How should revenue from virtual currency be recognized for a social gaming company?

It would be interesting to get some real world feedback on this one. This is still a newer area in revenue recognition treatment. Please do post an update when you have more clarity on the specific answer for your company.

From a systems and general compliance perspective the issue is how delivery is defined. Is delivery giving the customer the virtual cash to spend - or is delivery the customer actually purchasing the virtual goods.

The second option has the feel for final delivery - but would seem to indicate a massive tracking effort for percent complete / milestone delivery type revenue tracking for smaller amounts of money.

If there is no physical effort required from your company after the initial purchase transaction - and no additional cost incurred - it seems logical you could justify a revenue method based on the initial purchase of virtual cash. Options could include amortization of revenue straight line over the usual customer consumption period (sort of an inventory turns model) or on purchase or 2 months after purchase. Basically you would hope for a simplifying assumption to help with the detailed revenue transaction management.

Bob Scarborough
www.tensoft.com

OK - a few more points pointed out to me by my team.

There is another post on this site that references the E&Y guidance on virtual goods - which is an easy and decent read.

Essentially 3 rev rec models exist:
1) Game-based model (Average life of game) – Rev rec amortized over the anticipated game’s run. This is a bit tricky as it may be challenging to know how long the game will be popular among gamers if it is a new and untested title. Slowest form of revenue recognition as most companies are anticipating 5 year run rates or longer based on the investments made.
2) User-based model (Average user life) – Rev rec amortized over the average player’s gaming activity. The tricky part here is anticipating lulls when users have no activity but may come back months alter to start paying again.
3) Item-based model (Consumption model of virtual goods) – Most difficult rev rec method, but offers the quickest time to start recognizing revenue. Items needs to be classified as either 1) Consumable or 2) Durable
a. Consumable – This meets the delivery test you mention in the post. But if the virtual item has a lasting effect on the user’s character even after physical consumption and the delivery occurred, the item may still need to be classified as durable.
b. Durable – This is where the item enhances the user’s character over n extended period of time and may require amortization over the user's life (assuming the effects of the virtual item become part of the character’s attributes)

Also may be helpful - from the Zynga 10K (using the Item-based model)
“The proceeds from the sale of virtual goods are initially recorded in deferred revenue. We categorize our virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action. For the sale of consumable virtual goods, we recognize revenue as the goods are consumed, which approximates one month. Durable virtual goods represent virtual goods that are accessible to the player over an extended period of time. We recognize revenue from the sale of durable virtual goods ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the estimated average life of durable virtual goods. If we do not have the ability to differentiate revenue attributable to durable virtual goods from consumable virtual goods for a specific game we recognize revenue on the sale of durable and consumable virtual goods for that game ratably over the estimated average period that paying players typically play that game.”

Bob Scarborough
www.tensoft.com