the practical expedient only to contracts entered before the date of initial application.

For a contract that is, or contains, a lease, the entity shall account for each lease component within the contract as a lease separately from non-lease components of the contract. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. The lessee may elect not to apply the requirements to short-term lease (a lease term of 12 months or less at the commencement date) and low value assets (e.g. underlying assets below $ 5,000). In addition, as a practical expedient, the lessee may elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. The accounting treatment as a lessor did not change significantly from the one under IAS 1017 Leases.

Lease accounting as a lessee

The Group plans to apply Korean IFRS 1116 retrospectively with the cumulative effect of initially applying the standard as at January 1, 2019. The cumulative effect of applying the standard will be recognized as an adjustment to the opening balance of retained earnings at the date of initial application. The assessment was performed based on available information as at December 31, 2018 to identify effects on 2018 separate financial statements.

11


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The total minimum lease payment expected to be paid by the Group in relation to operating leases before discounted to their present value is 4,725,933 thousand. When the payment is discounted at incremental borrowing rate of the lessee, the total minimum lease payment amounts to 4,357,664 thousand. For a contract that is, or contains, a lease, the Company plans to apply the practical expedient to account for each lease component and any associated non-lease components as a single lease component.

The Company is analyzing the effects on the financial statement; however, it is difficult to provided reasonable estimates of financial effects until the analysis is complete.

Lease accounting as a lessor

In accordance with Korea IFRS 1116, the Company as a lessor, determined that its accounting will significantly change in identifying a lease and separating components of a contract; accordingly, the Company is analyzing the effects on the financial statements. As at December 31, 2018, it is expected that lease payments receivable to be increased by 310,715 thousand. However, the results of the assessment may be subject to change as the Company obtains additional available information.

2.3 Subsidiaries, Joint Ventures, and Associates – accounted for at cost

The financial statements of the Company are the separate financial statements prepared in accordance with Korean IFRS 1027 Separate Financial Statements. The Company is investing in four subsidiaries, including NeoCyon, Inc..

Investments in subsidiaries, joint ventures and associates are recognized at cost under the direct equity method in accordance with Korean IFRS 1027 (Note 7). Management applied the carrying amounts under the previous K-GAAP at the time of transition to Korean IFRS as deemed cost of investment. The Company recognizes dividend income from subsidiaries, joint ventures and associates in profit or loss when its right to receive the dividend is established.

2.4 Foreign Currency Translation

(a) Functional and presentation currency

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

12


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(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 year end exchange rates are generally recognized in profit or loss.

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognized in other comprehensive income.

2.5 Statement of Cash flow

The statement of cash flows are prepared using the indirect method, and cash flows denominated in foreign currencies are translated at average exchange rates for the period.

2.6 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 without significant transaction costs.

2.7 Financial Assets

 

(a)

Classification

From January 1, 2018, the Company classifies its financial assets in the following measurement categories:

 

those to be measured at fair value through profit or loss

 

those to be measured at fair value through other comprehensive income, and

 

those to be 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.

13


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

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 the 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.

A. 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 ‘other non-operating income or expenses’ in the year in which it arises.

14


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

B. 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 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. Dividend income from such investments continue to be recognized in profit or loss as ‘finance income’ when the right to receive payments is established.

Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘other 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 assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortized cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables and lease receivables, the Company applies the simplified approach, which requires expected lifetime credit losses to be recognized from initial recognition of the receivables.

 

(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.

(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.


15


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

2.8 Property and Equipment

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

Depreciation is calculated under straight-line method over estimated useful lives as follows:

 

 

Estimated Useful Lives

Computer and other equipment

 

4 years

Furniture and fixture

 

4 years

Leasehold improvements

 

4 years

 

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

2.9 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.

Software development costs that are directly attributable to internally generated by the Company are recognized when the criteria; such as, technically feasible, generate probable future economic benefits and other, are met. Customer contracts acquired in a business combination are recognized at fair value at the acquisition date. Membership rights that have an indefinite useful life are not subject to amortization because there is no foreseeable limit to the period over which the assets are expected to be utilized.

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

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

 

 

Estimated Useful Lives

Software

 

2~3 years

Patents

 

10 years

Other intangible assets

 

2 years

 


16


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

2.10 Impairment of Non-financial Assets

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

2.11 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 a designated as hedging instruments 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 ‘account payables’, ‘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

2.12 Provisions and Contingent Liabilities

Provisions for legal claims, service warranties and make good obligations 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.

17


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

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.

2.13 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.

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 losses.

The Company recognizes a deferred tax liability 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 current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current 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.


18


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

2.14 Employee Benefits

(a) Annual paid leave obligations

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

(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.

2.15 Revenue Recognition

From January 1, 2018, the Company has applied Korean IFRS 1115 Revenue from Contracts with Customers.

The Company engages in game licensing, IP licensing and game publishing business. Upon application of IFRS 1115, the Company identifies services promised in a contract as a single performance obligation.

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 disclosed as revenue are net of value added taxes, returns, rebates and discounts and after elimination of inter-company transactions.

(a) Subscription revenue (Online and Mobile)

The Company recognizes online and mobile subscription revenue on accrual basis when players make use of in-game premium features.

Players can access certain games free of charge, but may purchase game points to acquire in-game premium features. The Company defer revenue recognition for the unused game points at the end of reporting period. Consumable in-game items are deferred when such in-game items are purchased by users with game points and recognized as revenue when the purchased in-game items are used in the games. In-game items with limited time period are deferred and recognized as revenue in proportion to the number of days lapsed while permanent in-game items are recognized ratably as revenues over the estimated life cycle of game users.

(b) Royalties and license fees

According to IFRS 15, revenue is recognized over time when there is reasonable expectation of ongoing activities that may have a significant effect on the customers during the duration of the contracts and the customers are exposed to the effect by the activities and there is no additional goods or services offered to the customers from the activities.

19


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The nature of licensing promise is to provided a right to access the entity’s intellectual property as it exists throughout the license period. The Company determines performance obligation satisfied over time and recognizes revenue over a period of time.

The prepaid license fee revenues are recorded as deferred revenue and recognized on a straight-line method over the license period. The running royalties are recognized monthly on accrual basis as royalty payments are determined based on the conditions of contracts. The minimum guarantee (“MG”) royalties are recorded as deferred revenue and recognized on a straight-line method over the license period. If actual cumulative royalties exceed the cumulative revenue amount recognized under the straight-line method, the Company recognizes the excess amount as revenue.

2.16 Lease

A lease is an agreement, whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Company are classified as operating leases. Payments made under operating leases are charge to expenses on a straight-line basis over the period of lease.

2.17 Approval of the Financial Statements

The separate financial statements were approved by the Board of Directors on March 8, 2019.

3. Critical Accounting Estimates and Assumptions

 

The preparation of financial statements requires the Company to make estimates and assumptions concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. 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 discussed below.

(a) Deferred taxes

In assessing the realizability of the deferred tax assets, the Company considers whether it is probable that a portion or all of the deferred tax assets will not be realized. When the Company assessed the realizability of the deferred tax assets, the Company considered its performance, general economic environment, projected future taxable income, periods available to deduct tax loss carryforwards and tax credit carryforwards and etc. The ultimate realization of deferred tax assets is dependent on whether the Company is able to generate future taxable income in specific tax jurisdictions during the periods in which temporary differences become deductible. However, the amount of deferred tax assets may be different if we do not realize estimated future taxable income during the carry forward periods as originally expected.


20


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

4. Cash and cash equivalent

Cash and cash equivalents as at December 31, 2018 and 2017, consist of:

(in thousands of Korean won)

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Cash in bank, etc.

 

46,598,874

 

34,990,206

 

 

Restricted cash and cash equivalents as at December 31, 2018 and 2017, are as follows:

(in thousands of Korean won)

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Deposits for membership

 

-

 

20,120

 

 

5. Financial Instruments by Category

5.1 Carrying Amounts of Financial Instruments by Category

Carrying amounts of financial assets and liabilities by category as at December 31, 2018 and 2017, are as follows:

(in thousands of Korean won)

 

Financial assets at amortized cost

 

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

46,598,874

 

34,990,206

 

Short-term financial assets

 

 

9,500,000

 

 

22,500,000

 

Accounts receivables, net

 

 

24,659,595

 

 

38,890,644

 

Other receivables, net

 

 

469,710

 

 

704,664

 

Other current assets

 

 

189,539

 

 

154,371

 

Other non-current financial assets

 

 

1,405,988

 

 

1,357,272 

 

 

 

82,823,706

 

98,597,157

 

 

(in thousands of Korean won)

 

Financial liabilities at amortized cost

 

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Account payables

 

14,440,762

 

42,150,983

 

Other current liabilities

 

 

150,008

 

 

120,535

 

 

 

14,590,770

 

42,271,518

 

 


21


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

5.2 Net Gains or Losses by Category of Financial Instruments

Net gains or losses on each category of financial instruments for the years ended December 31, 2018 and 2017, are as follows:

(in thousands of Korean won)

 

Financial assets at amortized cost

 

 

2018

 

2017

 

 

 

 

 

 

 

Interest Income

 

1,075,805

 

538,448

Gain on foreign currency transaction

 

 

148,918

 

 

281,768

 

 

 

 

 

 

 

(in thousands of Korean won)

 

Financial liabilities at amortized cost

 

 

2018

 

2017

 

 

 

 

 

 

 

Gain (loss) on foreign currency transaction

 

108,279

 

(349,249)

 

 


22


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

5.3 Fair value of Financial Instruments by Category

The carrying amount and fair value of financial assets and liabilities as at December 31, 2018 and 2017, are as follows:

(in thousands of Korean won)

 

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Carrying

amount

 

Fair

Value

 

Carrying

amount

 

Fair

Value

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

46,598,874

 

46,598,874

 

34,990,206

 

34,990,206

Short-term financial instruments

 

9,500,000

 

 

9,500,000

 

 

22,500,000

 

 

22,500,000

Accounts receivable, net

 

24,659,595

 

 

(*)

 

 

38,890,644

 

 

(*)

Other receivables, net

 

469,710

 

 

(*)

 

 

704,664

 

 

(*)

Other current assets

 

189,539

 

 

(*)

 

 

154,371

 

 

(*)

Other non-current assets

 

1,405,988

 

 

(*)

 

 

1,357,272

 

 

(*)

 

82,823,706

 

 

 

98,597,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Account payables

14,440,762

 

(*)

 

42,150,983

 

(*)

Other current liabilities

 

150,008

 

 

(*)

 

 

120,535

 

 

(*)

 

14,590,770

 

 

 

42,271,518

 

 

 

(*) As the carrying amount is a reasonable approximation of fair value, it is excluded from fair value disclosure.

 


23


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

5.4 Fair value Hierarchy

Fair value hierarchy classifications of the financial assets and financial liabilities that are measured at fair value or its fair value is disclosed as at December 31, 2018 and 2017, are as follows:

(in thousands of Korean won)

 

December 31, 2018

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

38,222,868

 

8,376,006

 

-

 

46,598,874

Short-term financial assets

 

 

5,500,000

 

 

4,000,000

 

 

-

 

 

9,500,000

 

 

43,722,868

 

12,376,006

 

-

 

56,098,874

 

(in thousands of Korean won)

 

December 31, 2017

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

21,236,081

 

13,754,125

 

-

 

34,990,206

Short-term financial assets

 

 

11,000,000

 

 

11,500,000

 

 

-

 

 

22,500,000

 

 

32,236,081

 

25,254,125

 

-

 

57,490,206

 

Assets measured at fair value or for which the fair value is disclosed are categorized within the fair value hierarchy, and the defined levels are as follows:

 

 

Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1)

 

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 2)

 

Unobservable inputs for the asset or liability (Level 3)

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. Most of the products included in Level 1 consist of ordinary deposits and time deposits.

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.

24


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

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

- Disclosure of similar goods Market price or dealer price

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

For other financial instruments, we use other techniques, such as a discounted cash flow method. For accounts and other receivables classified as current assets, the carrying amount is estimated as a reasonable approximation of fair value.

 

6. Accounts and Other Receivables

Accounts receivables as at December 31, 2018 and 2017, are as follows:

 

(in thousands of Korean won)

 

 

December 31, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Non-related party

 

9,093,546

 

37,980,807

 

Related party

 

 

15,587,784

 

 

3,856,366

 

Less: provision for impairment

 

 

(21,735)

 

 

(2,946,529)

 

Accounts receivables, net

 

24,659,596

 

38,890,644

 

 

Other receivables as at December 31, 2018 and 2017, are as follows:

 


(in thousands of Korean won)

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Non-related party

 

192,625

 

691,453

 

Related party

 

 

358,764

 

 

382,906

 

Less: provision for impairment

 

 

(81,679)

 

 

(369,695)

 

Other receivables - net

 

469,710

 

704,664

 

 

Above accounts and other receivables are classified as financial assets at amortized cost.

 

The aging analysis of accounts receivables as at December 31, 2018 and 2017, are as follows:


(in thousands of Korean won)

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Receivables not past due

 

24,637,596

 

38,868,644

 

Past due but not impaired

 

 

22,000

 

 

22,000

 

Impaired

 

 

21,735

 

 

2,946,529

 

Total

 

24,681,331

 

41,837,173

 

 

 

25


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

The aging analysis of other receivables as at December 31, 2018 and 2017, are as follows:


(in thousands of Korean won)

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Receivables not past due

 

469,710

 

704,625

 

Past due but not impaired

 

 

-

 

 

39

 

Impaired

 

 

81,679

 

 

369,695

 

Total

 

551,389

 

1,074,359

 

 

The Company calculates recoverable amount of receivables for which loss event has been individually identified through individual analysis and recognizes the difference between such calculated recoverable amount and book value as impairment loss.

As for the receivables for which loss event has not been individually identified, the Company classifies such receivables based on the contractual collection period, and receivables whose collection period has not expired yet are deemed as receivables not past due. With regard to the receivables past due, the Company makes adjustments to provision for impairment by applying certain specified rate of impaired receivables in consideration of the credit risk based on the overdue period.

Movements in the provision for impairment of accounts and other receivables for the years ended December 31, 2018 and 2017, are as follows:

 

(in thousands of Korean won)

 

2018

 

2017

 

 

Accounts

 

Other

 

Accounts

 

Other

 

 

 

 

 

 

 

 

 

Balance as at January 1

 

2,946,529

 

369,695

 

2,353,716

 

330,451

Provisions for impaired receivables/ (reversals of unused amounts)

 

 

(2,870,546)

 

 

(285,816)

 

 

592,813

 

 

39,244

Receivables written off during the year as uncollectible

 

 

(54,248)

 

 

(2,200)

 

 

-

 

 

-

Balance as at December 31

 

21,735

 

81,679

 

2,946,529

 

369,695

 

In assessing the recoverability of accounts receivables, etc., the Company takes into consideration changes in the credit rating of accounts receivables from commencement of the credit granting to end of the reporting period.


26


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

7. Investment in Subsidiaries

 

Details of investment in subsidiaries at the end of reporting periods are as follows:

 

 

 

 

 

 

 

 

 

Percentage of ownership (%)

Subsidiary

 

Location

 

Main business

 

Closing month

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Gravity

Interactive, Inc.

 

USA

 

Online and mobile game services

 

December

 

100

%

 

100

%

 

Gravity Entertainment Corp.

 

Japan

 

Animation production, distribution, and game services

 

December

 

100

%

 

100

%

 

NeoCyon, Inc.

 

Korea

 

Mobile Game Development and Service

 

December

 

98.73

%

 

96.11

%

 

Gravity Games Corp.

 

Korea

 

Online Game Development

 

December

 

-

%

 

85.50

%

 

Gravity Communications Co.,Ltd.

 

Taiwan

 

Online and mobile game services

 

December

 

100

%

 

-

%

 

 

Changes in investment in subsidiaries for the years ended December 31, 2018 and 2017, are as follows:

 

(in thousands of Korean won)

 

2018

Subsidiary

 

Beginning balance

 

Acquisition

 

Impairment

 

Others

 

Ending

balance

Gravity Interactive, Inc. 1

 

-

 

10,580,150

 

(10,580,150)

 

-

 

-

Gravity Entertainment Corp.

 

 

379,978

 

 

-

 

 

-

 

 

-

 

 

379,978

NeoCyon, Inc. 2

 

 

1,403,250

 

 

1,999,995

 

 

-

 

 

-

 

 

3,403,245

Gravity Games Corp. 3

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Gravity Communications Co.,Ltd. 4

 

 

-

 

 

5,681,415

 

 

-

 

 

 

 

 

5,681,415

 

 

1,783,228

 

18,261,560

 

(10,580,150)

 

-

 

9,464,638

 

1 The Company reduced the carrying amount of investment in Gravity Interactive, Inc. to zero as indications of impairment were present and carrying amount exceeded recoverable amount.

2 Percentage of ownership increased as Gravity participated in capital increase with consideration by NeoCyon, Inc.

3 Excluded from the consolidation as liquidated in current year.

4 Newly established in current year with 100% ownership of Gravity.

 

 

 

 

 

 

 

 

27


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

(in thousands of Korean won)

 

2017

Subsidiary

 

Beginning balance

 

Acquisition

 

Impairment

 

Others

 

Ending

balance

Gravity Interactive, Inc.

 

-

 

-

 

-

 

-

 

-

Gravity Entertainment Corp.

 

 

379,978

 

 

-

 

 

-

 

 

-

 

 

379,978

NeoCyon, Inc.

 

 

1,403,250

 

 

-

 

 

-

 

 

-

 

 

1,403,250

Gravity Games Corp.

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,783,228

 

-

 

-

 

-

 

1,783,228

 

Summarized financial information for subsidiaries as at and for the years ended December 31, 2018 and 2017, are as follows:

(in thousands of Korean won)

December 31, 2018

Subsidiary

 

Assets

 

Liabilities

 

Sales

 

Profit (loss) for the year

Gravity Interactive, Inc.

 

79,806,232

 

80,016,529

 

84,329,085

 

(2,511,020)

Gravity Entertainment Corp.

 

 

509,183

 

 

96,184

 

 

157,425

 

 

29,797

NeoCyon, Inc.

 

 

6,619,844

 

 

5,209,590

 

 

22,782,618

 

 

(2,056,820)

Gravity Communications Co.,Ltd.

 

 

8,231,267

 

 

2,352,489

 

 

2,200,724

 

 

204,883

Gravity Games Corp.

 

 

-

 

 

-

 

 

11,641

 

 

4,164,622

 

(in thousands of Korean won)

December 31, 2017

Subsidiary

 

Assets

 

Liabilities

 

Sales

 

Profit (loss) for the year

Gravity Interactive, Inc.

 

2,152,360

 

10,087,107

 

5,418,466

 

(638,112)

Gravity Entertainment Corp.

 

 

361,573

 

 

3,077

 

 

16

 

 

(8,305)

NeoCyon, Inc.

 

 

6,855,116

 

 

5,376,927

 

 

23,601,638

 

 

18,143

Gravity Games Corp.

 

 

3,403,607

 

 

4,442,408

 

 

307,842

 

 

(40,100)

 


28


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

8. Property and Equipment

 

Details of property and equipment as at December 31, 2018 and 2017, are as follows:

(in thousands of Korean won)

 

December 31, 2018

 

December 31, 2017

 

 

 

Cost

 

Accumulated depreciation

 

Book amount

 

Cost

 

Accumulated depreciation

 

Book amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computer and other equipment

 

4,524,208

 

(3,981,176)

 

543,032

 

4,413,663

 

(4,094,625)

 

319,038

 

Furniture

and fixture

 

 

497,137

 

 

(282,402)

 

 

214,735

 

 

654,411

 

 

(624,189)

 

 

30,222

 

Leasehold improvements

 

 

1,121,820

 

 

(997,498)

 

 

124,322

 

 

1,080,809

 

 

(954,042)

 

 

126,767

 

 

 

6,143,165

 

(5,261,076)

 

882,089

 

6,148,883

 

(5,672,856)

 

476,027

 

 

Changes in property and equipment for the years ended December 31, 2018 and 2017, are as follows:

 

(in thousands of Korean won)

 

December 31, 2018

 

 

Computer

and

other equipment

 

Furniture

and

fixture

 

Leasehold

improvements

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Opening net book amount

 

319,038

 

30,222

 

126,767

 

476,027

Acquisitions

 

 

442,402

 

 

238,800

 

 

116,589

 

 

797,791

Depreciation

 

 

(187,394)

 

 

(33,508)

 

 

(115,098)

 

 

(336,000)

Disposals

 

 

(31,606)

 

 

(21,182)

 

 

(5,275)

 

 

(58,063)

Exchange differences

 

 

592

 

 

403

 

 

1,339

 

 

2,334

Closing net book amount

 

543,032

 

214,735

 

124,322

 

882,089

 

(in thousands of Korean won)

 

December 31, 2017

 

 

Computer

and

other equipment

 

Furniture

and

fixture

 

Leasehold

improvements

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Opening net book amount

 

155,737

 

21,403

 

143,420

 

320,560

Acquisitions

 

 

245,042

 

 

21,113

 

 

117,112

 

 

383,267

Depreciation

 

 

(81,096)

 

 

(11,813)

 

 

(98,281)

 

 

(191,190)

Disposals

 

 

-

 

 

-

 

 

(36,540)

 

 

(36,540)

Exchange differences

 

 

(645)

 

 

(481)

 

 

1,056

 

 

(70)

Closing net book amount

 

319,038

 

30,222

 

126,767

 

476,027

 


29


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Line items including depreciation in the statements of comprehensive income for the years ended December 31, 2018 and 2017, are as follows:


(in thousands of Korean won)

 

2018

 

2017

 

 

 

 

 

 

 

Cost of revenue

 

114,460

 

47,241

Selling, general and administrative expenses

 

 

221,540

 

 

143,949

 

 

336,000

 

191,190

 

As at December 31, 2018, there are no tangible assets of the Company that are pledged as collaterals for the Company’s debts.

 

9. Intangible Assets

 

Details of intangible assets as at December 31, 2018 and 2017, are as follows:

 

(in thousands of Korean won)

 

December 31, 2018

 

December 31, 2017

 

 

 

Cost

 

Accumulated amortization1

 

Book amount

 

Cost

 

Accumulated amortization1

 

Book amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

10,078,904

 

(9,575,685)

 

503,219

 

9,203,772

 

(9,186,698)

 

17,074

 

Patents

 

 

532,832

 

 

(461,451)

 

 

71,381

 

 

516,861

 

 

(440,326)

 

 

76,535

 

Other intangible assets

 

 

3,454,522

 

 

(2,456,408)

 

 

998,114

 

 

3,331,438

 

 

(2,436,192)

 

 

895,246

 

 

 

14,066,258

 

(12,493,544)

 

1,572,714

 

13,052,071

 

(12,063,216)

 

988,855

 

 

1 Accumulated amortization includes the amount of accumulated impairment loss

 


30


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Changes in intangible assets for the years ended December 31, 2018 and 2017, are as follows:

 

(in thousands of Korean won)

 

2018

 

 

Software

 

Patents

 

Other intangible assets

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

17,074

 

76,535

 

895,246

 

988,855

Acquisitions

 

 

877,339

 

 

15,971

 

 

976,225

 

 

1,869,535

Amortization

 

 

(388,811)

 

 

(21,125)

 

 

(250,216)

 

 

(660,152)

Disposals

 

 

(2,438)

 

 

-

 

 

-

 

 

(2,438)

Impairment loss (*)

 

 

-

 

 

-

 

 

(623,141)

 

 

(623,141)

Exchange differences

 

 

55

 

 

-

 

 

-

 

 

55

Ending balance

 

503,219

 

71,381

 

998,114

 

1,572,714

 

(*) The Company recognized \ 623,141 thousand in impairment loss as carrying amount of other intangible assets exceeded recoverable amount.

 

(in thousands of Korean won)

 

2017

 

 

Software

 

Patents

 

Other intangible assets

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

43,907

 

88,966

 

28,000

 

160,873

Acquisitions

 

 

11,966

 

 

11,936

 

 

1,129,310

 

 

1,153,212

Amortization

 

 

(25,765)

 

 

(24,367)

 

 

(32,064)

 

 

(82,196)

Disposals

 

 

(13,063)

 

 

-

 

 

-

 

 

(13,063)

Impairment loss

 

 

-

 

 

-

 

 

(230,000)

 

 

(230,000)

Exchange differences

 

 

29

 

 

-

 

 

-

 

 

29

Ending balance

 

17,074

 

76,535

 

895,246

 

988,855

 

The amortization expenses of intangible assets for the years ended December 31, 2018 and 2017 are charged to the following accounts:

 

(in thousands of Korean won)

2018

 

2017

 

 

 

 

Cost of revenue

255,321

 

11,946

Selling, general and administrative expenses

 

404,831

 

 

70,250

 

660,152

 

82,196

 

 

10. Employee Benefit

The expense recognized in relation to defined contribution plan for the years ended December 31, 2018 and 2017, are 770,086 thousand and 578,139 thousand, respectively.

31


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

11. Commitments

The Company has entered into exclusive license agreement with foreign licensees, such as GungHo Online Entertainment, Inc. and Electronics Extreme Ltd., etc. to provide exclusive license to distribute and sell online games and receives a certain portion of each licensee’s revenues (20-40%) as royalties.

 

In March 2016, the Company and Shanghai The Dream Network Technology Co., Ltd. entered existing development agreements to grant them an exclusive right to develop mobile games and web games in China based on the contents of Ragnarok Online and distribute such games in mainland China for five years.

 

As at December 31, 2018, the Company has entered into contracts with Gravity Interactive, Inc. and NeoCyon, Inc. for the exclusive rights of publishing and distributing online games and for the exclusive rights of developing, publishing and distributing mobile games, respectively. The Company also has entered into contracts with Gravity Communications Co., Ltd., for the exclusive rights of publishing and distributing online and mobile games(Note 21).

 

As at December 31, 2018, the Company has entered into license agreements with various third party game developers to secure exclusive right to publish the games developed by third party developers. Upfront license fees paid are capitalized as other intangible assets and minimum guaranteed royalties are capitalized as other non-current asset. Purchase obligations for future payment related to above agreements as at December 31, 2018 and 2017 are 1,709,357 thousand and 1,700,466 thousand, respectively.

 

The Company has entered into lease agreements for principal office in Seoul, its overseas branch office, etc. as at December 31, 2018.

 

Future minimum lease payments for the operating leases as at December 31, 2018 and 2017, are as follows:

 


(in thousands of Korean won)

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Within one year

 

1,856,346

 

1,972,220

 

Later than one year but not later than three years

 

 

2,019,825

 

 

245,349

 

Total

 

3,876,171

 

2,217,569

 

 

The lease payments recognized as expenses resulting from operating leases for the years ended December 31, 2018 and 2017, are as follows:


(in thousands of Korean won)

 

2018

 

2017

 

 

 

 

 

Lease payments

 

2,056,655

 

1,817,813

 

12. Contract Assets and Liabilities

 

As explained in Note 2, the Company has applied Korean IFRS 1115 Revenue from Contracts with Customers on January 1, 2018, the date of initial application.

32


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Details of the incremental costs of obtaining a contract and contract liabilities are as follows:


(in thousands of Korean won)

 

December 31, 2018

 

January 1, 2018

 

 

 

 

 

 

 

Incremental costs of obtaining a contract

(Prepaid expenses)

 

221,180

 

2,071,368

 

 

 

 

 

 

 

 

 

Contact liabilities(Deferred revenue)

 

10,114,516

 

20,476,897

 

  Subscription revenue

 

 

3,254,122

 

 

10,628,665

 

  Royalties and license fees

 

 

6,860,394

 

 

9,848,232

 

 

Changes in contract liabilities for the year ended December 31, 2018, are as follows:

(in thousands of Korean won)

Contract liabilities

 

 

 

Balance as at January 1, 2018

20,476,897

Increase due to subscription revenue

 

3,254,122

Increase due to royalties and license fees

 

540,460

Decrease due to satisfaction of performance obligation – subscription revenue

 

(10,628,665)

Decrease due to satisfaction of performance obligation – royalties and license fees

 

(2,919,483)

Decrease due to termination of contracts

 

(608,815)

Balance as at December 31, 2018

10,114,516

 

Meanwhile, there is no revenue in the reporting period which arises from performance obligations satisfied in previous periods.

Transaction price allocated to unsatisfied performance obligations as at December 31, 2018, are as follows:

(in thousands of Korean won)

Closing balance

 

 

 

  Subscription revenue

3,254,122

Royalties and license fees

 

6,860,394

 

The Company expects to recognize 67%(₩6,751,978 thousand) of transaction price allocated to unsatisfied performance in the following reporting period. The Company expects the remaining 33% (₩3,362,537 thousand) to be recognized after the following reporting period. Above amounts do not include estimation on variable consideration.

 

 

 

33


GRAVITY CO., LTD.

Notes to the Separate Financial Statements

December 31, 2018 and 2017

Incremental costs of obtaining a contract as at December 31, 2018, are as follows:

(in thousands of Korean won)

Closing balance

 

 

 

  Assets recognized from the costs incurred to obtain or fulfill a contract with a customer

221,180

  Amortization recognized as cost of revenue