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 and amended standards applied by the Group

The following standards have been applied by the Group for the first time for the financial year beginning on 1 September 2018:

– IFRS 9 Financial Instruments
– IFRS 15 Revenue from Contracts with Customers

Neither of the standards above had any material impact on the Group’s financial statements. IFRS 15 Revenue from Contracts with Customers has replaced IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations (IFRIC and SIC). Revenue is recognised when control of the goods or services sold is passed to the customer and replaces the previous policy of recognising revenue when the risks and rewards have been transferred to the buyer. The fundamental principle of IFRS 15 is that an entity recognises revenue in the manner that best reflects the transfer of control of the promised goods or services to the customer. Distinct goods or services in integrated contracts must be recognised as separate performance obligations and any discounts are, as a main rule, to be allocated to the distinct performance obligations. IFRS 15 entered force for financial years beginning on or after 1 January 2018. In accordance with the transition rules for IFRS 15, the Group has applied the new regulations with retrospective effect and has restated the comparative figures submitted, but this has had no impact on amounts recognised for preceding financial years. Nor is IFRS 15 expected to have a material impact on current or future periods.

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 2018/2019. 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 9 Financial Instruments has replaced IAS 39 Financial instruments: Recognition and measurement. The new standard entails new starting points for classifying and measuring financial instruments, a forward-looking impairment model and simplified conditions for hedge accounting. IFRS 9 entered force for financial years beginning on or after 1 January 2018, and the Group has chosen to apply IFRS 9 with retrospective effect but has chosen not to restate the comparative figures. As a result, the comparative figures provided continue to be accounted for in accordance with the group’s previous accounting policies. IFRS 9 did not have any impact on amounts recognised in prior years, nor is it expected to have any material impact on current or future periods.

New standards and interpretations which 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 2019 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 16 Leases In January 2016, the IASB published a new lease standard that will replace IAS 17 Leases, and related interpretations IFRIC 4, SIC-15 and SIC-27. The standard requires that assets and liabilities attributable to leases – with a few exceptions – are to be recognised in the balance sheet. Such recognition is based on the approach that the lessee has a right-of-use asset for a specific period of time, and simultaneously an obligation to pay for that right. Accounting for the lessor will remain essentially unchanged. The standard is applicable for financial years beginning on or after 1 January 2019, and will be applied by the Group as of 1 September 2019. Early application is permitted, and the standard has been adopted by the EU. See the disclosures on the effects on transition to IFRS 16 in Note 18.

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:

(a) assets and liabilities for each of the balance sheets are translated at the exchange rate on the balance sheet date;

(b) 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

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

(a) Goodwill

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 Financial instruments

IFRS 9 was applied for the current financial year, while IAS 39 was applied for the comparative period. Any differences between the policies are described in the section below.

Initial recognition

Financial assets and financial liabilities are recognised when the Group becomes a party to the financial instrument’s contractual conditions. Purchases and sales of financial assets and liabilities are recognised on the trade date, i.e. the date on which the Group undertakes to purchase or sell the asset.

Financial instruments are initially measured at fair value plus, for an asset or financial liability that is not measured at fair value in profit or loss, transaction costs that are directly attributable to acquisitions, or issues of a financial asset or financial liability (e.g. fees and commissions). Transaction costs for financial assets and financial liabilities measured at fair value through profit or loss are expensed in profit or loss.

Financial assets – Classification and measurement under IFRS 9, applied as of 1 September 2018

The Group classifies and measures its financial assets in the category of amortised cost.

Financial assets measured at amortised cost
Assets held to collect contractual cash flows and where these cash flows are solely payments of principal and interest are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit losses that have been recognised (see the paragraph below on impairment). Interest income from these financial assets is recognised using the effective interest method and is included in financial income. The Group’s financial assets that are measured at amortised cost consist of other non-current receivables, accounts receivable and other current receivables and accrued income as well as cash and cash equivalents.

Financial assets – Classification and measurement under IAS 39, applied to the comparative period before 1 September 2018
The Group classifies and measures its financial assets in the category of loan receivables and accounts receivable.

Loan receivables and accounts receivable
Loan receivables and accounts receivable are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s “loan receivables and accounts receivable” consist of other non-current receivables, accounts receivable (Note 2.10) and other current receivables as well as cash and cash equivalents (Note 2.11) while “accounts receivable” consist of prepaid expenses and accrued income that constitute financial instruments and are recognised after the date of acquisition at amortised cost using the effective interest method.

Derecognition of financial instruments
Financial assets, or portions thereof, are derecognised from the balance sheet when the contractual rights to collect the cash flows from the assets have expired or been transferred, and either (i) the Group transfers essentially all the risks and benefits associated with ownership or (ii) the Group neither transfers nor retains essentially all risks and advantages associated with ownership and has not retained control of the asset.

Derecognition of financial liabilities
Financial liabilities are derecognised from the balance sheet when the contractual obligations have been fulfilled, cancelled or extinguished in another manner. The difference between the carrying amount of a financial liability (or portion of a financial liability) that is extinguished or transferred to another party and the remuneration paid, including transferred assets that are not cash or assumed liabilities, is recognised in the statement of comprehensive income.

Since the terms of a financial liability are renegotiated and not derecognised from the balance sheet, a profit or loss is recognised in the statement of comprehensive income and the profit or loss is calculated as the difference between the original cash flows and the modified cash flows discounted at the original effective interest rate.

Financial liabilities – Classification and measurement according to IFRS 9 and under IAS 39

Financial liabilities measured at amortised cost
The Group’s other financial liabilities are subsequently classified as measured at amortised cost by applying the effective interest method. Other financial liabilities consist of accounts payable, other current liabilities and accrued expenses.

Impairment of financial assets recognised at amortised cost according to IAS 39 for comparative periods prior to 1 September 2018
At the end of each reporting period, the Group assesses whether there is objective evidence that a financial asset or group of financial assets needs to be impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of a need for impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

For the category of loan receivables and accounts receivable, the amount of the loss is calculated as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the original effective interest rate of the financial asset. The carrying amount of the asset is impaired and the amount of the loss is recognised in the consolidated income statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement.

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.

Impairment of financial assets

Impairment of financial assets recognised at amortised cost according to IFRS 9 applied from 1 September 2018
The Group assesses the future expected credit losses attributable to assets recognised at amortised cost. The Group recognises a reserve (“loss allowance”) for such expected credit losses on each reporting date. For accounts receivable, the Group applies the simplified approach for loss allowances, meaning that the reserve will correspond to the expected loss for the entire lifetime of the account receivable. To measure the expected credit losses, accounts receivable are grouped based on credit risk properties and days overdue. The Group employs forward-looking variables for expected credit losses. Expected credit losses are recognised in the consolidated income statement under operating expenses.

2.8 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.

2.9 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.

2.10 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 2018/19 only common stock exist in MAG Interactive AB (publ).

2.11 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.

2.12 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.

2.13 Employee benefits

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.

2.14 Recording income

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.

Sales in games take place in various mobile device platforms, and revenue is recognised when these are delivered to the customer, which is when control passes to the customer. A receivable is recognised when the goods are delivered since this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

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.

No substantial element of financing is deemed present as the sales are made with a credit term of 30–60 days. Furthermore, all contracts with customers have an original expected period of at most one year. As permitted under IFRS 15, the transaction price allocated to these unsatisfied obligations is not disclosed.

Normally, the Group’s customers pay with payment terms of 30–60 days.

The Group does not expect to have any contracts where the period between the transfer of the promised goods to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust the transaction price for the effects of a significant financing component.

All contracts with customers have an original expected period of at most one year. As permitted under IFRS 15, the transaction price allocated to these unsatisfied obligations is not disclosed.

2.15 Leases

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.

2.16 Dividends

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.

2.17 EBITDA

EBITDA, profit/loss before financial items, taxes and depreciation.

2.18 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.