Online gaming, revenue recognition and IFRS 15 - #Epicfail?

10 February 2016

GaryThis week’s guest blogger is Gary Berchowitz from Global Accounting Consulting Services in South Africa. Connect to him on LinkedIn.

Are you passionate about IFRS 15? Don’t be shy, we’re all accountants here or you are reading the wrong blog. Are you interested in online gaming? Answered yes to either question? Grab your popcorn, free your inner nerd and settle in. Listen to the story of one man’s struggle with some pretty stupid accounting.

Imagine a new age techno savvy guy called Gary who enjoys playing online games (those who call him a nerd are just noobs). Gary hops online to play his favourite online game, “League of Accountants”. League has been around for four years and has over 30 million active players. Gary notices that this week only, he can pay a non-refundable $10 fee and change his avatar’s virtual suit to purple from the regular “accountant grey”. Gary is ecstatic and can’t get to his wallet fast enough to make the purchase – wow, are his friends going to be jealous when they see his new outfit. Yes readers, this happens, it’s called ‘in app purchases’ or ‘micro-transactions’ in the gaming trade. He doesn’t read the fine print when he clicks “purchase” (seriously, have you ever read the terms & conditions?). The ‘ts&cs’ make it clear that ‘non-refundable’ means just that; the gaming company keeps his money even if Gary cannot access the “League of Accountants” game and his purple outfit is therefore useless.

Now comes the accounting. How might the gaming company record revenue under IFRS 15 for the purchase of the purple suit? I see three alternatives, here they are:

  1. The gaming company asserts there is only one promise being provided to our online hero, a game experience. Any money Gary pays needs to be recognized as revenue over the period that the company is providing the enhanced game experience. The $10 is recognized straight line over the expected customer life. Gary was one of the first players of ‘League of Accountants’ so his loyalty would indicate a long and sticky customer life.
  2. The game company decides that hosting the game and providing virtual items are separate promises. However, the promise to make the virtual suit purple can be fully satisfied only when Gary stops playing the game. Therefore, the game company recognizes the revenue over the period that it is standing ready to change the suit colour; and the $10 is recognised straight line over the expected customer life (same as option 1).
  3. The game company decides that hosting the game and providing virtual items are separate promises. From Gary’s perspective, he obtains control of his snazzy purple suit when he makes the purchase. He has ‘control’ of the suit on purchase because from that point forward, every time he plays the game, he can decide if his suit will be purple or grey.

There are arguments for and against each of these views, and this author could mount a spirited argument for each of them. But isn’t the purpose of financial statements to provide decision useful information to investors and analysts? Guided by that principle, which option makes the most sense?

Fast-forward 10 years, and unfortunately, the popularity of “League of Accountants” is declining. That’s an entire epoch in on-line gaming terms. Gary continues to play the game, but he and the remaining 10 million players have not made a material amount of purchases of virtual items in the last two years. ‘League of Accountants’ is not generating much cash inflow. However, if the accounting treatment under option 1 or 2 is followed, it appears that “League of Accountants” is still merrily providing goods and services and earning revenue based on the sale of virtual items several years ago.

Management of the gaming company, realising ‘cash is king’, decides that it’s time to shut down the ‘League of Accountants’. No one gets a cash refund. The company draws up the final income statement in which it recognises its highest ever revenue when it derecognises the remaining liability for the 10 million players who bought online items years ago.

Today entities generally recognise revenue based on alternative two above and many think that the answer should be the same under the new revenue standard. Is IFRS 15 fit for the digital future, or are we stuck with the same old “cray cray” accounting from the 90’s?

What do you think?


Hi Gary - very insightful article!

I generally find with these 'virtual items' that there are clauses in the terms of service that state the digital 'goods' remain the property of the games company. Therefore, the player is buying the right to use a snazzy purple suit - they technically have this right indefinitely which would suggest that alternative 2 is the correct measure to use.

I do agree that at the end of the product life-cycle there will be some distorted figures - due to the pace of the industry perhaps a new basis should be considered!

Hi Rich

Thanks for the response. I agree that you could view it as the gaming entity selling a right to use the virtual good, however, IFRS 15's principle for providing someone with a right of use to intellectual property is also point in time recognition if you want to view this as a form of license. Like I said in the article, I can definitely see the arguments for alternative 2, I'm just saying I could equally see an argument for alternative 3 and you seem to agree that this results in more useful information - or am I putting words in your mouth? Anyway, thanks for the response, see you in the virtual world!

Hi Gary,

Thank you for your excellent article, both technically and in the way you convey the matter.

I may be wrong but my understanding is as follows (references take into account April 2016 amendments:

1) - the avatar is a single performance obligation, that it should not be combined with other goods or services promised in other contracts (IFRS 15 Par 9, par 17 and par 22-3)

2) it should be accounted for according to the license criteria (IFRS B52-B63B)

3) As the nature of the promise is to provide a right of use (i.e. criteria of paragraph B58 are not met) the revenue should be recognized at the point of time at which the license is granted to the customer (par. B61)


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