6-K

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

Form 6-K

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

For the month of April 2022

Commission File Number 000-51138

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

(Translation of registrant’s name into English)

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

——————————————————————————————————————— (Address of principal executive office)

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

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

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

KPMG Samjong, our independent auditor for the fiscal year ended December 31, 2021 and December 31, 2020 for our consolidated financial statements in conformity with International Financial Reporting Standards as adopted by the Republic of Korea, or Korean IFRS, have conducted audits and expressed opinions with regards to the consolidated statements of financial position of Gravity Co., Ltd. (the “Company”) and its subsidiaries as of December 31, 2021 and December 31, 2020 and the related consolidated statements of comprehensive income, changes in equity, and cash flows for the year ended at December 31, 2021 and December 31, 2020 expressed in Korean Won.

KPMG Samjong, our independent auditor for the fiscal year ended December 31, 2021 and December 31, 2020 has also conducted audits and expressed opinions with regards to the separate statements of financial position of the Company as of December 31, 2021 and December 31, 2020 and the related separate statements of comprehensive income, changes in equity, and cash flows for the year then ended at December 31, 2021 and December 31, 2020 expressed in Korean Won.

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

SIGNATURES

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

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

Date: April 13, 2022

Exhibit Index

Exhibit No.	Description
99. 1	The Company’s Korean IFRS Consolidated financial statements as of and for the years ended December 31, 2021 and December 31, 2020 and the independent auditor’s report
99. 2	The Company’s Korean IFRS Seperate financial statements as of and for the years ended December 31, 2021 and December 31, 2020 and the independent auditor’s report

Document

GRAVITY CO., LTD. and Subsidiaries

Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

(With Independent Auditors’ Report Thereon)

Contents

Page

Independent Auditors’ Report    1

Consolidated Financial Statements

Consolidated Statements of Financial Position    3

Consolidated Statements of Comprehensive Income    5

Consolidated Statements of Changes in Equity    6

Consolidated Statements of Cash Flows    7

Notes to the Consolidated Financial Statements    8

Independent Auditors’ Report

Based on a report originally issued in Korean

To the Shareholders and Board of Directors of

Gravity Co., Ltd.:

Opinion

We have audited the accompanying consolidated financial statements of Gravity Co., Ltd. and its subsidiaries (the ”Group”), which comprise the consolidated statements of financial position as of December 31, 2021 and 2020, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes to the consolidated financial statements comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2021 and 2020, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with Korean International Financial Reporting Standards (“K-IFRS”).

Basis for Opinion

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

Other Matter

The procedures and practices utilized in the Republic of Korea to audit such consolidated financial statements may differ from those generally accepted and applied in other countries.

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

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

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

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

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

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

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

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

•Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

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

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

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

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

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

Seoul, Korea

March 23, 2022

This report is effective as of March 23, 2022, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2021 and 2020

(In thousands of won)		Notes		December 31, 2021	December 31, 2020
Assets
Current assets
	Cash and cash equivalents	5,6,22	W	99,104,943	110,632,482
	Short-term financial instruments	6,22		148,000,000	71,000,000
	Accounts receivable, net	6,7,13,22		52,614,595	59,761,256
	Other receivables, net	6,7,22		1,080,516	8,333
	Prepaid expenses	13		3,164,075	2,237,708
	Other current financial assets	6,22		598,099	817,825
	Other current assets			1,572,692	2,128,113
				306,134,920	246,585,717
Non-current assets
	Property and equipment, net	8,21		11,337,999	7,695,046
	Intangible assets, net	9		3,342,028	3,362,879
	Other non-current assets			1,973,064	2,814,792
	Other non-current financial assets	6,22		3,018,823	1,323,865
	Deferred tax assets	18		1,719,489	3,590,069
				21,391,403	18,786,651
Total assets			W	327,526,323	265,372,368

See accompanying notes to the consolidated financial statements.

GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position, Continued

As of December 31, 2021 and 2020

(In thousands of won)		Notes		December 31, 2021	December 31, 2020
Liabilities
Current liabilities
	Account payables	6,22	W	41,199,401	52,687,616
	Deferred revenue	13		13,480,518	13,692,283
	Withholdings			3,596,403	2,851,636
	Accrued expenses	6,22		1,484,019	1,364,753
	Income tax payable	18		10,628,981	9,469,833
	Other current liabilities	6,21,22		3,608,153	2,654,101
				73,997,475	82,720,222
Non-current liabilities
	Long-term account payables	6,22		729,173	1,402,466
	Long-term deferred revenue	13		98,226	101,015
	Other non-current liabilities	6,21,22		5,860,591	3,800,649
				6,687,990	5,304,130
Total liabilities			W	80,685,465	88,024,352
Equity
Equity attributable to owners of the Parent Company
Share capital		12		3,474,450	3,474,450
Share premium		12		27,098,264	27,109,803
Other components of equity		12		2,180,388	(1,044,533)
Retained earnings		12		213,317,805	147,371,155
Non-controlling interest				769,951	437,141
Total equity				246,840,858	177,348,016
Total liabilities and equity			W	327,526,323	265,372,368

See accompanying notes to the consolidated financial statements.

GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2021 and 2020

(In thousands of won, except per share amounts)	Notes		2021	2020
Revenues	13,23,24
Online games		W	75,370,395	89,545,060
Mobile games			320,163,555	298,323,908
Other revenue			18,404,024	18,084,053
			413,937,974	405,953,021
Cost of revenues	14		224,172,902	239,044,923
Gross profit			189,765,072	166,908,098
Selling, general and administrative expenses	14,15		92,201,177	77,433,905
Operating profit	23		97,563,895	89,474,193
Non-operating income and expenses
Finance income	6,16		5,268,535	3,475,764
Finance costs	6,16		(2,686,170)	(3,832,610)
Other non-operating income	17		606,731	657,898
Other non-operating expenses	17		(1,452,459)	(1,764,135)
Profit before income tax expense			99,300,532	88,011,110
Income tax expense	18		33,420,741	25,455,435
Profit for the year		W	65,879,791	62,555,675
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss
Foreign currency translation adjustments			3,273,897	(1,319,071)
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit liabilities			(2,761)	-
Total comprehensive income for the year		W	69,150,927	61,236,604
Profit (loss) attributable to:
Owners of the Parent Company		W	65,946,650	62,703,088
Non-controlling interests			(66,859)	(147,413)
Total comprehensive income (loss) attributable to:
Owners of the Parent Company		W	69,171,571	61,384,017
Non-controlling interests			(20,644)	(147,413)
Earnings per share attributable to the equity holders of the Parent Company
Basic earnings per share (in won)	19	W	9,490	9,023
Diluted earnings per share (in won)	19	W	9,490	9,023

See accompanying notes to the consolidated financial statements.

GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2021 and 2020

(In thousands of won)			Equity attributable to owners of the Parent Company
	Notes		Share<br><br>capital	Share<br><br>premium	Other components of equity	Retained earnings	Sub total	Non-controlling interests	Total equity
Balance at January 1, 2020		W	3,474,450	27,127,684	274,538	84,668,067	115,544,739	221,351	115,766,090
Total comprehensive income for the period:
Profit for the year			-	-	-	62,703,088	62,703,088	(147,413)	62,555,675
Foreign currency translation adjustments	12		-	-	(1,319,071)	-	(1,319,071)	-	(1,319,071)
Transactions with owners:
Equity transaction			-	(17,881)	-	-	(17,881)	1,227	(16,654)
Changes in interests in subsidiaries			-	-	-	-	-	361,976	361,976
Balance at December 31, 2020		W	3,474,450	27,109,803	(1,044,533)	147,371,155	176,910,875	437,141	177,348,016
Balance at January 1, 2021		W	3,474,450	27,109,803	(1,044,533)	147,371,155	176,910,875	437,141	177,348,016
Total comprehensive income for the period:
Profit for the year			-	-	-	65,946,650	65,946,650	(66,859)	65,879,791
Foreign currency translation adjustments	12		-	-	3,226,854	-	3,226,854	47,043	3,273,897
Transactions with owners:
Equity transaction			-	(11,539)	-	-	(11,539)	353,454	341,915
Remeasurements of defined benefit liabilities			-	-	(1,933)	-	(1,933)	(828)	(2,761)
Balance at December 31, 2021		W	3,474,450	27,098,264	2,180,388	213,317,805	246,070,907	769,951	246,840,858

See accompanying notes to the consolidated financial statements.

GRAVITY CO., LTD. and Subsidiaries

Consolidated Statements of Cash Flow

For the years ended December 31, 2021 and 2020

(In thousands of won)	Notes		2021	2020
Cash flows from operating activities
Profit for the year		W	65,879,791	62,555,675
Adjustments	20		40,575,779	32,132,238
Changes in operating assets and liabilities	20		(2,883,876)	(12,952,425)
Interest received			995,149	1,122,471
Interest paid			(111,416)	(185,742)
Income taxes paid			(30,272,469)	(12,815,314)
Net cash provided by operating activities			74,182,958	69,856,903
Cash flows from investing activities
Proceeds from disposal of property and equipment	8		13,850	3,039
Proceeds from disposal of other intangible assets	9		14,861	-
Decrease in other non-current financial assets			594,774	22,479
Increase in short-term financial instruments			(77,000,000)	(31,500,000)
Purchase of property and equipment	8		(1,747,427)	(1,071,379)
Purchase of intangible assets	9		(2,463,914)	(2,624,540)
Increase in other non-current financial assets			(1,883,900)	(879,063)
Net cash used in investing activities			(82,471,756)	(36,049,464)
Cash flows from financing activities
Proceeds from capital contribution from non-controlling interests			353,454	361,976
Payment of share issuance costs			(11,539)	(16,654)
Repayment of lease liabilities	21		(3,647,934)	(2,892,567)
Net cash used in financing activities			(3,306,019)	(2,547,245)
Effects of exchange rate changes on cash and cash equivalents			67,278	(55,691)
Net increase (decrease) in cash and cash equivalents			(11,527,539)	31,204,503
Cash and cash equivalents at beginning of the year			110,632,482	79,427,979
Cash and cash equivalents at end of the year		W	99,104,943	110,632,482

See accompanying notes to the consolidated financial statements.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

1. General Information

(1) The Parent Company

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

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

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

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

(2) Consolidated subsidiaries

Details of the consolidated subsidiaries as of December 31, 2021 and 2020 are as follows:

				Percentage of ownership (%)
Subsidiaries	Location	Main business	Fiscal<br><br>year end	December 31, 2021	December 31, 2020
Gravity Interactive, Inc.	USA	Online and mobile game services	December	100	100
Gravity NeoCyon, Inc.	Korea	Mobile Game Development and Service	December	99.53	99.53
Gravity Communications Co., Ltd.	Taiwan	Online and mobile game services	December	100	100
PT. Gravity Game Link	Indonesia	Online and mobile game services	December	70	70
Gravity Game Tech Co., Ltd.	Thailand	Online and mobile game services	December	100	100
Gravity Game Arise Co., Ltd.	Japan	Online and mobile game services	December	100	100
Gravity Game Hub PTE., Ltd.(*)	Singapore	Online and mobile game services	December	100	-

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

1. General Information, Continued

(3) Condensed financial information of subsidiaries as of and for the years ended December 31, 2021 and 2020 are as follows:

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

(*) Amounts before eliminating related party transactions.

(In thousands of won)		2020
Subsidiaries		Total<br><br>assets(*1)	Total<br><br>liabilities(*1)	Revenues(*1)	Profit (loss)<br><br>for the period(*1)
Gravity Interactive, Inc.	W	31,848,915	23,405,476	123,055,325	1,137,851
Gravity Entertainment Corp.(*2)		-	-	-	7,706
Gravity NeoCyon, Inc.		11,068,694	7,422,182	26,368,123	(1,753,593)
Gravity Communications Co., Ltd.		33,717,352	10,070,240	41,677,215	12,281,146
PT. Gravity Game Link		2,184,917	663,529	4,880,948	(315,190)
Gravity Game Tech Co., Ltd.		21,092,640	6,314,555	39,147,178	13,989,069
Gravity Game Arise Co., Ltd.		2,637,083	2,065,979	2,483,354	81,573

(*1) Amounts before eliminating related party transactions.

(*2) Gravity Entertainment Corp. was liquidated during 2020 and has been excluded from subsidiary since then.

2. Basis of Presentation

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

These consolidated financial statements were authorized for issuance by the Board of Directors on March 8, 2022, and are expected to be submitted for approval at the shareholders’ meeting to be held on March 31, 2022.

2. Basis of Presentation, Continued

(1) Basis of measurement

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

(2) Use of judgments and estimates

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

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

(a) Deferred revenue

As discussed in Note 4 (13), the Group sells virtual currency and items that can be used in online and mobile games to game users. For each game in each country, the Group estimates and applies the game user's life cycle in order to recognize revenue generated by micro-transactions. The game user's life cycle is estimated based on the average period from the game user's first payment date to the last access date for active paying game users. The Group considers a game user as an active user if the period between the time of the user’s most recent access of the game and the end of reporting period equals or is shorter than the estimated game users’ life cycle. For remaining amounts of virtual currency and items that active users own at period-end, the related revenue is deferred considering whether the virtual currency is refundable and items’ attributes. The Group estimates the user’s life cycle by analyzing game users’ activity patterns such as payment and access and it periodically reviews if there is any change of these estimates.

(b) Deferred tax assets

When the Group assesses the realizability of deferred tax assets, the Group considers its performance, general economic environment, projected future taxable income, and periods available to utilize tax loss carryforwards and tax credit carryforwards. The Group periodically monitors the estimates used in assessing the realizability of the deferred tax assets. The amount of deferred tax assets may be changed if estimated future taxable income during the carryforward periods changes.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

3. Changes in accounting policies

The Group has applied the following standards and amendments for the first time for the annual reporting period commencing on January 1, 2021.

(1) Amendments to K-IFRS No. 1116 Lease-Practical expedient for COVID-19_Related Rent Concessions

As a practical expedient, a lessee may elect not to assess whether a rent concession occurring as a direct consequence of the COVID-19 pandemic is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the rent concession as the same way it would account for the change applying this Standard if the change were not a lease modification. The amendments do not have a significant impact on the consolidated financial statements.

(2) Amendment to K-IFRS No. 1109 Financial Instruments, K-IFRS No. 1039 Financial Instruments: Recognition and Measurement, K-IFRS No. 1107 Financial Instruments: Disclosure, K-IFRS 1104 Insurance Contracts and K-IFRS 1116 Lease-Interest Rate Benchmark Reform (Phase 2 amendments)

In relation to interest rate benchmark reform, the amendments provide exceptions including adjust effective interest rate instead of book amounts when interest rate benchmark of financial instruments at amortized costs is replaced, and apply hedge accounting without discontinuance although the interest rate benchmark is replaced in hedging relationship. The amendments do not have a significant impact on the consolidated financial statements.

4. Significant Accounting Policies

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

(1) Consolidation

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(1) Consolidation, Continued

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

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

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

(2) Segment reporting

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

(3) Cash and Cash equivalents

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

(4) Financial Assets

(a) Classification

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

•measured at fair value through profit or loss;

•measured at fair value through other comprehensive income; and

•measured at amortized cost.

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(4) Financial Assets, Continued

(a) Classification, Continued

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

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

(b) Measurement

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

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

(i) Debt instruments

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(4) Financial Assets, Continued

(b) Measurement, Continued

(i) Debt instruments, Continued

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

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

(ii) Equity instruments

The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments, which are held for long-term investment or strategic purpose, in other comprehensive income. There is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividend income from such investments continue to be recognized in profit or loss as ‘finance income’ when the right to receive payments is established.

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(4) Financial Assets, Continued

(c) Impairment

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

•financial assets measured at amortized cost;

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

•contract assets under K-IFRS No. 1115.

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

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

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

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

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

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

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

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

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

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(4) Financial Assets, Continued

(c) Impairment, Continued

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

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

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

(d) Recognition and Derecognition

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

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

(e) Offsetting of financial instruments

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

(5) Property and Equipment

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(5) Property and Equipment, Continued

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

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

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

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

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

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

(6) Intangible Assets

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

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

	Estimated Useful Lives
Software	1~3 years
Patents	10 years
Other intangible assets	3 years

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(6) Intangible Assets, Continued

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

(7) Impairment of Non-financial Assets

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

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

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

(8) Leases

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

(a) As a lessee

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(8) Leases, Continued

(a) As a lessee, Continued

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

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

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

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

•fixed payments, including in-substance fixed payments;

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

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

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

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(8) Leases, Continued

(a) As a lessee, Continued

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

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

(b) As a lessor

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

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

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

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

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

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(9) Financial Liabilities

(a) Classification and measurement

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

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

(b) Derecognition

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

(10) Provisions and Contingent Liabilities

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

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(11) Foreign Currency Translation

(a) Functional and presentation currency

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

(b) Transactions and balances

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

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

(12) Statement of cash flows

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

(13) Revenues from contracts with customers

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(13) Revenues from contracts with customers, Continued

(a) Revenue from micro-transaction and subscription

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

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

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

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

(i) Online Games

At the end of the reporting period, the Group defers the total amount of remaining virtual currency as the Group has the obligation to refund for remaining virtual currency.

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

The Group recognizes online subscription revenue as game users make use of in-game premium features. Subscription revenue comes from subscription fee for internet cafés. Prepaid subscription fees from internet cafés are deferred and recognized as revenue monthly based on actual hours used.

(ii) Mobile Games

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(13) Revenues from contracts with customers, Continued

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

(ii) Mobile Games, Continued

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

(b) Online and Mobile games—royalties and license fees

In connection with the Group’s online and mobile games, the Group enters into license agreement in connection with the right to access the intellectual property, such as game character images and stories. The Group believes that the agreement is a promise to provide a right to the customer to access the related IP because the Group will undertake activities that significantly affect the intellectual property to which the customer has rights, the rights granted by the license directly expose the customer to any positive or negative effects of the Group’s activities, and those activities do not result in the transfer of a good or a service to the customer as those activities occur. Therefore, the Group’s performance obligations in connection with these agreements are satisfied over time. Since the nature of the license promise is to provide customers with access to the intellectual property of the Group during the license period, the Group's performance obligation corresponds to the performance obligation satisfied over time, and revenue is recognized over the license period. The Group recognizes revenue for the license fee through the straight-line method during the contract period, and for the running royalty revenue, the revenue is recognized on an accrual basis at the time the revenue distribution is established in accordance with the terms of the contract. When the running royalty revenue based on the contractual royalty rate and the actual revenue of the licensee exceeds the ratably recognized minimum guarantee, the excess amount is then recognized as revenue and accounts receivable.

(c) Other revenue

Other revenue consists of revenue from sales of console games, game character merchandise, animation and other services, including website development and operation services for third parties. Revenues from development and operation services for third parties are recognized over time by measuring progress towards complete satisfaction of a performance obligation. The progress is measured by reference to the costs incurred up to the end of the reporting period as a percentage of total estimated costs for each contract.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(13) Revenues from contracts with customers, Continued

(d) Incremental costs of obtaining contract

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

(14) Current and Deferred Tax

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

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

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

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(15) Employee Benefits

(a) Short-term employee benefits

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

(b) Defined contribution pension plan

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

(16) Standards issued but not yet effective

A number of new standards are effective for annual periods beginning after January 1, 2021 and earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these consolidated financial statements.

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

•COVID-19 Related Rent Concessions (Amendment to K-IFRS No 1116)

•Reference to Conceptual Framework (Amendment to K-IFRS No 1103)

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

•Proceeds before intended use (Amendment to K-IFRS No 1016)

•Onerous Contracts – Cost of Fulfilling a Contract (Amendments to K-IFRS No 1037)

•K-IFRS No 1117 Insurance Contracts

•Annual Improvements to K-IFRS Standards 2018~2020

5. Cash and cash equivalents

(1) Cash and cash equivalents as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Demand deposits, etc.	W	99,104,943	110,632,482

(2) The Group does not have any restricted cash and cash equivalents as of December 31, 2021 and 2020.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

6. Financial Instruments by Category

(1) Carrying amounts of financial instruments by category as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Financial assets at amortized cost
Cash and cash equivalents	W	99,104,943	110,632,482
Short-term financial instruments		143,000,000	71,000,000
Accounts receivable, net		52,614,595	59,761,256
Other receivables, net		6,085	8,333
Other current financial assets		598,099	817,825
Other non-current financial assets		3,018,823	1,323,865
		298,342,545	243,543,761
Financial assets at fair value through profit or loss
Short-term financial instruments		5,000,000	-
	W	303,342,545	243,543,761
(In thousands of won)		December 31, 2021	December 31, 2020
---	---	---	---
Financial liabilities at amortized cost
Accounts payable(*)	W	36,864,256	52,687,616
Long-term accounts payable		729,173	1,402,466
Accrued expenses(*)		49,299	62,194
Other current liabilities		3,606,965	2,653,144
Other non-current liabilities		5,123,598	3,247,072
	W	46,373,291	60,052,492

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

6. Financial Instruments by Category, Continued

(2) Net income(expenses) from financial instruments for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Financial assets at amortized cost
Interest income	W	1,355,123	1,087,865
Differences in foreign currency		2,135,281	(1,796,086)
		3,490,404	(708,221)
Financial assets at fair value through profit or loss
Interest income		28,054	-
	W	3,518,458	(708,221)
(In thousands of won)		2021	2020
---	---	---	---
Financial liabilities at amortized cost
Interest expense	W	(115,321)	(185,742)
Differences in foreign currency		(820,772)	537,117
	W	(936,093)	351,375

(3) Fair value hierarchy

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

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

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

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

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

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

6. Financial Instruments by Category, Continued

(3) Fair value hierarchy, Continued

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

• Market price or dealer price of a similar financial instrument

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

For the other financial instruments, the Group applied other valuation techniques such as discounted cash flow, etc. As of December. 31 2021. the Group has W5,000,000 thousand of short-term financial instruments measured at fair value through profit or loss that is classified as level 2. For the financial assets and liabilities of which carrying amount are reasonable approximation of fair value, those were excluded from fair value disclosure.

7. Accounts and Other Receivables

(1) Accounts and other receivables as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021		December 31, 2020
		Accounts<br><br>receivables	Other receivables	Accounts<br><br>receivables	Other receivables
Non-related party	W	48,050,332	1,085,325	57,792,924	13,142
Related party		5,253,873	-	2,547,419	-
Less: Loss allowance		(689,610)	(4,809)	(579,087)	(4,809)
Accounts and other receivables, net	W	52,614,595	1,080,516	59,761,256	8,333

(2) Changes in the loss allowance of accounts and other receivables during the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021		2020
		Accounts<br><br>receivables	Other receivables	Accounts<br><br>receivables	Other receivables
Beginning balance	W	579,087	4,809	165,065	4,272
Bad debt expenses		933,226	-	712,184	537
Reversal of allowance for doubtful accounts		(131,927)	-	(49,767)	-
Write-off		(690,776)	-	(248,395)	-
Ending balance	W	689,610	4,809	579,087	4,809

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

7. Accounts and Other Receivables, Continued

(3) Expected credit losses (ECLs) and credit risk exposures for accounts and other receivables as of December 31, 2021 and 2020 are as follows:

(a) Accounts receivable

(In thousands of won)	December 31, 2021
	Expected loss rate(%)		Carrying<br><br>amount	Loss<br>allowance
Not due or overdue for less than 90 days	0.1	W	52,172,521	63,553
More than 90 days ~ Less than 180 days	0.1		437,979	362
More than 180 days ~ Less than 270 days	73.2		242,765	177,602
More than 270 days ~ Less than 1 year	98.8		237,309	234,462
More than 1 year	100.0		213,631	213,631
		W	53,304,205	689,610
(In thousands of won)	December 31, 2020
---	---	---	---	---
	Expected loss rate(%)		Carrying<br><br>amount	Loss<br>allowance
Not due or overdue for less than 90 days	0.1	W	57,661,634	54,409
More than 90 days ~ Less than 180 days	5.0		2,138,182	107,297
More than 180 days ~ Less than 270 days	55.3		275,733	152,645
More than 270 days ~ Less than 1 year	99.9		79,025	78,967
More than 1 year	100.0		185,769	185,769
		W	60,340,343	579,087

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

7. Accounts and Other Receivables, Continued

(3) Expected credit losses (ECLs) and credit risk exposures for accounts receivable as of December 31, 2021 and 2020 are as follows, Continued:

(b) Other receivables

(In thousands of won)	December 31, 2021
	Expected loss rate(%)		Carrying<br><br>amount	Bad debt<br>allowance
Not due or overdue for less than 90 days	0.0	W	1,080,516	-
More than 90 days ~ Less than 180 days	0.0		-	-
More than 180 days ~ Less than 270 days	0.0		-	-
More than 270 days ~ Less than 1 year	0.0		-	-
More than 1 year	100		4,809	4,809
		W	1,085,325	4,809
(In thousands of won)	December 31, 2020
	Expected loss rate(%)		Carrying<br><br>amount	Bad debt<br>allowance
Not due or overdue for less than 90 days	0.0	W	8,333	-
More than 90 days ~ Less than 180 days	0.0		-	-
More than 180 days ~ Less than 270 days	0.0		-	-
More than 270 days ~ Less than 1 year	0.0		-	-
More than 1 year	100		4,809	4,809
		W	13,142	4,809

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

8. Property and Equipment

(1) Details of property and equipment as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021			December 31, 2020
		Acquisition<br><br>cost	Accumulated depreciation	Carrying<br><br>amount	Acquisition cost	Accumulated depreciation	Carrying<br><br>amount
Computer and other equipment	W	6,654,286	(5,199,734)	1,454,552	6,074,169	(4,695,201)	1,378,968
Furniture and fixture		1,793,228	(1,412,770)	380,458	2,037,880	(1,727,467)	310,413
Construction in progress		-	-	-	128,163	-	128,163
Vehicles		9,101	(3,223)	5,878	9,101	(948)	8,153
Leasehold improvements		1,935,005	(1,177,894)	757,111	1,160,456	(1,028,347)	132,109
Right-of-use assets		15,860,960	(7,120,960)	8,740,000	11,500,352	(5,763,112)	5,737,240
	W	26,252,580	(14,914,581)	11,337,999	20,910,121	(13,215,075)	7,695,046

(2) Changes in property and equipment for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021
		Computer and other equipment	Furniture<br><br>and fixture	Constru-ction in progress	Vehicles	Leasehold<br><br>Improve-ments	Right-of-use assets	Total
Beginning balance	W	1,378,968	310,413	128,163	8,153	132,109	5,737,240	7,695,046
Acquisitions/Capital expenditure		711,660	321,653	-	-	753,223	6,318,561	8,105,097
Depreciation		(646,546)	(249,410)	-	(2,275)	(223,319)	(3,448,318)	(4,569,868)
Disposals		(15,161)	(2,028)	-	-	(44,303)	(62,827)	(124,319)
Reclassification		-	(80)	(128,163)	-	128,243	-	-
Foreign exchange differences		25,631	(90)	-	-	11,158	195,344	232,043
Ending balance	W	1,454,552	380,458	-	5,878	757,111	8,740,000	11,337,999
(In thousands of won)		2020
---	---	---	---	---	---	---	---	---
		Computer and other equipment	Furniture<br><br>and fixture	Constru-ction in progress	Vehicles	Leasehold<br><br>Improve-ments	Right-of-use assets	Total
Beginning balance	W	1,056,984	442,778	-	-	217,402	4,946,280	6,663,444
Acquisitions/Capital expenditure		849,675	81,174	128,163	9,101	3,266	3,783,994	4,855,373
Depreciation		(529,285)	(212,696)	-	(948)	(83,430)	(2,956,888)	(3,783,247)
Disposals		(1,061)	(766)	-	-	(2,032)	(13,562)	(17,421)
Foreign exchange differences		2,655	(77)	-	-	(3,097)	(22,584)	(23,103)
Ending balance	W	1,378,968	310,413	128,163	8,153	132,109	5,737,240	7,695,046

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

8. Property and Equipment, Continued

(3) Classification of depreciation expenses in the statements of comprehensive income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Cost of revenues	W	2,102,270	2,123,300
Selling, general and administrative expenses(*)		2,467,598	1,659,947
	W	4,569,868	3,783,247

(*) The deprecation expenses recognized as the research and development included in selling, general and administrative expenses was W301,242 thousand and W235,771 thousand, respectively, for the years ended December 31, 2021 and 2020.

(4) As of December 31, 2021 and 2020, there are no property and equipment that are pledged as collateral for the Group’s debts.

9. Intangible Assets

(1) Details of intangible assets as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021			December 31, 2020
		Acquisition cost	Accumulated amortization(*)	Carrying<br><br>amount		Acquisition<br><br>cost	Accumulated amortization(*)	Carrying<br><br>amount
Software	W	14,491,146	(13,226,409)	1,264,737		14,303,511	(12,069,126)	2,234,385
Patents		1,082,626	(600,313)	482,313		858,883	(526,741)	332,142
Other intangible assets		6,264,360	(4,669,382)	1,594,978		4,545,813	(3,749,461)	796,352
	W	21,838,132	(18,496,104)	3,342,028		19,708,207	(16,345,328)	3,362,879

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

(2) Changes in intangible assets for the years ended December 31, 2021 and 2020 are as follows:

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

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

9. Intangible Assets, Continued

(2) Changes in intangible assets for the years ended December 31, 2021 and 2020 are as follows, Continued:

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

(In thousands of won)			2020
		Software		Patents		Other intangible assets		Total
Beginning balance	W		1,143,794		185,427		387,839		1,717,060
Acquisitions/Capital expenditure			1,985,736		184,978		725,494		2,896,208
Amortization			(897,141)		(38,263)		(201,820)		(1,137,224)
Impairment(*)			-		-		(115,475)		(115,475)
Foreign exchange differences			1,996		-		314		2,310
Ending balance	W		2,234,385		332,142		796,352		3,362,879

(*) The Group recognized W115,475 thousand of impairment loss as carrying amount of the other intangible assets exceeded recoverable amount as of December 31, 2020.

(3) Classification of amortization in the statements of comprehensive income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Cost of revenues	W	737,028	479,402
Selling, general and administrative expenses(*)		1,010,514	657,822
	W	1,747,542	1,137,224

(*) The amortization recognized as the research and development included in selling, general and administrative expenses was W80,081 thousand and W60,551 thousand, respectively, for the years ended December 31, 2021 and 2020.

10. Employee Benefit

The expenses recognized in relation to defined contribution plan for the years ended December 31, 2021 and 2020 are W2,067,288 thousand and W1,968,132 thousand, respectively. In addition, expenses related to defined benefit plans amounting to W19,848 thousand are included in other non-current liabilities as of December 31, 2021.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

11. Commitments

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

(2) In July 2021, the Parent Company and Shanghai TA REN Network Technology Co., Ltd. entered into development agreements to grant them the right to develop mobile games based on the contents of Ragnarok Online and distribute such games in China for 3 years.

(3) As of December 31, 2021, the Group has entered into license agreements with various third-party game developers to secure exclusive right to publish the games developed by the third-party developers. Upfront license fees paid are capitalized and recognized as other intangible assets and minimum guaranteed royalties are capitalized and recognized as other non-current assets. Purchase obligations for future payment related to above agreements as of December 31, 2021 and 2020 are W2,335,425 thousand and W3,309,965 thousand, respectively.

(4) As of December 31, 2021, the Parent Company benefited from payment guarantee of USD 818,000 from KB Kookmin Bank regarding overseas IP contracts.

(5) As of December 31, 2021, the Group has been provided with a payment guarantee amounting to W1,818,168 thousand from Seoul Guarantee Insurance Co., Ltd.

12. Share Capital and Share Premium

(1) Details of common shares as of December 31, 2021 and 2020 are as follows:

(In won and in number of shares)		December 31, 2021	December 31, 2020
Number of authorized shares		40,000,000	40,000,000
Value per share	W	500	500
Number of shares issued		6,948,900	6,948,900
Common shares	W	3,474,450,000	3,474,450,000

(2) Details of share premium as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Additional paid-in capital	W	25,292,211	25,303,750
Other capital surplus		1,806,053	1,806,053
	W	27,098,264	27,109,803

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

12. Share Capital and Share Premium, Continued

(3) Details of other components of equity as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Remeasurements of defined benefit liability	W	(1,933)	-
Foreign currency translation adjustments		2,182,321	(1,044,533)
	W	2,180,388	(1,044,533)

(4) Details of retained earnings as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Unappropriated retained earnings	W	213,317,805	147,371,155

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

13. Revenue from Contracts with Customers

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

(In thousands of won)		2021	2020
Service contract
Micro-transaction and subscription revenue	W	229,028,411	328,069,089
- Online Game		64,382,094	76,109,581
- Mobile Game		164,646,317	251,959,508
Royalties and license fees		166,505,539	59,799,879
- Online Game		10,988,301	13,435,479
- Mobile Game		155,517,238	46,364,400
Others		18,404,024	18,084,053
	W	413,937,974	405,953,021
Timing of satisfaction of performance obligations
At a point in time		7,496	-
Over time		413,930,478	405,953,021
	W	413,937,974	405,953,021

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

13. Revenue from Contracts with Customers, Continued

(2) Accounts receivables, incremental costs of obtaining a contract and contract liabilities related to contracts with customers as of December 31, 2021 and December 31, 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Accounts receivable	W	52,614,595	59,761,256
Incremental costs of obtaining a contract (Prepaid expenses)		860,626	1,276,880
Contact liabilities (Deferred revenue)		13,578,744	13,793,298
Micro-transaction and subscription revenue		12,622,063	12,886,441
Royalties and license fees		116,281	306,620
Website and application development		840,400	600,237

(3) Changes in contract liabilities for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		Contract liabilities
		2021	2020
Balance at January 1	W	13,793,298	10,845,936
Increase related to micro transaction and subscription revenue		26,380,295	29,124,334
Increase related to royalties and license fees		204,044	14,329,908
Increase related to website and application development		8,455,518	4,580,264
Decrease upon satisfaction of performance obligation<br><br>– micro transaction and subscription revenue		(26,644,673)	(24,979,904)
Decrease upon satisfaction of performance obligation<br><br>– royalties and license fees		(394,383)	(15,426,367)
Decrease upon satisfaction of performance obligation<br><br>- web and application development		(8,215,355)	(4,680,873)
Balance at December 31	W	13,578,744	13,793,298

The amount of revenue recognized from previous period’s contract liabilities satisfied during the year ended December 31, 2021 is W13,692,283 thousand.

(4) Transaction price allocated to unsatisfied performance obligations as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Micro transaction and subscription revenue	W	12,622,063	12,886,441
- Online Game		9,374,114	8,418,089
- Mobile Game		3,247,949	4,468,352
Royalties and license fees		116,281	306,620
- Online Game		95,755	286,094
- Mobile Game		20,526	20,526
Website and application development		840,400	600,237
	W	13,578,744	13,793,298

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

13. Revenue from Contracts with Customers, Continued

(4) Transaction price allocated to unsatisfied performance obligations as of December 31, 2021 and 2020 are as follows, Continued:

The Group’s management expects to recognize 99.3% (W13,480,518 thousand) of the transaction price allocated to contracts that have not been performed as of December 31, 2021 as revenue within 12 months. The remaining 0.7% (W98,226 thousand) is expected to be recognized as revenue thereafter. The amounts disclosed above do not include variable consideration which is constrained.

(5) Details of incremental costs of obtaining a contract recognized as assets as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Incremental costs of obtaining a contract	W	860,626	1,276,880
Incremental costs of obtaining a contract recognized as cost of revenues		1,276,880	998,464

14. Classification of expenses by nature

Details of classification of expenses by nature for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Fees and commissions	W	215,612,852	230,411,406
Advertising expenses		35,947,806	30,083,581
Salaries		35,532,330	32,340,302
Outsourcing expenses		12,997,334	9,499,609
Rent		1,125,317	920,119
Employee benefits		3,389,869	3,328,850
Expenses related to defined contribution plan		2,090,517	2,030,438
Depreciation		4,569,868	3,783,247
Amortization		1,747,542	1,137,224
Others		3,360,644	2,944,052
	W	316,374,079	316,478,828

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

15. Selling, General and Administrative Expenses

Details of the selling, general and administrative expenses for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Advertising expenses	W	35,947,806	30,083,581
Fees and commissions		13,959,003	13,927,755
Salaries		15,490,971	11,761,013
Research and development		16,569,508	15,033,944
Employee benefits		1,597,984	1,419,175
Rent		529,623	459,633
Expenses related to defined contribution plan		729,380	584,757
Depreciation		2,166,356	1,424,176
Amortization		930,433	597,271
Other expenses		4,280,113	2,142,600
	W	92,201,177	77,433,905

16. Finance Income and Costs

(1) Details of finance income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Finance income
Interest income	W	1,383,177	1,087,865
Unrealized foreign currency gain		133,980	320,769
Gain on foreign currency transactions		3,751,378	2,067,130
	W	5,268,535	3,475,764

(2) Details of finance costs for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Finance costs
Interest expense	W	115,321	185,742
Unrealized foreign currency loss		210,730	682,378
Loss on foreign currency transactions		2,360,119	2,964,490
	W	2,686,170	3,832,610

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

17. Other Non-Operating Income and Expenses

(1) Details of other non-operating income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Gain on disposal of property and equipment		6,648	1,749
Reversal of allowance for doubtful accounts		-	49,767
Others		600,083	606,382
	W	606,731	657,898

(2) Details of other non-operating expenses for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Loss on disposal of property and equipment		56,897	2,549
Impairment loss on intangible assets		281,008	115,475
Impairment loss on other non-current assets		1,087,357	1,455,310
Donations		1,200	13,000
Others		25,997	177,801
	W	1,452,459	1,764,135

18. Income tax expense

(1) Details of income tax expense for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Current tax expense
Current year	W	29,903,384	21,383,122
Adjustments recognized related to prior period income		1,646,777	-
Deferred tax expense
Changes in net deferred tax assets		1,870,580	4,072,313
Income tax expense	W	33,420,741	25,455,435

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

18. Income tax expense, Continued

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

(In thousands of won)		2021	2020
Profit before income tax expense	W	99,300,532	88,011,110
Income tax using the statutory tax rate of each country		25,957,358	19,828,535
Adjustments:
Expenses not deductible for tax purposes		11,096	20,050
Foreign tax credits		4,499,964	3,222,677
Change in estimates related to prior period		-	11,483
Utilization of previously unrecognized tax losses		-	(412,268)
Adjustments recognized related to prior period income		1,646,777	-
Tax credit		(765,118)	(1,022,086)
Additional tax for insufficient investments in designated areas		487,118	667,846
Changes in deferred tax liabilities related to investment in subsidiaries		1,350,956	2,576,624
Effect of change of foreign currency exchange rate		(2,006)	(18,850)
Others		234,596	581,424
		7,463,383	5,626,900
Income tax expense	W	33,420,741	25,455,435
Effective tax rate		34%	29%

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

18. Income tax expense, Continued

(3) Details of the changes in deferred tax assets (liabilities) for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)			2021						2020
		Beginning<br><br>balance		Increase<br><br>(Decrease)		Ending<br><br>balance		Beginning<br><br>balance		Increase<br><br>(Decrease)		Ending<br><br>balance
Property and equipment	W		11,148		22,425		33,573		6,465		4,683		11,148
Intangible assets			402,613		(4,551)		398,062		221,106		181,507		402,613
Other non-current assets			503,856		24,557		528,413		103,268		400,588		503,856
Accounts Payable			1,468,833		(64,900)		1,403,933		1,527,327		(58,494)		1,468,833
Accrued expenses			177,549		15,346		192,895		39,427		138,122		177,549
Deferred revenue			497,185		(186,057)		311,128		674,159		(176,974)		497,185
Allowance for doubtful account			285,002		82,277		367,279		275,018		9,984		285,002
Other non-current liabilities			46,264		29,204		75,468		46,264		-		46,264
Investment in subsidiaries			-		-		-		389,453		(389,453)		-
Lease			7,932		(51,135)		(43,203)		734		7,198		7,932
Taxes paid to foreign countries			547		(348)		199		(159)		706		547
Investment in subsidiaries			(2,576,624)		(1,182,265)		(3,758,889)		-		(2,576,624)		(2,576,624)
Others			42,198		(45,322)		(3,124)		(24,548)		66,746		42,198
Subtotal(Ⅰ)			866,503		(1,360,769)		(494,266)		3,258,514		(2,392,011)		866,503
Deferred tax due to carry-forward deficits(Ⅱ)			-		134,931		134,931		32,626		(32,626)		-
Deferred tax due to tax credit carry-forward(Ⅲ)			2,723,566		(644,742)		2,078,824		4,371,242		(1,647,676)		2,723,566
Deferred tax asset(Ⅰ+Ⅱ+Ⅲ) (*)	W		3,590,069		(1,870,580)		1,719,489		7,662,382		(4,072,313)		3,590,069

(*) The future realizability of deferred tax assets is assessed by taking into consideration various factors such as the Group's performance, the overall economic environment and industry outlook, expected future earnings, and deductible period of tax credit carry-forward. As of December 31, 2021, the Group has recognized deferred tax assets related to temporary differences, carry-forward deficits and tax credit carry-forward, which can be utilized based on the likelihood of future taxable income. This amount may change if the estimate for future taxable income changes.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

18. Income tax expense, Continued

(4) Details of unused tax loss carryforwards and unused tax credit carryforwards that are not recognized as deferred income tax assets as of December 31, 2021 are as follows:

(In thousands of won)
Year of expiration		Unused loss carryforwards	Unused tax credit carryforwards
2023	W	1,023,021	-
2024		2,648,483	-
2025		1,126,795	-
2026		1,821,055	175,371
After 2026		5,916,856	1,614,098
Total	W	12,536,210	1,789,469

As of December 31, 2021 and 2020, the Group did not recognize deferred income tax asset for the temporary difference of W14,877,089 thousand and W18,489,150 thousand relating to investments in subsidiaries and other temporary differences of W630,686 thousand and W750,590 thousand, respectively, as it is not probable such temporary differences can be utilized in the foreseeable future.

19. Earnings per share

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

(1) Basic earnings per share

(In thousands won and in number of shares)		2021	2020
Profit attributable to owners of the Parent	W	65,946,650	62,703,088
Weighted average outstanding shares of common shares		6,948,900	6,948,900
Basic earnings per share(in won)	W	9,490	9,023

(2) Diluted earnings per share

As of and for the years ended December 31, 2021 and 2020, the Parent Company does not have outstanding dilutive potential ordinary shares. Accordingly, the diluted earnings per share for the years ended December 31, 2021 and 2020 are the same as the basic earnings per share.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

20. Cash flow information

(1) Adjustments for calculating cash generated from operations for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Adjustments for:
Depreciation	W	4,569,868	3,783,247
Amortization		1,747,542	1,137,224
Bad debt expense		933,226	712,722
Unrealized foreign currency loss		210,730	682,378
Interest expense		115,321	185,742
Impairment loss on intangible asset		281,008	115,475
Impairment loss on other non-current assets		1,087,357	1,455,310
Retirement benefit expenses		23,229	62,306
Income tax expense		33,420,741	25,455,435
Unrealized foreign currency gain		(133,980)	(320,769)
Gain on disposal of property and plant		(6,648)	(1,749)
Loss on disposal of property and plant		56,897	2,549
Interest income		(1,383,177)	(1,087,865)
Reversal of allowance for doubtful accounts		(131,927)	(49,767)
Other		(214,408)	-
	W	40,575,779	32,132,238

(2) Changes in assets and liabilities arising from operating activities for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Accounts receivable	W	5,529,558	(29,116,366)
Other receivables		(1,081,577)	59,867
Prepayment		2,165,238	(2,755,198)
Prepaid expense		(3,296,129)	(2,134,645)
Other current assets		243,483	622,435
Other non-current assets		144,235	2,255,241
Accounts payable		(8,512,361)	15,510,243
Deferred revenue		1,184,816	3,332,169
Withholding		685,623	1,217,663
Accrued expense		118,271	180,641
Other current liabilities		34,012	(1,256,588)
Other non-current liabilities		(99,045)	(867,887)
	W	(2,883,876)	(12,952,425)

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

20. Cash flow information, Continued

(3) Significant non-cash transactions for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Reclassification of prepayment to intangible assets	W	219,487	72,498
Increase in accounts payable relating to the acquisition of software		667,078	1,144,166
Acquisition of right-of-use assets		6,055,394	3,783,994

(4) Changes in liabilities arising from financing activities for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Beginning of the year	W	5,900,216	4,994,159
Cash flows used in financial activities – payment of lease liabilities		(3,647,934)	(2,892,567)
Cash flows used in operating activities – Interest paid		(111,416)	(185,742)
Non-cash transactions:
Acquisitions – leases		6,055,394	3,783,994
Interest expense		111,416	185,742
Early termination of leases		-	(14,729)
Translation difference		422,887	29,359
Ending of the year	W	8,730,563	5,900,216

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

21. Leases

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

(1) Details of right-of-use assets and lease liabilities recognized in the consolidated statements of financial position as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Right-of-use assets(*1)
Offices	W	6,698,105	3,904,222
Vehicles		292,432	102,149
Others		1,749,463	1,730,869
	W	8,740,000	5,737,240
Lease liabilities(*2)
Current		3,606,965	2,653,144
Non-current		5,123,598	3,247,072
	W	8,730,563	5,900,216

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

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

(2) Changes in right-of-use assets for the years ended December 31, 2021 and 2020 are as follows:

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

21. Leases, Continued

(2) Changes in right-of-use assets for the years ended December 31, 2021 and 2020 are as follows, Continued:

(In thousands of won)		2020
		Offices	Vehicles	Others	Total
Balance as of January 1, 2020	W	3,641,648	266,332	1,038,300	4,946,280
Depreciation		(1,492,452)	(186,685)	(1,277,751)	(2,956,888)
Reassessment		310,936	4,256	11,016	326,208
Acquisitions		1,469,588	31,525	1,956,673	3,457,786
Disposals		-	(13,562)	-	(13,562)
Translation difference		(25,498)	283	2,631	(22,584)
Balance as of December 31, 2020	W	3,904,222	102,149	1,730,869	5,737,240

(3) Details of amounts recognized in the consolidated statements of comprehensive income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Interest expense relating to lease liabilities (included in finance cost)	W	111,416	185,742
Expense relating to short-term leases		117,000	122,587
Expense relating to leases of low-value assets excluding short-term leases		20,547	8,765

(4) Details of amounts recognized in the consolidated statement of cash flows for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Total cash outflows of leases	W	3,896,897	3,209,661

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

22. Financial Risk Management

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

(1) Capital Risk Management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so the Group can continue to provide returns and benefits for shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Group monitors capital on the basis of the debt ratio. This ratio is calculated as total debt divided by total capital. The debt ratios as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Total Liabilities	W	80,685,465	88,024,352
Total Equity		246,840,858	177,348,016
Debt ratio		33%	50%

(2) Market Risk

(a) Foreign exchange risk

The Group is exposed to foreign exchange risk arising from royalty revenues and commission payment primarily with respect to the US dollar and etc. The Group’s financial assets and liabilities are exposed to foreign currency risk as of December 31, 2021 and 2020 are as follows:

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

22. Financial Risk Management, Continued

(2) Market Risk, Continued

(a) Foreign exchange risk, Continued

(In thousands of won, in foreign currencies)
	December 31, 2020
	Assets in foreign<br><br>currency	Liabilities in foreign currency		Assets in<br><br>Korean Won	Liabilities in Korean Won
USD	29,204,905	15,715,800	W	31,774,937	17,098,790
JPY	388,760,925	198,432,867		4,098,551	2,091,998
EUR	344,842	8,399		461,482	11,240
IDR	12,955,000	15,289,944		1,003	1,183
THB	28,510	7,379		1,036	268
TWD	105,408,193	3,264,754		4,076,135	126,248
VND	9,270,000	3,243,600		437	153
			W	40,413,581	19,329,880

The Group measures foreign exchange risk at the exchange rate of 10% for each foreign currency, and the rate of change reflects the management's assessment of the risk of exchange rate fluctuation that can be reasonably experienced. The effects of changes in foreign currency exchange rate on profit before tax for the years ended of December 31, 2021 and 2020 are as follows:

(In thousands of won)	2021		2020
	Increased by 10%	Decreased by 10%	Increased by 10%	Decreased by 10%
	1,682,378	(1,682,378)	1,467,615	(1,467,615)
	620,863	(620,863)	200,655	(200,655)
Others	83,258	(83,258)	440,100	(440,100)
	2,386,499	(2,386,499)	2,108,370	(2,108,370)

All values are in Japanese Yen.

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

(b) Interest rate risk

There are no borrowings under variable interest rate conditions as of December 31, 2021 and 2020.

(c) Price risk

There are no assets and liabilities exposed to price risk as of December 31, 2021 and 2020.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

22. Financial Risk Management, Continued

(3) Credit Risk

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

The carrying amounts of financial assets represent their maximum exposure to credit risk. The maximum exposure to credit risk of the Group as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Cash and cash equivalents	W	99,104,943	110,632,482
Short-term financial instruments		148,000,000	71,000,000
Accounts receivable, net		52,614,595	59,761,256
Other receivables, net		6,085	8,333
Other current financial assets		598,099	817,825
Oher non-current financial assets		3,018,823	1,323,865
	W	303,342,545	243,543,761

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

(4) Liquidity Risk

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

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

22. Financial Risk Management, Continued

(4) Liquidity Risk, Continued

(In thousands of won)		December 31, 2020
		Carrying<br>value	Less than<br><br>3 months	3 months to 1 year	1 to 2 years	2 to 3 years	3 to 5 years	Total
Accounts payable	W	54,090,082	43,437,577	9,250,039	1,402,466	-	-	54,090,082
Accrued expense		62,194	62,194	-	-	-	-	62,194
Other liabilities (*)		5,900,216	812,448	2,107,488	2,146,292	596,395	732,681	6,395,304
	W	60,052,492	44,312,219	11,357,527	3,548,758	596,395	732,681	60,547,580

(*) Other liabilities as of December 31, 2020 consist of lease liabilities.

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

23. Segment information

(1) Operating segments

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

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

The Group assesses the performance of its operating segments based on its operating profit or loss, which does not differ from operating profit reported on the consolidated statement of comprehensive income except for inter-segment transactions. The segment information for the years ended December 31, 2021 and 2020 are as follows.

(In thousands of won)		2021
		Online	Mobile	Others	Total	Inter-segment<br><br>eliminations(*1)	Total
Revenue	W	90,122,650	346,928,640	23,416,966	460,468,256	(46,530,282)	413,937,974
Depreciation/<br><br>amortization		1,974,227	1,875,207	2,467,976	6,317,410	-	6,317,410
Operating profit(*2)		32,084,067	65,144,121	821,701	98,049,889	(485,994)	97,563,895

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

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

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

23. Segment information, Continued

(1) Operating segments, Continued

(In thousands of won)		2020
		Online	Mobile	Others	Total	Inter-segment<br><br>eliminations(*1)	Total
Revenue	W	107,949,331	336,325,541	22,333,340	466,608,212	(60,655,191)	405,953,021
Depreciation/<br><br>amortization		1,608,883	1,823,606	1,487,982	4,920,471	-	4,920,471
Operating profit(*2)		45,453,933	43,031,974	738,137	89,224,044	250,149	89,474,193

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

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

(2) Revenue from external customers by country for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021(*)	2020(*)
Korea	W	73,750,935	109,895,360
Taiwan		77,462,311	100,048,694
Japan		40,259,220	22,499,530
United States of America		20,893,708	20,659,465
Thailand		94,475,403	59,085,890
Philippines		20,172,684	23,690,316
Indonesia		10,722,875	12,728,872
Malaysia		30,422,263	23,121,031
Other		45,778,575	34,223,863
	W	413,937,974	405,953,021

(*) Revenue was attributed to the country based on the customer’s location and royalty revenue was attributed to the country where the end user's payment was made.

(3) Non-current assets by geographical regions as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021(*)	December 31, 2020(*)
Domestic	W	10,883,766	7,611,771
Overseas		5,769,325	5,480,559
Total	W	16,653,091	13,092,330

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

(4) No individual external customer accounted for more than 10% of consolidated revenue for the years ended December 31, 2021 and 2020.

GRAVITY CO., LTD. and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2021 and 2020

24. Related Party Transactions

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

(2) Account balances with related party

Balances of receivables and payables with related party as of December 31, 2021 and 2020 are as follows:

(In thousands of won)			December 31, 2021		December 31, 2020
Related party	Name of entity		Receivables	Payables	Receivables	Payables
Parent Company	GungHo Online Entertainment, Inc.	W	5,253,873	7,448	2,547,419	4,924

(3) Transactions with related parties

The details of transactions with related party for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)			2021		2020
Related party	Name of entity		Revenue	Purchases	Revenue	Purchases
Parent Company	GungHo Online Entertainment, Inc.	W	36,646,582	55,382	21,833,464	211,348

(4) Other transactions with related parties

No financing transactions were made with related parties for the years ended December 31, 2021 and 2020.

(5) Key management personnel compensation

The compensation given to key management personnel (registered directors) for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Salaries	W	1,472,348	1,176,630

25. Subsequent event

Gravity Game Vision Limited, a subsidiary, was established in Hong Kong on January 5, 2022.

53

Document

GRAVITY CO., LTD.

Separate Financial Statements

For the Years Ended December 31, 2021 and 2020

(With Independent Auditors’ Report Thereon)

Contents

Page

Independent Auditors’ Report    1

Separate Statements of Financial Position    3

Separate Statements of Comprehensive Income    5

Separate Statements of Changes in Equity    6

Separate Statements of Cash Flows    7

Notes to the Separate Financial Statements    8

Independent Auditors’ Review Report on Internal Accounting Control System    58

Report on the Effectiveness of the Internal Accounting Control System    60

Independent Auditors’ Report

Based on a report originally issued in Korean

To the Shareholders and Board of Directors of

Gravity Co., Ltd.:

Opinion

We have audited the accompanying separate financial statements of Gravity Co., Ltd (“the Company”), which comprise the separate statements of financial position as of December 31, 2021 and 2020, the separate statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes to the separate financial statements comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying separate financial statements present fairly, in all material respects, the separate financial position of the Company as of December 31, 2021 and 2020, and its separate financial performance and its separate cash flows for the years then ended in accordance with Korean International Financial Reporting Standards (“K-IFRS”).

Basis for Opinion

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

Other Matter

The procedures and practices utilized in the Republic of Korea to audit such separate financial statements may differ from those generally accepted and applied in other countries.

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

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

In preparing the separate financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

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

Auditors’ Responsibilities for the Audit of the Separate Financial Statements

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

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

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

•Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

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

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

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

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

Seoul, Korea

March 23, 2022

This report is effective as of March 23, 2022, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying separate financial statements and notes thereto. Accordingly, the readers of the audit report should understand that the above audit report has not been updated to reflect the impact of such subsequent events or circumstances, if any.

GRAVITY CO., LTD.

Separate Statements of Financial Position

As of December 31, 2021 and 2020

(In thousands of won)		Notes		December 31, 2021	December 31, 2020
Assets
Current assets
	Cash and cash equivalents	5,6,22	W	26,602,122	45,956,245
	Short-term financial instruments	6,22		148,000,000	71,000,000
	Accounts receivables, net	6,7,14,22		40,569,841	44,353,327
	Other receivables, net	6,7,22		1,677,451	478,428
	Prepaid expenses	14		1,823,623	1,293,345
	Other current financial assets	6,22		790,051	841,092
	Other current assets			42,487	680,086
				219,505,575	164,602,523
Non-current assets
	Investments in subsidiaries	8		21,679,845	14,958,641
	Property and equipment, net	9,21		5,608,320	3,176,858
	Intangible assets, net	10		3,228,635	2,663,857
	Deferred tax assets	19		4,045,964	4,718,718
	Other non-current financial assets	6,22		2,895,565	1,128,475
	Other non-current assets			1,701,669	1,891,247
				39,159,998	28,537,796
Total assets			W	258,665,573	193,140,319

See accompanying notes to the separate financial statements.

GRAVITY CO., LTD.

Separate Statements of Financial Position, Continued

As of December 31, 2021 and 2020

(In thousands of won)			Notes		December 31, 2021	December 31, 2020
Liabilities
Current liabilities
	Accounts payable		6,22	W	29,467,721	34,810,387
	Deferred revenue		14		4,139,025	4,680,655
	Withholdings				2,754,347	2,096,706
	Accrued expenses				785,358	610,004
	Income tax payable		19		9,403,175	4,998,566
	Other current liabilities		6,21,22		2,254,206	1,628,058
					48,803,832	48,824,376
Non-current liabilities
Long-term accounts payable			6,22		729,173	1,402,466
Long-term deferred revenue			14		199,062	133,936
Other non-current liabilities			6,21,22		3,256,413	1,834,352
					4,184,648	3,370,754
Total liabilities				W	52,988,480	52,195,130
Equity
		Share capital	1,13		3,474,450	3,474,450
		Share premium	13		27,482,683	27,482,683
		Other components of equity	13		-	929
		Retained earnings	13		174,719,960	109,987,127
Total equity					205,677,093	140,945,189
Total liabilities and equity				W	258,665,573	193,140,319

See accompanying notes to the separate financial statements.

GRAVITY CO., LTD.

Separate Statements of Comprehensive Income

For the years ended December 31, 2021 and 2020

(In thousands of won)	Notes		2021		2020
Revenue	14,23
Online games		W	30,176,025	W	37,917,065
Mobile games			256,918,510		190,926,376
Other revenue			1,163,841		152,628
			288,258,376		228,996,069
Cost of revenue	15		141,815,263		119,227,125
Gross profit			146,443,113		109,768,944
Selling, general and administrative expenses	15,16		68,268,646		53,093,896
Operating profit			78,174,467		56,675,048
Non-operating income and expenses
Finance income	6,17		4,921,817		2,735,951
Finance costs	6,17		(1,989,233)		(2,909,451)
Other non-operating income	18		11,997,743		3,020,932
Other non-operating expenses	18		(558,730)		(4,472,004)
Profit before income tax			92,546,064		55,050,476
Income tax expense	19		27,813,231		15,633,554
Profit for the year		W	64,732,833	W	39,416,922
Other comprehensive income
Items that may be subsequently reclassified to profit or loss
Foreign currency translation adjustments			-		26,946
Total comprehensive income for the year		W	64,732,833	W	39,443,868

See accompanying notes to the separate financial statements.

GRAVITY CO., LTD.

Separate Statements of Changes in Equity

For the years ended December 31, 2021 and 2020

(In thousands of won)	Notes		Share<br><br>capital	Share<br><br>Premium	Other components of equity	Retained earnings	Total
Balance at January 1, 2020		W	3,474,450	27,482,683	(26,017)	70,570,205	101,501,321
Total comprehensive income for the period:
Profit for the year			-	-	-	39,416,922	39,416,922
Foreign currency translation adjustments	13		-	-	26,946	-	26,946
Balance at December 31, 2020		W	3,474,450	27,482,683	929	109,987,127	140,945,189
Balance at January 1, 2021		W	3,474,450	27,482,683	929	109,987,127	140,945,189
Total comprehensive income for the period:
Profit for the year			-	-	-	64,732,833	64,732,833
Foreign currency translation adjustments	13		-	-	(929)	-	(929)
Balance at December 31, 2021		W	3,474,450	27,482,683	-	174,719,960	205,677,093

See accompanying notes to the separate financial statements.

GRAVITY CO., LTD.

Separate Statements of Cash Flow

For the years ended December 31, 2021 and 2020

(In thousands of won)	Notes		2021		2020
Cash flows from operating activities
Profit for the year		W	64,732,833	W	39,416,922
Adjustments	20		18,716,916		19,381,149
Changes in operating assets and liabilities	20		(2,637,125)		(8,008,589)
Interest received			966,070		998,281
Dividend received			11,326,984		2,382,800
Interest paid			(68,886)		(120,865)
Income tax paid			(22,716,206)		(10,051,517)
Net cash provided by operating activities			70,320,586		43,998,181
Cash flows from investing activities
Decrease in other non-current financial assets			500,000		6,391
Decrease in other non-current financial liabilities			89,860		-
Disposal of property and equipment	9		235		1,238
Purchase of subsidiaries	8		(6,721,204)		(3,853,178)
Increase in short-term financial instruments			(77,000,000)		(31,500,000)
Increase in other non-current financial assets			(1,660,952)		(100)
Acquisition of property and equipment	9		(1,210,372)		(158,284)
Acquisition of intangible assets	10		(2,151,543)		(1,129,588)
Net cash used in investing activities			(88,153,976)		(36,633,521)
Cash flows from financing activities
Repayment of lease liabilities	21		(1,787,171)		(1,515,930)
Net cash used in financing activities			(1,787,171)		(1,515,930)
Effects of exchange rate changes on cash and cash equivalents			266,438		19,265
Net increase (decrease) in cash and cash equivalents			(19,354,123)		5,867,995
Cash and cash equivalents at beginning of the year			45,956,245		40,088,250
Cash and cash equivalents at end of the year		W	26,602,122	W	45,956,245

See accompanying notes to the separate financial statements.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

1. General Information

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

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

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

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

2. Basis of Presentation

These separate financial statements have been prepared in accordance with Korean International Financial Reporting Standards (“K-IFRS”), as prescribed in the Act on External Audits of Stock Companies, Etc. in the Republic of Korea.

These separate financial statements were authorized for issuance by the Board of Directors on March 8, 2022, and are expected to be submitted for approval at the shareholders’ meeting to be held on March 31, 2022.

(1) Basis of measurement

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

(2) Use of judgments and estimates

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

2. Basis of Presentation, Continued

(2) Use of judgments and estimates, Continued

(a) Deferred revenue

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

(b) Deferred tax assets

When the Company assesses the realizability of the deferred tax assets, the Company considers its performance, general economic environment, projected future taxable income, and periods available to utilize tax loss carryforwards and tax credit carryforwards. The Company periodically monitors the estimates used in assessing the realizability of the deferred tax assets. The amount of deferred tax assets may be changed if estimated future taxable income during the carryforward periods changes.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

3. Changes in Accounting Policies

The Company has applied the following standards and amendments for the first time for the annual reporting period commencing on January 1, 2021.

(1) Amendments to K-IFRS No. 1116 Lease-Practical expedient for COVID-19_Related Rent Concessions

As a practical expedient, a lessee may elect not to assess whether a rent concession occurring as a direct consequence of the COVID-19 pandemic is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the rent concession as the same way it would account for the change applying this Standard if the change were not a lease modification. The amendments do not have a significant impact on the consolidated financial statements.

(2) Amendment to K-IFRS No. 1109 Financial Instruments, K-IFRS No. 1039 Financial Instruments: Recognition and Measurement, K-IFRS No. 1107 Financial Instruments: Disclosure, K-IFRS 1104 Insurance Contracts and K-IFRS 1116 Lease-Interest Rate Benchmark Reform (Phase 2 amendments)

In relation to interest rate benchmark reform, the amendments provide exceptions including adjust effective interest rate instead of book amounts when interest rate benchmark of financial instruments at amortized costs is replaced, and apply hedge accounting without discontinuance although the interest rate benchmark is replaced in hedging relationship. The amendments do not have a significant impact on the consolidated financial statements.

4. Significant Accounting Policies

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

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

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

(2) Cash and Cash equivalents

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(3) Financial Assets

(a) Classification

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

•measured at fair value through profit or loss;

•measured at fair value through other comprehensive income; and

•measured at amortized cost.

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

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

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

(b) Measurement

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(3) Financial Assets, Continued

(b) Measurement, Continued

(i) Debt instruments

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

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

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(3) Financial Assets, Continued

(b) Measurement, Continued

(ii) Equity instruments

The Company subsequently measures all equity investments at fair value. Where the Company’s management has elected to present fair value gains and losses on equity investments, which are held for long-term investment or strategic purpose, in other comprehensive income. There is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividend income from such investments continue to be recognized in profit or loss as ‘finance income’ when the right to receive payments is established.

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

(c) Impairment

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

•financial assets measured at amortized cost;

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

•contract assets under K-IFRS No. 1115.

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

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

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

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(3) Financial Assets, Continued

(c) Impairment, Continued

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

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

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

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

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

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

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

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

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

(d) Recognition and Derecognition

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(3) Financial Assets, Continued

(e) Offsetting of financial instruments

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

(4) Property and Equipment

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

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

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

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

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

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(5) Intangible Assets

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

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

	Estimated Useful Lives
Software	1~3 years
Patents	10 years
Other intangible assets	3 years

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

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

(6) Impairment of Non-financial Assets

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

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(7) Leases

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

(a) As a lessee

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

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

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

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(7) Leases, Continued

(a) As a lessee, Continued

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

•fixed payments, including in-substance fixed payments;

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

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

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

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

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

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

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

(b) As a lessor

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(7) Leases, Continued

(b) As a lessor, Continued

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

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

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

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(8) Financial Liabilities

(a) Classification and measurement

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

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

(b) Derecognition

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

(9) Provisions and Contingent Liabilities

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(9) Provisions and Contingent Liabilities, Continued

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

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

(10) Foreign Currency Translation

(a) Functional and presentation currency

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

(b) Transactions and balances

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(11) Statement of cash flows

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

(12) Revenues from contracts with customers

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

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

(a) Revenue from micro-transaction and subscription

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

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

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

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

(i) Online Games

At the end of the reporting period, the Company defers the total amount of remaining virtual currency as the Company has the obligation to refund for remaining virtual currency.

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(12) Revenues from contracts with customers, Continued

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

(i) Online Games, Continued

The Company recognizes online subscription revenue as game users make use of in-game premium features. Subscription revenue comes from subscription fee for internet cafés. Prepaid subscription fees from internet cafés are deferred and recognized as revenue monthly based on actual hours used.

(ii) Mobile Games

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

At the end of the reporting period, the Company defers revenue for the remaining virtual currency possessed by paying active users. For consumable in-game virtual items, revenue is recognized when the in-game virtual item is consumed. The Company defers the revenue for remaining virtual items possessed by active users within the estimated user life cycle at the end of the reporting period. For periodic in-game virtual items with effective period, revenue is recognized ratably over the effective period. The Company defers the revenue for remaining effective period. For permanent in-game virtual items, revenue is recognized ratably over the estimated user life cycle. The Company defers the revenue for remaining period of estimated user life cycle at the end of the reporting period.

(b) Online and Mobile games—royalties and license fees

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(12) Revenues from contracts with customers, Continued

(c) Incremental costs of obtaining contract

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

(13) Current and Deferred Tax

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

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(13) Current and Deferred Tax, Continued

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

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

(14) Employee Benefits

(a) Short-term employee benefits

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

(b) Defined contribution pension plan

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

4. Significant Accounting Policies, Continued

(15) Standards issued but not yet effective

A number of new standards are effective for annual periods beginning after January 1, 2021 and earlier application is permitted; however, the Company has not early adopted the new or amended standards in preparing these separate financial statements.

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

•COVID-19 Related Rent Concessions (Amendment to K-IFRS No 1116)

•Reference to Conceptual Framework (Amendment to K-IFRS No 1103)

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

•Proceeds before intended use (Amendment to K-IFRS No 1016)

•Onerous Contracts – Cost of Fulfilling a Contract (Amendments to K-IFRS No 1037)

•K-IFRS No 1117 Insurance Contracts

•Annual Improvements to K-IFRS Standards 2018~2020

5. Cash and cash equivalents

(1) Cash and cash equivalents as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Demand deposits, etc.	W	26,602,122	45,956,245

(2) The Company does not have any restricted cash and cash equivalents as of December 31, 2021 and 2020.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

6. Financial Instruments by Category

(1) Carrying amounts of financial instruments by category as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Financial assets at amortized cost
Cash and cash equivalents	W	26,602,122	45,956,245
Short-term financial instruments		143,000,000	71,000,000
Accounts receivable, net		40,569,841	44,353,327
Other receivables, net		619,903	478,428
Other current financial assets		790,051	841,092
Other non-current financial assets		2,895,565	1,128,475
		214,477,482	163,757,567
Financial assets at fair value through profit or loss
Short-term financial instruments		5,000,000	-
	W	219,477,482	163,757,567
(In thousands of won)		December 31, 2021	December 31, 2020
---	---	---	---
Financial liabilities at amortized cost
Accounts payable(*)	W	26,738,648	34,810,387
Long-term accounts payable		729,173	1,402,466
Other current liabilities		2,254,206	1,627,967
Other non-current liabilities		2,761,849	1,493,680
	W	32,483,876	39,334,500

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

6. Financial Instruments by Category, Continued

(2) Net income(expenses) from financial instruments for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Financial assets at amortized cost
Interest income	W	1,326,044	961,895
Differences in foreign currency		2,533,854	(1,350,489)
		3,859,898	(388,594)
Financial assets at fair value through profit or loss
Interest income		28,054	-
	W	3,887,952	(388,594)
(In thousands of won)		2021	2020
---	---	---	---
Financial liabilities at amortized cost
Interest expense	W	(72,790)	(120,865)
Differences in foreign currency		(882,578)	335,958
	W	(955,368)	215,093

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

6. Financial Instruments by Category, Continued

(3) Fair value hierarchy

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

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

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

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

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

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

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

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

• Market price or dealer price of a similar financial instrument

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

For the other financial instruments, the Company applied other valuation techniques such as discounted cash flow, etc. As of December. 31 2021. the Company has W5,000,000 thousand of short-term financial instruments measured at fair value through profit or loss that is classified as level 2. For the financial assets and liabilities of which carrying amount are reasonable approximation of fair value, those were excluded from fair value disclosure.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

7. Accounts and Other Receivables

(1) Accounts and other receivables as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021		December 31, 2020
		Accounts<br><br>receivables	Other receivables	Accounts<br><br>receivables	Other receivables
Non-related party	W	29,466,816	1,059,450	35,189,727	620
Related party		11,106,547	618,001	9,217,304	477,808
Less: Loss allowance		(3,522)	-	(53,704)	-
	W	40,569,841	1,677,451	44,353,327	478,428

(2) Changes in the loss allowance of accounts receivables during the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		Accounts receivable
		2021	2020
Beginning balance	W	53,704	18,957
(Reversal of) Bad debt expenses		(50,182)	34,747
Ending balance	W	3,522	53,704

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

7. Accounts and Other Receivables, Continued

(3) Expected credit losses (ECLs) and credit risk exposures for accounts and other receivables as of December 31, 2021 and 2020 are as follows:

(a) Accounts receivables

(In thousands of won)	December 31, 2021
	Expected loss rate(%)		Carrying<br><br>amount	Loss allowance
Not due or overdue for less than 90 days	0.01	W	40,569,575	2,721
More than 90 days ~ Less than 180 days	4.28		2,226	95
More than 180 days ~ Less than 270 days	28.33		473	134
More than 270 days ~ Less than 1 year	44.67		934	417
More than 1 year	100.00		155	155
		W	40,573,363	3,522
(In thousands of won)	December 31, 2020
---	---	---	---	---
	Expected loss rate(%)		Carrying<br><br>amount	Loss allowance
Not due or overdue for less than 90 days	0.01	W	43,578,577	3,437
More than 90 days ~ Less than 180 days	5.75		825,662	47,497
More than 180 days ~ Less than 270 days	41.63		1	-
More than 270 days~ Less than 1 year	53.78		46	25
More than 1 year	100.00		2,745	2,745
		W	44,407,031	53,704

(b) Other receivables

(In thousands of won)	December 31, 2021
	Expected loss rate(%)		Carrying amount		Loss allowance
Not due or overdue for less than 90 days	0.00	W		1,677,451	-
(In thousands of won)	December 31, 2020
---	---	---	---	---	---
	Expected loss rate(%)		Carrying amount		Loss allowance
Not due or overdue for less than 90 days	0.00	W		478,428	-

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

7. Accounts and Other Receivable, Continued

(3) ECLs and credit risk exposures for accounts and other receivables as of December 31, 2021 and 2020 are as follows, Continued:

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

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

8. Investment in Subsidiaries

(1) Details of investment in subsidiaries as of December 31, 2021 and 2020 are as follows:

				Percentage of ownership (%)
Subsidiary	Location	Main business	Fiscal year end	December 31, 2021	December 31, 2020
Gravity Interactive, Inc.	USA	Online and mobile game services	December	100.00	100.00
Gravity NeoCyon, Inc.	Korea	Mobile Game Development and Service	December	99.53	99.53
Gravity Communications Co., Ltd.	Taiwan	Online and mobile game services	December	100.00	100.00
PT. Gravity Game Link	Indonesia	Online and mobile game services	December	70.00	70.00
Gravity Game Tech Co., Ltd.	Thailand	Online and mobile game services	December	100.00	100.00
Gravity Game Arise Co., Ltd.	Japan	Online and mobile game services	December	100.00	100.00
Gravity Game Hub PTE., Ltd.(*)	Singapore	Online and mobile game services	December	100.00	-

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

8. Investment in Subsidiaries, Continued

(2)Changes in investment in subsidiaries for the years ended December 31, 2021 and 2020 are as follows:

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

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

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

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

(In thousands of won)		2020
Subsidiary		Beginning balance	Acquisition	Impairment	Ending balance
Gravity Interactive, Inc. (*1)	W	-	-	-	-
Gravity Entertainment Corp. (*2)		-	-	-	-
Gravity NeoCyon, Inc. (*3, 4)		1,934,272	2,999,995	(1,287,755)	3,646,512
Gravity Communications Co., Ltd.		5,681,415	-	-	5,681,415
PT. Gravity Game Link (*3)		830,491	853,183	-	1,683,674
Gravity Game Tech Co., Ltd.		3,407,555	-	-	3,407,555
Gravity Game Arise Co., Ltd.		539,485	-	-	539,485
	W	12,393,218	3,853,178	(1,287,755)	14,958,641

(*1) Prior to 2020, the Company recognized an impairment loss at its full amount as the recoverable amount was less than its book value.

(*2) Gravity Entertainment Corp. was liquidated during 2020 and has been excluded from subsidiary since then.

(*3) The Company participated to capital increase of PT.Gravity Game Link with W853,183 thousand and Gravity NeoCyon, Inc. with W2,999,995 thousand.

(*4) The Company recognized an impairment loss of W1,287,755 thousand as the recoverable amount was less than its book value in 2020.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

8. Investment in Subsidiaries, Continued

(3) Condensed financial information of subsidiaries as of and for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021
Subsidiary			Total assets	Total liabilities	Revenue	Profit (loss) for<br><br>the year
Gravity Interactive, Inc.	W		26,385,056	16,162,917	79,241,593	986,634
Gravity NeoCyon, Inc.			14,902,641	9,378,474	25,443,458	(110,799)
Gravity Communications Co., Ltd.			33,120,691	9,236,188	33,342,145	9,096,285
PT. Gravity Game Link			2,916,316	318,233	2,461,680	(221,131)
Gravity Game Tech Co., Ltd.			25,591,172	5,665,835	28,345,984	5,495,689
Gravity Game Arise Co., Ltd.			3,912,442	2,167,254	3,258,230	158,563
Gravity Game Hub PTE., Ltd.			2,538,395	722,377	116,791	(1,109,627)
(In thousands of won)		2020
---	---	---	---	---	---	---
Subsidiary			Total assets	Total liabilities	Revenue	Profit (loss) for<br><br>the year
Gravity Interactive, Inc.	W		31,848,915	23,405,476	123,055,325	1,137,851
Gravity Entertainment Corp.			-	-	-	7,706
Gravity NeoCyon, Inc.			11,068,694	7,422,182	26,368,123	(1,753,593)
Gravity Communications Co., Ltd.			33,717,352	10,070,240	41,677,215	12,281,146
PT. Gravity Game Link			2,184,917	663,529	4,880,948	(315,190)
Gravity Game Tech Co., Ltd.			21,092,640	6,314,555	39,147,178	13,989,069
Gravity Game Arise Co., Ltd			2,637,083	2,065,979	2,483,354	81,573

9. Property and Equipment

(1) Details of property and equipment as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021			December 31, 2020
		Acquisition<br><br>cost	Accumulated depreciation	Carrying<br><br>amount	Acquisition cost	Accumulated depreciation	Carrying<br><br>amount
Computer and other equipment	W	4,172,294	(3,716,022)	456,272	3,857,812	(3,524,869)	332,943
Furniture and fixture		724,455	(469,552)	254,903	509,794	(355,465)	154,329
Vehicles		9,101	(3,223)	5,878	9,101	(948)	8,153
Leasehold improvements		1,506,967	(993,613)	513,354	1,002,556	(956,407)	46,149
Right-of-use assets		7,660,610	(3,282,697)	4,377,913	4,641,874	(2,006,590)	2,635,284
	W	14,073,427	(8,465,107)	5,608,320	10,021,137	(6,844,279)	3,176,858

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

9. Property and Equipment, Continued

(2) Changes in property and equipment for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021
		Computer and other equipments	Furniture<br><br>and fixture	Vehicles	Leasehold<br><br>improvements	Right-of-use assets	Total
Beginning balance	W	332,943	154,328	8,153	46,149	2,635,285	3,176,858
Acquisitions		362,508	226,865	-	621,000	3,354,809	4,565,182
Depreciation		(239,179)	(126,290)	(2,275)	(110,074)	(1,612,181)	(2,089,999)
Disposition		-	-	-	(43,721)	-	(43,721)
Ending balance	W	456,272	254,903	5,878	513,354	4,377,913	5,608,320
(In thousands of won)		2020
---	---	---	---	---	---	---	---
		Computer and other equipments	Furniture<br><br>and fixture	Vehicles	Leasehold<br><br>improvements	Right-of-use assets	Total
Beginning balance	W	420,212	207,353	-	75,297	2,152,281	2,855,143
Acquisitions		121,067	28,116	9,101	-	1,889,574	2,047,858
Depreciation		(208,336)	(81,141)	(948)	(29,148)	(1,406,570)	(1,726,143)
Ending balance	W	332,943	154,328	8,153	46,149	2,635,285	3,176,858

(3) Classification of depreciation expenses in the statements of comprehensive income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Cost of revenues	W	925,788	910,309
Selling, general and administrative expenses(*)		1,164,211	815,834
	W	2,089,999	1,726,143

(*) The deprecation expenses recognized as the research and development included in selling, general and administrative expenses was W143,599 thousand and W91,750 thousand, respectively, for the years ended December 31, 2021 and 2020.

(4) As of December 31, 2021, and 2020, there are no property and equipment that are pledged as collateral for the Company’s debts.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

10. Intangible Assets

(1) Details of intangible assets as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021			December 31, 2020
		Acquisition cost	Accumulated<br><br>amortization(*)	Carrying<br><br>amount	Acquisition cost	Accumulated amortization (*)	Carrying<br><br>amount
Software	W	12,099,601	(10,994,260)	1,105,341	12,045,136	(10,343,230)	1,701,906
Patents		1,069,591	(597,999)	471,592	850,104	(525,641)	324,463
Other intangible assets		5,742,439	(4,090,737)	1,651,702	5,217,088	(4,579,600)	637,488
	W	18,911,631	(15,682,996)	3,228,635	18,112,328	(15,448,471)	2,663,857

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

(2) Changes in intangible assets for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)			2021
		Software		Patents		Other intangible<br><br>assets		Total
Beginning balance	W		1,701,906		324,463		637,488		2,663,857
Acquisitions			54,465		219,487		1,430,000		1,703,952
Amortization			(651,030)		(72,358)		(415,786)		(1,139,174)
Ending balance	W		1,105,341		471,592		1,651,702		3,228,635
(In thousands of won)			2020
---	---	---	---	---	---	---	---	---	---
		Software		Patents		Other intangible<br><br>assets		Total
Beginning balance	W		558,396		181,530		1,285,617		2,025,543
Acquisitions			1,521,701		180,250		499,305		2,201,256
Amortization			(378,191)		(37,317)		(231,960)		(647,468)
Impairment loss(*)			-		-		(915,474)		(915,474)
Ending balance	W		1,701,906		324,463		637,488		2,663,857

(*) The Company recognized W915,474 thousand of impairment loss as carrying amount of other intangible assets exceeded recoverable amount as of December 31, 2020.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

10. Intangible Assets, Continued

(3) Classification of amortization in the statements of comprehensive income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Cost of revenues	W	360,661	190,246
Selling, general and administrative expenses(*)		778,513	457,222
Total	W	1,139,174	647,468

(*) The amortization recognized as the research and development included in selling, general and administrative expenses was W65,857 thousand and W55,813 thousand, respectively, for the years ended December 31, 2021 and 2020.

11. Employee Benefit

The expenses recognized in relation to defined contribution plan for the years ended December 31, 2021 and 2020 are W1,270,511 thousand and W1,014,773 thousand, respectively.

12. Commitments

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

(2) In July 2021, the Company and Shanghai TA REN Network Technology Co., Ltd. entered into development agreements to grant them the right to develop mobile games based on the contents of Ragnarok Online and distribute such games in China for 3 years.

(3) As of December 31, 2021, the Company has entered into contracts with Gravity Interactive, Inc. and Gravity NeoCyon, Inc. for the exclusive rights of publishing and distributing online games and for the exclusive rights of developing, publishing and distributing mobile games, respectively. The Company also has entered into contracts with Gravity Communications Co., Ltd., Gravity Game Tech Co., Ltd., PT. Gravity Game Link and Gravity Game Hub PTE., Ltd. for the exclusive rights of publishing and distributing online and mobile games (Note 23).

(4) As of December 31, 2021, the Company has entered into license agreements with various third-party game developers to secure exclusive right to publish the games developed by the third-party developers. Upfront license fees paid are capitalized and recognized as other intangible assets and minimum guaranteed royalties are capitalized and recognized as other non-current assets. Purchase obligations for future payment related to above agreements as of December 31, 2021 and 2020 are W2,335,425 thousand and W2,929,165 thousand, respectively.

(5) As of December 31, 2021, the Company benefited from payment guarantee of USD 818,000 from KB Kookmin Bank regarding overseas IP contracts.

13. Share Capital and Share Premium

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

(1) Details of common shares as of December 31, 2021 and 2020 are as follows:

(In won and in number of shares)		December 31, 2021	December 31, 2020
Number of authorized shares		40,000,000	40,000,000
Value per share	W	500	500
Number of shares issued		6,948,900	6,948,900
Common shares	W	3,474,450,000	3,474,450,000

(2) Details of share premium as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Additional paid-in capital	W	25,357,547	25,357,547
Other capital surplus		2,125,136	2,125,136
	W	27,482,683	27,482,683

(3) Details of other components of equity as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Foreign currency translation adjustments	W	-	929

(4) Details of retained earnings as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Unappropriated retained earnings	W	174,719,960	109,987,127

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

13. Share Capital and Share Premium, Continued

(6) Statements of appropriation of retained earnings as of December 31, 2021 and 2020 are as follows:

Date of appropriation for 2021: March 31, 2022
Date of appropriation for 2020: March 31, 2021
(In thousands of won)		2021	2020
Retained earnings available for appropriation
Unappropriated retained earnings carried over from prior year	W	109,987,127	70,570,205
Profit for the year		64,732,833	39,416,922
		174,719,960	109,987,127
Appropriation of retained earnings		-	-
Unappropriated retained earnings to be carried forward	W	174,719,960	109,987,127

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

14. Revenue from Contracts with Customers

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

(In thousands of won)		2021	2020
Service contract
Micro transaction & Subscription revenue	W	92,578,768	130,363,485
Online games		4,464,078	6,077,315
Mobile games		88,114,690	124,286,170
Royalties & License fees		194,515,767	98,479,956
Online games		25,711,947	31,839,750
Mobile games		168,803,820	66,640,206
Others		1,163,841	152,628
		288,258,376	228,996,069
Major geographic market
Taiwan		57,133,716	76,336,807
Korea		55,387,538	91,004,966
Thailand		61,245,032	11,220,320
Japan		39,934,979	22,019,495
United States of America		12,053,184	4,594,304
Philippines		6,835,992	1,059,789
Indonesia		5,496,618	1,540,529
Malaysia		11,063,200	240,773
Others		39,108,117	20,979,086
		288,258,376	228,996,069
Timing of satisfaction of performance obligations
At a point in time		6,003	-
Over time		288,252,373	228,996,069
	W	288,258,376	228,996,069

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

14. Revenue from Contracts with Customers, Continued

(2) Accounts receivables, incremental costs of obtaining a contract and contract liabilities related to contracts with customers as of December 31, 2021 and December 31, 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Accounts receivable	W	40,569,841	44,353,327
Incremental costs of obtaining a contract (Prepaid expenses)		508,007	722,231
Contact liabilities (Deferred revenue)		4,054,633	4,814,591
Micro transaction & Subscription revenue		3,755,190	4,475,049
Royalties and License fees		299,443	339,542

(3) Changes in contract liabilities for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		Contract liabilities
		2021	2020
Balance at January 1	W	4,814,591	4,297,596
Increase related to Micro transaction & Subscription revenue		17,513,422	20,688,222
Increase related to royalties and license fees		391,217	14,362,829
Decrease upon satisfaction of performance obligation<br><br>– Micro transaction & Subscription revenue		(18,233,281)	(19,107,689)
Decrease upon satisfaction of performance obligation<br><br>– Royalties and License fees		(431,316)	(15,426,367)
Balance at December 31	W	4,054,633	4,814,591

The amount of revenue recognized from previous period’s contract liabilities satisfied during the year ended December 31, 2021 is W4,680,655 thousand.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

14. Revenue from contracts with customers, Continued

(4) Transaction price allocated to unsatisfied performance obligations as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Micro transaction & Subscription revenue	W	3,755,190	4,475,049
Online games		1,835,824	1,821,790
Mobile games		1,919,366	2,653,259
Royalties and License fees		299,443	339,542
Online games		95,755	286,094
Mobile games		203,688	53,448
	W	4,054,633	4,814,591

The Company’s management expects to recognize 95.1% (W3,855,572 thousands) of the transaction price allocated to contracts that have not been performed as of December 31, 2021 as revenue within 12 months. The remaining 4.9% (W199,061 thousands) is expected to be recognized as revenue thereafter. The amounts disclosed above do not include variable consideration which is constrained.

(5) Details of incremental costs of obtaining a contract recognized as assets as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Incremental costs of obtaining a contract	W	508,007	722,231
Amortization costs recognized as cost of revenue		722,231	320,460

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

15. Classification of expenses by nature

Details of classification of expenses by nature for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Fees and commissions	W	142,578,338	119,541,745
Advertising expenses		24,112,161	19,787,229
Salaries		18,821,721	14,979,460
Outsourcing expenses		16,226,357	11,347,150
Rent		811,038	722,777
Employee benefits		1,448,393	1,301,773
Expenses related to defined contribution plan		1,289,470	1,029,394
Depreciation		2,089,999	1,726,143
Amortization		1,139,174	647,468
Bad debt expenses		-	63,066
Reversal of allowance for doubtful accounts		(50,182)	(28,319)
Other expenses		1,617,440	1,203,135
	W	210,083,909	172,321,021

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

16. Selling, general and administrative expenses

Details of selling, general and administrative expenses for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021		2020
Advertising expenses	W	24,112,161	W	19,787,229
Fees and commissions		9,233,447		6,393,092
Research and development		18,101,978		15,361,686
Salaries		10,185,539		7,750,903
Employee benefits		967,471		872,588
Rent		457,640		389,383
Expenses related to defined contribution plan		657,869		512,705
Depreciation		1,020,612		724,084
Amortization		712,656		401,409
Bad debt expenses		-		63,066
Reversal of allowance for doubtful accounts		(50,182)		(28,319)
Other expenses		2,869,455		866,070
	W	68,268,646	W	53,093,896

17. Finance Income and Costs

(1) Details of finance income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Finance income
Interest income	W	1,354,098	961,895
Unrealized foreign currency gain		98,602	125,238
Gain on foreign currency transactions		3,469,117	1,648,818
	W	4,921,817	2,735,951

(2) Details of finance costs for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Finance costs
Interest expense	W	72,790	120,865
Unrealized foreign currency loss		73,257	216,379
Loss on foreign currency transactions		1,843,186	2,572,207
	W	1,989,233	2,909,451

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

18. Other Non-Operating Income and Expenses

(1) Details of other non-operating income for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Gain on disposal of property and equipment	W	235	1,238
Dividend income		11,326,984	2,382,800
Others		670,524	636,894
	W	11,997,743	3,020,932

(2) Details of other non-operating expenses for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Loss on disposal of property and equipment	W	43,721	-
Impairment loss on intangible assets		-	915,474
Impairment loss on other non-current assets		510,293	2,255,312
Impairment loss on investment in subsidiaries		-	1,287,755
Others		4,716	13,463
	W	558,730	4,472,004

19. Income tax expense

(1) Details of income tax expense for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Current tax expense
Current year	W	25,493,700	14,512,250
Adjustments recognized related to prior period income		1,646,777	-
Deferred tax expense
Changes in net deferred tax assets		672,754	1,121,304
Income tax expense	W	27,813,231	15,633,554

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

19. Income tax expense, Continued

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

(In thousands of won)		2021	2020
Profit before income tax expense	W	92,546,064	55,050,476
Income tax using the statutory tax rate		21,934,147	12,860,215
Adjustments:
Expenses not deductible for tax purposes		7,832	9,912
Tax amounts paid in a foreign country		4,446,429	2,936,989
Tax credit		(765,118)	(944,162)
Additional tax for insufficient investments in designated areas		487,118	667,846
Adjustments recognized related to prior period income		1,646,777	-
Others		56,046	102,754
		5,879,084	2,773,339
Income tax expense	W	27,813,231	15,633,554
Effective tax rate		30%	28%

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

19. Income tax expense, Continued

(3)Details of the changes in deferred tax assets(liabilities) for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)			2021					2020
		Beginning<br><br>balance		Increase<br><br>(Decrease)		Ending<br><br>balance			Beginning<br><br>balance		Increase<br><br>(Decrease)		Ending<br><br>balance
Unearned revenue	W		(43,184)		(81,313)		(124,497)			(51,189)		8,005		(43,184)
Property and equipment			39,527		10,698		50,225			35,423		4,104		39,527
Intangible assets			399,894		(11,482)		388,412			221,106		178,788		399,894
Prepaid expenses			503,856		(1,153)		502,703			103,268		400,588		503,856
Accounts Payable			613,984		9,991		623,975			302,710		311,274		613,984
Accrued expenses			134,201		38,578		172,779			124,217		9,984		134,201
Deferred revenue			-		-		-			7,197		(7,197)		-
Retirement benefit provision liabilities			28,684		4,652		33,336			25,467		3,217		28,684
Allowance for doubtful accounts			264,484		-		264,484			264,484		-		264,484
Asset retirement obligation			46,264		29,204		75,468			46,264		-		46,264
Investment in subsidiaries			-		-		-			389,453		(389,453)		-
Tax paid in foreign countries			-		-		-			(354)		354		-
Others			7,442		(27,187)		(19,745)			734		6,708		7,442
Sub-total(Ⅰ)	W		1,995,152		(28,012)		1,967,140			1,468,780		526,372		1,995,152
Deferred tax due to tax credit<br><br>carry-forward(Ⅱ)			2,723,566		(644,742)		2,078,824			4,371,242		(1,647,676)		2,723,566
Deferred tax assets (Ⅰ+Ⅱ+Ⅲ) (*)	W		4,718,718		(672,754)		4,045,964			5,840,022		(1,121,304)		4,718,718

(*) The future realizability of deferred tax assets is assessed by taking into consideration various factors such as the Company's performance, the overall economic environment and industry outlook, expected future earnings, and deductible period of tax credit carry-forward. The Company periodically monitors those factors used in assessing the realizability of the deferred tax assets. As of December 31, 2021, the Company has recognized deferred tax assets related to temporary differences, carry-forward deficits and tax credit carry-forward, which can be utilized based on the likelihood of future taxable income. This amount may change if the estimate for future taxable income changes.

(4) As of December 31, 2021, the Company did not recognize deferred income tax asset for the temporary difference of W33,632,252 thousand relating to investments in subsidiaries as it is not probable such temporary differences can be utilized in the foreseeable future.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

20. Cash flow information

(1) Adjustments for calculating cash generated from operations for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Adjustments for:
Depreciation	W	2,089,999	1,726,143
Amortization		1,139,174	647,468
Bad debt expense		-	63,066
Impairment loss on investment in subsidiaries		-	1,287,755
Interest expense		72,790	120,865
Unrealized foreign currency loss		73,257	216,379
Impairment loss on intangible asset		-	915,474
Impairment loss on other non-current assets		510,293	2,255,312
Retirement benefit expenses		18,959	14,622
Income tax expense		27,813,231	15,633,554
Unrealized foreign currency gain		(98,602)	(125,237)
Gain on disposal of property and plant		(235)	(1,238)
Loss on disposal of property and plant		43,721	-
Interest income		(1,354,098)	(961,895)
Dividend income		(11,326,984)	(2,382,800)
Reversal of allowance for doubtful accounts		(50,182)	(28,319)
Others		(214,407)	-
	W	18,716,916	19,381,149

(2) Changes in assets and liabilities arising from operating activities for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Accounts receivable	W	3,736,094	(26,620,833)
Other receivable		(1,195,818)	682,111
Prepayment		557,898	(1,609,393)
Prepaid expense		(530,278)	(513,652)
Lease receivable		198,682	139,853
Long-term prepaid expense		(478,318)	(878,967)
Accounts payable		(5,281,785)	19,000,251
Deferred revenue		(476,504)	516,995
Withholdings		657,642	1,231,136
Accrued expenses		175,354	43,910
Advanced receipt		(92)	-
	W	(2,637,125)	(8,008,589)

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

20. Cash flow information, Continued

(3) Significant non-cash transactions for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Reclassification of Prepayment to intangible assets	W	219,487	72,498
Acquisition of right-of-use assets		3,354,809	1,889,573
Increase(Decrease) in accounts payable relating to the acquisition of software		667,078	(1,144,166)

(4) Changes in liabilities arising from financing activities for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Beginning of the year	W	2,971,638	2,482,547
Cash flows used in financial activities–payment of lease liabilities		(1,787,171)	(1,515,930)
Cash flows used in operating activities – Interest paid		(68,886)	(120,865)
Non-cash transactions:
Acquisitions – right-of-use asset		3,090,682	1,889,573
Acquisitions – leases receivables		501,038	115,448
Interest expense		68,886	120,865
Ending of the year	W	4,776,187	2,971,638

21. Leases

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

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

21. Leases, Continued

(1) As a lessee

(a) Details of right-of-use assets and lease liabilities recognized in the separate statements of financial position as of December 31, 2021 and December 31, 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Right-of-use assets(*1)
Offices	W	3,366,358	1,237,961
Vehicles		283,570	84,723
Others		727,985	1,312,600
	W	4,377,913	2,635,284
Lease liabilities(*2)
Current		2,014,338	1,477,958
Non-current		2,761,849	1,493,680
	W	4,776,187	2,971,638

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

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

(b) Changes in right-of-use assets for the years ended December 31, 2021 and December 31, 2020 are as follows:

(In thousands of won)			2021
		Offices		Vehicles	Others	Total
Balance as of January 1, 2021	W	1,237,963		84,723	1,312,599	2,635,285
Depreciation		(848,628)		(178,938)	(584,615)	(1,612,181)
Reassessment		1,516,018		-	-	1,516,018
Acquisitions		1,461,006		377,785	-	1,838,791
Balance as of December 31, 2021	W	3,366,359		283,570	727,984	4,377,913
(In thousands of won)			2020
---	---	---	---	---	---	---
		Offices		Vehicles	Others	Total
Balance as of January 1, 2020	W	1,851,301		253,928	47,052	2,152,281
Depreciation		(651,281)		(173,474)	(581,815)	(1,406,570)
Reassessment		37,943		4,269	-	42,212
Acquisitions		-		-	1,847,362	1,847,362
Balance as of December 31, 2020	W	1,237,963		84,723	1,312,599	2,635,285

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

21. Leases, Continued

(1) As a lessee, Continued

(c) Details of amounts recognized in the separate statements of comprehensive income for the years ended December 31, 2021 and December 31, 2020 are as follows:

(In thousands of won)		2021	2020
Interest expense relating to lease liabilities (included in finance cost)	W	68,886	120,865
Revenue from sub-lease of right-of-use asset		10,007	15,519
Expense relating to short-term leases		105,197	47,189
Expense relating to leases of low-value assets excluding short-term leases		2,454	1,732

(d) Details of amounts recognized in the separate statement of cash flows for the years ended December 31, 2021 and December 31, 2020 are as follows:

(In thousands of won)		2021	2020
Total cash outflows of leases	W	1,963,708	1,685,716

(2) As a lessor

The Company has sub-leased part of its right-of-use assets. The Company recognized interest income related to the lease receivable amounting to W10,007 thousand for the year ended December 31, 2021.

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

(In thousands of won)
	Less than<br><br>1 Year	1 to 2 Years	2 to 5 Years	Contractual<br><br>cash flow	Unrealized financial income	Net investment in the lease
W	227,260	197,789	191,895	616,944	12,061	604,883

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

22. Financial Risk Management

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

(1) Capital Risk Management

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern, so the Company can continue to provide returns and benefits for shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Company monitors capital on the basis of the debt ratio. This ratio is calculated as total debt divided by total capital. The debt ratios as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Total liabilities	W	52,988,480	52,195,130
Total equity		205,677,093	140,945,189
Debt ratio		26%	37%

(2) Market Risk

(a) Foreign exchange risk

The Company is exposed to foreign exchange risk arising from royalty revenues and commission payment primarily with respect to the US dollar and etc. The Company’s financial assets and liabilities are exposed to foreign currency risk as of December 31, 2021 and 2020 are as follows:

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

22. Financial Risk Management, Continued

(2) Market Risk, Continued

(a) Foreign exchange risk, Continued

(In thousands of won, in foreign currencies)
	December 31, 2020
	Assets in foreign<br><br>currency	Liabilities in<br><br>foreign currency		Assets in<br><br>Korean Won	Liabilities in Korean Won
USD	29,682,778	16,433,086	W	32,294,862	17,879,197
JPY	466,962,404	322,888,518		4,922,998	3,553,625
EUR	344,842	-		461,482	-
IDR	12,955,000	15,289,944		1,003	1,183
THB	28,510	7,379		1,036	268
TWD	17,957,553	3,264,754		694,419	126,248
VND	9,270,000	3,243,600		437	153
			W	38,376,237	21,560,674

The Company measures foreign exchange risk at the exchange rate of 10% for each foreign currency, and the rate of change reflects the management's assessment of the risk of exchange rate fluctuation that can be reasonably experienced. The effects of changes in foreign currency exchange rate on profit before tax for the years ended of December 31, 2021 and 2020 are as follows:

(In thousands of won)	2021			2020
	Increased by 10%	Decreased by 10%	Increased by 10%		Decreased by 10%
	1,584,392	(1,584,392)	1,441,567		(1,441,567)
	503,538	(503,538)	136,937		(136,937)
Others	84,281	(84,281)	103,053		(103,053)
	2,172,211	(2,172,211)	1,681,557		(1,681,557)

All values are in Japanese Yen.

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

(b) Interest rate risk

There are no borrowings under variable interest rate conditions as of December 31, 2021 and 2020.

(c) Price risk

There are no assets and liabilities exposed to price risk as of December 31, 2021 and 2020.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

22. Financial Risk Management, Continued

(3) Credit Risk

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

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

The maximum exposure to credit risk of the Company as of December 31, 2021 and 2020 are as follows:

(In thousands of won)		December 31, 2021	December 31, 2020
Cash and cash equivalents	W	26,602,122	45,956,245
Short-term financial instruments		148,000,000	71,000,000
Accounts receivables, net		40,569,841	44,353,327
Other receivables, net		619,903	478,428
Other current financial assets		790,051	841,092
Oher non-current financial assets		2,895,565	1,128,475
	W	219,477,482	163,757,567

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

(4) Liquidity Risk

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

(In thousands of won)	December 31, 2021
		Carrying<br>value	Less than<br><br>3 months	3 months to<br><br>1 year	1 to 2 years	2 to 4 years	Total
Accounts payable	W	27,467,821	26,673,446	65,203	729,172	-	27,467,821
Other liabilities (*)		5,016,055	510,225	1,564,539	1,431,702	1,615,293	5,121,759
	W	32,483,876	27,183,671	1,629,742	2,160,874	1,615,293	32,589,580

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

22. Financial Risk Management, Continued

(4) Liquidity Risk, Continued

(In thousands of won)	December 31, 2020
		Carrying<br>value	Less than<br><br>3 months	3 months to<br><br>1 year	1 to 2 years	2 to 3 years	Total
Accounts payable	W	36,212,853	34,022,592	787,795	667,078	735,388	36,212,853
Other liabilities (*)		3,121,647	397,460	1,160,815	1,565,172	106,460	3,229,907
	W	39,334,500	34,420,052	1,948,610	2,232,250	841,848	39,442,760

(*) Other liabilities as of December 31, 2020 consist of lease deposits received and lease liabilities.

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

23. Related Party Transactions

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

Ownership interests in subsidiaries as of December 31, 2021 and 2020 are as follows:

Name of entity		Percentage of ownership (%)
	December 31, 2021		December 31, 2020
Gravity Interactive, Inc.		100.00		100.00
Gravity NeoCyon, Inc.		99.53		99.53
Gravity Communications Co., Ltd.		100.00		100.00
PT. Gravity Game Link		70.00		70.00
Gravity Game Tech Co., Ltd.		100.00		100.00
Gravity Game Arise Co., Ltd.		100.00		100.00
Gravity Game Hub PTE., Ltd.(*)		100.00		-

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

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

23. Related Party Transactions, Continued

(2) Account balances with related parties

Balances of receivables and payables with related parties as of December 31, 2021 and 2020 are as follows:

(In thousands of won)					December 31, 2021				December 31, 2020
Related party		Name of entity			Receivables		Payables		Receivables		Payables
Parent company		GungHo Online Entertainment, Inc.	W		5,051,013		7,448		2,449,506		4,924
Subsidiaries		Gravity Interactive, Inc.			3,538,932		405,359		3,845,373		-
	Gravity NeoCyon, Inc.			822,009		1,550,411		349,634		862,702
	Gravity Communications Co., Ltd.			1,179,228		1,283,908		1,021,437		1,296,845
	PT. Gravity Game Link			35,824		9,411		442,927		14,899
	Gravity Game Tech Co., Ltd.			1,439,384		181,043		966,402		-
	Gravity Game Arise Co., Ltd.			310,412		1,106,765		922,360		1,461,626
	Gravity Game Hub PTE., Ltd.			96,628		-		-		-
			W		12,473,430		4,544,345		9,997,639		3,640,996

(3) Transactions with related parties

The details of transactions with related parties for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)					2021				2020
Related party		Name of entity			Revenues		Purchases		Revenues		Purchases
Parent company		GungHo Online Entertainment, Inc.	W		35,489,010		57,144		20,970,472		211,348
Subsidiaries		Gravity Interactive, Inc.(*1)			14,838,616		643,324		22,952,182		859
	Gravity NeoCyon, Inc.			327,329		6,734,567		301,672		7,504,107
	Gravity Communications Co., Ltd. (*2)			18,682,591		5,676,890		7,779,917		9,855,435
	PT. Gravity Game Link			298,864		157,600		1,535,466		28,007
	Gravity Game Tech Co., Ltd.			6,769,774		29,534		9,662,919		54
	Gravity Game Arise Co., Ltd.			-		3,246,517		-		2,478,752
			W		76,406,184		16,545,576		63,202,628		20,078,562

(*1) Revenues include dividend income of W2,382,800 thousand received from Gravity Interactive, Inc. in 2020.

(*2) Revenues include dividend income of W11,326,984 thousand received from Gravity Communications Co., Ltd. in 2021.

GRAVITY CO., LTD.

Notes to the Financial Statements

As of December 31, 2021 and 2020

23. Related Party Transactions, Continued

(4) Other transactions with related parties

Other transactions with related parties for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)					Contribution
Related party		Name of entity			2021		2020
Subsidiaries		Gravity NeoCyon, Inc.	W		1,990,577		2,999,995
	PT. Gravity Game Link			799,733		853,183
	Gravity Game Arise Co., Ltd.			1,024,400		-
		Gravity Game Hub PTE., LTD			2,906,494		-

No financing transactions were made with related parties for the years ended December 31, 2021 and 2020.

(5) Key management personnel compensation

The compensation given to key management personnel (registered directors) for the years ended December 31, 2021 and 2020 are as follows:

(In thousands of won)		2021	2020
Salaries	W	1,224,617	882,635

24. Subsequent event

Gravity Game Vision Limited, a subsidiary, was established in Hong Kong on January 5, 2022.

Independent Auditors’ Review Report on Internal Accounting Control System

(English translation of a Report Originally Issued in Korean)

To the Shareholders and Board of Directors of

Gravity Co., Ltd.

We have reviewed the accompanying report on the Operation of Internal Accounting Control System (“IACS”) of Gravity Co., Ltd. (the “Company”) as of December 31, 2021. The Company's management is responsible for designing and maintaining effective IACS and for its assessment of the effectiveness of IACS. Our responsibility is to review the management's assessment and issue a report based on our review. In the accompanying report of management’s assessment of IACS, the Company’s management stated: “Based on the assessment of the operation of the IACS as of December 31, 2021, Chief Executive Officer and IACS Officer believe that no material weaknesses are identified as of December 31, 2021, in all material respects, in accordance with the IACS Framework issued by the Internal Accounting Control System Operation Committee.”

We conducted our review in accordance with IACS Review Standards, issued by the Korean Institute of Certified Public Accountants. Those Standards require that we plan and perform the review to obtain assurance of a level less than that of an audit as to whether the Report on the Operation of Internal Accounting Control System is free of material misstatement. Our review consists principally of obtaining an understanding of the Company’s IACS, inquiries of company personnel about the details of the report, and tracing to related documents we considered necessary in the circumstances. We have not performed an audit and, accordingly, we do not express an audit opinion. However, as the Company is a privately-held large enterprise, the design and operations and assessment of its IACS are limited compared with those of publicly-held large enterprises, under Chapter 5 “Application for Small and Medium Sized Enterprises” of IACS Standards. As such, we performed our review in accordance with Chapter 14 “Review Standards for Small and Medium Sized Enterprises.”

A company's IACS is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Korean International Financial Reporting Standards. Because of its inherent limitations, however, IACS may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our review, nothing has come to our attention that the Report on the Operational Status of Internal Accounting Control System as of December 31, 2021 is not prepared, in all material respects, in accordance with Chapter 5, “Application for Small and Medium Sized Enterprises” of the IACS Framework issued by the Internal Accounting Control System Operation Committee.

This report applies to the Company’s IACS in existence as of December 31, 2021. We did not review the Company’s IACS subsequent to December 31, 2021. This report has been prepared for Korean regulatory purposes, pursuant to the Act on External Audit of Stock Companies, Etc. and may not be appropriate for other purposes or for other users.

KPMG Samjong Accounting Corp.

March 23, 2022

Notice to Readers<br>This report is annexed in relation to the audit of the financial statements as of December 31, 2021.

Report on the Effectiveness of the Internal Accounting Control System

(English translation of a Report Originally Issued in Korean)

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

We, as the Chief Executive Officer and the IACS Officer of Gravity (“the Company”), assessed operating status of the Company’s Internal Accounting Control System(“IACS”) for the year ending December 31, 2021.

Design and operation of IACS is the responsibility of the Company’s management, including the Chief Executive Officer and the IACS Officer. We evaluated whether the Company effectively designed and operated its IACS to prevent and detect errors or frauds which may cause a misstatement in financial statements to ensure preparation and disclosure of reliable financial information. The CEO and IACS Officer followed Chapter 5 (Application to Small-and-Medium sized Companies) of the Best Practice Guideline to evaluate the effectiveness of the IACS design and operation.

As a result of the evaluation of the operation status of the internal accounting control system by the CEO and IACS Officer of Gravity, as of December 31, 2021, based on the best practices for the internal accounting management system, no material weakness was found in our internal accounting control system.

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

<Attachment>

Implementation status of remediation plans for material weaknesses reported in previous year.

[Measures to Remediate Material Weakness]

1. Material Weakness related to ITGC

The Company has failed to design and operate effective controls over program change management of systems operated by outsourced developers used to calculate deferred revenue. This represents a significant vulnerability that could potentially result in unauthorized program changes resulting in incomplete and inaccurate deferred revenue data. As a corrective action for Material Weakness related to ITGC, we have strengthened the monitoring of the Company’s service organizations with respect to the design and operation of controls related to: managing user access and program change management.

2. Material Weakness related to Control Environment and Risk Assessment

In relation to risk assessment, the Company lacked effective control operation in the program change procedure of the service organizations that could affect financial reporting. In relation to the control environment, there was insufficient retention of qualified personnel to respond to and remediate the Company's Material Weakness related ITGC and other significant deficiencies. In order to remediate Material Weakness related to this, the following measures were taken during 2021.

1 Through the recruitment of qualified personnel and training, the Company specifically identifies the risks exposed to the Company in relation to the program changes at the service organizations , and designs and operates the post-change monitoring control for all program changes and distribution to respond to these risks. We strengthened the process.

2 Internal control operation is being improved to effectively respond to risks by emphasizing the importance of internal control and training for control owners.

March 8, 2022

Chief Executive Officer Park Hyun Chul (signature)

IACS Officer Kim Heung Gon (signature)

61