Kakao Corporation and Subsidiaries. Consolidated Financial Statements December 31, 2016 and 2015

Transcription

1 Kakao Corporation and Subsidiaries Consolidated Financial Statements

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

3 Independent Auditor s Report (English Translation of a Report Originally Issued in Korean) To the Shareholders and Board of Directors of Kakao Corporation We have audited the accompanying consolidated financial statements of Kakao Corporation and its subsidiaries (collectively the Company ), which comprise the consolidated statements of financial position as of, and the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including 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 the consolidated financial statements in accordance with 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 the consolidated financial statements based on our audits. We conducted our audits in accordance with 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company s preparation and fair presentation of the consolidated 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 Company s internal control. Accordingly, we express no such opinion. 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 consolidated 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 accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Kakao Corporation and its subsidiaries as of December 31, 2016 and 2015, and its consolidated financial performance and its consolidated 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 8, 2017 This report is effective as of March 8, 2017, 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 millions of Korean won) Notes Assets Current assets Cash and cash equivalents 4,5,7,8 641, ,177 Short-term financial instruments 4,5,7 236, ,389 Derivative financial instruments 4,5,7,23 3,942 5,241 Trade receivables 4,5,7,10 173,853 88,822 Other current financial assets 4,5,7,11 83,340 59,619 Inventories 12,555 5,353 Other current assets 14 64,876 40,466 1,216, ,067 Non-current assets Long-term financial instruments 4,5,7 10,000 10,193 Available-for-sale securities 5,7,9 93,182 30,892 Investments in associates ,076 68,704 Other non-current financial assets 4,5,7,11 35,269 23,040 Property and equipment , ,052 Intangible assets 17 3,733,166 1,855,604 Other non-current assets 14 6,584 9,592 Deferred income tax assets 21 18,028 1,334 4,267,159 2,218,411 Total assets 5,484,117 3,188,478 Liabilities Current Liabilities Trade and other payables 4,5,7,12 263,130 89,506 Short-term borrowings 4,5,7,18 203,900 22,055 Current portion of long-term borrowings 4,5,7, Other current financial liabilities 4,5,7,13 17,228 3,673 Income tax payable 30,944 29,448 Provisions 22 1,350 1,149 Derivative financial instruments 4,5,7,23 7,375 8,504 Other current liabilities , , , ,078 Non-current liabilities Non-current trade and other payables 4,5,7,12 2, Long-term borrowings 4,5,7,18 795, ,675 Non-current provisions 22 4,099 3,402 Net defined benefit liabilities 19 1,440 8,311 Other long-term employee benefits liabilities 20 28,220 24,968 Deferred income tax liabilities ,919 48,637 Other non-current financial liabilities 4,5,7,13-1, , ,925 Total liabilities 1,781, ,003 The above consolidated statements of financial position should be read in conjunction with the accompanying notes. 3

6 Consolidated Statements of Financial Position (in millions of Korean won) Notes Equity Share capital 1,24 33,858 30,098 Share premium 24 3,105,014 2,274,186 Other component of equity 26 (11,232) (9,032) Accumulated other comprehensive income Retained earnings , ,313 Equity attributable to owners of the Parent Company 3,432,513 2,552,394 Non-controlling interest 270,431 33,081 Total equity 3,702,944 2,585,475 Total liabilities and equity 5,484,117 3,188,478 The above consolidated statements of financial position should be read in conjunction with the accompanying notes. 4

7 Consolidated Statements of Comprehensive Income Years ended (in millions of Korean won, except per share data) Note Revenue 6 1,464, ,152 Operating expenses 29 1,348, ,564 Operating income 116,135 88,588 Other non-operating income 30 25,257 25,198 Other non-operating expenses 30 31,406 25,977 Finance income 31 24,673 29,904 Finance costs 31 23,979 3,697 Share of net loss of associates 15 (10,384) (4,473) Profit before income tax 100, ,543 Income tax expense 21 34,841 30,778 Profit for the year 65,455 78,765 Profit is attributable to: Equity holders of the Parent Company 57,674 75,666 Non-controlling interest 7,781 3,099 Other comprehensive income (loss) Items not to be reclassified subsequently to profit or loss: Remeasurement of net defined benefit liability 3,312 (3,712) Items to be reclassified subsequently to profit or loss: Gains (losses) on valuation of available-for-sale securities, net of tax (3,895) 1,098 Share of other comprehensive income of associates, net of tax Foreign currency translation adjustments, net of tax (540) 893 Other comprehensive loss for the year, net of tax (562) (1,292) Total comprehensive income for the year 64,893 77,473 Total comprehensive income is attributable to: Equity holders of the Parent Company 57,765 74,380 Non-controlling interest 7,128 3,093 Earnings per share to the equity holders of the Parent Company 32 Basic earnings per share 874 1,269 Diluted earnings per share 850 1,220 The above consolidated statements of financial position should be read in conjunction with the accompanying notes. 5

8 Consolidated Statements of Changes in Equity Years ended (in millions of Korean won) Note Share Capital Share Premium Attributable to equity holders of the Parent Company Accumulated Other Other Components Comprehensive of Equity Income (loss) Retained Earnings Total Noncontrolling Interest Total Equity Balance at January 1, ,121 2,258,974 (26,268) 2, ,678 2,454,619 8,609 2,463,228 Comprehensive income : Profit for the year ,666 75,666 3,099 78,765 Foreign currency translation adjustments, net of tax (2) 894 Share of other comprehensive income of associates, net of tax Gain on valuation of available-for-sale securities, net of tax ,098-1,098-1,098 Remeasurement of defined benefit obligation (3,701) - (3,701) (12) (3,713) Total comprehensive income (loss) for the year (1,285) 75,666 74,381 3,091 77,472 Transactions with equity holders: Exercise of stock options ,114 (3,441) ,650 (540) 13,110 Share-based compensation ,197 Cash dividends (10,030) (10,030) (1,571) (11,601) Disposal of treasury shares , ,985-19,985 Donated stocks of a subsidiary from shareholders - 14, ,592 (93) 14,499 Change in ownership interest over subsidiaries - (15,494) (15,494) (51) (15,545) Change in scope of consolidation ,130 23,130 Total transactions with equity holders ,212 17,236 - (10,030) 23,395 21,380 44,775 Balance at December 31, ,098 2,274,186 (9,032) ,314 2,552,395 33,080 2,585,475 The above consolidated statements of financial position should be read in conjunction with the accompanying notes. 6

9 Consolidated Statements of Changes in Equity Years ended (in millions of Korean won) Note Share Capital Share Premium Attributable to equity holders of the Parent Company Accumulated Other Other Components Comprehensive of Equity Income (loss) Retained Earnings Total Noncontrolling Interest Total Equity Balance at January 1, ,098 2,274,186 (9,032) ,314 2,552,395 33,080 2,585,475 Comprehensive income : Profit for the year ,674 57,674 7,781 65,455 Foreign currency translation adjustments, net of tax (571) - (571) 31 (540) Share of other comprehensive income of associates, net of tax Gain on valuation of available-for-sale securities, net of tax (3,014) - (3,014) (881) (3,895) Remeasurement of defined benefit obligation ,384-3,384 (72) 3,312 Total comprehensive income for the year ,674 57,765 7,128 64,893 Transactions with equity holders: Exercise of stock options 24, ,842 (2,241) - - 7, ,117 Issue of ordinary shares 24 3, , , ,683 Share-based compensation ,733 1,774 Cash dividends (10,035) (10,035) (1,303) (11,338) Disposal of treasury shares Change in ownership interest over subsidiaries - 66, ,760 86, ,296 Change in scope of consolidation , ,044 - Total transactions with equity holders 3, ,828 (2,200) - (10,035) 822, ,223 1,052,576 Balance at December 31, ,858 3,105,014 (11,232) ,953 3,432, ,431 3,702,944 The above consolidated statements of financial position should be read in conjunction with the accompanying notes. 7

10 Consolidated Statements of Cash Flows Years ended (in millions of Korean won) Note Cash flows from operating activities Cash generated from operations , ,360 Interest received 9,381 10,576 Interest paid (9,131) (728) Dividend received Income tax paid (54,355) (35,074) Net cash inflow from operating activities 317, ,217 Cash flows from investing activities Decrease (increase) in short-term financial instruments 254,077 (186,579) Decrease (increase) in long-term financial instruments 193 (10,029) Purchase of property and equipment 16 (80,964) (76,083) Disposal of property and equipment 521 1,191 Purchase of intangible assets 17 (24,261) (8,772) Disposal of intangible assets 368 1,609 Acquisition of available-for-sale securities 9 (52,496) (8,779) Disposal of available-for-sale securities 6,912 21,587 Acquisition of associates 15 (60,750) (65,749) Disposal of associates 1,265 9,785 Acquisition of subsidiaries, net of cash acquired (1,044,383) (60,505) Disposal of subsidiaries, net of cash acquired 970 4,431 Decrease in other non-current financial assets 10,009 20,049 Increase other non-current financial assets (13,070) (11,714) Decrease (increase) in short-term loans receivables 398 (817) Increase in long-term loans receivables (150) - Cash flows from business acquisition - (36,329) Increase in long-term advanced payments - (3,948) Acquisition of derivative financial instruments (3,702) (5,000) Disposal of derivative financial instruments 5,093 - Other cash inflow(outflow) from investing activities (41) 1,411 Net cash outflow from investing activities (1,000,011) (414,241) Cash flows from financing activities Proceeds from short-term borrowings 1,000,000 3 Repayments of short-term borrowings (800,350) (50) Repayments of current portion of long-term borrowings (100) (50) Exercise of stock options 8,118 13,109 Issuance of corporate bonds, convertible bonds, and exchangeable bonds 794, ,366 Repayments of corporate bonds (201,987) - Issuance of redeemable convertible preferred stock - 12,000 Payments of dividends (11,338) (11,601) Acquisition of non-controlling interests (2,600) (19,067) New shares issued by subsidiaries (to non-controlling interest shareholders) 137,521 4,750 Allocation of investments - (1,231) Other cash inflow from financing activities - 5 Other cash outflow from financing activities (20) (1) Net cash inflow from financing activities 923, ,233 The above consolidated statements of financial position should be read in conjunction with the accompanying notes. 8

11 Consolidated Statements of Cash Flows Years ended (in millions of Korean won) Note Net increase (decrease) in cash and cash equivalents 241,041 (54,791) Cash and cash equivalents at the beginning of year 397, ,228 Effect of exchange rate changes on cash and cash equivalents 3, Cash and cash equivalents at the end of year 641, ,177 The above consolidated statements of financial position should be read in conjunction with the accompanying notes. 9

12 1. General Information Kakao Corporation (the Parent Company ) has prepared the consolidated financial statements in accordance with Korean IFRS 1110, Consolidated Financial Statements, and its consolidated subsidiaries include Daum Global Holdings and 58 other entities. 1.1 The Company General information about Kakao Corporation and its subsidiaries (collectively the Company ) is as follows: The Parent Company was incorporated in February 1995 to develop computer programs and provide internet service and mainly engaged in the online mobile services business such as provision of online advertising services, mobile payment services and messaging service, application development and mobile platform establishment. On October 1, 2014, Daum Communications Corporation merged with Kakao Corporation, with the approval of the Board of Directors on May 23, 2014, and the shareholders on August 27, The Parent Company changed its name to Daum Kakao Corporation as ratified by the shareholders on October 31, 2014, and changed again to Kakao Corporation with the shareholders approval on September 23, The Parent Company s headquarter is located in Youngpyong-dong, Jeju City, in Jeju Province, Korea. As of December 31, 2016, the Parent Company s share capital amounted to 33,858 million and the Parent Company s shareholders are as follows: Number of shares Percentage of ownership (%) Kim Bum Soo 12,554, K Cube Holdings Co., Ltd. 9,949, MAXIMO PTE. LTD. 5,599, Star InvestHoldings Limited 5,555, Other related parties 1,950, Others 32,000, ,610, Treasury shares 5, ,615,

13 Details of the consolidated subsidiaries as of December 31, 2016, are as follows: (in millions of Korean won, except number of shares) Subsidiaries Share Capital Primary Business Location Closing Month Number of shares Percentage of ownership (%) Daum Global Holdings 2,498 Holding company Korea December 499, PATH MOBILE INC. PTE. LTD. 1 61,057 Service operations Singapore December 73,128, PT. PATH MOBILE INDONESIA 5, 15 1,911 Service operations Indonesia December 1,700, DK Service 511 Service operations Korea December 102, DK Techin 993 Service operations Korea December 198, DK Business 1,074 Service operations Korea December 214, Daum Service CHINA Co., Ltd. 1,093 Service operations China December Daum Service CHINA YanJiao Co., Ltd Service operations China December ImageOn Corp. 2,370 Contents development Korea December 474, Buzzpia Company 194 Mobile services Korea December 38, Thinkreals Corp. 42 Software development and services Korea December 83, Lotiple Inc. 74 Software development and services Korea December 148, Kakao Lab Corp. 743 Software development and services Korea December 1,485, Sunnyloft Corp. 413 Software development and services Korea December 82, KAKAO SINGAPORE PTE. Ltd. 299 Software development and services Singapore December 3, Beijing KAKAO Co., Ltd. 20,483 Software development and services China December 18,839, Ultra Caption Corp. 28 Software development and services Korea December 5, Ultra Interactive, Inc Software development and services USA December 1,000, KAKAO JAPAN Corp. 1,291 Software development and services Japan December 322, Kids Note Co., Ltd. 100 Software development and services Korea December 26, K Venture Group 13,612 Holding company Korea December 1,361, TNK Factory 6,7 1,633 Mobile advertisement platform operations Korea December 3,265, Sellit Inc Software consultation Korea December 120, K CUBE VENTURES Co., Ltd. 18,511 Holding company Korea December 3,702, K Cube Venture Fund no.1 8 8,092 Investment/Holding company Korea December KAKAO Venture Fund 8, 9 30,000 Investment/Holding company Korea December Locnall Inc. 391 Software development and services Korea December 122, Kakao Friends Corp. 1,600 Contents sales Korea December 160, Valuepotion 7 99 Mobile marketing service Korea December 10, Valuepotion Pte.LTD Mobile marketing service Singapore December 476, CARDOC Inc Online information service Korea December 313, Kakao Games Corp. Game development and (Formerly NZIN Corp.) services Korea December 37, Genie labs 3 10 Game development and services Korea December 20, Aina Corporation Game development and services Korea December 1,055,

14 Subsidiaries Capital Stock Primary Business Location Closing Month Number of shares Percentage of ownership (%) NGLE CORPORATION Game development and services Korea December 210, Peoplug Inc. 3 1 Game development and services Korea December 3, SuperNova11 Corp Game development and services Korea December 760, Kakao Games Europe B.V. 3 1,296 Game development and services Netherlands December 1,000, Kakao Games USA. Inc. 5, 19 2,305 Game development and services USA December 1,000, About-time 11 Software development and services Korea December 22, Podotree Inc. 7,350 Software development and services Korea December 8,466, Kakao digital contents Fund 5, 8, 9 18,550 Investment/Holding company Korea December Kakao Game Growth Share Fund 5, 8 22,500 Investment/Holding company Korea December 15, Linkage Lab Services Korea December 20, LOEN ENTERTAINMENT, INC. 12, 21 12,646 Recording Media Korea December Reproduction 19,322, STARSHIP ENTERTAINMENT CORP Entertainment management Korea December 7, PLAN A ENTERTAINMENT Entertainment management Korea December 7, MTECHCREW, INC. 5, Data processing business Korea December 10, Fave Entertainment Co., Ltd. 5, Entertainment management Korea December 32, Cre.ker Entertainment Co., Ltd. 5, Entertainment management Korea December 32, Mun Hwa In Co., Ltd. 5, Entertainment management Korea December 20, King Kong Entertainment Co., Ltd Entertainment management Korea December 10, NAVIRO Co., Ltd. (Formerly DeNA Software development and Japan December Locations) 14 3,319 41, services Parking Square Inc Software development and Korea December services 162, Numberworks Inc Software development and Korea December services 1,023, KVG SG PTE.LTD 7 1,313 Holding company Singapore December 1,100, KAKAO_CCVC Jeju Creative Economy Korea December Innovative Fund 5 2,000 Investment/Holding company BLUEPIN INC. 7, Software development and Korea December services 81, During 2016, the Parent Company acquired 100.0% ownership of Daum Global Holdings. The number of shares and the percentage of ownership represent the Parent Company s ownership as of December 31, As a subsidiary of Daum Service CHINA Co., Ltd., the number of shares and the percentage of ownership represent Daum Service CHINA Co., Ltd. s ownership as of December 31, As a subsidiary of Kakao Games Corp. (Formerly NZIN Corp.), the number of shares and the percentage of ownership represent Kakao Games Corp. s ownership as of December 31, As a subsidiary of Ultra Caption Corp., the number of shares and the percentage of ownership represent Ultra Caption Corp. s ownership as of December 31, Newly established in During 2016, the Parent Company newly acquired 102,000 shares (100% ownership) and acquired additional 2,449,200 shares by capital increase without consideration. 7 As a subsidiary of K Venture Group, the number of shares and the percentage of ownership represent K Venture Group s ownership as of December 31, As a subsidiary of K CUBE VENTURES Co., Ltd., the number of shares and the percentage of ownership represent K CUBE VENTURES Co., Ltd. s ownership as of December 31,

15 9 Classified as subsidiary although the ownership is less than 50% as the Company is considered to have a control over the investees. 10 As a subsidiary of Valuepotion, the number of shares and the percentage of ownership represent Valuepotion s ownership as of December 31, During 2016, the Parent Company newly acquired 162,502 shares (100% ownership). 12 During 2016, the Parent Company newly acquired 19,322,346 shares (76.4% ownership). 13 As a subsidiary of LOEN ENTERTAINMENT, INC., the number of shares and the percentage of ownership represent LOEN ENTERTAINMENT, INC. s ownership as of December 31, During 2016, it was reclassified to a subsidiary of Locnall Inc. from an investment in associates of Locnall Inc. As a subsidiary of Locnall Inc., the number of shares and the percentage of ownership represent Locnall Inc. s ownership as of December 31, As a subsidiary of PATH MOBILE INC. PTE. LTD., the number of shares and the percentage of ownership represent PATH MOBILE INC. PTE. LTD. s and the Parent Company s ownership as of December 31, During 2016, Daum Games and NZIN Corp., both subsidiaries of Kakao Corporation, merged and changed their name to Kakao Games Co., Ltd. 17 During 2016, the Parent Company newly acquired 1,023,076 shares (100% ownership). 18 As a subsidiary of STARSHIP ENTERTAINMENT CORP., the number of shares and the percentage of ownership represent STARSHIP ENTERTAINMENT CORP. s ownership as of December 31, As a subsidiary of KAKAO Games Europe B.V., the number of shares and the percentage of ownership represent KAKAO Games Europe B.V. s ownership as of December 31, During 2016, the Parent Company newly acquired 81,231 shares (51% ownership). 21 In 2016, the Company has entered into a securities lending agreement with each of two underwriters of the exchangeable bonds, Citigroup Global Markets Limited and Morgan Stanley & Co. International plc for up to an aggregate 2,191,885 shares of LOEN ENTERTAINMENT, INC., equivalent to 100% of the total exchangeable shares, 8.67% of the ownership. According to the agreement, the shares will be lend up to the date specified such as the date of the 5th anniversary of the issuance of the bonds, the date on which all of the bonds are redeemed, or exchanged through the underwriters' agent, NH Investment & Securities Co., Ltd. Since the Company has retained rights as shareholder for the dividends, the Company has included the aforementioned number of shares to the number of shares in the table above. 13

16 Status of subsidiaries excluded from the preparation of the consolidated financial statements for the year ended December 31, 2016, is as follows: Company Reason Tangram Design Lab Inc. Disposal of investments in subsidiaries in 2016 Tangram Factory Disposal of investments in subsidiaries in 2016 TANGRAM FACTORY AMERICA, INC. Disposal of investments in subsidiaries in 2016 Disposal of investments in subsidiaries in 2016 BULLHOC Soft Disposal of investments in subsidiaries in 2016 Mmagnet Disposal of investments in subsidiaries in 2016 Black Star Games Inc. Merged with SuperNova11 Corp. Red Star Games Inc. Daum Games Merged with SuperNova11 Corp. Merged with Kakao Games Corp. (Formerly NZIN Corp.) The summarized financial information for consolidated subsidiaries as of and for the year ended December 31, 2016, is as follows: (in millions of Korean won) 2016 Assets Liabilities Equity Revenue Net income (loss) Comprehensive income (loss) Daum Global Holdings 1, ,537 - (240) (240) PATH MOBILE INC. PTE. LTD. 37,047 1,545 35,502 1,107 (13,702) (13,247) PT. PATH MOBILE INDONESIA (1,389) (1,353) DK Service 2,393 1, , (254) DK Techin 1, ,252 (29) (41) DK Business 3,378 1,417 1,961 13, Daum Service CHINA Co., Ltd (5) (12) Daum Service CHINA YanJiao Co., Ltd , ImageOn Corp. 2, ,549 3, Buzzpia Company Thinkreals Corp (12) (12) Lotiple Inc (12) (12) Kakao Lab Corp (30) (30) Sunnyloft Corp (8) (8) KAKAO SINGAPORE PTE. Ltd (2) (2) Beijing KAKAO Co., Ltd. 10, ,382 1,116 (7,638) (8,242) Ultra Caption Corp (162) (161) KAKAO JAPAN Corp. 8,899 1,736 7,163 3,007 (4,656) (4,470) Kids Note Co., Ltd. 1,775 1, (1,473) (1,473) K Venture Group 137,459 1, ,201 7 (2,667) (2,671) TNK Factory 18,811 3,143 15,668 23,491 2,872 2,873 Sellit Inc ,090 (354) 2,491 (1,884) (1,884) K CUBE VENTURES Co., Ltd. 20, ,369 2, K Cube Venture Fund no.1 16, ,619-4,807 3,646 KAKAO Venture Fund 28, ,001 - (2,012) (487) Locnall Inc. 6,789 8,561 (1,772) 476 (2,875) (2,671) Kakao Friends Corp. 61,348 19,392 41,956 70,506 18,492 18,524 14

17 (in millions of Korean won) 2016 Assets Liabilities Equity Revenue Net income (loss) Comprehensive income (loss) Valuepotion 1,730 1, ,341 (864) (864) Valuepotion.Pte.LTD (551) 158 (744) (737) CARDOC Inc. 2, ,455 1,022 (1,525) (1,525) Daum Games ,349 5,738 5,790 Kakao Games Corp. (Formerly NZIN Corp.) 107,022 39,527 67,495 77,669 (1,940) (2,249) Genie labs (34) (34) Aina Corporation (106) 26 3,687 3,687 NGLE CORPORATION , Peoplug Inc ,842 (1,123) - (556) (556) SuperNova11 Corp. 2,742 3,242 (500) 1,724 (4,619) (4,619) KAKAO Games Europe B.V. 29,898 13,557 16,341 87,449 16,118 15,921 KAKAO Games USA. Inc. 1, ,740 - (639) (566) About-time (1) (1) Podotree Inc. 160,398 8, ,732 64,037 (3,385) (3,340) Kakao Digital Contents Fund 17, ,629 - (893) (893) Kakao Game Growth Share Fund 22, ,953 - (547) (547) Linkage Lab (392) (392) LOEN ENTERTAINMENT, INC , , , ,705 47,937 42,198 STARSHIP ENTERTAINMENT CORP. 1 18,672 7,203 11,469 12,910 1,383 1,383 PLAN A ENTERTAINMENT 1 11,081 3,862 7,219 6, MTECHCREW, Inc. 1 1, , Fave Entertainment Co., Ltd. 1 1, ,248 1,240 (2) (2) Cre.ker Entertainment Co., Ltd. 1 2,573 1, (264) (264) Mun Hwa In Co., Ltd. 1 2, ,330 1,325 (633) (633) King Kong Entertainment Co.,Ltd. 1 5,791 3,487 2,304 9, NAVIRO Co., Ltd. (Formerly DeNA Locations) 3, , (1,391) (34) Parking Square Inc , Numberworks Inc (46) (46) KVG SG PTE.LTD. 1,347-1, KAKAO_CCVC Jeju Creative Economy Innovative Fund 2, , BLUEPIN Inc. 1 5, , The above table represents financial information since the acquisition date, respectively. 15

18 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 Company maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with International Financial Reporting Standards as adopted by the Republic of Korea ( Korean IFRS ). The accompanying consolidated financial statements have been, restructured and translated into English from the Korean language financial statements. Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Company's financial position, financial performance or cash flows, is not presented in the accompanying consolidated financial statements. The consolidated financial statements of the Company 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 Company 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 Changes in Accounting Policy 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, The adoption of these amendments did not have any significant impact on the current period or any prior period and is not likely to affect future periods. 16

19 - Disclosure Initiative Amendments to Korean IFRS 1001, Presentation of Financial Statements Korean IFRS 1001 clarifies that materiality applies to the exclusion or inclusion or aggregation of the disclosures in the notes. And the amendments also clarify that the share of other comprehensive income arising from equity-accounted should be presented in total for items which will and will not be reclassified to profit or loss. Additional amendments are made in relation to a particular order of the notes and other. - Korean IFRS 1011, Construction Contract, Korean IFRS 1037, Provisions, Contingent Liabilities and Contingent Assets and Interpretation 2115, Arrangements for Property Construction These standards and interpretation clarify the accounting information disclosure requirement for construction contracts. The accounting estimates and potential risk information of the construction contracts should be disclosed in detail by either individual construction or operating segment. - Agriculture: Bearer Plants Amendments to Korean IFRS 1016, Property, Plant and Equipment, and Korean IFRS 1041, Agriculture Korean IFRS 1041 now distinguishes between bearer plants and other biological asset. Bearer plants must be accounted for as Korean IFRS Clarification of Acceptable methods of Depreciation and Amortization Amendments to Korean IFRS 1016, and Korean IFRS 1038, Intangible assets Amendments to Korean IFRS 1016 clarify that a revenue-based method should not be used to calculate the depreciation of items of property, plant and equipment. Korean IFRS 1038 now includes a rebuttable presumption that the amortization of intangible assets based on revenue is inappropriate. This presumption can be overcome if either; the intangible asset is expressed as a measure of revenue, or it can be shown that revenue and the consumption of economic benefits generated by the asset are highly correlated. - Investment entities: Applying the Consolidation Exception Amendments to Korean IFRS 1110, Consolidated Financial Statements, Korean IFRS 1028, Investments in Associates and Joint Ventures, and Korean IFRS 1112, Disclosures of Interests in Other Entities Amendments made to Korean IFRS 1110 clarify that the exception from preparing consolidated financial statement is also available to intermediate parent entities which are subsidiaries of investment entities. If an investment entity has a subsidiary that is an investment entity and whose activities are providing services that related to the investment entity s investment activities, the investment entity measures the subsidiary at fair value through profit or loss. 17

20 Amendments made to Korean IFRS 1028 clarify that entities which are not investment entities but have an interest in an associate which is an investment entity have a policy choice when applying the equity method of accounting. Amendments made to Korean IFRS 1112 clarify that an investment entity which does not prepare consolidated financial statements should present disclosures relating to investment entities required by Korean IFRS Accounting for Acquisitions of Interests in Joint Operations Amendments to Korean IFRS 1111, Joint Arrangements Amendments to Korean IFRS 1111 clarify the accounting for the acquisition of an interest in a joint operation where the activities of the operation constitute a business. An investor requires to apply the principles of business combination accounting when the investor acquires an interest in a joint operation that constitutes a business. - Annual Improvements to Korean IFRS Cycle Annual Improvements to Korean IFRS Cycle consist of the following amendments. The application does not have a material impact on the consolidated financial statements. Korean IFRS 1105 Non-current Assets Held for Sale and Discontinued Operation clarifies when an asset (or disposal group) is reclassified from held for sale to held for distribution or vice versa, this does not have to be accounted for as such. Korean IFRS 1107 Financial Instruments: Disclosures clarifies the specific guidance for transferred financial assets to help management determine whether the terms of a servicing arrangement constitute continuing involvement, and also clarifies that the additional disclosures relating to the amendments in 2012 Offsetting of Financial Assets and Financial Liabilities only need to be included in interim reports if required by Korean IFRS 1034 Interim Financial Reporting. Korean IFRS 1019 Employee Benefits clarifies that when determining the discount rate for post-employment benefit obligations, it is the currency in which the liabilities are denominated that is important, and not the country where they arise. Korean IFRS 1034 Interim Financial Reporting clarifies what is meant by the reference in the standard to information disclosed elsewhere in the interim financial report ; and also amended requirements for a cross-reference from the interim financial statements to the location of that information. 18

21 (b) New standards and interpretations not yet adopted by the Company Certain new accounting standards and interpretations that have been published that are not mandatory for December 31, 2016 reporting periods and have not been early adopted by the Company are set out below. - Amendments to Korean IFRS 1007 Statement of Cash Flows Amendments to Korean IFRS 1007 Statement of Cash flows require to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash flows. This amendment will be effective for annual periods beginning on or after January 1, 2017, with early adoption permitted. The Company does not expect the amendments to have a significant impact on the consolidated financial statements. - Amendments to Korean IFRS 1012 Income Tax Amendments to Korean IFRS 1012 clarify how to account for deferred tax assets related to debt instruments measured at fair value. Korean IFRS 1012 provides requirements on the recognition and measurement of current or deferred tax liabilities or assets. The amendments issued clarify the requirements on recognition of deferred tax assets for unrealized losses, to address diversity in practice. This amendment will be effective for annual periods beginning on or after January 1, 2017, with early adoption permitted. The Company does not expect the amendments to have a significant impact on the consolidated financial statements. - Amendments 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. And also, clarifies 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. This amendment will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not expect the amendments to have a significant impact on the consolidated financial statements. 19

22 - Korean IFRS 1109 Financial Instruments The new standard for financial instruments issued on September 25, 2015 are effective for annual periods beginning on or after January 1, 2018 with early application permitted. This standard will replace Korean IFRS 1039 Financial Instruments: Recognition and Measurement. The Company will apply the standards for annual periods beginning on or after January 1, The standard requires retrospective application with some exceptions. For example, an entity is not required to restate prior period in relation to classification and measurement (including impairment) of financial instruments. The standard requires prospective application of its hedge accounting requirements for all hedging relationships except the accounting for time value of options and other exceptions. Korean IFRS 1109 Financial Instruments requires all financial assets to be classified and measured on the basis of the entity s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. A new impairment model, an expected credit loss model, is introduced and any subsequent changes in expected credit losses will be recognized in profit or loss. Also, hedge accounting rules amended to extend the hedging relationship, which consists only of eligible hedging instruments and hedged items, qualifies for hedge accounting. An effective implementation of Korean IFRS 1109 requires preparation processes including financial impact assessment, accounting policy establishment, accounting system development and the system stabilization. The impact on the Company s financial statements due to the application of the standard is dependent on judgements made in applying the standard, financial instruments held by the Company and macroeconomic variables. With the implementation of Korean IFRS 1109, the Company neither prepared for internal management process nor began to adjust accounting system for financial instruments reporting. Also, the Company did not analyze the financial effects of applying the standard. The Company plans to analyze the financial effects of applying the standard and disclose the result of the analysis in the notes on the financial statements as of December 31, However, the following areas are likely to be affected in general. 20

23 (a) Classification and Measurement of Financial Assets When implementing Korean IFRS 1109, the classification of financial assets will be driven by the Company s business model for managing the financial assets and contractual terms of cash flow. The following table shows the classification of financial assets measured subsequently at amortized cost, at fair value through other comprehensive income and at fair value through profit or loss. If a hybrid contract contains a host that is a financial asset, the classification of the hybrid contract shall be determined for the entire contract without separating the embedded derivative. Business model for the contractual cash flows characteristics Hold the financial asset for the collection of the contractual cash flows Hold the financial asset for the collection of the contractual cash flows and trading Hold for trading Solely represent payments of principal and interest Measured at amortized cost 1 Recognized at fair value through other comprehensive income 1 Recognized at fair value through profit or loss All other Recognized at fair value through profit or loss 2 1 A designation at fair value through profit or loss is allowed only if such designation mitigates an accounting mismatch (irrevocable). 2 Equity investments not held for trading can be recorded in other comprehensive income (irrevocable). With the implementation of Korean IFRS 1109, the criteria to classify the financial assets at amortized cost or at fair value through other comprehensive income are more strictly applied than the criteria applied with Korean IFRS Accordingly, the financial assets at fair value through profit or loss may increase by implementing Korean IFRS 1109 and may result an extended fluctuation in profit or loss. As of December 31, 2016, the Company owns loan and trade receivables of \1,180,854 million and financial assets available-for-sales of \93,182 million. According to Korean IFRS 1109, a debt instrument is measured at amortized cost if: a) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and b) the contractual cash flows under the instrument solely represent payments of principal and interest. As at December 31, 2016, the Company measured loan and trade receivables of \1,180,854 million at amortized costs. 21

24 According to Korean IFRS 1109, a debt instrument is measured at fair value through other comprehensive income if the objective of the business model is achieved both by collecting contractual cash flows and selling financial assets; and the contractual cash flows represents solely payments of principal and interest on a specific date under contract terms. As at December 31, 2016, the Company holds debt instruments of \6,387 million classified as financial assets available-for-sale in total. According to Korean IFRS 1109, equity instruments that are not held for trading, the Company can make an irrevocable election at initial recognition to classify the instruments as assets measured at fair value through other comprehensive income, which all subsequent changes in fair value being recognized in other comprehensive income and not recycled to profit or loss. As at December 31, 2016, the Company holds equity instruments of \86,795 million classified as financial assets available-for-sale. According to Korean IFRS 1109, debt instruments those contractual cash flows do not represent solely payments of principal and interest and held for trading, and equity instruments that are not designated as instruments measured at fair value through other comprehensive income are measured at fair value through profit or loss. As at December 2016, the Company holds debt and equity instruments classified as financial assets at fair value through profit or loss that amount to \3,942 million. (b) Impairment: Financial Assets and Contract Assets Korean IFRS 1109 sets out a new forward looking expected loss impairment model which replaces the incurred loss model under Korean IFRS 1039 that impaired assets if there is an objective evidence and applies to: Financial assets measured at amortized cost Debt investments measured at fair value through other comprehensive income, and Certain loan commitments and financial guaranteed contracts. 22

25 Under Korean IFRS 1109 expected loss model, a credit event (or impairment trigger ) no longer has to occur before credit losses are recognized. The Company will always recognize (at a minimum) 12-month expected credit losses in profit or loss. Lifetime expected losses will be recognized on assets for which there is a significant increase in credit risk after initial recognition. 1 2 Stage 1 No significant increase in credit risk after initial recognition 2 Significant increase in credit risk after initial recognition 3 Credit-impaired Loss allowance 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date) Lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument) 1 A loss allowance for lifetime expected credit losses is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. It is also required for contract assets or trade receivables that are not, according to Korean IFRS 1115 Revenue from Contracts with Customers, considered to contain a significant financing component. Additionally, the Company can elect an accounting policy of recognizing lifetime expected credit losses for all contract assets and/or all trade receivables, including those that contain a significant financing component. 2 If the financial instrument has low credit risk at the end of the reporting period, the Company may assume that the credit risk has not increased significantly since initial recognition. Under Korean IFRS 1109, the asset that is credit-impaired at initial recognition would recognize all changes in lifetime expected credit losses since the initial recognition as a loss allowance with any changes recognized in profit or loss. 23

26 As at December 31, 2016, the Company owns debt investment carries at amortized cost of \1,180,854 million (loan and trade receivables of \1,180,854 million), debt investments carried at fair value through other comprehensive income, which classified as financial assets available-for-sales, of \6,387 million. And, the Company recognized loss allowance of \9,629 million for these assets. - Korean IFRS 1115 Revenue from Contracts with Customers The Company will apply Korean IFRS 1115 Revenue from Contracts with Customers issued on November 6, 2015 for annual reporting periods beginning on or after January 1, Earlier adoption is permitted under Korean IFRS. This standard replaces Korean IFRS 1018 Revenue, Korean IFRS 1011 Construction Contracts, Interpretation 2031 Revenue-Barter Transactions Involving Advertising Services, Interpretation 2113 Customer Loyalty Programs, Interpretation 2115 Agreements for the Construction of Real Estate and Interpretation 2118 Transfers of assets from customers. The Company must apply Korean IFRS 1115 Revenue from Contracts with Customers within annual reporting periods beginning on or after January 1, 2018, and will apply the standard retrospectively to prior reporting period presented in accordance with Korean IFRS 1008 Accounting Policies, Changes in Accounting Estimates and Errors and apply simplified transition method with no restatement for completed contracts and other as of January 1, The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer so the notion of control replaces the existing notion of risks and rewards. A new five-step process must be applied before revenue from contract with customer can be recognized: Identify contracts with customers Identify the separate performance obligation Determine the transaction price of the contract Allocate the transaction price to each of the separate performance obligations, and Recognize the revenue as each performance obligation is satisfied. As of December 31, 2016, the Company neither prepared for internal management process nor began to adjust accounting system in relation to implementation of Korean IFRS Also, the Company did not analyze the financial effects of applying the standard. The Company plans to analyze the financial effects of applying the standard and disclose the result of the analysis in the notes on the financial statements as of December 31,

27 2.3 Consolidation The Company 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 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 investee. Consolidation of a subsidiary begins from the date the Company obtains control of a subsidiary and ceases when the Company loses control of the subsidiary. The Company 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 Company recognizes any non-controlling 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 standards. 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 Parent Company and its subsidiaries are eliminated during the consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company. In transactions with non-controlling interest, which do not result in loss of control, the Company recognizes directly in equity any difference between the amount of the non-controlling interests and the fair value of the consideration paid or received, and attributes it to the owners of the Parent Company. 25