SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2013

Summary Of Significant Accounting Policies

Note 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of December 31, 2013 and 2012, and the results of operations and cash flows for the years ended December 31, 2013 and 2012, have been made.

The accompanying consolidated financial statements as of December 31, 2013 and 2012, and for the years then ended include the Companies, SHL, Santaro HK, Ningbo Sntaro, Beijing Sntaro and FL Network (only through December 31, 2012). All inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with the U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the revenue recognition on Massively Multiplayer Online Role-Playing Games (“MMORPG”); the useful lives of fixed assets the realization of deferred tax assets and; the recoverability of intangible assets and property and equipment. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

Foreign Currency Translation and Transaction

The Company maintains its books and accounting records in RMB, which is determined as the functional currency. The Company’s financial statements are translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of the Company are translated at the prevailing exchange rate at each reporting period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from translation of these financial statements are reflected as accumulated other comprehensive loss in stockholders’ deficit.

Translation adjustments resulting from this process are included in accumulated other comprehensive loss in the consolidated statement of operations and comprehensive loss and amounted $531,822 as of December 31, 2013, and $358,075 as of December 31, 2012. The balance sheet amounts with the exception of equity at December 31, 2013 were translated at 6.1140 RMB to $1.00 USD as compared to 6.3161 RMB at December 31, 2012. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the years ended December 31, 2013 and 2012 were 6.1982 RMB and 6.3198 RMB, respectively.

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income (loss) in the consolidated financial statements for the respective periods.

Statement of Cash Flows

In accordance with FASB guidance, “Statement of Cash Flows,” cash flows from the Company’s operations is calculated based upon the functional currency. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

Fair Value of Measurements

ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements and establishes a framework for measuring fair value and expands disclosure about such fair value measurements.

ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

Level 1:	Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2:	Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3:	Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

There were no transfers between level 1, level 2 or level 3 measurements for the year ended December 31, 2013.

As of December 31, 2013, none of the Company’s nonfinancial assets or liabilities was measured at fair value on a nonrecurring basis.

Cash and cash equivalents, accounts due from and to related parties, other payables and accrued expenses are carried at cost on the balance sheets and the carrying amount approximates their fair value because of the short-term nature of these financial instruments.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.

The Company maintains cash deposits in financial institutions or state-owned banks within the PRC that are not covered by insurance. Non-performance by these institutions could expose the Company to losses. To date, the Company has not experienced any losses in such accounts.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:

Computer equipment	3-5 years
Leasehold improvements	3 years
Furniture and fixtures	3-5 years

Expenditures for maintenance and repairs are expensed as incurred. Gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations and comprehensive income.

Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount of the asset and its fair value. There were no impairment losses for the year ended December 31, 2013 and 2012, respectively.

Revenue Recognition

The Company currently provides online game services in the PRC and recognizes revenue in accordance to the criteria of ASC subtopic 605 and 985, Revenue Recognition when persuasive evidence of an arrangement exists, the service has been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. Online game revenues include our MMORPG operations, Co-operation of web browser game and game art design services.

MMORPG operations

The Company operates Massively Multiplayer Online Role-Playing Games (“MMORPG”) under a free-to-play model. The online game revenue derives from the sale of in-game virtual items and revenue was recognized pursuant to the item-based revenue model.

Under the item-based model, players are able to play the basic features of the game for free. We generate revenues when players purchase virtual items that enhance their playing experience, such as weapons, clothing, accessories and pets. The item-based revenue model allows us to introduce new virtual items or change the features or properties of virtual items to enhance game player interaction and create a better game community.

The Company sells prepaid cards, in both virtual and physical forms, to third party distributors who in turn sell the prepaid cards to end customers. The prepaid cards provide customers with a pre-specified number of game points for consumption. All prepaid cards sold to distributors require upfront advance cash payments. The prepaid game cards entitle end users to purchase virtual items in the Company’s online games. Prepaid cards will expire two years after the date of card production if they have never been activated. The proceeds from the expired game cards are recognized as revenue upon expiration of cards. In contrast, once the prepaid cards are activated and credited to a player’s personal game account, they will not expire as long as the personal game account remains active. The personal game account will always remain active before the game stop operating.

The end users also could choose bank recharge method directly to exchange Santaro currency (“Long Bi”) or game currency of 108 warriors (“Silver”) through third-party payment platforms.

All proceeds received from distributors or through direct online payment systems are deferred when received, revenues are recognized over estimated life of the virtual items that game players purchase or as the virtual items are consumed. The below description are the detailed revenue recognition method adopted by the company.

Instant consumption mode is used when users purchase instant services or items with Silver. And as that service or item will be immediately consumed right after the Silver is paid by the user, therefore the reflected RMB value (from equivalent Silver) can be confirmed and recorded as revenue after the completion of the purchase (exchange Long Bi for Silver) by the user.

Limited consumption mode is used when users purchase the items or services with limited effective time. This type of items or services will be fully consumed by the end of the effective time. Therefore the reflected RMB value of that purchase will be confirmed as revenue after the item or service has been fully consumed (expired).

Apportioned consumption mode is used for perpetual virtual items and services, which can be used unlimited times through their estimated life spans. The delivery criterion for perpetual virtual items is generally met ratably over the expected delivery obligation period, which, in this case, is the estimated life of the perpetual virtual items purchased. Revenue is recognized proportionately over the estimated life spans which are based on data related to paying game player usage patterns for each category of virtual item. The game log, which records the whole process of a specific item or service being purchased and consumed, will be used periodically to readjust the estimation on perpetual virtual items’ life spans.

Co-operation of web browser game

The Company established an online distribution platform www.1799.com to operate third-party web browser games in November, 2012. The focus of the platform is to provide diversification and make available a wide variety of games to a large and diverse spectrum of users and be a credit to the Company’s user database. On the other hand, as the operator, the Company signed distribution agreements with third-party developers to offer games to users on its platform. Although the Company is the party that signs user agreements and is responsible for its users’ experience, its remaining obligation is deemed to be inconsequential and perfunctory after the end users recharge to exchange the game coins of these web browser games. Besides, the third-party developers are obliged to provide on-going services to users, so a proportion of the full revenue received from end users is recorded as revenue according to the distribution agreements.

Game art design services

The Company also receives game art design service income from third-parties in PRC by providing game art design service when available. The service fees are determined based on contract terms, which are fixed or determinable, and collectability is reasonably assured. The service revenue is recognized when substantially all material services or conditions relating the sales have been performed or satisfied.

Cost of Revenue

Cost of revenue consists primarily of service fee, depreciation, salary and social insurance and other expenses incurred by the Company and are recorded on an accrual basis.

Costs incurred for maintenance after the online games are available for marketing are expensed when incurred and are included in product cost of revenues.

Cost of revenue also includes business tax and surcharges with 5.60% tax rate. Business tax and surcharges for the year ended December 31, 2013 and 2012 were $25,501 and $1,717, respectively.

Research and Development Expenses

For software development costs, including online games, to be sold or marketed to customers, the Company expenses software development costs incurred prior to reaching technological feasibility. Once a software product has reached technological feasibility, all subsequent software costs for that product are capitalized until that product is released for marketing. After an online game is released, the capitalized product development costs are amortized over the estimated product life. To date, the Company has essentially completed its software development concurrently with the establishment of technological feasibility. As of December 31, 2013, no costs have been capitalized.

Research and development expenses consist primarily of outsourced research and development expenses, payroll, depreciation charge and other overhead expenses for the development of the Company’s proprietary games, and are recorded on an accrual basis.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salary, advertising and promotion fee, and other expense incurred by the Company’s sales and marketing personnel. Sales and marketing expenses are recorded on an accrual basis. Sales and marketing expenses for the year ended December 31, 2013 and 2012 were $548,544 and $362,145, respectively.

Gain on Deconsolidation of Subsidiary

The Company accounts for deconsolidation of subsidiaries in accordance with ASC Topic 810 “Consolidation”. In accordance with ASC Topic 810, the parent shall account for the deconsolidation of a subsidiary by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:

a. The aggregate of all of the following:

1. The fair value of any consideration received;

2. The fair value of any retained non-controlling investment in the former subsidiary at the date the subsidiary is deconsolidated;

3. The carrying amount of any non-controlling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the non-controlling interest) at the date the subsidiary is deconsolidated.

b. The carrying amount of the former subsidiary’s assets and liabilities.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.

ASC 740 clarifies the accounting for uncertain tax positions and requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income tax expense in the consolidated statements of income.

Recent Issued Accounting Pronouncements

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012 for public entities. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect of the consolidated financial position, results of operation and cash flows.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

+ References+ Details

Santaro Interactive Entertainment Co 10-K