www.pwc.com/miag 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 a ect 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 a ecting 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 a ect 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 emotional and/or cognitive enjoyment experience is sold), and by sessions compared to traditional investment in the game, and game game type and genre. MMOGs. One popular type of web play may last for a few hours per games are those social games played • Monetisation: Subscription-based session, with many such sessions. on social network platforms. Web games are monetised by either a These games are typified by the games typically do not require any periodic subscription fee, a download virtual gathering of multiple players software installation apart from a fee or other usage fee. Non- in the same online environment (via web browser or sometimes browser subscription-based games are typically internet connection), with gamers plug-in. Web games are often free to play (‘freemium’) but are often cooperating or competing in free-to-play but players can choose monetised through the sale of virtual the context of an epic adventure or to purchase virtual items to enhance items or other premium content to the thematic experience. MMOGs the game-playing experience (the game player (‘gamer’). Successful typically require dedicated software ‘freemium’ model). monetisation of a freemium game 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, – Web games – also known as a digital concept with its own meaning can be single-player or multi-player, browser game, these games are within the game (e.g. power, magic, and appeal to a broader audience. played over the internet via a web special ability). However, mobile games are even browser, generally on PC. Web easier to access than web games so • Game types: Games can be for a single games include all game genres (such people tend to play in even more player (solo) against pre-scripted rules as hardcore games, midcore games, frequent and shorter sessions. Due or for multiple players in a world casual games, social games etc.) and to the limitations of the screen, designed to foster collaboration and/or can be single-player or multi-player. mobile games tend to be less competition. The types of online games Unlike MMOGs that attract more complex and include more casual can be summarised in many di erent hardcore players, web games appeal games and social games. Unlike web ways but perhaps most commonly to a wide spectrum of age groups games, mobile games require the as follows: and demographics due to easy and installation of software known as free access. Also, they are often – Large multi-player games – often the application (‘app’). Apps are played in more frequent, shorter termed ‘massive multi-player online 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 di erent roles can • Distribution channels and both online and o ine. The pay-per- be carried out by di erent 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 di erent for publishing platforms built by mobile should be applied to the transaction as di erent types of games. Operations in game publishers on the strength of their a single unit. Conversely, if the di erent terrorities may also di er. For products and user base. These platforms customer perceives there to be a example, in traditional MMOGs, there are o er 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 economic benefits will flow to the Occasionally, the publisher and the IAS 18 Revenue recognition does not seller; (ii) revenues and costs can be developer is the same company. However, provide industry-specific guidance and measured reliably; and (iii) the risks the operation of a web game or mobile indeed was written long before online and rewards of ownership have been game generally involves more parties. In gaming even existed as a concept! A transferred with minimal ongoing addition to game developers and general approach to revenue recognition involvement (for sale of goods) or the publishers, mobile app stores, mobile for online gaming companies is stage of completion can be measured carriers, social networks, and online as follows: portals might also be involved. Or the reliably (for provision of services). • Determine who the customer is mobile game developer may launch its For the gaming industry, two models – this helps to determine whether game directly on Apple’s App Store. The 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 a ect 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 di erence 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 di ering 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 di erent 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 di erent. 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 e ective 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 di erent 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 e orts 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 a ect 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: 8 Scenario How should game publisher P Game publisher P’s net profit under each account for its sales? Game publisher P obtains from overseas treatment is €5. 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 Publisher P is responsible for arranging would be similar to the second agents i.e. record gross revenues of IT infrastructure, internet connections, treatment above where P is acting as an €10 received from gamers with €5 deciding the game price in the country’s agent on behalf of the developer. costs comprising €3 to developer D local currency, and providing customer However, identifying the customer as and €2 to channel C; or service to domestic gamers. Publisher P developer D alone, or both D and 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 9 Assessment 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 dicult 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 di erent can recognise that amount as revenue conclusions. with the di erence 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 di erent 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 suciently broad that an accurate intermediary, and that developer D costs of €3 paid to developer D. estimate is dicult, the publisher should
10 MIAG Issue: 8 has 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). The TRG’s discussions highlighted that which a company is now defined as • Pricing: who has discretion in application of the IFRS 15 guidance in principal if it obtains control of the 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 that the IASB and FASB discuss this Conversely, a company is an agent if its • Commission: is consideration in the issue at a future meeting. It might be performance obligation is to arrange for 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 11 Example 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 di erently 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 estimated at the item level (or grouping publisher might legally be able to • Periodic items are consumed over a of similar items) and revenue recognised terminate game operation without any specified duration or period of time. over that period. But publishers may penalty, game publishers typically have an For example, a virtual vial of magic have millions of virtual items spread implied obligation to maintain the digital power once purchased/consumed may across many thousands of users so game environment that enables the last for only 90 days. Revenue should keeping track individually might be cost virtual items to be used. This implicit generally be recognised rateably over prohibitive or impossible. Publishers obligation is created by the game the period in which gamers enjoy might therefore need to estimate the publisher’s intention to continue its online access to, or benefit from, these items. 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 (The rest of this example focuses on publisher can demonstrate the sword is should generally be recognised over games that require a digital environment rarely used or abandoned after a given the estimated life of the to be maintained in which to use the period; but conversely its consumption gaming relationship. virtual items. There are also simpler, period could be longer than an 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: 8 Estimating the virtual item delivery • Life of the good: item (or group of • Life of the game: if the average period is often particularly dicult 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 13 Scenario 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 di ering 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 dicult 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: 8 Considerations 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 di erent 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 una ected 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 di erent 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 e ective 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 15 Example 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 di erent 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 di erent 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: 8 Conclusions 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 17 Example 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 expected to be forfeited is recognised virtual currency or virtual goods. On • Liability model: the publisher could as revenue at the same time as sale of a prepaid card or virtual currency choose to recognise revenue when a services are delivered for the portion the game publisher has an obligation to gamer’s right to redeem expires. This is redeemed. provide a future game service to the 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, attention of many gamers inevitably publishers must determine whether • Remote model: publishers that can moves from one game to the next, unredeemed amounts represent reliably estimate the pattern of meaning some unused consumable deferred revenue or other liabilities. redemptions over time may be able to virtual items will not be consumed and Additionally, in some countries determine when the likelihood of some durable virtual items will no publishers should evaluate whether further redemptions becomes remote. longer be used. escheatment laws apply i.e. should the It would be appropriate to recognise 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 • Period items: for items that are account for unused virtual some time must elapse before the consumed over a specified period of currency? point is reached when further redemptions become a time, the concept of breakage is If unused prepaid cards and unused remote possibility. usually not applicable as the items will 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 e ect 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 19 Conclusion
The significant growth of online gaming for online gaming companies when is driven partly by online players considering the real revenue recognition interacting with online friends and issues that arise in virtual worlds. The rivals, and partly by the rise of mobile answer for complicated real life gaming facilitated by increasing arrangements will depend on the penetration of smartphones and tablets. specific facts and circumstances in each New technology platforms and new case. Where transactions are significant, entrants have driven new business management should include disclosures models such as ‘freemium’ games that in the financial statements that enable are free to play but in which real cash users to understand the conclusions must be spent to acquire virtual goods or reached. As always, planning ahead can other premium content. prevent painful surprises.
This paper has considered the resulting We hope you find this paper useful and accounting challenges in various welcome your feedback. practical examples covering principal/ agent arrangements, virtual items and To comment on any of the issues virtual currencies, and multiple element highlighted in this paper please visit our arrangements. dedicated website www.pwc.com/miag or contact your local PwC entertainment The scenarios in this paper are clearly and media specialist. not designed to be exhaustive; but they will hopefully provide food for thought
20 MIAG Issue: 8 Issue: 8 MIAG 21 Further reading
www.pwc.com/miag www.pwc.com/miag MIAG Issue: 3 MIAG Issue: 4 Media Industry April 2012 Media Industry June 2012 Accounting group Accounting group
Making sense of a Making sense of a complex world complex world Broadcast television: Accounting for royalty Acquired programming arrangements – issues rights for media companies
This paper explores the This paper explores some critical considerations of the key challenges under under IFRS relating to the IFRS in accounting for recognition, presentation, royalty arrangements by both amortisation and licensors and licensees. impairment of acquired programming rights.
EP6-2012-01-23-02 32-SW_MIAG Issue 4v7.indd 1 22/06/2012 17:13:40
MIAG Issue: 5 MIAG Issue: 3 MIAG Issue: 4
Broadcast television: Acquired Accounting for royalty arrangements – Content development and cost programming rights issues for media companies capitalisation by media companies This paper explores the critical This paper explores some of the key This paper explores the critical considerations under IFRS relating to considerations under IFRS in considerations relating to the the recognition, presentation, accounting for royalty arrangements by classification, capitalisation and amortisation and impairment of both licensors and licensees. amortisation of content development acquired programming rights. spend under the applicable IFRS standards IAS 2 Inventories and IAS 38 Intangible Assets, focusing on the television production, educational publishing and video game sectors.
22 MIAG Issue: 8 www.pwc.com/miag MIAG Issue: 7 Media Industry May 2014 Accounting Group
Making sense of a complex world Revenue recognition: payments to customers – issues for media companies
This paper explores some of the key IFRS accounting considerations for payments by media companies to their customers.
MIAG Issue: 6 MIAG Issue: 7 Global E&M Outlook
Revenue recognition: principal/agent Revenue recognition: payments to PwC’s Global entertainment and media arrangements – issues for media customers – issues for media outlook contains detailed industry companies companies analysis and forecasts trends in the global entertainment and media This paper considers the assessment This paper explores some of the key industry over the next five years across of the key principal/agent IFRS accounting considerations for considerations in various practical payments by media companies to their 13 industry segments in 54 countries. examples, covering physical books, customers, covering the purchase of eBooks, television content and film advertising space, physical and digital production. ‘slotting fees’, outsourced advertising sales and video game prizes.
Issue: 8 MIAG 23 Contacts
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24 MIAG Issue: 8 Issue: 8 MIAG 25 www.pwc.com/miag
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