| Significant Accounting Policies | 2. Significant Accounting Policies Basis of presentation The accompanying consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“U.S. GAAP”). Significant accounting policies
followed by the Company in the preparation of the accompanying
consolidated financial statements are summarized below. Principles of consolidation The accompanying consolidated financial statements
include the accounts of Gravity and the following subsidiaries
(collectively referred to as the “Company”). All
intercompany balances and transactions have been eliminated in the
consolidation.
Subsidiary Year of Year of Percentage of
Gravity Interactive, Inc. 2003 2003 100.00
Gravity Entertainment Corporation 2003 2004 100.00
NeoCyon, Inc. 2000 2005 96.11
Gravity Games Corporation (*1) 2003 2010 85.50
(*1)
In October 2010, the Company acquired 50.83%
ownership of Barunson Interactive Corporation. Based on the
shareholders’ meeting held on March 28, 2011, Barunson
Interactive Corporation changed its name to Gravity Games
Corporation. In August 2013, the Company additionally acquired
34.67% of the share capital of Gravity Games Corporation through
additional capital increase. As a result of increase in ownership
interest, additional paid-in W non-controlling
The subsidiary that was excluded from consolidation
during the year ended December 31, 2015 is as follows:
Subsidiary
Reason
Gravity Middle East & Africa FZ LLC ( ) Liquidation
(*)
In November 2015, Gravity Middle East & Africa
FZ LLC was liquidated in accordance with the law of United Arab
Emirates. As a result of liquidation, the entire accumulated other
comprehensive income balance of W Investments in entities where the Company holds
more than 20% but less than 50% ownership or over which the Company
has significant management influence are accounted for using the
equity method of accounting and the Company’s share of the
investee’s operations is included in Equity method
investments. The Company follows the equity method of accounting
for investments in its joint ventures Animation Production
Committee and Gravity EU SAS (See Note 6). Investments in limited partnerships are accounted
for using the equity method in accordance with Accounting Standards
Codification (“ASC”) 323, Investment—Equity
Method and Joint Ventures The Company recorded its initial investments at
cost and records its pro rata share of the earnings or losses in
the results of operations of the equity method investees. Use of estimates The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant items
subject to such estimates and assumptions include useful lives of
property and equipment, salvage values and recovery of property and
equipment; recoverability of goodwill and intangible assets;
valuation allowances for receivables, realization of deferred
income tax assets, and estimated life cycle of game users. Actual
results could differ materially from the estimates and assumptions
used. Risks and uncertainties Industry and revenue The industry in which the Company operates is
subject to a number of industry-specific During the years ended December 31, 2013, 2014
and 2015, the Company generated 81%, 84% and 87% of its revenues
from countries in Asia, respectively.
As of December 31, 2013, 2014, and 2015,
GungHo Online Entertainment, Inc. and LG Electronics Inc.
are customers whose related accounts receivable and total
revenue exceeds 10% of the Company’s total accounts
receivable and total revenue, and the proportions are as
follows:
2013 2014 2015
Country
Customer Accounts Revenues Accounts Revenues Accounts Revenues
Japan GungHo Online
Entertainment, Inc. 30% 38% 25% 28% 23% 27%
Korea LG Electronics Inc. 9% 6% 15% 8% 11% 12% The amounts included within the accounts receivable
balance as of December 31, 2015 are
W W Concentrations of credit risk Cash and cash equivalents and short-term short-term Revenue recognition The Company recognizes revenue when persuasive
evidence of an arrangement exists, the product or the service has
been delivered or rendered, the price is fixed or determinable, and
collection of the resulting receivable is reasonably assured. The Company derives most of its revenues from
online game subscription revenue mainly from Ragnarok Online paid
by users in Korea, the United States and Canada, and royalties and
license fees paid by the licensees of the Company in overseas
markets. Online games—subscription revenue Players can access certain games free of charge,
but may purchase game points to acquire in-game (i) micro-transactions, Micro-transaction in-game in-game in-game in-game Micro-transaction in-game Online games—royalties and license
fees The Company licenses the right to sell and
distribute its games in exchange for an initial prepaid license fee
and guaranteed minimum royalty payments. The prepaid license fee
revenues are recorded as deferred revenue and recognized ratably
over the license period. If license agreements are renewed upon
expiration of their terms, renewed license fees are deferred and
recognized ratably over the new license period.
The Company generally provides its licensees with
minimal post-contract vendor-specific The guaranteed minimum royalty payments are
recorded as deferred revenue and recognized as the royalties are
earned. In addition, the Company receives a royalty payment based
on a specified percentage of the licensees’ sales, including
game item revenues. These royalties that exceed the guaranteed
minimum royalty are recognized on a monthly basis, as the related
revenues are earned by the licensees. Mobile games and applications revenue Mobile games and applications revenue consists of
(i) revenues from micro-transactions per-download Micro-transaction in-game in-game Per-download Mobile application development service revenues are
recognized by measuring progress-to-completion percentage-of-completion Character merchandising, animation and other
revenue Character merchandising, animation and other
revenue consist of revenues from sales of console games, game
character merchandising, animation and other services, including
sales of goods related to mobile phones and website development and
operation services for third parties.
Revenues from sales of console games are derived
from a specified percentage of the publisher’s sales after
deductibles, including payments to the platform holder and others,
and recognized on a quarterly basis as they are earned by the
publisher. Royalty payments from game character merchandising are
recognized on a quarterly basis as they are earned by the licensee.
Contract prices for the Company’s services provided to third
parties are recognized when the products or services have been
delivered or rendered and the customers can begin their use in
accordance with the contractual terms. The Company also sells goods related to mobile
phones, such as accessories and USB data cable or provides
contracted services, which is recorded in other revenue. The
Company records these sales of goods when delivery has occurred and
collectability of the fixed or determinable sales price is
reasonably assured. Out-of-Period The accompanying 2013 consolidated statement of
operations includes certain out-of-period in-game W Cash and cash equivalents Cash equivalents consist of time deposits with
original maturity of three months or less at the time of
purchase. Short-term Short-term Allowance for doubtful accounts The Company maintains allowances for doubtful
accounts receivable based upon the following information: an aging
analysis of its accounts receivable balances, historical bad debt
rates, repayment patterns, creditworthiness of its customers, and
industry trend analysis. The payment processing service providers are
responsible for remitting to the Company the full subscription
revenues generated in Korea after deducting their fixed service
fees and charges, which range from approximately 1.4% to 15% and
risk of loss or delinquencies are borne by such payment processing
service providers. Property and equipment Property and equipment are stated at cost, less
accumulated depreciation. Depreciation for property and equipment
is computed using the straight-line
Computer and equipment 4 years
Furniture and fixtures 4 years
Software 3 years
Vehicles 4 years Leasehold improvements are depreciated on a
straight-line
Routine maintenance and repairs are charged to
expense as incurred. Expenditures which enhance the value or extend
the useful lives of the related assets are capitalized. Depreciation for property and equipment is
allocated to cost of revenue, selling, general and administrative
expenses or research and development expenses. Accounting for the impairment of long-lived Definite-lived The Company reviews property and equipment and
other long-lived Property, Plant, and Equipment Intangible assets Capitalized software development
costs—online game development costs The Company capitalizes certain software
development costs relating to online games that will be distributed
through subscriptions or licenses. The Company accounts for
software development costs in accordance with ASC 985, Costs of
Software to be Sold, Leased, or Marketed product-by-product The Company amortizes capitalized software
development costs relating to games and records such costs as a
component of cost of revenues. Amortization is determined as the
greater of the amount computed using the ratio of current gross
revenues for a game to the total of current and anticipated future
gross revenues for that game or the straight-line Capitalized software development costs for games,
net of accumulated amortization and impairment, at
December 31, 2014 and 2015 were
W W W W The Company evaluates the recoverability of
capitalized software development costs on a product-by-product Impairment losses on capitalized software
development cost for games for the years ended December 31,
2014 and 2015 were nil and W Capitalized software development
costs—website and internal use software development
costs The Company accounts for website and internal use
software development cost in accordance with ASC 340, Internal
Use Software Research and development costs Research and development expenses consist primarily
of payroll and other overhead expenses which are all expensed as
incurred (i) until technological feasibility of an online game is
reached or (ii) until commercial operation of a mobile game
commences. Once technological feasibility of an online game is
reached, these costs are capitalized and, once commercial operation
commences, amortized as cost of revenues. Goodwill Goodwill is accounted for under ASC 350,
Intangibles—Goodwill and Other indefinite-lived Specifically, qualitative factors are assessed to
determine whether it is more likely than not that the fair value of
a reporting unit is less than its carrying amount, including
goodwill. In evaluating whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount,
the relevant events and circumstances are assessed. If, after
assessing the totality of events or circumstances, it is determined
that it is not more likely than not that the fair value of a
reporting unit is less than its carrying amount, then a
two-step two-step stand-alone When performing goodwill impairment testing, the
fair values of reporting units are determined based on valuation
techniques using the best available information, primarily
discounted cash flow projections. The Company makes significant
assumptions and estimates about the extent and timing of future
cash flows and discount rates that represent unobservable inputs
into valuation methodologies. Acquired in-process Acquired IPR&D assets are considered
indefinite-lived The Company’s intangible assets other than
capitalized software development costs and goodwill are remeasured
at fair value only if an impairment charge is recognized. The
Company uses unobservable inputs to the valuation methodologies
that were significant to the fair value measurements, and the
valuations required management judgment due to the absence of
quoted market prices. Advertising The Company expenses advertising costs as incurred.
Advertising expense was W W W Accrued severance benefits and pension
plan Certain employees and directors in Korea with one
year or more of service are entitled to receive a lump-sum Compensation—Retirement
Benefits Gravity and NeoCyon introduced a defined
contribution pension plan in 2005 and 2011, respectively, and
provide an individual account for each participant. A plan’s
defined contributions to an individual’s account are to be
made for periods in which that individual renders services, the net
pension cost for a period shall be the contribution called for in
that period.
Foreign currency translation The Korean parent company and its subsidiaries use
their local currencies as their functional currencies. The
financial statements of the subsidiaries in functional currencies
other than the Korean Won are translated into the Korean Won in
accordance with ASC 830, Foreign Currency Matters Foreign currency transactions Net gains and losses resulting from foreign
exchange transactions are included in foreign currency income
(losses) in the consolidated statements of comprehensive loss. Income taxes The Company accounts for income taxes under the
provisions of ASC 740, Income Taxes A valuation allowance is provided on deferred
income tax assets to the extent that it is more likely than not
that such deferred income tax assets will not be realized. The
total income tax provision includes current tax expenses under
applicable tax regulations and the change in the balance of
deferred income tax assets and liabilities. The Company follows ASC 740, Income Taxes two-step more-likely-than-not Segment Reporting An operating segment is defined as a component of a
company that engages in business activities for which discrete
financial information is available, that is regularly reviewed by
the company’s Chief Operating Decision Maker (the
“CODM”) to make decisions about resources to be
allocated to the segment and assess its performance. In accordance
with ASC 280, Segment Reporting
Fair Value Measurements Fair value is defined as an exit price,
representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based
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Level 1
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Level 2
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Level 3 Fair Value of Financial
Instruments ASC 825, Financial Instruments, short-term Earnings (losses) per share Basic earnings (losses) per share is computed by
dividing net income (loss) attributable to common shareholders by
the weighted average number of common shares outstanding for all
periods. Diluted earnings (losses) per share is computed by
dividing net earnings (losses) by the weighted average number of
common shares outstanding, increased by common stock equivalents.
However, for each of three years in the period ended December 31,
2015, there has been no common stock equivalent. Recent accounting pronouncements In July 2013, the FASB issued ASU 2013-11, Income Taxes 2013-05 In May 2014, the Financial Accounting Standards
Board (FASB) issued ASU 2014-09, Revenue from Contracts with
Customers In August, 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements-Going Concern In February 2015, the FASB issued ASU 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation
Analysis In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall In February 2016, the FASB issued ASU 2016-02,
Leases |
