Edward Hackert, Assurance Services Partner, Featured in The Wall Street Journal Article, "How Mobile-Game Makers Account for Magic-Wand Sales."

Excerpt:

When game companies change their assumptions it can skew their short-term results.

Some virtual goods, like potions and spells, are good for a single use, and are accounted for as a one-time sale.

Virtual durable goods are those that are continually available to the player. They might include a superhero character or a tractor, depending on the game.

These goods are accounted for like services or club memberships. Companies book part of the player’s payment upfront, but defer the rest until the end of the average period in which the item will be used—whether four days or 14 months.

Game makers say they base their estimates on historical data, but that the playing periods can change substantially each year, especially for the newest and more popular games.

The Securities and Exchange Commission has sent more than two dozen letters to the companies since 2010, asking them to explain more about how they come up with these estimates.

Earlier this year, the SEC asked Zynga Inc., the maker of “FarmVille” and other games, to reveal more about how its estimates of the average life of durable virtual goods affect its financial data.

The agency noted that changes Zynga made in its average-life assumptions boosted revenue by $12.3 million and $14.1 million in 2013 and 2012, respectively.

When it went public in 2011, Zynga said its virtual durable goods had an estimated average life of 15 months, down from 19 months in 2009. In its latest annual report, the company said it expects paying players to stick with its games for between six and 18 months.

In June, Zynga told the SEC that it had “carefully considered the disclosure requirements,” and would note in future regulatory filings how changes in its assumptions affected net income, per-share earnings and income from continuing operations.

Keeping up with the industry’s changes is hard even for accountants and auditors. “We re-evaluate revenue recognition every single quarter,” said Ed Hackert, a partner at accounting firm Marcum LLP, who has worked with game companies. “It all comes down to a contractual arrangement, and the devil is in the details. It is a real hot-button issue for the SEC.”

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