GRAVITY Co., Ltd.

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 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 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) Impairment of investments in subsidiaries

The Company has elected to account for its investments in subsidiaries and associates using the cost method in accordance with Korean International Financial Reporting Standards (K-IFRS) No. 1027, 'Separate Financial Statements.' Meanwhile, dividends received from subsidiaries and associates are recognized in profit or loss at the point when the right to receive the dividend is established.

The Company determines whether to recognize impairment losses on investments in subsidiaries and associates in accordance with the provisions of K-IFRS No. 1036, 'Impairment of Assets.' If there are indicators of impairment, the Company performs an impairment test by comparing the entire carrying amount of the investment in subsidiaries and associates (including goodwill) with its recoverable amount (the higher of its fair value less costs to sell and its value in use) in accordance with K-IFRS No. 1036, 'Impairment of Assets.'

Any recognized impairment loss is not allocated to any asset (including goodwill) that forms part of the carrying amount of the investment in subsidiaries and associates. Furthermore, the reversal of an impairment loss is recognized to the extent that the recoverable amount of such investment assets subsequently increases in accordance with K-IFRS No. 1036, 'Impairment of Assets.'