NXC Corporation and Subsidiaries Consolidated Financial Statements December 31, 2015 and 2014

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1 Consolidated Financial Statements

2 Index Page(s) Independent Auditor s Report 1 2 Consolidated Financial Statements Consolidated Statements of Financial Position 3 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Changes in Equity 6 Consolidated Statements of Cash Flows

3 Independent Auditor s Report (English Translation of a Report Originally Issued in Korean) To the Shareholder and Board of Directors of NXC Corporation We have audited the accompanying consolidated financial statements of NXC Corporation and its subsidiaries (collectively the Group ), which comprise the consolidated statements of financial position as of, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards as adopted by the Republic of Korea ( 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. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Korean Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of NXC Corporation and its subsidiaries as of, and their financial performance and cash flows for the years then ended in accordance with Korean IFRS. Other Matters 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. Seoul, Korea March 15, 2016 This report is effective as of March 15, 2016, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that 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. 2

5 Consolidated Statements of Financial Position (in Korean won) Notes Assets Current assets Cash and cash equivalents 4,6,7,9 \ 1,967,108,516,441 \ 1,122,293,940,854 Financial assets at fair value through profit or loss 4,5,6,13 128,907,776, ,591,952,141 Trade receivables 4,6,8 337,854,693, ,203,617,243 Other financial assets 4,5,6,7,10,11 967,854,269, ,586,145,210 Other assets 12 45,564,685,751 44,688,761,232 Current tax assets 26 4,580,757, ,833,870 Inventories 14 21,050,639,722 22,769,609,217 3,472,921,339,761 2,628,114,859,767 Non-current assets Available-for-sale financial assets 5,6,16 256,084,371, ,139,287,184 Other financial assets 4,5,6,10,11 77,005,471, ,868,702,363 Other assets 12 26,024,087,841 19,188,256,724 Property and equipment ,090,696, ,951,210,795 Intangible assets ,447,091,404 1,044,584,559,826 Investment property 19 23,703,650,015 53,868,653,912 Investment in associates 20 62,534,365,413 53,980,675,505 Deferred tax assets 26 25,885,699,273 47,221,415,841 1,652,775,433,845 2,355,802,762,150 Total assets \ 5,125,696,773,606 \ 4,983,917,621,917 3

6 Consolidated Statements of Financial Position (in Korean won) Notes Liabilities Current liabilities Trade payables 4,6 52,720,617,576 46,845,187,834 Borrowings 4,6,22 176,908,825, ,268,079,347 Other financial liabilities 4,5,6,11,21,39 131,747,510, ,400,091,897 Other liabilities ,417,665, ,824,092,496 Provisions ,385, ,461,735 Current tax liabilities 26 96,941,140, ,621,785, ,974,145, ,444,699,111 Non-current liabilities Borrowings 4,6,22 141,774,813, ,417,297,143 Other financial liabilities 4,5,6,21,39 21,806,024,142 27,418,335,452 Other liabilities 23 19,213,366,891 22,223,403,380 Provisions 24 3,168,127,821 3,808,055,533 Defined benefit liabilities 25 2,153,985,587 2,016,154,803 Deferred tax liabilities ,819,692, ,186,545, ,936,010, ,069,791,321 Total liabilities 865,910,156,461 1,409,514,490,432 Equity attributable to owners of the Parent Capital stock 27 1,454,250,000 2,023,659,000 Paid-in capital in excess of par value 27 5,257,138,814 5,257,138,814 Other components of equity ,429,838, ,342,314,623 Retained earnings 29 2,337,540,138,726 2,032,073,319,848 Non-controlling interest 40 1,614,105,250,857 1,234,706,699,200 Total equity 4,259,786,617,145 3,574,403,131,485 Total liabilities and equity \ 5,125,696,773,606 \ 4,983,917,621,917 The accompanying notes are an integral part of these consolidated financial statements. 4

7 Consolidated Statements of Comprehensive Income (in Korean won) Notes Revenue 31 \ 1,976,638,534,843 \ 1,948,525,292,306 Cost of sales 33 Cost of service 541,571,641, ,413,610,432 Cost of finished goods sold 85,433,926,122 99,834,404, ,005,568, ,248,014,915 Gross profit 1,349,632,966,762 1,301,277,277,391 Selling and administrative expenses 32,33 712,076,759, ,065,581,185 Operating profit 637,556,207, ,211,696,206 Other income ,987,624,993 65,667,434,333 Other expenses ,437,915, ,794,214,484 Financial income 35 93,588,545, ,504,445,522 Financial expenses 35 61,133,793,738 75,314,386,303 Share of profit(loss) 20 4,410,923,345 (7,491,136,614) Profit before income tax 732,971,591, ,783,838,660 Income tax expense ,419,805, ,595,247,309 Profit for the year \ 545,551,785,674 \ 224,188,591,351 Attributable to: Equity holders of the Parent Company \ 314,374,802,865 \ 119,983,962,726 Non-controlling interest 231,176,982, ,204,628,625 Other comprehensive income (loss) Items that will not be reclassfied to profit or loss Remeasurements of the net defined benefit liabilities 25 \ (38,112,228) \ (284,687,155) Items that may be subsequently reclassified to profit or loss Changes in fair value of available-for-sale financial assets 16 (53,071,559,005) (97,283,455,052) Gain on valuation of derivatives 349,760, ,252,589 Changes in equity method investees ,879,912 1,701,182,096 Exchange differences on translating foreign operations 50,374,564,164 (131,291,302,863) (1,474,466,495) (226,701,010,384) Total comprehensive income (loss) for the year \ 544,077,319,179 \ (2,512,419,033) Attributable to: Equity holders of the Parent Company \ 308,297,288,259 \ (37,416,696,553) Non-controlling interest 235,780,030,920 34,904,277,520 The accompanying notes are an integral part of these consolidated financial statements. 5

8 Consolidated Statements of Changes in Equity Notes Attributable to equity holders of the Parent Company (in Korean won) Capital surplus Other components of equity Capital Retained stock earnings Total equity Total Non-controlling Interest Balances as of January 1, 2014 \ 2,023,659,000 \ 5,257,138,814 \ 481,425,957,421 \ 1,912,287,368,320 \ 2,400,994,123,555 \ 1,244,672,136,022 \ 3,645,666,259,577 Total comprehensive income: Profit for the year ,983,962, ,983,962, ,204,628, ,188,591,351 Other comprehensive loss - - (157,202,648,081) - (157,202,648,081) (69,213,675,149) (226,416,323,230) Remeasurements of the net defined benefit liabilities (198,011,198) (198,011,198) (86,675,957) (284,687,155) Transactions with equity holders of the Company: Dividends of subsidiaries paid (16,385,809,918) (16,385,809,918) Changes in shares of subsidiaries - - (23,457,730,272) - (23,457,730,272) (74,328,383,117) (97,786,113,389) Acquisition of treasury stock , , , ,230 Share-based payment associated with stock options of subsidiaries ,089,987,458 46,089,987,458 Others - - (423,851,605) - (423,851,605) (245,849,834) (669,701,439) Balances as of December 31, 2014 \ 2,023,659,000 \ 5,257,138,814 \ 300,342,314,623 \ 2,032,073,319,848 \ 2,339,696,432,285 \ 1,234,706,699,200 \ 3,574,403,131,485 Balances as of January 1, 2015 \ 2,023,659,000 \ 5,257,138,814 \ 300,342,314,623 \ 2,032,073,319,848 \ 2,339,696,432,285 \ 1,234,706,699,200 \ 3,574,403,131,485 Total comprehensive income: Profit for the year ,374,802, ,374,802, ,176,982, ,551,785,674 Other comprehensive loss - - (6,054,030,620) - (6,054,030,620) 4,617,676,353 (1,436,354,267) Remeasurements of the net defined benefit liabilities (23,483,987) (23,483,987) (14,628,241) (38,112,228) Transactions with equity holders of the Company: Capital reduction with consideration paid (26,500,000) - (70,100,715,000) - (70,127,215,000) - (70,127,215,000) Capital reduction without consideration paid (542,909,000) - 542,909, Paid for dividends (8,884,500,000) (8,884,500,000) - (8,884,500,000) Dividends of subsidiaries paid (15,770,978,909) (15,770,978,909) Changes in shares of subsidiaries ,939,803,974-78,939,803, ,012,684, ,952,488,646 Share-based payment associated with stock options of subsidiaries ,787,852,343 17,787,852,343 Changes in scope of consolidation - - (2,240,443,229) - (2,240,443,229) 2,588,962, ,519,401 Balances as of December 31, 2015 \ 1,454,250,000 \ 5,257,138,814 \ 301,429,838,748 \ 2,337,540,138,726 \ 2,645,681,366,288 \ 1,614,105,250,857 \ 4,259,786,617,145 The accompanying notes are an integral part of these consolidated financial statements. 6

9 Consolidated Statements of Cash Flows (in Korean won) Notes Cash flows from operating activities Cash generated from operations ,569,412,898 \ 668,690,385,657 Interest received 35,024,632,462 35,267,245,158 Interest paid (9,707,347,088) (16,263,955,554) Dividends income 20,432,093,635 15,443,842,955 Income tax paid (229,995,206,242) (246,101,713,811) Net cash inflow from operating activities 577,323,585, ,035,804,405 Cash flows from investing activities Decrease in financial deposits 1,182,076,718, ,777,986,763 Increase in financial deposits (1,189,805,057,525) (1,157,527,254,219) Decrease in financial assets at fair value through profit or loss 259,691,757, ,468,542,416 Increase in financial assets at fair value through profit or loss (232,984,072,708) (161,063,805,855) Decrease in held-to-maturity investment - 1,000,000,000 Decrease in non-current asset held-for-sale - 46,867,653,750 Decrease in available-for-sale financial assets ,663,033, ,890,949,207 Increase in available-for-sale financial assets 16 (150,684,422,273) (38,251,230,368) Decrease in other receivables 13,168,645,154 21,360,455,620 Increase in other receivables (2,403,942,740) (61,676,482,519) Disposal of property and equipment ,065,079 8,478,898,044 Acquisition of property and equipment 17 (24,801,310,935) (40,877,292,089) Disposal of intangible assets ,977,572 1,373,217,313 Acquisition of intangible assets 18 (24,842,013,469) (18,297,917,035) Acquisition of investment property 19 (77,577,877) - Acquisition of investment in associates 20 (1,000,000,000) (2,025,244,252) Disposal of investment in subsidiaries 59,382,172,627 (737,708,922) Contingent consideration 37 (6,926,795,536) - Business combination 39 (19,466,206,034) (549,419,556,192) Net cash inflow(outflow) from investing activities 502,398,971,334 (971,658,788,338) Cash flows from financing activities Capital reduction with consideration paid (70,127,215,000) - Increase in short-term borrowings 300,621,661, ,811,050,510 Decrease in short-term borrowings (413,818,826,654) (29,494,633,441) Redemption of current portion of borrowings (240,017,641,430) (122,433,711,811) Increase in long-term borrowings 49,430,166, ,924,560,471 Decrease in long-term borrowings (123,361,025,520) (332,078,857,508) Increase in financial lease liabilities - 1,123,117,504 Decrease in financial lease liabilities (3,262,127,679) (5,575,431,631) Dividends paid (8,884,500,000) - Dividends of subsidiaries paid (15,770,978,909) (16,385,809,918) Transactions with equity holders of the Company 220,394,135,624 (97,786,113,389) Net cash provided by (used in) financing activities (304,796,351,744) 193,104,170,787 Net increase (decrease) in cash and cash equivalents 774,926,205,255 (321,518,813,146) Cash and cash equivalents at the beginning of year 1,122,293,940,854 1,523,549,370,620 Exchange loss on cash and cash equivalents 69,888,370,332 (79,736,616,620) Cash and cash equivalents at the end of year 1,967,108,516,441 \ 1,122,293,940,854 The accompanying notes are an integral part of these consolidated financial statements. 7

10 1. General Information NXC Corporation (the Parent Company) and its subsidiaries (collectively the Group ) primarily engage in the business of game development and services, and lease and investment of real estate. The Group s offices are located in Korea, Japan, United States and other locations. As of December 31, 2015, the Parent Company s paid-in capital amounted to 1,454 million after several capital increases and the Parent Company s shareholders consist of Mr. Kim Jeong-Ju and four others. 1.1 Consolidated Subsidiaries Details of the consolidated subsidiaries as of, are as follows: Percentage of ownership (%) Closing Subsidiaries Location month Controlling company NEXON Co., Ltd. Japan December The Parent Company and 1 other NXMH B.V.B.A. 1 Belgium September The Parent Company NXProperties Corporation Korea December The Parent Company NXCL Corporation Korea December The Parent Company VIP Private Equity Fund Korea December The Parent Company Alignment B-Corp CircleUp Fund LLC USA December The Parent Company ATMedia Investor LLC USA December The Parent Company Future Foods, LLC USA December The Parent Company FutureFood, LLC USA December Future Foods, LLC NEXON Korea Corporation Korea December Nexon Co., Ltd. Rushmo Korea December Nexon Co., Ltd. Nexon America, Inc. USA December Nexon Co., Ltd. Nexon Software Development (Shanghai) Co., Ltd. China December Nexon Co., Ltd. gloops Inc. Japan December Nexon Co., Ltd. Inblue Inc. Japan December Nexon Co., Ltd. Fantage.com Inc. USA December Nexon Co., Ltd. NEXON Europe S.a.r.l. Luxembourg December Nexon Co., Ltd. NEXON Europe Gmbh Germany December Nexon Co., Ltd. Nexon M (formerly gloops International Inc.) USA December Nexon Co., Ltd. Nexon Networks Corporation Korea December NEXON Korea Corporation Neople Korea December NEXON Korea Corporation Nexon Communications Korea December NEXON Korea Corporation Nexon Space Co., Ltd. Korea December NEXON Korea Corporation NDOORS Corporation Korea December NEXON Korea Corporation Nexon GT Co., Ltd. (formerly GameHi Inc.) Korea December NEXON Korea Corporation Neon Studio Corporation Korea December NEXON Korea Corporation NEXON Taiwan Ltd. Taiwan December NEXON Korea Corporation 8

11 Percentage of ownership (%) Closing Subsidiaries Location month Controlling company Boolean Games Korea December NEXON Korea Corporation THINGSOFT Inc. Korea December Neople Rushmo America, Inc USA December Rushmo gloops Vietnam Co., Ltd. Vietnam December gloops Inc. COMLIE.INC Japan December gloops Inc. BRICKLINK LIMITED Hong Kong December NXMH B.V.B.A. NXMH LLC USA December NXMH B.V.B.A. NXMH AS Norway December NXMH B.V.B.A. Stokke AS Norway December NXMH AS Stokke Amerika AS Norway December Stokke AS Stokke Fabriker AB Sweden December Stokke AS Stokke Danmark ApS Denmark December Stokke AS Stokke Nederland BV Netherlands December Stokke AS Stokke GmbH Germany December Stokke AS Stokke GesmbH Austria December Stokke AS Stokke AG Switzerland December Stokke AS Stokke France S.A.S. France December Stokke AS Stokke UK LTD UK December Stokke AS Stokke Mobiliario SL Spain December Stokke AS Stokke SRL Italy December Stokke AS Stokke Hong Kong Limited Hong Kong December Stokke AS Stokke Ltd (Japan) Japan December Stokke AS Stokke Korea Co., Ltd Korea December Stokke AS Stokke China Ltd China December Stokke AS Stokke RU LLC Russia December Stokke AS Stokke LLC USA December Stokke Amerika AS 1 The September 30 financial statements were used after reviewing the significant events from October to December. 2 NXProperties Corporation was reclassified to other related party due to sales of its shares to WiseKids Co.,Ltd. Which is other related party of the Parent Company. 9

12 1.2 Summarized Financial Information on Significant Subsidiaries The summarized financial information for significant subsidiaries as of and for the years ended, is as follows: (In thousands of Korean won) 2015 Profit (loss) for Assets Liabilities Equity Sales the year NEXON Co., Ltd. and it s subsidiaries \4,118,606,511 \448,458,425 \3,670,148,086 \1,791,254,208 \593,474,004 NXMH B.V.B.A. 1,537,673, ,671,066 1,409,001, ,125 42,053,460 NXMH AS and its subsidiaries 569,624, ,242, ,381, ,690,054 11,357,181 BRICKLINK LIMITED 8,700, ,699, ,425 (31,046) NXCL Corporation 2,679, ,730 2,301,983 1,259,161 (1,891,424) (In thousands of Korean won) 2014 Profit (loss) Assets Liabilities Equity Sales for the year NEXON Co., Ltd. and it s subsidiaries \3,983,022,889 \830,215,852 \3,152,807,037 \1,737,108,803 \300,477,133 NXMH B.V.B.A. 1,593,430, ,839,098 1,350,591, ,676 (15,816,098) NXMH AS and its subsidiaries 632,943, ,461, ,482, ,630,008 (11,943,678) BRICKLINK LIMITED 8,217,222 6,513 8,210, ,550 (42,526) NXCL Corporation 3,988, ,083 3,694,431 2,330,815 (2,616,952) 1.3 Changes in Scope for Consolidation Subsidiaries newly included in the consolidation for the year ended December 31, 2015: Location Subsidiary Reason USA ATMedia Investor LLC Newly established USA Future Foods, LLC Newly established USA FutureFood, LLC Newly established Germany NEXON Europe Gmbh Newly established Korea Boolean Games Newly acquired Taiwan NEXON Taiwan Ltd. Newly established Russia Stokke RU LLC Newly established 10

13 Subsidiaries excluded from the consolidation for the year ended December 31, 2015: Location Subsidiary Reason Korea NX Properties Sold to other related party Japan Inblue Inc. Merged with gloops Inc. Luxembourg NEXON Europe S.a.r.l. Liquidated 2. Significant Accounting Policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of Preparation The Group maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with the International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS). The accompanying consolidated financial statements have been condensed, restructured and translated into English from the Korean language financial statements. Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Group's financial position, financial performance or cash flows, is not presented in the accompanying consolidated financial statements. The consolidated financial statements of the Group have been prepared in accordance with Korean IFRS. These 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 consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3. 11

14 2.2 Changes in Accounting Policy and Disclosures (a) New and amended standards adopted by the Group The Group newly applied the following amended and enacted standards for the annual period beginning on January 1, 2015: - Amendment to Korean IFRS 1019, Employee Benefits Amendment to Korean IFRS 1019, Employee Benefits, permits a practical expedient in recognizing amount of contributions from employees or third parties as reduction in the service cost. The application of this amendments has no material impact on the consolidated financial statements. - Amendment to Korean IFRS 1108, Operating Segments Amendment to Korean IFRS 1108, Operating Segments, clarify that a reconciliation of the total of the reportable segments assets should only be provided if the segment assets are regularly provided to the top management. The application of this amendments has no material impact on the consolidated financial statements. - Annual Improvements to Korean IFRS Cycle Amendment to K-IFRS 1103, Business Combination, clarifies that it excludes the accounting for the formation of joint arrangement in the financial statements of the joint arrangement itself from the scope of K-IFRS 1103, Business Combination. Amendments to K-IFRS 1113, Fair Value Measurements, and K-IFRS 1040, Investment property, exist. The application of these amendments has no material impact on the consolidated financial statements. (b) New standards and interpretations not yet adopted The Group expects that new standards, amendments and interpretations issued but not effective for the financial year beginning January 1, 2015 and not early adopted would not.have a material impact on the consolidated financial statements. 2.3 Consolidation The Group has prepared the consolidated financial statements in accordance with Korean IFRS 1110, Consolidated Financial Statements. (a) Subsidiaries Subsidiaries are all entities over which the Parent Company has control. the Parent Company controls the corresponding investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the 12

15 investee. The consolidation of a subsidiary begins from the date the Parent Company obtains control of a subsidiary and ceases when the Parent Company loses control of the subsidiary. The Group applies the acquisition method to account for business combinations. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Group recognizes any noncontrolling interest in the acquiree on an acquisition-by-acquisition basis in the event of liquidation, either at fair value or at the non-controlling interest s proportionate share of the recognized amounts of acquiree s identifiable net assets. All other non-controlling interests are measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs. Acquisition-related costs are expensed as incurred. Goodwill is recognized as the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree, and the acquisition-date fair value of the acquirer s previously held equity interest in the acquiree over the identifiable net assets acquired. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss. Balances of receivables and payables, income and expenses and unrealized gains on transactions between the Group subsidiaries are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. In transactions with non-controlling interests, which do not result in loss of control, the Group recognizes directly in equity attributable to owners of the Parent Company any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attribute it to the owners of the Parent Company. If the Group loses control of a subsidiary, any investment retained in the subsidiary is remeasured at its fair value at the date when control is lost and any resulting differences are recognized in profit or loss. (b) Associates Associates are all entities over which the Group has significant influence, and investments in associates are initially recognized at acquisition cost using the equity method. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. If there is any objective evidence that the investment in the associate is impaired, the Group recognizes the difference between the recoverable amount of the associate and its book value as impairment loss. (c) Joint Arrangements A joint arrangement, wherein two or more parties have joint control, is classified as either a joint 13

16 operation or a joint venture. A joint operator has rights to the assets, and obligations for the liabilities, relating to the joint operation and recognizes the assets, liabilities, revenues and expenses relating to its interest in a joint operation. A joint venturer has rights to the net assets relating to the joint venture and accounts for that investment using the equity method. 2.4 Foreign Currency Translation (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the each entity operates (the functional currency). The consolidated financial statements are presented in Korean won, which is the Parent Company s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Exchange differences arising on non-monetary financial assets and liabilities such as equity instruments at fair value through profit or loss and available-for-sale equity instruments are recognized in profit or loss and included in other comprehensive income, respectively, as part of the fair value gain or loss. 14

17 2.5 Financial Assets (a) Classification and measurement The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, available-for-sale financial assets, loans and receivables, and held-tomaturity financial assets. Regular purchases and sales of financial assets are recognized on the trade date. Regular purchases and sales of financial assets are recognized on the trade date. At initial recognition, financial assets are measured at fair value plus, in the case of financial assets not carried at fair value through profit or loss, transaction costs. Transaction costs of financial assets carried at fair value through profit or loss are expensed in the statement of income. After the initial recognition, available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables, and held-to-maturity investments are subsequently carried at amortized cost using the effective interest rate method. Changes in fair value of financial assets at fair value through profit or loss are recognized in profit or loss and changes in fair value of available-for-sale financial assets are recognized in other comprehensive income. When the available-for-sale financial assets are sold or impaired, the fair value adjustments recorded in equity are reclassified into profit or loss. (b) Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated. Impairment of loans and receivables is presented as a deduction in an allowance account. Impairment of other financial assets is directly deducted from their carrying amount. The Group writes off financial assets when the assets are determined to be no longer recoverable. The objective evidence that a financial asset is impaired includes significant financial difficulty of the issuer or obligor; a delinquency in interest or principal payments over three months; or the disappearance of an active market for that financial asset because of financial difficulties. A decline in the fair value of an available-for-sale equity instrument by more than 50% from its cost or a prolonged decline below its cost for more than 12 months is also objective evidence of impairment. 15

18 (c) Derecognition If the Group transfers a financial asset and the transfer does not result in derecognition because the Group has retained substantially of all risks and rewards of ownership of the transferred asset due to a recourse in the event the debtor defaults, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. (d) Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty. 2.6 Derivative Instruments Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of the derivatives that are not qualified for hedge accounting are recognized in the statement of income within 'other income (expenses)' or 'financial income (expenses)' according to the nature of transactions. The Group has entered into derivative financial instruments, including foreign exchange forward contracts and interest rate swaps, in purpose of selling in short term or managing its exposure to interest rate risk and foreign exchange rate risk. These derivatives are presented as other financial assets (liabilities) in the statement of financial position, regardless of retention purposes and subsequent measurement standards. The Group designated some derivatives as hedging instruments to hedge risk of changes in the fair value of assets, liabilities or firm commitments (a fair value hedge), and cash flow risk (a cash flow hedge). At the inception of the hedging transaction, the Group has designated and documented the relationship between hedging instruments and hedged items, as well as its objectives in risk management and strategy for undertaking various hedging transactions. The document contains hedging instrument, hedged items, nature of hedge, and assessment of whether the hedging instrument are highly effective in offsetting risk of changes in fair value of hedged items. (a) Derivative financial instruments for trading Derivative financial instruments, other than the derivatives that are effective in hedge, are measured at fair value. Gain or loss on valuation of fair value is recognized in statement of comprehensive income as finance cost. 16

19 (b) Derivative financial instruments for fair value hedge Changes in the fair value of a derivative financial instrument, designated as hedging instrument and satisfied the criteria for fair value hedge accounting, are recognized in profit or loss as well as changes in fair value of hedged items. The change in fair value of hedging instrument and hedged items are all recognized in statement of comprehensive income as part of profit or loss. The fair value accounting is discontinued if the hedging instrument is expired, sold, terminated or exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising from gain or loss on the hedged item attributable to the hedged risk is amortized and recognized in profit or loss from the date the hedge accounting is discontinued. (c) Derivative financial instruments for cash flow hedge The effective portion of changes in fair value of derivatives that are designated and qualify as fair value hedges is recognized as finance cost in other comprehensive income, and the ineffective portion is recognized immediately in profit or loss. The previously recognized profit or loss in other comprehensive income is reclassified as reclassification adjustment from equity to profit or loss during accounting period that is in effect of expected cash flow related with the hedge. If the hedging instrument no longer meets the criteria for hedge accounting; the hedging instrument is expired, sold, terminated, or exercised; or the designation is revoked; then hedge accounting is discontinued prospectively. The cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income is reclassified to profit or loss in the periods during which the forecasted transaction occurs. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss. 2.7 Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method. 2.8 Non-current Assets (or Disposal Group) Held-for-sale Non-current assets (or disposal group) are classified as assets held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. The assets are measured at the lower amount between their carrying amount and the fair value less costs to sell. 2.9 Property and Equipment Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that are directly attributable to the acquisition of the items. 17

20 Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between their cost and their residual values over their estimated useful lives, as follows: Useful life Building 40 years Structure 15 Machinery 3 Leasehold improvements 3 Others 3 The depreciation method, residual values and useful lives of property and equipment are reviewed at each financial year-end and, if appropriate, accounted for as changes in accounting estimates Intangible Assets Goodwill is measured as explained in Note 2.3.(a) and carried at its cost less accumulated impairment losses. Intangible assets, except for goodwill, are initially recognized at its historical cost and carried at its cost less accumulated amortization and accumulated impairment losses. Internally generated software development costs are the aggregate costs recognized after meeting the asset recognition criteria, including technical feasibility, and determined to have future economic benefits. Membership rights are regarded as intangible assets with indefinite useful life and not amortized because there is no foreseeable limit to the period over which the assets are expected to be utilized. Intangible assets with definite useful life that are amortized using the straight-line method over their estimated useful lives, are as follows: Intellectual property Software 3 Others1-10 Useful life 5-80 years 2.11 Government Grants Government grants are recognized at their fair values when there is reasonable assurance that the grant will be received and the Group will comply with the conditions attaching to it. Government grants related to assets are presented by deducting the grants in arriving at the carrying amount of the assets, and grants related to income are deferred and presented by deducting the related expenses for the purpose of the government grants. 18

21 2.12 Investment Property Property held to earn rentals or for capital appreciation or both is classified as investment property. Investment property is measured initially at its cost. After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. Investment property, except for land, is depreciated using the straight-line method over their useful lives for 40 years Impairment of Non-financial Assets Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An 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 value in use. Non-financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment at the end of each reporting period Financial Liabilities (a) Classification and measurement Financial liabilities at fair value through profit or loss are financial instruments held for trading. Financial liabilities are classified in this category if incurred principally for the purpose of repurchasing them in the near term. Derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives are also categorized as held-fortrading. The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and presented as trade payables, borrowings, and other financial liabilities in the 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, cancelled or expired or when the terms of an existing financial liability are substantially modified. 19

22 2.15 Provisions Provisions are measured at the present value of the expenditures expected to be required to settle the obligation and the increase in the provision due to passage of time is recognized as interest expense Current and Deferred Tax The tax expense for the period consists of current and deferred tax. Tax is recognized on the profit for the period in the statement of income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period. Management periodically evaluates tax policies that are applied in tax returns in which applicable tax regulation is subject to interpretation. The Parent Company recognizes current income tax on the basis of the amount expected to be paid to the tax authorities. Deferred tax is recognized for temporary differences arising between the tax bases of assets and liabilities and their carrying amounts as expected tax consequences at the recovery or settlement of the carrying amounts of the assets and liabilities. However, deferred tax assets and liabilities are not recognized if they arise 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 to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized. Deferred tax liability is recognized for taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except to the extent that the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, deferred tax asset is recognized for 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 against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 20

23 2.17 Employee Benefits (a) Post-employment benefits The Group has both defined contribution and defined benefit plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The contributions are recognized as employee benefit expense when an employee has rendered service. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds and that have terms to maturity approximating to the terms of the related pension obligation. The remeasurements of the net defined benefit liability are recognized in other comprehensive income. If any plan amendments, curtailments, or settlements occur, past service costs or any gains or losses on settlement are recognized as profit or loss for the year. (b) Other long-term employee benefits Certain Group companies provide long-term employee benefits, which are entitled to employees with service period for ten years and above. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. The Group recognizes past service cost, net interest on other long-term employee benefits and remeasurements as profit or loss for the year. These liabilities are valued annually by independent qualified actuaries. 21

24 (c) Share-based payments Equity-settled share-based payments granted to employees are estimated at the grant date fair value of equity instruments and recognized as employee benefit expenses over the vesting period. The number of equity instruments expected to vest is remeasured with consideration to nonmarket vesting conditions at the end of the reporting period, with any changes from the original measurement recognized in the profit for the year and equity. Compensation expenses arising from share-based payments granted by subsidiaries are recognized according to the ownership interest of equity holders of the Parent Company and noncontrolling interest, and re-classified as non-controlling interest in consolidated statement of financial position. (d) Annual paid leave The Group 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 Revenue Recognition 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 activities of the Group. The Group recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group s activities, as described below. The Group bases its estimate on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. (a) Royalty income Royalty income is recognized on an accrual basis in accordance with the substance of the relevant agreements. (b) Sale of virtual goods The Group provides online games to individual customers for free. However, the Group sells virtual items that are used in online games at a cost. Revenue from the sales of item is recognized when it is probable that future economic benefits will flow to the Group and these benefits can be measured reliably. Revenue from the sales of item is generally recognized on a straight-line basis over the period for which the item is expected to be used (Note 3). 22

25 (c) Sale of goods Revenue from the sale of goods is recognized when products are delivered to the purchaser. (d) Interest income Interest income is recognized using the effective interest method according to the time passed. When a loan and receivable is impaired, the Group reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate. (e) Dividend income Dividend income is recognized when the right to receive payment is established 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 where all the risks and rewards of ownership are not transferred to the Group are classified as operating leases. Lease payments under operating leases are recognized as expenses on a straight-line basis over the lease term. Leases where the Group has substantially all the risks and rewards of ownership are classified as finance leases and recognized as lease assets and liabilities at the lower of the fair value of the leased property and the present value of the minimum lease payments on the opening date of the lease period. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership at the inception of the lease. A lease other than a finance lease is classified as an operating lease. Lease income from operating leases is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred by the lessor in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income Approval of Issuance of the Financial Statements The issuance of the December 31, 2015 financial statements of the Group was approved by the Board of Directors on February 26, 2016, which is subject to change with the approval of the shareholders at their annual shareholders meeting. 23