Krafton’s Accumulated Goodwill Impairment Reaches 420.7 Billion Won
Up 22% from Previous Year…595 Billion Won Impairment from Unknown Worlds Alone
Potential Damage Acknowledged, but Outlook Remains Positive
[Edaily Market-In Reporter Lee Gun-Um] Krafton’s (259960) aggressive mergers and acquisitions (M&A) strategy has turned into a significant accounting loss, casting a shadow over the company. Despite investing massive capital for expansion, the value of acquired companies has declined, resulting in a cumulative impairment loss exceeding 420 billion won on the books.
According to the Financial Supervisory Service’s electronic disclosure system on the 16th, Krafton’s goodwill amortization and impairment accumulation in intangible assets on a consolidated basis reached 420.8 billion won, a 22.1% increase from 344.7 billion won at the end of the previous year.
Goodwill impairment occurs when the actual profit-generating capacity of an acquired company falls short of the expected synergy or future value. In other words, the substantial management premium paid by Krafton during the M&A process is evaporating alongside poor performance, transferring into a financial burden.
In detail, the underperformance of the American game company Unknown Worlds, acquired for 734 billion won in 2021, was particularly painful. Krafton recorded an impairment loss of 59.5 billion won on Unknown Worlds’ goodwill alone last year, which accounts for 89% of the 66.7 billion won goodwill impairment recognized by Krafton over the same period.
Krafton is acutely aware of the potential value deterioration of Unknown Worlds. In the audit report, Krafton designated the impairment assessment as a ‘key audit matter,’ considering the uncertainty in accounting estimates and the significant book value of Unknown Worlds’ cash-generating unit.
A concerning aspect is that while internally vigilant about risks, Krafton has been applying relatively favorable indicators for valuation. In fact, Krafton applied a ‘discount rate’ of 7.87% to convert Unknown Worlds’ future cash flows into present value.
Typically, higher discount rates reflect risks conservatively in value evaluation. Considering that Krafton applied discount rates ranging from 9.10% to 14.15% for other goodwill, the rate applied to Unknown Worlds can be interpreted as relatively low.
This trend is also evident in performance estimates. Krafton assumed a high level of a 16.9% average annual revenue growth and a 40.6% average operating margin for Unknown Worlds over the next five years.
The recognition of large impairment losses adversely impacted Krafton’s bottom line net income. Krafton’s net income last year plummeted 43.7% to 733.7 billion won from 1.3026 trillion won the previous year. Exchange losses combined with one-time costs from intangible asset impairment, including goodwill, contributed to the net income decline.
Despite this situation, Krafton continued expanding by acquiring the Japanese ADK Group (ADKRAFTON) for 708 billion won last year, increasing the overall goodwill size by 84.2% year-on-year to 1.3479 trillion won.
Concerns are rising that if the acquired studios, into which significant funds have been invested, fail to prove profitability in the future, the accumulated goodwill of over 1 trillion won may lead to additional large-scale impairment losses, posing a medium to long-term financial risk.