MOBI Sky-Mobi Limited ADS (MM)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Shanghai Mihoyo Network Technology Co., Ltd. (the “Company”) was incorporated in Shanghai, the People’s Republic of China (the “PRC”) as a company with limited liability under the laws of the PRC on February 13, 2012. The Company through its subsidiaries (collectively referred to as the “Group”) is principally engaged in the developing and operating innovative and high quality animation, comic, game (ACG) for smartphones.

The consolidated financial statements of the Group are presented in Renminbi (“RMB”), which is the functional currency of the Company.

The Company has two wholly-owned subsidiaries as of August 31, 2015. Mihoyo Technology (Shanghai) Co., Ltd was established in Shanghai on July 9, 2014 and Mihoyo Entertainment Limited was established in Hong Kong on August 4, 2015. These companies conduct mobile game related business.

The Company adopts January 1, 2013 as the date of transition to IFRSs. Previously, the Group prepared its annual consolidated financial statements in accordance with Accounting Standards for Business Enterprises (“PRC GAAP”).

IFRS 1 requires retrospective application for all IFRS standards effective at the reporting date except for certain mandatory exceptions and optional exemptions from retrospective application.

The Group retrospectively apply those accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements.

The first-time adoption of IFRSs has had no material impact on the Group’s consolidated statement of financial position consolidated statement of profit or loss and other comprehensive income and consolidated statement of cash flows.

There is no difference in equity nor total comprehensive income, between the amounts reported in PRC GAAP and the amounts reported in IFRSs at the date of transition to IFRSs, at August 31, 2015 or during the eight months ended August 31, 2015, whichever applicable. Accordingly, no reconciliation of equity nor total comprehensive income is presented.

The Company was restructured to a joint stock company from September 1, 2015 for its domestic listing purpose. From September 1, 2015, one investor of the Company, Hangzhou Miyi Technologies Co., Ltd (subsidiary of Sky-mobi Limited, or Sky-Mobi), lost the significant influence over the Company. The consolidated financial statements of the Company is presented as of August 31, 2015 and for the period then ended pursuant to the SEC Rule 3-09 of Regulation S-X, which requires Sky-mobi to file separate annual financial statements for its equity- method investee that trips certain significant tests. Since the Company ceased to be an associate of Sky-Mobi From September 1, 2015, this financial statements only cover the period from January 1, 2015 to August 31, 2015 and amounts presented in the financial statements are not entirely comparable.

Statement of compliance

The Group’s consolidated financial statements comply with IFRSs as issued by the IASB.

Basis of preparation

The Group’s consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value as explained in the accounting policies set out below. Historical cost is generally based on fair value of the consideration given in exchange of assets, goods or services.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements are determined on such a basis, except for leasing transactions that are within the scope of IAS 17 Leases , and measurements that have some similarities to fair value but are not fair value, such as value in use in IAS 36 Impairment of Assets .

In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

The principal accounting policies are set out below.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries. Control is achieved where the Company:

The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year/period are included in the consolidated statements of profit or loss and other comprehensive income from the date the Group gains control until the date when the Group ceased to control the subsidiary.

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group, the revenue can be measured reliably and collectability is reasonably assured.

Mobile Game Revenues

(i) Self-operation

The Group primarily operates self-developed mobile games and generates mobile game revenues from the sale of in-game premium features of mobile phone games that are operated under the free-for-trial model. The Group sells in-game currency, which will be later used by game players to purchase in-game premium features and recorded as deferred revenue at first. The in-game premium features, including skills, privileges or other in-game consumables, features or functionality are consumed immediately by the game players in the games. The Group records revenue generated from mobile games once the in-game premium features are consumed, on a gross basis, as the Group is acting as the principal to fulfill all obligations related to the mobile game operation.

(ii) Cooperation

The Group also generates revenues from cooperating with other mobile games operators, who will operate the games of the Group on third-party’s game platform or third-party app stores. Other mobile games operators pay fixed license fees to the Group to obtain licenses to publish and operate the games of the Group in limited years, and will share certain percentage of the revenue generated from game players with the Group. The license fees received will be recorded as deferred revenue and recognized into revenue within the contract period on a straight-line basis. The Group records revenues shared by other mobile operators upon receipt of monthly statements from these game operators when collectability is reasonably assured.

Promotion revenues

The Group allows content providers and service providers to sell their mobile applications and other contents to mobile users through its website or games, for which the Group charges a commission based on a percentage of the revenue earned from those applications or number of active users. The Group records such promotion revenue upon receipt of monthly statements from the content providers and service providers when collectability is reasonably assured.

Cost of revenues

Cost of revenues primarily consists of (i) fees paid to distribution channels, (ii) fees paid to payment channels, (iii) fees paid to third-party service providers. Cost of revenues also includes staff salaries, utilities, infrastructure maintenance fees, and operating expenses directly related to the operation of the mobile game platforms.

Leases

Leases are classified as operating leases unless the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee, which would be classified as finance leases.

The Group as lessee

Operating lease payments are recognized as expenses on a straight-line basis over the lease term.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency, which is the currency of the primary economic environment in which the entity operates, are recorded in the respective entities’ functional currency at the rates of exchange prevailing on the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising from the settlement of monetary items, and the retranslation of monetary items are recognized in profit or loss in the period in which they arise.

Government grants

Government grants are not recognized until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognized in profit or loss in the period in which they become receivable.

Employee benefits

Payments to defined contribution retirement benefit plan are recognised as an expense when employees has rendered service entitle them to contributions. A liability is recognised for benefits accruing to employees in respect of wages, salaries and annual leave in the period the related service is rendered at the undiscounted amount of the benefits to be paid in exchange for the service.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year/period. Taxable profit differs from profit before tax as reported in the consolidated statement of profit or loss and other comprehensive income because of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax are recognized in profit or loss.

Research and development expenses

Expenditure on research activities is recognized as an expense in the period in which it is incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project), is recognized if all of the following have been demonstrated:

The amount initially recognized for an internally-generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above.

Subsequent to initial recognition, an internally-generated intangible asset is measured at cost less accumulated amortization and accumulated impairment losses (if any), on the same basis as intangible assets acquired separately.

The Group currently expenses internal and external development costs incurred as all current development costs do not fulfill the above conditions.

Property and equipment

Property and equipment are stated in the consolidated statement of financial position at cost less subsequent accumulated depreciation and accumulated impairment losses, if any.

Depreciation is computed on a straight-line basis over the following estimated useful lives:

The useful lives of the property and equipment are evaluated annually. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset is included in profit or loss in the period in which the item is derecognized.

Impairment of tangible assets

At the end of the reporting period, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indicator exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Recoverable amount is defined as the higher of an asset’s fair value less costs of disposal and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately.

When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Cash and cash equivalents/Term deposits

Cash and cash equivalents include cash on hand and in banks and other short-term highly liquid investments with original maturities of three months or less which are not restricted as to use. Term deposits represent bank deposits with original maturities of over three months but equal or less than one year when purchased. Such deposits are available for general use by the Company, which are unrestricted as to withdraw and use.

Financial instruments

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities, other than financial assets or financial liabilities at fair value through profit or loss, are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

The Group’s financial assets are classified into loans and receivables and available-for-sale financial assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including cash and cash equivalent, term deposit, trade and other receivables(excluding prepayments) and amounts due from related parties), are carried at amortised cost using the effective interest method, less any identified impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables where the recognition of interest would be immaterial.

Available-for-sale financial assets (AFS financial assets)

AFS financial assets are non-derivatives that are either designed as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

Bank financial products held by the group are classified as AFS and stated at fair value at the end of each reporting period with the change in fair value recorded in other comprehensive income, and reclassified to earnings upon sale of the products. Fair value is determined in the manner described in note 5.

Impairment of financial assets

Financial assets are assessed for indicators of impairment at the end of the reporting period. Financial assets are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected. Objective evidence of impairment could include:

For certain categories of financial assets, such as trade receivables and other receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 60 days and observable changes in national or local economic conditions that correlate with default on receivables and other receivables.

For financial assets carried at amortized cost, the amount of loss recognized is the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the financial asset's original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade and other receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. When a trade and other receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

For financial assets measured at amortized cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

Financial liabilities and equity instruments

Debt and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recognized at the proceeds received, net of direct issue costs.

Financial liabilities

Financial liabilities, including trade and other payables and amounts due to related parties, are subsequently measured at amortized cost, using the effective interest.

Effective interest method

The effective interest method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset or liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition

Interest income and expense is recognized on an effective interest basis.

Derecognition

The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognized in profit or loss.

Financial liabilities are derecognized when the obligation is discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.

In the current period, the Group has applied a number of amendments to IFRS issued by IASB that are mandatorily effective for an accounting period that begins on or after January 1, 2015.

The application of the amendments to IFRSs in the current period has had no material impact on the Group's financial performance and positions for the current and prior years/period and/or on the disclosures set out in these consolidated financial statements.

The Group has not early applied the following new and amendments to IFRSs that have been issued but are not yet effective:

Except as disclosed below, the application of the new and amendments to IFRSs issued but not yet effective has had no material impact on the Group's financial performance and positions and/or the disclosures when they became effective.

IFRS 9 Financial Instruments

IFRS 9 issued in 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and further amended in 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a 'fair value through other comprehensive income' (FVTOCI) measurement category for certain simple debt instruments. Key requirements of IFRS 9 are described as follows:

• All recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent reporting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss.

• With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability, that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value of financial liabilities attributable to change in the financial liabilities’ credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was presented in profit or loss.

• In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised.

•The new general hedge accounting requirements retain the three types of hedge accounting mechanisms. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an 'economic relationship'. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity's risk management activities have also been introduced.

Based on the Group's financial assets and financial liabilities as of December 31, 2015, the directors anticipate that the adoption of IFRS 9 in the future will affect the classification and measurement of the Group's available-for-sale investments and is not likely to have significant impact on the amounts of the Group's other financial assets and financial liabilities. Regarding the Group's available-for-sale investments, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

IFRS 15 Revenue from Contracts with Customers

In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective.

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction prices.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation.

Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.

The directors of the Company anticipate that the application of IFRS 15 in the future may have an impact on the amounts reported and disclosures made in the Group’s consolidated financial statements. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 15 until the Group performs a detailed review.

IFRS 16 Leases

IFRS 16, which upon the effective date will supersede IAS 17 Leases, introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Specifically, under IFRS 16, a lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Accordingly, a lessee should recognise depreciation of the right-of-use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows. Also, the right-of-use asset and the lease liability are initially measured on a present value basis. The measurement includes non-cancellable lease payments and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. This accounting treatment is significantly different from the lessee accounting for leases that are classified as operating leases under the predecessor standard, IAS 17.

In respect of the lessor accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

The directors of the Company will assess the impact of the application of IFRS 16. For the moment, it is not practicable to provide a reasonable estimate of the effect of the application of IFRS 16 until the Group performs a detailed review.

Capital risk management

The primary objective of the Group’s capital management is to safeguard the Group’s ability to continue as a going concern, so that it can provide an adequate return to shareholders by pricing its services commensurately with the level of risk. The Group’s overall strategy remains unchanged during the reporting periods.

The capital structure of the Group consists of equity attributable to owners of the Company, which includes share capital and reserves.

The Group reviews the capital structure regularly and considers the cost of capital and the risks associated with each class of capital and, to the extent necessary, balances its overall capital structure through the repurchase of share and issuance of new shares.

Categories of financial instruments

The carrying amounts of financial assets and financial liabilities are as follows:

Financial risk management objectives and policies

Foreign currency risk management

The Group mainly operates in the PRC with most of its transactions settled in RMB. The foreign currency risk is mainly attributable to the Group’s U.S. dollar (“US$”) bank account balances. The carrying amount of the US$ bank account balances was approximately nil and RMB9,154,000 and RMB9,850,000 as of December 31, 2013 and 2014 and as of August 31, 2015, respectively. The Group has not used any forward contracts, currency borrowings or other means to hedge its foreign currency risk exposure.

If the RMB exchange rate against the US$ had appreciated or depreciated by 5% with all other variables held constant, the carrying value of bank accounts denominated in US$ would have decreased or increased by RMB nil, RMB458,000 and RMB492,000 as of December 31, 2013 and 2014 and as of August 31, 2015, respectively, with a corresponding decrease or increase in net profit for the respective years/period. The sensitivity analysis only details the Group’s sensitivity to a 5% appreciation and depreciation in RMB, against the foreign currency, US$. The 5% figure is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rate.

Interest rate risk management

The Group has exposure to cash flow interest rate risk due to the fluctuation of the variable interest rates associated with its cash and cash equivalents which are based on prevailing market interest rates. Currently, the Group does not have a specific policy to manage their interest rate risk. The Group does not have significant exposure to cash flow interest rate risk as of December 31, 2013 and 2014 and as of August 31, 2015 as the interest rates have not fluctuated significantly in recent years.

The Group’s exposure to interest rates on cash and cash equivalents and term deposit are detailed in the liquidity risk management section of this note.

Credit risk management

The Group’s maximum exposure to credit risks is equivalent to the total carrying amount of trade and other receivables, amount due from related parties, cash and cash equivalents, term deposits and AFS financial assets of RMB1,092,000, RMB75,029,000 and RMB170,971,000 as of December 31, 2013 and 2014 and as of August 31, 2015, respectively.

In order to minimize the credit risk of trade receivables from mobile game operators and platforms, the Group assesses the credit worthiness of them prior to contracting with them. The Group further monitors the subsequent performance of them in order to mitigate collection risk going forward. In addition, the Group reviews the recoverable amount of each individual trade receivable at the end of each reporting period to determine if provision should be made for uncollectible amounts.

The Group has concentration of credit risks with exposure limited to certain mobile game operators and platforms. As of December 31, 2013 and 2014 and as of August 31, 2015, five customers accounted for approximately RMB28,000, RMB15,108,000 and RMB 27,776,000, or 100%, 99% and 66% of the Group’s trade receivables, respectively. The Group closely monitors the subsequent settlement of trade receivables and does not grant long credit periods to the counterparties.

The Group’s cash and cash equivalents, term deposits and AFS financial assets are held by large banks established in the PRC. The Group does not expect any losses arising from non-performance of these financial institutions.

Liquidity risk

The Group monitors and attempts to maintain a level of cash and cash equivalents adequate to finance the Group’s operations and mitigate the effects of fluctuations in cash flows.  

The following tables present the maturities of the Group’s financial liabilities based upon the undiscounted cash flows of financial liabilities assuming payment on the earliest date on which the Group can be required to pay. The table includes both interest, if any, and principal cash flows.

The following table details the Group’s expected maturity for its non-derivative financial assets. The table has been drawn up based on the undiscounted contractual maturities of the financial assets including interest that will be earned on those assets. The inclusion of information on non-derivative financial assets is necessary in order to understand the Company’s liquidity risk management as the liquidity is managed on a net asset and liability basis. 

In the management of liquidity risk, the Group monitors and maintains a level of cash and cash equivalent deemed adequate by the management to finance of the Group’s operations and mitigate the effects of fluctuations in cash flows.

Fair value

(i) Fair value of the Group's financial assets that are measured at fair value on a recurring basis

Some of the Group's financial assets are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets are determined (in particular, the valuation technique and inputs used).

* AFS financial assets is in Level 3 of Fair value Hierarchy that is valued through discounted cash flow. Future cash flows are based on expected return and credit risks of investments underlying the financial products.

The carrying amounts of all financial assets (except for the AFS financial assets) and financial liabilities as of December 31, 2013 and 2014 and as of August 31, 2015 are recorded at amortized cost, using the effective interest method. The directors of the Company consider such amounts approximate their fair value.  

Segment information

The Group operates and manages its business as a single segment. The Group’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews the revenue analysis by revenues driven from games operating and other revenues and the profit from operation of the Group as a whole when making decisions about allocating resources and assessing performance of the Group.

Geographical information

All of the Group’s non-current assets are located in the PRC. Revenues are primarily derived from the PRC, with minimal revenues derived from Southeast Asia, Korea and other countries. The following table sets forth revenues by geographic area:

Information about major customers

During the year ended December 31, 2013 and 2014 and the eight-month period ended August 31, 2015, customers that individually accounted for over 10% of the Group’s total revenue are as followed:

*: Less than 10%.

Note: Government grant represents subsidies granted by PRC local government authorities to the Group — for rewarding their performance in technology industry. Such grants were unconditional and had been approved by the PRC local government authorities.

PRC

The statutory income tax rate is 25%.

In 2014, Shanghai Mihoyo Network Technology Co., Ltd. (“Mihoyo”) was granted the status of "Software Enterprise" under the PRC tax laws that entitled it to a preferential Enterprise Income Tax ("EIT") rate of two-year EIT exemption from its first year of profitable operation, after offsetting prior years’ tax losses, and a 50% reduction of its applicable EIT rate for the succeeding three years. The first profit-making year of Mihoyo was 2014. As a result, Mihoyo was subject to a tax rate of 0% for calendar year 2014 and 2015, and a tax rate of 12.5% for calendar year 2016, 2017 and 2018. Mihoyo prepaid RMB5,970,000 income tax to local tax bureau in 2014 before obtaining above stated tax exemption which was recorded as tax recoverable and this balance was collected back in 2015.

The tax expense can be reconciled to the profit before tax per the consolidated statement of profit or loss and other comprehensive income as follows:

The Company did not pay and declare any dividends on ordinary shares in the year ended December 31, 2013 and declared and paid dividends of RMB10,000,000 in the year ended December 31, 2014. In the eight-month period ended August 31, 2015, the company declared dividend of RMB52,000,000, of which RMB12,000,000 has been pay as of August 31, 2015.

The trade receivables are all within 6 months and none of them are past due but not impaired.

The Group has not recognized an allowance for doubtful receivables because there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral or other credit enhancements over these balances.

Note: Mihoyo Technology Limited is controlled by the same individual shareholders of the Group.

The amounts due from related party are trading in nature. The trade balances are unsecured, non-interest bearing and repayable on contract credit term (i.e.: 6 month).

The amounts due to related party are loan from shareholder in nature. The non-trade balances are unsecured, non-interest bearing and repayable on demand.

(b) Related party transactions

During the year ended December 31, 2013 and 2014 and the eight-month period ended August 31, 2015, respectively, significant related party transactions were as follows:

(c) Key management compensation

The compensation of directors and other key management during the years was as follows:

* The Group has accrued and paid RMB1,656,000 bonus to key management during the year 2014.

16. OPERATING LEASES

The Group has operating lease agreements principally for its office properties and servers in the PRC with lease terms between one to two years. These leases are renewable upon negotiation.

The Group’s commitments for future minimum lease payments under non-cancelable operating lease agreements are as follows:

17. APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved by the board of directors and authorized for issue on June 30, 2016.

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