Giant Network is one of the leading online game developers and operators in China. In 2008, Giant Network announced that it had invested in 51.com, a leading internet community platform in China. However, in 2011, Giant Network revealed in its annual report that it had suffered a loss of 240 million RMB from this investment. This article will analyze how this loss occurred and the accounting methods involved.
Giant Network Invested 36 Million RMB for 25% Stake in 51.com in 2008
In July 2008, 51.com announced that it had received investment from Giant Network. According to Giant Network’s 2011 annual report, they invested 36 million RMB and acquired a 25% stake in 51.com. At that time, 51.com was a leading internet community platform in China, so this investment gave Giant Network exposure to the internet sector beyond gaming.
Investment Classified as Available-for-Sale, Fair Value Determined Using Income Approach
According to Giant Network’s 2011 annual report, they classified their investment in 51.com as an available-for-sale investment. This means it is recorded at fair value on the balance sheet rather than at cost. To determine the fair value, an independent valuation was performed using an income approach. This approach estimates value based on the present value of expected future economic benefits generated by the investment.
240 Million RMB Loss Recorded Due to Decline in Fair Value from 2008 to 2011
In the 2011 annual report, Giant Network recorded a fair value of 144 million RMB for their 25% stake in 51.com. Compared to their original investment of 36 million RMB in 2008, this represents a decline in fair value of 240 million RMB. Under accounting standards for available-for-sale investments, this loss is recorded in other comprehensive income rather than net income.
Loss Attributed to Lower Valuation for 51.com’s Business Prospects
The decline in fair value implies 51.com’s business value decreased significantly from 2008 to 2011. This could be due to lower revenue/profit growth than originally expected, greater competition, or other business challenges. The income valuation approach would capture a downturn in 51.com’s long-term business prospects. Regardless of the reason, Giant Network’s investment clearly did not meet expectations.
Giant Network invested in 51.com in 2008 but recorded a major loss in 2011 due to a decline in the estimated fair value. This highlights the risks associated with equity investments, as business values can change rapidly.