As part of the TriplePoint speaker series, we hosted a private luncheon with Mick Bobroff, Audit Partner at Ernst & Young LLP, in which he presented general observations and principals on the accounting policies applied by companies using free-to-play/virtual goods-based business models. Additionally, Bobroff provided an overview on the different models that have recently emerged for recognizing revenue on the sale of virtual goods.
Bobroff brings to the table over 13 years of experience specifically focused in software and internet media industries, including social networking. Over the past several years, as the social gaming industry has rapidly expanded, Bobroff formed Ernst & Young’s positioning on how revenue should be recognized on the sale of virtual goods. Additionally, they recently released a white paper that gives an in-depth overview of the firm’s views on revenue recognition, and the presentation that Bobroff gave during our luncheon provides a summary of this white paper.
Here are some of the key findings from the presentation:
- Currently, three models exist for recognizing revenue on the sale of virtual goods – Game-based, User-based, and Item-based revenue models – and publishers can determine which model is most appropriate for their business based on the extent of user behavior data that is available for each of their specific games
- The sale of virtual currency itself does not initiate the earnings process for game publishers – it isn’t until the currency is redeemed for items such as virtual goods that the revenue must then be recognized
- Revenue is recognized when all of the following criteria are met: evidence of an arrangement between the seller and purchaser, the fee for the virtual item is fixed or determinable, collection of the virtual item is reasonably assured and delivery has been met; it’s also important to note that publishers are obligated to continue displaying the purchased virtual goods over certain periods of time based on the characteristics of those virtual goods
For more information, visit the Ernst & Young website to download the full white paper: http://www.ey.com/Publication/vwLUAssets/Hot_topic_-_Revenue_recognition/$FILE/Hot_Topic_Sale_of_virtual_goods.pdf.