Note 2 - Summary of important accounting policies
The most important accounting policies applied in producing these consolidated accounts are described below. Unless otherwise specified, these policies have been applied consistently for all years presented.
2.1 Basis on which the statements have been prepared
These annual accounts contain MAG Interactive AB’s published consolidated accounts, and the accounting policies chosen to prepare them are the IFRS (International Financial Reporting Standards). The consolidated accounts have been prepared in accordance with the Swedish Annual Accounts Act, RFR 1 Complementary Accounting Rules for Groups as well as IFRS and interpretations issued by the IFRS Interpretations Committee (IFRS IC) as adopted by the EU. They have been prepared in accordance with the acquisition value method, apart from financial assets valued at their fair value through the income statement.
The preparation of financial statements in accordance with IFRS requires the use of a number of important estimates for accounting purposes. Management is also required to make certain judgements when applying the Group’s accounting policies. The areas that involve a high degree of assessment, that are complex and areas in which assumptions and estimates are of significant importance to the consolidated accounts are described in Note 4.
Changes in accounting policies and disclosures
New standards and interpretations that have not yet been applied by the Group
A number of new standards and interpretations enter into force for financial years that start after 31 August 2018 and have not been applied in the preparation of this financial statement. None of these are expected to have any significant impact on the Group’s financial statements, with the exception of those described below:
IFRS 9 “Financial instruments” deals with the classification, valuation and recording of financial assets and liabilities. It replaces those parts of IAS 39 that deal with the classification and valuation of financial instruments. IFRS 9 retains a mixed valuation approach, but simplifies this approach in certain respects. There will be three valuation categories for financial assets: accrued cost of acquisition, fair value through other comprehensive income and fair value through the income statement. How an instrument is to be classified depends on the company’s business model and the instrument’s characteristics. Investments in equity instruments must be recorded at fair value through the income statement, although there is also a possibility to record instruments when first recorded at fair value through other comprehensive income. There will then be no reclassification to the income statement when the instrument is disposed of. For financial liabilities, the classification and valuation are not changed, unless a liability is recorded at fair value through the income statement based on the fair value alternative. The standard is to be applied for financial years that start as of 1 January 2018 (not yet adopted by the EU). For the group this means the standard applies since 1 September 2018.
The group has no financial assets and therefore IFRS 9 does not have any effect. The development is continuously monitored for changes.
IFRS 15 “Revenue from contracts with customers” regulates how the recording of income takes place. The principles on which IFRS 15 is based aim to provide users of financial statements with more useful information about the company’s income. The extended duty of disclosure means that information must be provided about income type, date of settlement, uncertainties associated with the recording of income and cash flow attributable to the company’s customer contracts. According to IFRS 15, an item of income must be recorded when the customer obtains control over the product or service sold and is able to use or obtain benefit from the product or service. IFRS 15 replaces IAS 18 Revenue and IAS 11 Construction Contracts and related SIC and IFRIC. IFRS 15 enters into force on 1 January 2018. For the Group, this means application in the financial year that begins on 1 September 2018.
The group has evaluated the effect from IFRS 15 from the following principles. Revenue from purchases in games that are playable off-line, meaning that the game works independent of any effort from neither any of the group companies nor any of its partners, as well as advertising revenue are recognised immediately. The net sales corresponding to this category was 91% of total net sales during the financial year. Out of the remaining 9% two thirds of net sales are of items in games that are consumed within less than seven days. About 2.5% of net sales are purchases of items that are consumed within 30-60 days and has a non material effect on the group from an IFRS 15 perspective. The group is monitoring ongoing changes to its portfolio products as well as its means to generate revenue with regards to IFRS 15.
IFRS 16 “Leases”. In January 2016, the IASB published a new leasing standard that will replace IAS 17 Leases and associated interpretations IFRIC 4, SIC-15 and SIC-27. The standard requires that assets and liabilities attributable to all leases, with a few exceptions, be recorded in the balance sheet. This recording standard is based on the view that the lessee has a right to use an asset over a specific period of time and at the same time an obligation to pay for this right. Recording for the lessor will essentially remain unchanged. The standard is applicable for financial years that start on 1 January 2019 or later. For the Group, this means application in the financial year that begins on 1 September 2019. Early application is permitted. The Group has not yet evaluated the impact of IFRS 16.
None of the other IFRS or IFRIC interpretations that have not yet come into force are expected to have any significant effect on the Group.
2.2 Consolidated accounts
Subsidiaries are all companies over which the Group has a controlling influence. The Group controls a company when it is exposed to or has the right to a variable return on its holding in the company and is able to affect its return through its influence in the company. Subsidiaries are included in the consolidated accounts as from the date on which the controlling influence was transferred to the Group. They are excluded from the consolidated accounts as from the date on which the controlling influence ceases.
The acquisition method is used when recording the Group’s business combinations. The purchase price of an acquisition of a subsidiary consists of the fair value of assets and liabilities transferred that the Group incurs to the former owners of the acquired company. The purchase price also includes the fair value of all liabilities that are the consequence of a contingent consideration agreement. Identifiable acquired assets and debts taken over in a business combination are initially valued at their fair value on the acquisition date.
Expenses relating to the acquisition are recorded as expenses when they arise.
Any contingent consideration to be transferred by the Group is recorded at the fair value on the acquisition date. Subsequent changes in the fair value of a contingent consideration that have been classified as a liability are recorded in accordance with IAS 39 in the income statement.
Goodwill is valued initially as the amount by which the total purchase price and any fair value of a holding without a controlling influence on the date of acquisition exceeds the fair value of identifiable acquired net assets. If the purchase price is lower than the fair value of the acquired company’s net assets, the difference is recorded directly in the income statement.
Internal Group transactions, balance sheet items, income and expenses between Group companies are eliminated. Profits and losses resulting from internal Group transactions and recorded under assets are also eliminated. The accounting policies for subsidiaries have been changed as necessary in order to guarantee the consistent application of the Group’s policies.
2.3 Translation of foreign currency
(a) Functional currency and reporting currency
Items included in the financial statements for the various entities in the Group are valued in the currency used in the financial environment in which each company is primarily operational (functional currency). The consolidated accounts use Swedish kronor (SEK), which is the Group’s reporting currency.
(b) Transactions and balance sheet items
Transactions in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction date or on the date when the items are revalued. Exchange rate gains and losses that arise when paying for such transactions and when translating monetary assets and liabilities in foreign currency at the exchange rate on the balance sheet date are recorded in the income statement.
Exchange rate gains and losses attributable to cash and cash equivalents are recorded in the income statement as financial income or expenses. All other exchange rate gains or losses are recorded in the item “Other operating income/Other operating expenses” in the income statement.
(c) Group companies
The profit/loss and financial position of all Group companies with a functional currency that is different from the reporting currency are translated into the Group’s reporting currency as follows:
assets and liabilities for each of the balance sheets are translated at the exchange rate on the balance sheet date;
income and expenses for each of the income statements are translated at the average exchange rate (unless this average exchange rate is not a reasonable approximation of the accumulated effect of the exchange rates in force on the transaction date, in which case income and expenses are translated at the exchange rate on the transaction date), and
all exchange rate differences that arise are recorded in other comprehensive income.
Accumulated profits and losses in equity are recorded in the income statement when the foreign business is disposed of, either fully or partly.
Goodwill and adjustments to fair value that arise from the acquisition of a foreign business are treated as assets and liabilities in that business and are translated at the exchange rate on the balance sheet date. Exchange rate differences are recorded in other comprehensive income.
2.4 Tangible assets
All tangible non-current assets are recorded at the cost of acquisition deductions for depreciation. The cost of acquisition includes expenses that can be attributed directly to the acquisition of the asset.
Additional expenses are added to an asset’s carrying amount or are recorded as a separate asset, depending on which is appropriate, only if it is likely that the future financial benefits associated with the asset will benefit the Group and the asset’s cost of acquisition can be measured in a reliable way. The carrying amount of the part replaced is removed from the balance sheet. All other forms of repairs and maintenance are recorded as expenses in the income statement in the period when they arise.
Depreciation of assets in order to allocate their cost of acquisition down to the calculated residual value over the estimated useful life is performed on a straight-line basis as follows:
Equipment - 5 years
The residual values and useful life of assets are reviewed at the end of each reporting period and adjusted as required.
An asset’s carrying amount is written down immediately to its recoverable value if the asset’s carrying amount exceeds its estimated recoverable value (Note 2.6).
Profits and losses upon disposal are defined by means of a comparison between sales income and carrying amount, and are recorded net in the income statement under Other operating income/Other operating expenses.
2.5 Impairment of financial assets
Goodwill arises in connection with the acquisition of a subsidiary and refers to the amount by which the purchase price, any holding without a controlling influence in the acquired company and the fair value as of the date of acquisition of the previous equity share in the acquired company exceeds the fair value of identifiable acquired net assets.
In order to test the impairment requirement, goodwill acquired in a business combination is allocated to cash-generating units or groups of cash-generating units that are expected to benefit from synergies in the acquisition.
The impairment of goodwill is tested annually or more often if events or changes in conditions indicate a possible reduction in value. The carrying amount of the cash-generating unit to which goodwill has been assigned is compared with the recoverable amount, which is the higher of the value in use and the fair value minus sales-related costs. Any impairment is recorded immediately as an expense and is not cancelled.
(b) Acquired intellectual rights to games for platforms
Intellectual rights to games for platforms that have been acquired separately are recorded at the cost of acquisition. Intellectual rights to games for platforms that have been acquired through a business combination are recorded at fair value on the acquisition date. Intellectual rights have a definable useful life and are recorded at the cost of acquisition minus accumulated depreciation. Depreciation is performed on a straight-line basis in order to allocate the cost of intellectual rights over their estimated useful life of 3–10 years.
(c) Capitalised expenditure for development works in respect of games for platforms
Costs of maintenance of games for platforms are recorded as expenses as they arise. Development expenses that are directly attributable to the development and testing of identifiable and unique games for platforms that are controlled by the Group are recorded as intangible assets when the following criteria are met:
- it is technically possible to produce the game for platforms so that it can be used,
- MAG Interactive’s intention is to produce the game for platforms and to use or sell it,
- the conditions exist to use or sell the game on platforms,
- it can be shown how the game for platforms generates probable future financial benefits,
- adequate technical, financial and other resources to complete development and to use or sell the game on platforms are available, and
- the expenses attributable to the game for platforms during its development can be calculated in a reliable way.
Directly attributable expenses that are capitalised as a part of a game for platforms include expenses for employees and a reasonable proportion of indirect expenses.
Other development expenses that do not meet these criteria are recorded as expenses when they arise. Development expenses that have previously been recorded as an expense are not recorded as an asset in the subsequent period.
Development expenses for games for platforms that are recorded as an asset are depreciated during their estimated useful life, which does not exceed three years.
2.6 Impairment of non-financial assets
Intangible assets that have an indeterminate useful life or intangible assets that are not ready for use are not depreciated, but are tested annually in respect of a possible impairment requirement. Assets that are depreciated are assessed with regard to any value reduction whenever events or changes in conditions indicate that the carrying amount may perhaps not be recoverable. An impairment is performed to the amount by which the asset’s carrying amount exceeds its recoverable value. The recoverable value is the higher of an asset’s fair value minus sales-related costs and the value in use. When assessing an impairment requirement, assets are grouped at the lowest levels where there are essentially identifiable cash flows (cash-generating units). For assets (other than goodwill) that have previously been impaired, a test is conducted as of each balance sheet date to determine whether cancellation should take place.
2.7 Impairment of financial assets
The Group classifies its financial assets in the following categories: financial assets valued at fair value through the income statement, and loan receivables and trade and other receivables. The classification depends on the purpose for which the financial asset was acquired. Management confirms the classification of financial assets when they are recorded for the first time.
Financial assets and liabilities valued at fair value through the income statement
Financial assets and liabilities valued at fair value through the income statement are financial instruments that when first recorded were identified as an item valued at fair value through the income statement. On the assets side, this item consists of other short-term securities (investment in a fund) and on the liabilities side this item consists of contingent additional considerations.
Loan receivables and trade and other receivables
Loan receivables and trade and other receivables are financial assets that are not derivatives, that have defined or definable payments and that are not listed in an active market. They are included in current assets, with the exception of items with a due date more than 12 months after the balance sheet date, which are classified as non-current assets. The Group’s loan receivables and trade and other receivables consist of the following items in the balance sheet: other long-term receivables, trade and other receivables (Note 2.10), cash and cash equivalents (Note 2.11) and other current receivables and prepaid expenses and accrued income to the extent that they relate to financial instruments.
Other financial liabilities
The Group’s other long-term liabilities, trade and other payables and the element of other current liabilities and interim liabilities that relates to financial instruments are classified as other financial liabilities.
Recording and valuation
Purchases and sales of financial assets are recorded on the transaction date – the date on which the Group commits itself to buy or sell the asset. Financial instruments are recorded initially at the fair value plus transaction costs, which applies to all financial assets that are not valued at their fair value through the income statement. Financial assets valued at fair value through the income statement are recorded initially at fair value, while attributable transaction costs are recorded in the income statement. Financial assets are removed from the balance sheet when the right to receive cash flows from the instrument has expired or been transferred and the Group has essentially transferred all risks and benefits associated with the right of ownership. Loan receivables and trade and other receivables are recorded at the accrued cost of acquisition, applying the effective interest method.
Profits and losses resulting from changes in fair value in respect of the category financial assets valued at fair value through the income statement are recorded under the item other short-term securities in the income statement in the period when they arise and are included in the income statement item net financial income/expenses. For the item contingent additional considerations, changes in fair value are recorded as an adjustment to the cost of acquisition of the asset.
2.8 Offsetting of financial instruments
Financial assets and liabilities are offset and recorded as a net amount in the balance sheet only when there is a legal right to offset the recorded amounts and an intention to settle them with a net amount or to simultaneously realise the asset and settle the liability. This legal right may not be dependent on future events and it must be legally binding on the company and the counterparty, both in normal business operations and in the event of a cancellation of payments, insolvency or bankruptcy.
2.9 Impairment of financial assets
Assets recorded and accrued cost of acquisition
As of the end of each reporting period, the Group assesses whether there is objective evidence of an impairment requirement for a financial asset or a group of financial assets. There is an impairment requirement for a financial asset or a group of financial assets and it is impaired only if there is objective evidence of an impairment requirement as a consequence of one or more events having occurred since the asset was first recorded (a “loss event”) and this loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
For the category trade and other receivables, the impairment is calculated as the difference between the asset’s carrying amount and the current value of estimated future cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset’s original effective interest rate. The asset’s carrying amount is impaired and the impairment amount is recorded in the consolidated income statement.
If the impairment requirement reduces in a subsequent period and this reduction can be attributed objectively to an event that has occurred since the impairment was recorded (e.g. an improvement in the debtor’s credit rating), the cancellation of the previously recorded impairment is recorded in the consolidated income statement.
2.10 Trade and other receivables
Trade and other receivables are amounts that are to be paid by customers for games for platforms and advertisements in operating activities. Trade and other receivables are recorded initially at fair value and then at accrued cost of acquisition applying the effective interest method minus any reserve for value reduction.
2.11 Cash and cash equivalents
Cash and cash equivalents, in both the balance sheet and the cash flow statement, include cash, bank balances and other short-term investments with due dates within three months of the acquisition date.
2.12 Share capital
Ordinary shares are classified as equity. Preference shares issued are also classified as equity if they are not compulsorily callable. Transaction costs that can be attributed directly to the issue of new ordinary shares or options are recorded, net after tax, in equity as a deduction from the share issue fund. As of the end of the financial year 2017/18 only common stock exist in MAG Interactive AB (publ).
2.13 Trade and other payables
Trade and other payables are obligations to pay for goods or services that have been acquired from suppliers in operating activities. Trade and other payables are classified as current liabilities if they fall due within one year. If not, they are classified as long-term liabilities.
Trade and other payables are recorded initially at fair value and then at accrued cost of acquisition applying the effective interest method.
2.14 Current and deferred income tax
The tax expense for the period included current tax and deferred tax. Tax is recorded in the income statement, except when the tax relates to items recorded in other comprehensive income or directly in equity. In such cases, the tax is also recorded in other comprehensive income or equity.
The current tax expense is calculated on the basis of the tax rules adopted on the balance sheet date or adopted in practice in the country where the parent company and its subsidiaries operate and generate taxable income.
Deferred tax is recorded for all temporary differences that arise between the tax value of assets and liabilities and their carrying amounts in the consolidated accounts. A deferred tax liability is not, however, recorded if it arises as a consequence of the initial recording of goodwill. Nor is deferred tax recorded if it arises as a consequence of a transaction that constitutes the first recording of an asset or liability that is not a business combination and that, at the time of the transaction, affects neither the recorded profit/loss nor the profit/loss for tax purposes. Deferred income tax is calculated by applying the tax rates (and laws) that have been adopted or announced as of the balance sheet date and that are expected to apply when the relevant deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recorded to the extent that it is likely that future tax surpluses will be available against which the temporary differences can be utilised.
A deferred tax liability is calculated on taxable temporary differences that arise from participations in subsidiaries, except when the date of cancellation of the temporary difference can be controlled by the Group and it is likely that the temporary difference will not be cancelled within the foreseeable future. A deferred tax asset that is attributable to deductible temporary differences in respect of holdings in subsidiaries is only recorded to the extent that it is likely that the temporary difference will be cancelled in future and there will be a taxable surplus against which the deduction can be utilised.
Deferred tax assets and liabilities are settled when there is a legal right to settle for the relevant tax receivables and tax liabilities, and when the deferred tax receivables and tax liabilities are attributable to taxed charged by one single tax authority and relate to either the same tax subject or different tax subjects where there is an intention to settle the balances by means of net payments.
2.15 Employee benefits
(a) Pension obligations
The Group has defined contribution pension plans. A defined contribution pension plan is a pension plan under which the Group pays fixed contributions to a separate legal entity. The Group has no legal or informal obligations to pay additional contributions if this legal entity does not have sufficient assets to pay all compensation to employees associated with the employees’ service during the current or earlier periods. The contributions are recorded as personnel costs when they fall due for payment. Prepaid contributions are recorded as an asset to the extent that cash repayment or a reduction of future payments may be credited to the Group.
2.16 Recording income
Income is valued at the fair value of what has been received or will be received, and represents the amounts received for goods sold net of discounts, returns and Value Added Tax.
The Group records income when its amount can be measured reliably, it is probable that future economic benefits will accrue to the company and special criteria have been met as described below.
Sales of mobile games
The Group’s income comes from in-app purchases on platforms, advertising income attributable to these games and a small element from royalties. Income is recorded when the income can be calculated in a reliable way and when essentially all risks and rights associated with ownership have been transferred to the buyer, which usually happens in connection with delivery.
In-app purchases take place on various platforms, and income is recorded when they are delivered to the customer. In-app purchases are also recorded as they take place and are delivered to the customer.
In connection with in-app purchases, the gross payment flows pass from the end user in all cases to the platform, which deducts its charge, which is 30% of the price paid by the end user, before the money reaches MAG Interactive. The assessment is that MAG Interactive shall record the full income gross and the platform’s share of incomes shall be reported as an outgoing expense item, which represents the same net result as with income recorded net.
MAG Interactive also receives income from advertisements that are displayed in the company’s games. This income is recorded as the advertisements are displayed and the company receives compensation for these.
The Group also has some royalty income associated with the granting of rights to use the company’s games in other contexts. MAG Interactive then receives a proportion of income from this, which is recorded as it arises.
Leases in which a significant element of the risks and benefits of ownership are retained by the lessor are classified as operational leases. Payments made during the term of the lease (after deductions for any incentives from the lessor) are recorded as expenses in the income statement on a straight-line basis over the term of the lease.
A lease agreement for non-current assets in which the Group essentially owns the financial risks and benefits associated with ownership is classified as a financial lease. A financial lease is recorded in the balance sheet at the beginning of the term of the lease at the lower of the lease object’s fair value and the current value of the minimum lease charges.
At present the MAG Interactive Group only has lease agreements that are classified as operating lease agreements.
A dividend to the parent company’s shareholders is recorded as a liability in the consolidated financial statements in the period when the dividend is approved by the parent company’s shareholders.
EBITDA, profit/loss before financial items, taxes and depreciation.
2.21 Performance-based marketing
Direct marketing includes digital advertising, TV advertising and other advertising associated directly with the company’s products, as well as services and charges directly attributable to direct marketing as well as the production of advertising material. General marketing of the company and brand is not included in the cost of direct marketing.