MAKING SENSE OF A COMPLEX WORLD ONLINE GAMING: REAL ISSUES IN VIRTUAL WORLDS - PWC
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MIAG Issue: 8
Media Industry May 2015
Accounting Group
Making sense of a
complex world
Online gaming: Real
issues in virtual worlds
This paper explores some
of the key IFRS revenue
recognition issues in the
world of online gaming.
Contents Introduction to MIAG 2 Online gaming: Real issues in virtual worlds 3 Background 4 Example 1: Who is my customer? 8 Example 2: Virtual items and virtual currencies 12 Example 3: Multiple element arrangements 16 Example 4: Unused currency and unused items 18 Conclusion 20 Further reading 22 Contacts 24
Introduction to MIAG
Our Media Industry Accounting Group (MIAG) brings
together our specialist media knowledge from across our
worldwide network. Our aim is to help our clients by
addressing and resolving emerging accounting issues that
affect the entertainment and media sector.
With more than 4,200 industry your thoughts and suggestions about
dedicated professionals, PwC’s global future topics of debate for the MIAG
entertainment and media (E&M) forum, and very much look forward to
practice has depth and breadth of our ongoing conversations.
experience across key industry sectors
including: television, film, advertising, Best wishes
publishing, music, internet, video and
online games, radio, sports, business
information, amusement parks, casino
gaming and more. And just as
significantly, we have aligned our media Sam Tomlinson
practice around the issues and PwC UK
challenges that are of utmost
importance to our clients in these
Chairman
sectors. One such challenge is the
PwC Media Industry Accounting Group
increasing complexity of accounting for
transactions and financial reporting of
results – complexity that is driven not
just by rapidly changing business models
but also by imminent changes to the
world of IFRS accounting.
Through MIAG, PwC1 aims to work
together with the E&M industry to
address and resolve emerging
accounting issues affecting this dynamic
sector, through publications such as this
one, as well as conferences and events to
facilitate discussions with your peers. I Sam Tomlinson
would encourage you to contact us with PwC UK
1
PwC refers to the PwC network and/or one or more of its member firms, each of which is a
separate legal entity
2 MIAG Issue: 8
Online gaming: Real issues in virtual worlds
PwC’s Global E&M Outlook 2014-2018 forecast an increase in
global spending on video games from €66 billion in 2014 to €89
billion in 2018, with online gaming being one of the key drivers.
Our eighth MIAG paper explores some of the key revenue
recognition issues in these virtual worlds.
Video gaming encompasses not only exhaustive; but they will hopefully
traditional console or PC games, which provide food for thought for online
have been in existence for over 20 years, gaming companies when considering
but also online gaming. The significant the real revenue recognition issues that
growth of online gaming is driven partly arise in virtual worlds.
by online players interacting with online
friends and rivals, and partly by the rise We hope that you find this paper useful
of mobile gaming facilitated by and welcome your feedback.
increasing penetration of smartphones
and tablets. Best wishes
The rise of online gaming encompasses
not just expensively-produced
blockbusters but also low-cost mobile
games. The low cost of producing Wilson Chow Samying Huie
certain types of games has drastically PwC China PwC China
lowered barriers to entry compared with
console and PC games, causing the
number of game developers to explode PwC Media Industry Accounting Group
over the past five years.
New technology platforms and new
entrants have driven new business
models such as ‘freemium’ games that
are free to play but in which real cash
must be spent to acquire virtual goods or
other premium content. This paper
considers the resulting accounting
challenges in various practical examples
covering principal/agent arrangements,
virtual items and virtual currencies, and
multiple element arrangements. Our
Wilson Chow Samying Huie
scenarios are clearly not designed to be PwC China PwC China
Issue: 8 MIAG 3
Background
PwC’s Media Industry Accounting Group (MIAG) is our
premier forum for discussing and resolving emerging
accounting issues that affect the entertainment and media
sector – visit our dedicated website: www.pwc.com/miag
What are the most common online games’ (MMOGs), these games are
gaming business models? characterised by longer playing
Online games can be categorised by how periods and high game intensity.
they are monetised (i.e. how the game The gamer makes a significant
enjoyment experience is sold), and by emotional and/or cognitive
sessions compared to traditional
game type and genre. investment in the game, and game
MMOGs. One popular type of web
play may last for a few hours per
• Monetisation: Subscription-based games are those social games played
session, with many such sessions.
games are monetised by either a on social network platforms. Web
These games are typified by the
periodic subscription fee, a download games typically do not require any
virtual gathering of multiple players
fee or other usage fee. Non- software installation apart from a
in the same online environment (via
subscription-based games are typically web browser or sometimes browser
internet connection), with gamers
free to play (‘freemium’) but are plug-in. Web games are often
often cooperating or competing in
monetised through the sale of virtual free-to-play but players can choose
the context of an epic adventure or
items or other premium content to the to purchase virtual items to enhance
thematic experience. MMOGs
game player (‘gamer’). Successful the game-playing experience (the
typically require dedicated software
monetisation of a freemium game ‘freemium’ model).
to be downloaded through which
involves creating a gaming experience the game is delivered and played on – Mobile games – are those games
where players are incentivised to spend computer screens of video game played on smartphones, tablets,
money on virtual items that enhance consoles. Large multi-player games PDAs and other mobile devices.
overall enjoyment. A virtual item can be delivered on a subscription or They share a lot of the same
represents either the digitisation of a non-subscription basis. characteristics as web games, such
real-world product (e.g. virtual hat) or as that they include all game genres,
a digital concept with its own meaning – Web games – also known as
can be single-player or multi-player,
within the game (e.g. power, magic, browser game, these games are
and appeal to a broader audience.
special ability). played over the internet via a web
However, mobile games are even
browser, generally on PC. Web
• Game types: Games can be for a single easier to access than web games so
games include all game genres (such
player (solo) against pre-scripted rules people tend to play in even more
as hardcore games, midcore games,
or for multiple players in a world frequent and shorter sessions. Due
casual games, social games etc.) and
designed to foster collaboration and/or to the limitations of the screen,
can be single-player or multi-player.
competition. The types of online games mobile games tend to be less
Unlike MMOGs that attract more
can be summarised in many different complex and include more casual
hardcore players, web games appeal
ways but perhaps most commonly games and social games. Unlike web
to a wide spectrum of age groups
as follows: games, mobile games require the
and demographics due to easy and
installation of software known as
– Large multi-player games – often free access. Also, they are often
the application (‘app’). Apps are
termed ‘massive multi-player online played in more frequent, shorter
generally downloaded by players
4 MIAG Issue: 8
from mobile app stores but Who have the key roles in delivery? game maintenance, and providing
sometimes are pre-installed by Delivery of an online game to paying and customer service functions (e.g. call
mobile carriers and mobile device non-paying players often involves the centre, player support, online forum).
makers. Mobile games can be played following roles. These different roles can
• Distribution channels and
both online and offline. The pay-per- be carried out by different entities or one
intermediaries are other parties
download model is most common entity may serve one of more of the roles.
involved in this gaming ecosystem.
but subscription-based and
For mobile and some web games, the
freemium model are also becoming • Game developers combine
distribution channel might be the
more popular. With the programmers, graphic artists and
publisher. These intermediaries
development of cross-platform other specialists to develop the code
include:
delivery of content, publishers are and intellectual property (IP)
increasingly delivering a seamless underlying a game. Game developers – Storefronts such as the Apple App
connection between web games and may be involved in post-release game Store, Google Play or Amazon
mobile games. Gamers are able to upgrade, maintenance, and bug-fixing Appstore (for Android) are
play their chosen games on both activities. Game development used to distribution channels that have
their computers and their be mostly an in-house function of a direct access to end users;
mobile devices. fully integrated gaming company that
– Other delivery intermediaries
also markets, distributes, operates
• Game genres: Within both single – providing e.g. IT infrastructure;
games and supports game customers.
and multi-player online games there social websites; and online portals
Today, there are more and more
are numerous genres including action, and other commercial websites that
studios and individuals focused
sports, mystery, fantasy, adventures, allow access to the game; and
exclusively on game development.
science fiction, and so on. Often, the
– Payment intermediaries that
game environment is adapted from a • Game publishers release the game
facilitate payment transactions
popular trademark (brand), book or code by selling DVDs or making the
between a gamer and another party.
movie with the right to use such game available for access on the
These include credit card payment
intellectual property licensed from internet or storefronts. Game
processors, distributors of prepaid
another party. publishers may use their own IT
cards or online payment service
infrastructure connected to the
providers such as Paypal. Payment
internet, or they may use a delivery
functions can also be provided by
intermediary. Game publishers may
storefronts and delivery
also be responsible for marketing,
intermediaries.
Issue: 8 MIAG 5
The arrangements will be different for publishing platforms built by mobile should be applied to the transaction as
different types of games. Operations in game publishers on the strength of their a single unit. Conversely, if the
different terrorities may also differ. For products and user base. These platforms customer perceives there to be a
example, in traditional MMOGs, there are offer functions including publishing, number of elements to the transaction,
typically only two main parties involved promotion, operation, social connectivity then the revenue recognition criteria
in providing game service to end users. and account management to game should be applied to each element
Game developers focus on research and developers. These trends are separately.
development as well as the creation and transforming the distribution and
upgrade of the games. Game publishers consumption of online games. • Apply the revenue recognition
license the games from the developers criteria to each element (or to the
and are responsible for distribution, What is the relevant IFRS transaction as a whole) – revenue is
marketing and operations of the games. guidance? recognised when (i) it is probable that
Occasionally, the publisher and the economic benefits will flow to the
IAS 18 Revenue recognition does not
developer is the same company. However, seller; (ii) revenues and costs can be
provide industry-specific guidance and
the operation of a web game or mobile measured reliably; and (iii) the risks
indeed was written long before online
game generally involves more parties. In and rewards of ownership have been
gaming even existed as a concept! A
addition to game developers and transferred with minimal ongoing
general approach to revenue recognition
publishers, mobile app stores, mobile involvement (for sale of goods) or the
for online gaming companies is
carriers, social networks, and online stage of completion can be measured
as follows:
portals might also be involved. Or the reliably (for provision of services).
mobile game developer may launch its • Determine who the customer is
For the gaming industry, two models
game directly on Apple’s App Store. The – this helps to determine whether
generally emerge:
role of each party might vary significantly revenue is recognised gross (as a
depending on specific arrangements. principal) or net (as an agent) and • Gaming as software: e.g. traditional
what the company’s obligations are to packaged console and PC games, for
The online gaming industry is currently its customer. which the company is selling software.
undergoing dramatic change driven by • Determine if the transaction is one • Gaming as service: this model
significant technology and consumer unit or comprises multiple elements encompasses online or hosted games
trends including (1) rapid growth of – the transaction should generally be where the operational business model
mobile platforms, (2) social networks as viewed from the perspective of the is the delivery of the game as a
an integral part of the entertainment customer and not the seller i.e. what service, regardless of whether
fabric, and (3) mobile platforms and does the customer believe he or she is accessed by PC, console, or mobile
social networks opening their platforms purchasing? If the customer views the device. It is this type of gaming that is
to developers. There is also an purchase as one product, then it is explored in the subsequent scenarios
emergence of independent mobile game likely that the recognition criteria in this paper.
6 MIAG Issue: 8
This paper considers the resulting for accounting periods beginning on or often follow accounting revenues. So
accounting challenges in various after 1 January 2017 (or 2018) with judgements about revenue recognition in
practical examples covering principal/ earlier adoption permitted. Transition to online gaming scenarios can affect the
agent arrangements, virtual items and IFRS 15 will require companies to review timing of tax cash payments.
virtual currencies, and multiple all sales arrangements closely, which in
element arrangements. Our scenarios practice might result in media companies Some countries may have tax legislation
are clearly not designed to be needing to revisit historical policies and specifically designed to address online
exhaustive; but they will hopefully judgements even where there is not an gaming, in which case the accounting
provide food for thought for online obvious difference between IAS 18 and treatment adopted should in theory be
gaming companies when considering IFRS 15. Even if a company expects tax neutral. However, even in such
the real revenue recognition issues that revenue recognition to be similar under countries, the accounting treatment
arise in virtual worlds. As business IFRS 15 to its existing practice under IAS adopted might have implications with
models continue to develop, other 18, it cannot simply assume that this will regards to corporation tax and sales tax,
since differing treatments for accounting
issues might become increasingly be the case. IFRS 15 is a fundamentally
and tax purposes might raise the
important for this industry, such as different model to the current revenue
attention of local tax authorities or
appropriate recognition of ‘in-game’ guidance and even where revenue
accounting regulators. Tax authorities
advertising revenue, the timing of cost recognition is unchanged, the rationale
might also pay close attention to sales to,
recognition and broader principal/ might be different. We expect practice to or distribution by, related group
agent issues. As always, the answer develop quickly over the coming months companies to understand the substance
for complicated real life arrangements and recommend that companies consult of intra-group transactions.
will depend on specific facts and with their accounting advisors as they
circumstances. work through their transition projects. We would always recommend consulting
with a local tax expert to determine
What about IFRS 15? Are there any tax implications? possible tax consequences of revenue
This paper focuses primarily on the This paper is concerned primarily with recognition judgements.
revenue recognition challenges that accounting, which should be consistent
online gaming companies face today. across companies reporting under IFRS,
However, for each scenario, we have also rather than tax, which will vary with
included relevant considerations under each country’s local laws and tax
the new revenue recognition standard regulations. We note that both
IFRS 15, which is expected to be effective corporation (income) tax and sales tax
Issue: 8 MIAG 7
Example 1: Who is my customer?
“As a game publisher, all my income
ultimately derives from gamers. But are
these gamers my customers?”
In example 1 we consider what the game amount paid to the distribution company is responsible for the
publisher is selling and who it is selling channel (the expense instead being acceptability of the products or
to. As set out below, this assessment is presented as a cost) if the publisher services or has the most influence on
key, as the measurement of revenue has significant latitude over the their content.
could be significantly different relationships with distribution
• The company has inventory risk
dependent on who the game publisher channels and responsibility for the
before or after the customer order,
identifies as its customer. For example, transactions with them.
during shipping or on return – for
identifying the customer can be
Another possibility (perhaps less this indicator the general sales risk of
important when assessing whether
common) is that the game publisher’s the developed good could also be
payments made or discounts given to
customer is the distribution channel. considered i.e. who bears the greater
either the developer or the gamers are
This might be the case where the risk from the investment in content
the publisher’s marketing costs or
distribution channel is acting principal and distribution.
revenue deductions.
selling to the ultimate gamer and the
• The company has latitude in
publisher sells game software or
Complex gaming arrangements – establishing prices – this might be
provides a game service to the channel.
involving a game developer; publisher; the case if the company sets the sales
distribution channel (e.g. internet portal price or has the ability to set prices
In certain situations, the publisher might
or platform provider or internet store); within a broad range. An agent is
also need to consider whether it is
and gamer – typically require the game more likely to have earnings that are
actually an intermediary between the
publisher to assess whether it is predetermined via a fixed fee per
developer and the ultimate gamers and
functioning as: transaction or a stated percentage of
in fact has two customers because its
the amount billed to the customer.
• A principal selling directly to efforts benefit both the developer and
ultimate gamers, using the internet the ultimate gamer. This is sometimes • The company bears the customer’s
portal or store as its agent, in which known as the ‘dual customer’ model. credit risk for the amount
case the game publisher would receivable from the customer – this
recognise as revenue the gross amount A company is acting as principal when it ‘traditional’ risk might be mitigated by
paid by the gamers, with the amount has exposure to the significant risks and up-front electronic payment.
paid to the developer and portal/store rewards associated with selling goods or
These indicators are not exhaustive; nor
representing a cost of sales; or rendering services. In contrast, a
must all of them have been met to
company that acts on behalf of another
• A sales agent acting on behalf of the confirm that a company is acting as
party realises revenues by receiving
game developer, i.e. its customer is principal. In practice, some indicators
commissions or fees, because it is acting
really the developer so it recognises as might suggest that one party is
as an agent. The illustrative examples
revenues only the net amounts principal, while other indicators suggest
attached to IAS 18 set out some
retained after deducting directly the reverse. Relevant indicators are
indicators to consider when assessing
related payments; it is worth noting therefore considered as a whole to assess
potential principal/agent arrangements.
that the ‘net revenue’ recognised the economic substance of the
Indicators that a company should
might either (i) include a deduction arrangement, with the greater weight
account for a transaction as principal
for the amount paid to the distribution being assigned to the most important. In
include:
channel, if the publisher’s transactions some cases a small change in the
with the distribution channel are • The company has the primary relevant contractual terms or business
closely directed by the game developer responsibility for providing the practice can affect the principal/agent
or (ii) not include a deduction for the goods or services to the customer assessment.
or for fulfilling of the order – i.e. the
8 MIAG Issue: 8Scenario How should game publisher P Game publisher P’s net profit under each
account for its sales? treatment is €5.
Game publisher P obtains from overseas
game developer D an exclusive licence to Game publisher P must decide who its
operate a MMOG in P’s country by customer is. That is, whether it is (Note: If P is the intermediary agent
paying an up-front licence fee and a acting as: acting on behalf of both developer D and
sales-based royalty. the gamers by bringing them together in
• Principal selling the game to ultimate the ‘dual customer’ model, the analysis
gamers, using channel C as its sales would be similar to the second
Publisher P is responsible for arranging
agents i.e. record gross revenues of treatment above where P is acting as an
IT infrastructure, internet connections,
€10 received from gamers with €5 agent on behalf of the developer.
deciding the game price in the country’s
costs comprising €3 to developer D However, identifying the customer as
local currency, and providing customer
and €2 to channel C; or developer D alone, or both D and
service to domestic gamers. Publisher P
promotes itself as the operator of the • Sales agent acting on behalf of ultimate gamers, may have other
game and enters into agreements with developer D i.e. record net revenues of accounting consequences e.g. (i)
gamers accordingly. (i) €7 retained from gamers after whether gamer incentives are presented
deducting amounts paid to developer as a cost or revenue deduction; and (ii)
Publisher P also pays distribution channel D with costs of €2 paid to channel C; determining P’s explicit and implicit
C (e.g. an internet portal or app store) a or (ii) €5 if P is not taking overall obligations to the ‘customer’.)
fixed price per game sold to make responsibility for the services
available the game for sale as well as an provided via channel C; or
agreed amount of banner advertisements.
• Principal selling to channel C,
Channel C collects cash from the gamers
recording as revenue the €8 it receives
and remits that cash, net of the fixed fee,
from channel C with costs of €3 paid
back to publisher P. Gamers click through
to developer D.
to P’s infrastructure from channel C to
download the game.
P sets the price of the game at €10; and P
pays €3 to D as a sales-based royalty and
€2 to channel C for each game sold.
IT and customer service
Game code (via channel C)
Game Game
developer D publisher P Gamer
Non-refundable Cash
licence plus royalty (via channel C)
Issue: 8 MIAG 9Assessment of key principal/agent indicators
The ultimate sale is to the gamer and the remitted directly to game publisher P. Publisher P considers four key indicators
gross payment of €10 is received from P receives €8, from distribution to establish whether or not the gamer is
the gamer. But the gross amount is not channel C, net of the channel’s fee. publisher P’s customer:
Indicator Assessment by game publisher P
Primary • The gamer visits channel C (e.g. internet portal or app store) and might consider that he or she pays
responsibility for channel C for the game
providing the • The gamer might be aware of who originally developed the game
goods and services
• However, P appears to be the primary obligor to gamers in that it clearly markets itself as the game
operator and this is reflected in its contracts with gamers
• Further, P is responsible for IT infrastructure, internet connections, and customer service
• Indicates game publisher P (rather than developer D or channel C) is acting as principal selling
to gamers
Inventory risk • There is no traditional inventory risk for online gaming since there is no physical product
• It may be considered that publisher P takes something akin to inventory risk by paying developer D a
non-refundable initial licence fee
• It seems likely that D takes the most significant risk given its historical investment to develop the game,
although that investment is not specific to sales in this country
• Both D and P take some risk here (which might be considered analogous to inventory risk) and as
such, this indicator is mixed
Latitude in • Publisher P sets the price charged to gamers
establishing prices • P’s revenues are not predetermined i.e. P can vary prices to drive sales volumes
• Both developer D and channel C receive a fixed amount per sale
• Indicates game publisher P is acting as principal selling to gamers
Credit risk • Online gaming is generally paid by credit card and the distribution channel would typically obtain
authorisation for the charge prior to completing transactions
• Credit risk is therefore largely mitigated
• Lack of substantive credit risk means this indicator unlikely to be determinative
Conclusions
The principal/agent indicators suggest However, even if publisher P were to reconsider its determination that it is
that game publisher P is acting as give some pricing latitude to channel C, acting as a principal because the
principal in selling the game to it might still be principal based on the channel appears has significant
gamers. P would therefore record other indicators. Occasionally, game pricing latitude. These judgements
gross revenues of €10 received from publishers that use distribution channels can be difficult and must be made in
gamers with €5 costs, comprising €3 do not have visibility of the exact final light of all available facts and
to developer D and €2 to channel C. selling price. In such cases, the game circumstances, considering all the
publisher should make its best estimate indicators and not just who sets
Of course, alterations of this scenario’s of the price paid by gamers, so that it selling price.
fact pattern could result in different can recognise that amount as revenue
conclusions. with the difference between that gross For mobile games, in many cases
amount and the cash it receives treated publisher P may actually be an
For example, if channel C had the as cost of sales (the channel’s internet portal, which provides access
power to determine the price charged commission). If the publisher believes it to many different casual game titles
to gamers and paid a fixed amount per cannot make a reasonable estimate of (i.e. the role of publisher P and
game to publisher P, then the the price paid by gamers, it should distribution channel C are combined).
conclusion might be that P is selling to consider the reasons for this. If the range Where P makes clear to gamers that it
C. P would then record net revenues of of prices open to the channel is is acting as the sales and payment
€8 received from C, with separate sufficiently broad that an accurate intermediary, and that developer D
costs of €3 paid to developer D. estimate is difficult, the publisher should
10 MIAG Issue: 8has ultimate responsibility to the required to make its own assessment of game code services to the publisher
gamers, P should be recording whether it was selling to publisher P, to for it to sell to gamers. The
revenue on a net basis. As noted channel C, or direct to gamers. agreement should also make it clear
above, this might be the case even if P who sets prices, maintains user
has some latitude to set the Factors that can help inform these accounts and provides IT
selling price. judgements by the game publisher and infrastructure.
developer include:
• Business practices: is the game
Alternatively, developer D might be
available via multiple channels, or
marketing the game under its own • Agreements with gamers: which
exclusive to one? If either the
brand, providing IT infrastructure company (developer or publisher or
publisher or channel has an
and customer support, setting the channel) presents the gamers with
exclusive right to operate in a
prices charged to gamers, but uses their terms and conditions; and which
particular territory, the gamers
publisher P to administer the game of them has ultimate responsibility,
might view that exclusive provider
locally (via approved distribution legally or otherwise, to gamers if
as the primary obligor as opposed to
channels) by drawing up relevant game service is not properly provided?
a situation where the same game
contracts, acting with gamers and
• Cooperation agreements between appears via many channels. Which
channels on its behalf and collecting
game developers, publishers, and company name does the gamer see
and disbursing cash. In this case
channels: do the agreements indicate when he logs on? And who is
publisher P might be acting as an
a clear service provider? For example, responsible for customer service to
agent for developer D.
some agreements might indicate that gamers? What do the marketing
the channel is supplying payment materials and the game’s website
In this example we focused on game
processing services to the game indicate?
publisher P’s perspective but game
publisher, while others may indicate
developer D would of course also be
that the game developer is providing
Considerations under IFRS 15 • Inventory risk: who has inventory risk revenue when its agent has some pricing
IFRS 15 is a control based model under in the transaction? discretion (the ‘dual customer’ model).
which a company is now defined as The TRG’s discussions highlighted that
• Pricing: who has discretion in
principal if it obtains control of the application of the IFRS 15 guidance in
establishing prices?
goods or services of another party in this area is not straightforward,
advance of transferring control of those • Credit risk: who has customer especially in the context of online
goods or services to a customer. credit risk? transactions. The TRG recommended
Conversely, a company is an agent if its that the IASB and FASB discuss this
• Commission: is consideration in the
performance obligation is to arrange for issue at a future meeting. It might be
form of a commission?
another party to provide the goods or that the IASB and FASB decide to
services. These criteria can be Although the indicators are broadly provide further clarification on this
contrasted to the previous ‘risk and unchanged, transfer of control is not topic, although at the time of this
reward’ model described above. necessarily equivalent to transfer of publication, it is currently not clear
risks and rewards so close review of whether any further guidance will be
The nature of a company’s obligation is sales arrangements might result in provided and, if it is, when that
not always clear and so IFRS 15 revised principal/agent conclusions. would be.
provides indicators to help companies
decide whether or not a good or service It is worth noting that the application of
is controlled before it is transferred. the new principal/agent guidance in
These are broadly unchanged from the IFRS 15 was discussed at the July 2014
principal/agent indicators included in meeting of the Transition Resource
IAS 18: Group (TRG), which informs the IASB
and the FASB of any issues arising with
• Fulfilment: who zhas primary implementation of the new standard.
responsibility for fulfilment of the The TRG was also asked to consider
contract? ‘’how a principal should recognise
Issue: 8 MIAG 11Example 2: Virtual items and virtual currencies
“How long does a digital energy drink
last? What about a digital sword?”
In example 2 we consider the challenging What are some common types of It is not always straightforward to fit a
question of when a company has fulfilled virtual items and the associated virtual item into the above categories.
its obligation, so that it is entitled to revenue recognition? For example, players may purchase a
recognise revenue for virtual items. It is virtual cow for their farm that can
clear that the sale of virtual items can be • Consumable items are consumed reproduce virtual calves that can be
viewed differently from the sale of virtually for immediate or near- gifted to friends or kept in the farm; the
physical goods. For example, after the sale immediate gratification. For example, cow might also produce virtual milk that
of a physical red hat to a customer, the a virtual ice cream can only be players can give to friends or use in their
retailer will usually have no further consumed once; a virtual bundle of virtual restaurant to make ice cream.
obligations to the customer. When a three non-reusable arrows is fully The game company should look at the
virtual hat is sold to a gamer, he or she can consumed after the third arrow is underlying substance by focusing on the
only benefit by wearing the hat in a digital shot. Consumption might take place period over which the gamer enjoys the
environment that must be maintained by immediately on purchase or there benefits of that virtual good or its direct
the game publisher (or developer). In this could be a short ‘consumption derivatives.
example we assume the company is the window’ between purchase and
principal in selling to the gamer. expiry. Revenue should generally be How is the delivery period
recognised as these items determined?
Although payments made by gamers are are consumed. If possible, the delivery period should be
generally non-refundable and the
• Periodic items are consumed over a estimated at the item level (or grouping
publisher might legally be able to
specified duration or period of time. of similar items) and revenue recognised
terminate game operation without any
For example, a virtual vial of magic over that period. But publishers may
penalty, game publishers typically have an
power once purchased/consumed may have millions of virtual items spread
implied obligation to maintain the digital
last for only 90 days. Revenue should across many thousands of users so
game environment that enables the
generally be recognised rateably over keeping track individually might be cost
virtual items to be used. This implicit
the period in which gamers enjoy prohibitive or impossible. Publishers
obligation is created by the game
access to, or benefit from, these items. might therefore need to estimate the
publisher’s intention to continue its online
average consumption period based on
game business and supporting operations. • Durable (or permanent) items are the nature of the item(s) and the game.
Accordingly, revenue should be recognised made available to gamers over a
over the period of the implied obligation longer period of time, often for as long This can be complex: for example, a
(the ‘delivery period’) for those virtual as the user continues to play the game. virtual sword might be technically a
items that provide prolonged utility or For example, a virtual sword can be permanent item, but with a shorter
enjoyment to the gamer. used as long as the user plays the consumption period if the game
game. Revenue from these items publisher can demonstrate the sword is
(The rest of this example focuses on
should generally be recognised over rarely used or abandoned after a given
games that require a digital environment
the estimated life of the period; but conversely its consumption
to be maintained in which to use the
gaming relationship. period could be longer than an
virtual items. There are also simpler,
single-player mobile games where an individual gamer’s game life if the sword
application can be downloaded to a can be transferred among players.
gamer’s smartphone and played remotely
without an online connection. In these
instances, a virtual item might carry no
implied obligation so the game publisher
could recognise revenue immediately.)
12 MIAG Issue: 8Estimating the virtual item delivery • Life of the good: item (or group of • Life of the game: if the average
period is often particularly difficult for items) is classified as consumable, paying player life cannot be estimated,
start-up publishers and/or new games. periodic or durable and revenue is or if a durable virtual item is likely to
Start-ups might not retain the historical recognised accordingly. be traded and used indefinitely,
data on player behaviour, item revenue can be recognised over the
• Life of the gamer: revenue is
consumption and item transfer that is life of the game. This method is not
recognised over the average period for
necessary for an accounting estimate of commonly used and results in a
which a paying player participates in
delivery period. And for new games such build-up of revenue towards the end of
the game or related games. The
data by definition does not exist. the game life as each payment is
estimation of average gamer life might
Additionally, for some publishers, the spread over the remaining (shrinking)
include (i) defining a player as
information might not be available estimated game life. Game life can
terminated after a certain period of no
because such information may only be reflect factors such as plans for new
activity and calculating an actual
accessed by the developer. In such cases game content or sequels or game
attrition rate and average player life
game publishers could estimate the closure; industry data for games in
based on that definition; and/or (ii)
average user life of paying players and similar genres; and impacts from the
using historical player behaviour data
use that as the delivery period for launch of competitor games.
and employing statistical
virtual items. If a lack of relevant history
extrapolation methods to the whole
or data precludes both an item level
player population to project future
approach (‘life of the good’) and a user
player attrition, and calculating player
life approach (‘life of the gamer’), then
life based on that projected attrition
revenue can be recognised over the
rate. The most sophisticated
estimated ‘life of the game’, as the
publishers might use actuarial
delivery period would not extend
methods similar to those used by life
beyond that date:
insurance companies to estimate the
life of policyholders.
Issue: 8 MIAG 13Scenario
Game publisher P is acting as the For each type of sword-skill, what is an
principal in selling the game Warriors & appropriate appr oach to revenue
Wizards, a massive multi-player online recognition and what are the factors
swords-and-sorcery game. Players can to consider?
buy enhanced sword-skills with
differing characteristics as listed below.
Sword-skill characteristic Proposed revenue recognition Example factors to consider
When used, the gamer’s sword-skills are Consumable item therefore recognise If tracking such items individually is too
improved for one duel only revenue at single point in time when used onerous then consider estimating average
period between purchase and use
On purchase, gamer’s sword-skills are Periodic item therefore recognise revenue What is the probability the gamer will
improved for next 3 months straight-line over 3 months from purchase continue to play for the full 3 months?
On purchase, gamer’s sword-skills are Durable item therefore recognise revenue Is information available to estimate gamer
permanently improved straight-line over estimated life of gamer life? What if sword-skills become less
relevant as gamers progress from being
warriors to wizards?
Sword-skills are permanently improved and Durable item therefore recognise revenue Is there really an ongoing obligation? Can
are transferred to anyone that defeats that straight-line over estimated life of game game life be estimated based on genre etc?
character Will sword-skills remain relevant
throughout? What if gamers tend to drop out
rather than their character be defeated? Are
sequels planned or probable?
Conclusions on virtual items
As described above, when developing life of the gamer or the life of the game. estimates. If a publisher were to
a revenue recognition policy for the This is sometimes the case for newer expand its data collection and
sale of virtual items, one of the three game companies, whose data collection analytic capabilities, enabling a more
methods might be appropriate systems are still developing. precise estimate, this would represent
depending on the facts and a change in accounting estimate so
circumstances. Game publishers will For mobile and web games, the publisher would be implemented prospectively.
also need to consider the availability (often also the distribution channel) is Start-up companies reporting under
of information about how virtual commonly acting as an agent for the IFRS for the first time will need to
items are consumed. Estimating the developer. If this is the case, determining consider all available information in
virtual item delivery period is likely the appropriate revenue recognition determining the proper estimates for
to be more difficult for games model can be more complex. For their historical financial statements.
publishers with a limited operating example, such games publishers often do
history or those launching a new not necessarily have all the data for the
game in a new genre. virtual items as such information may
only reside with the game developer.
When it is not possible or practical to
estimate the delivery period at the Game publishers should ensure they
item level, game publishers might have robust processes and controls to
need to instead estimate the average develop and periodically review these
14 MIAG Issue: 8Considerations for virtual for completing a customer survey) or in Considerations under IFRS 15
currency connection with purchasing a specified Under IFRS 15 online gaming
Online games often include virtual amount of virtual currency (e.g., companies must decide whether control
currency that can be exchanged for purchase 500 points and receive 100 of virtual items is delivered over a
virtual items. Virtual currency can be points free). While these virtual period of time or at a point in time. IFRS
sold to gamers by distribution channels currency points are merely digital 15 sets out three criteria to assess
such as: strings of ones and zeros and are whether control of a good or service is
fungible, entities need to determine the transferred over time. If none of these
• Physical prepaid cards of virtual amount of real money represented by criteria are met, the control passes at a
currency, sold in internet cafes or each virtual currency point. point in time, and that point in time
other retailers; or
must be established. Since these criteria
• Electronic virtual currency, sold by A moving averaging approach is often are different from the guidance in
intermediaries such as social website adopted by game companies that current standards, the pattern of
or directly by game publishers through periodically blend together existing revenue recognition will not always be
payment aggregators such as Paypal. unused currencies and successive the same.
issuance to calculate an average unit
The accounting on purchase of virtual price. For example, assume gamers have One key consideration might be whether
currency is typically straightforward: 1,000 unused virtual currency units the virtual item purchased is distinct
debit cash, credit deferred revenue. representing real cash payments of €100 from the underlying licence to play the
Generally, revenue recognition remains (an average unit price of €0.10 per unit), game. If it is determined that the virtual
unaffected if the gamer must first buy and a gamer pays for 5oo units for €50 item is distinct from the hosted
virtual currency to acquire a virtual at €0.10 each, and receives 100 ‘free’ underlying licence, the pattern of
item i.e. revenue should be recognised units. In this simple example, the revenue recognition might be different
when or as the service is provided, incentive simply results in a lower from that under IAS 18. However, if it is
which means on delivery and effective per-unit price below €0.10 per determined that the virtual item is not
consumption of the virtual item, not at unit (more precisely, €150 divided by distinct from the underlying licence, it is
the purchase of the virtual currency. 1,600 units). If promotions are likely that the approaches used today
significant and frequent, keeping track and described above will remain
Complications can arise from of such promotions can be a challenge. appropriate under IFRS 15.
promotional programs. For example, (See also example 4 below for further
free virtual currency may be granted as discussion on unused currency and
part of a promotion (e.g. a gamer virtual items.)
receives free virtual currency in
exchange for first-time registration or
Issue: 8 MIAG 15Example 3: Multiple element arrangements
“Can I buy some more magic arrows for
my magic bow?”
In example 3 we consider the challenges The usual multiple element rules apply • Can revenue be reasonably
with separating virtual items into to online gaming arrangements but allocated between elements? IAS 18
multiple elements. there are some unique considerations permits appropriate methods of
that make the accounting inherently allocating revenue between elements,
IAS 18 requires that, when the substance judgmental and complex. meaning ideally relative fair value but
of a single transaction indicates it also allowing the residual and reverse
includes separately identifiable Scenario residual. In this bow-and-arrow
components each with value to the As in example 2 above, game publisher P scenario, since arrows are sold
customer, revenue is allocated between runs Warriors & Wizards, a massive standalone, the value of the bow can
these components, usually by reference multi-player online swords-and- be imputed using the residual method,
to their fair values. Under current IFRS sorcery game. being the total price of bow-and-arrow
this might mean relative fair value or, if less the standalone selling price of a
the standalone fair value of an element is Players can buy virtual magical bow- bundle of arrows. Switching to a strict
unknown (perhaps because it is never and-arrows that never miss their target. relative fair value approach would
sold in isolation), it can be imputed by The bow always comes with a quiver of result in a different pattern of revenue
deducting the sales price of known arrows and additional quivers of arrows recognition compared to the
elements from the total transaction price can also be bought separately. residual model.
i.e. the ‘residual’ and ‘reverse residual’
methods are both permitted. What are the key judgements involved in
recognising revenue on the sale of a
What types of multiple element bow-and-arrow?
arrangements might arise in
online gaming? • Does the item have standalone
Two common examples are: value to the customer? Although the
bow is never sold in isolation, it seems
• Bundled virtual items: a game likely that the customer thinks he or
publisher may bundle different types she is purchasing two items (the bow
of virtual items together and sell the and the arrows). In the real world,
combination to a gamer, perhaps with companies often look to competitors
a discount on the total. to assess whether goods can be sold
• Subscription for premium access standalone, but given the variations
bundled with virtual items: as the between games and publishers a
industry evolves these types of comparison between games is less
bundled arrangements are becoming meaningful here. Instead, publishers
more common. When gamers can look within their game – into the
purchase these packages, they receive virtual world – and assess whether
a specified period (e.g. one month) of they could sell the items standalone or
premium access or VIP status within indeed if gamers have created a
the game, plus virtual currency or secondary market by buying and
items that may have a life beyond the selling goods (in this case, a bow
premium access period. without arrows) within the game.
16 MIAG Issue: 8Conclusions
Multiple element arrangements within Even if a transaction can be theoretically Similar considerations would apply to
online gaming should follow the rules unbundled it may be impractical (or other gaming scenarios, such as when
of the real world i.e. separate elements cost-prohibitive) to track immaterial gamers pay for VIP access to a virtual
where possible and then recognise items individually (such as virtual world for a period of time (e.g. three
revenue for each element as it is arrows) for revenue recognition months) that includes other ‘free’
delivered. But sometimes, in the purposes. However, if all the virtual virtual goods or services that are
online world, this can mean looking items have similar delivery periods, then used within that period (e.g. a virtual
within the game (rather than outside revenue could be recognised over the limousine that can be used by the
it) to assess whether a transaction can total estimated delivery period. The gamer only in the first month of the
be unbundled. delivery period itself, whether for subscription period).
individual elements or bundled items,
would be determined in accordance with
the guidance under example 2 above.
Considerations under IFRS 15 If more than one performance obligation is one of the most common methods
The IFRS 15 model is built around is identified, IFRS 15 includes more used today, is now only permitted in
‘performance obligations’. A specific guidance on the allocation of the very limited circumstances. Where there
performance obligation is a distinct total value of the contract (the are no directly observable standalone
promise (or group of promises) in a transaction price) to each of the selling prices, estimation and allocation
contract to transfer goods or services to performance obligations. Companies can be complicated and requires
a customer. Performance obligations will be required to use a relative significant judgement.
replace the current concept of ‘elements’. standalone selling price basis. This
IFRS 15 includes factors to consider means that the company must establish
when determining whether a what each of the performance
contractual promise is separately obligations would have been sold for if
identifiable from the other promises in sold on their own (using actual or
the contract. While in many cases the estimated selling prices), and then
performance obligations identified allocate the total contract value based
under IFRS 15 might be the same as on the relative value of each. The
under IAS 18, contracts will still need to residual method described above, which
be reassessed in light of the
new guidance.
Issue: 8 MIAG 17Example 4: Unused currency and unused items
“What if I don’t spend all my virtual
currency? Or I leave some magical arrows
in my quiver?”
In example 4 we consider how game publishers must choose an appropriate reflect expected forfeitures prior to
publishers should account for unused accounting policy. (Recognising all of the actual expiry date. Such a
virtual currency and unused virtual the expected breakage upfront is treatment would be dependent on a
items – that is, the accounting generally not allowed!) The appropriate reliable and evidenced history of
for ‘breakage’. model will depend on the specific breakages. In this model, a
features of the arrangement and the proportional part of the estimated
What is ‘breakage’? game publisher’s ability to reliably breakage is recognised together with
Game publishers often sell prepaid cards estimate breakage. Three possible actual redemptions as they occur. In
that a customer can use to acquire approaches are: other words, the amount that is
virtual currency or virtual goods. On expected to be forfeited is recognised
• Liability model: the publisher could
sale of a prepaid card or virtual currency as revenue at the same time as
choose to recognise revenue when a
the game publisher has an obligation to services are delivered for the portion
gamer’s right to redeem expires. This
provide a future game service to the is redeemed.
model might be most appropriate if
customer. Typically, holders do not use the publisher is not able to reliably How should a game publisher
all prepaid cards and/or all virtual estimate breakage. However, this account for unused virtual items?
currency. The unredeemed portion is model is unlikely to be appropriate if In addition to unredeemed prepaid
commonly referred to as ‘breakage’. the prepaid cards or virtual currency cards and virtual currency, there can
have no expiry date. also be breakage for virtual items. The
Based on the gamer’s contractual rights,
• Remote model: publishers that can attention of many gamers inevitably
publishers must determine whether
reliably estimate the pattern of moves from one game to the next,
unredeemed amounts represent
redemptions over time may be able to meaning some unused consumable
deferred revenue or other liabilities.
determine when the likelihood of virtual items will not be consumed and
Additionally, in some countries
further redemptions becomes remote. some durable virtual items will no
publishers should evaluate whether
It would be appropriate to recognise longer be used.
escheatment laws apply i.e. should the
unredeemed portion be treated as breakage at that time, based on the • Consumable items: if a game
unclaimed property and remitted to a expectation that the gamer holding publisher has adequate historical data,
government authority. A game publisher the rights will not demand the revenue associated with the unused
would be unable to recognise revenue performance. That expectation should consumable virtual items can usually
from breakage if it represents be developed using relevant historical be accounted for under one of the three
escheatable funds. experience. Such a model should not acceptable approaches to unused
result in immediate revenue virtual currency discussed above.
How should a game publisher recognition for forecast breakage since
some time must elapse before the • Period items: for items that are
account for unused virtual
point is reached when further consumed over a specified period of
currency?
redemptions become a time, the concept of breakage is
If unused prepaid cards and unused usually not applicable as the items will
remote possibility.
virtual currency are not escheatable, a expire as the period ends. Assuming
game publisher can recognise income • Proportional model: when a reliable, this period is shorter than the
from the estimated breakage. IFRS does supportable estimate can be made for anticipated gamer life, revenue for the
not prescribe a specific method for expected breakage, revenue periodic item will already be
recognising breakage so game recognition by the game publisher can recognised before ‘breakage’ occurs.
18 MIAG Issue: 8• Durable items: for unused durable
virtual items, revenue is recognised
over the estimated life of the gamer or
game, both of which are developed
based on estimated player attrition.
Such estimation of player attrition
naturally takes into account repeated
game play and breakage factors so
automatically spreads the revenue
associated with breakage over the
delivery period.
Considerations under IFRS 15
Conclusions developer when the gamer demands a If the game publisher expects that not all
In conclusion, breakage can have a certain good or service. Alternatively, unused items will be used by the
significant effect on the timing and virtual currency sold by the publisher customer, the guidance in IFRS 15 is
pattern of revenue recognition. The might be redeemed by the gamer with more prescriptive than current practice.
model adopted will depend both on another company, which would Where the publisher expects there to be
actual usage patterns and the quality require the publisher to make a breakage, the pre-paid amount that is
and granularity of available data. payment to that company. expected to be forfeited is recognised as
The selection of a recognition model revenue when services are delivered for
for breakage is an accounting policy Where the game publisher has to pay the portion that is redeemed (similar to
election that the game publisher cash when virtual currency is the proportional model described
should apply consistently to similar redeemed, rather than just provide a above), subject to the requirement that
arrangements. good or service, it is less clear how the publisher must be satisfied that it is
any expected breakage should be highly probable that it will not be
The discussions above assume that accounted for. At the time of this necessary to reverse a material amount
the game publisher is transacting publication, the IFRS Interpretations of revenue in a future period.
directly with the gamer so has no Committee is debating whether the
obligation to provide anything other liability to pay cash in such scenarios If the publisher does not expect there to
than the virtual goods or services constitutes a financial liability, be breakage, revenue is recognised only
when the gamer demands them. which would mean that no breakage when it considers that there is only a
Sometimes, if the game publisher is can be recognised. Given that this is remote possibility that the customer will
acting as an agent for a game a developing area of guidance and exercise his or her right to demand
developer, the game publisher might could be complex, we recommend further goods or services.
be acting as an intermediary that that you consult with an adviser if
collects cash from the gamer and that this might apply to you. (This
is then obliged to pay cash to the ongoing debate will be equally
applicable when IFRS 15 is adopted.)
Issue: 8 MIAG 19You can also read
