Please see attached my discussion question for class. Each question only needs about 3-4 Sentences for the answer.
Read the article "How Mobile-Game Makers Account for Magic-Wand Sales" (see below) and discuss the following questions: How do the products of the video game industry differ from many other products? How does that affect revenue recognition? What are the potential problems associated with how the game companies book sales and costs? Who could be affected? How Mobile-Game Makers Account for Magic-Wand Sales by: Emily Chasen, Noelle Knox, and Tiziana Barghini Nov 11, 2014 Lucia Rubin was an avid player of "Candy Crush Saga" for a few months last year. She spent about $5 buying extra life candies and more playing time for the mobile videogame. Then, she switched to "Virtual Families 2," a game that lets players build their dream home and adopt children. She accidentally bought $50 in virtual coins--oops, instead of $5--to spend on food, furniture, gardeners and maids. Again she lost interest after a couple of months. "I don't play anymore because it's kind of boring if you don't have that much money," in the game, said the 9-year-old New Yorker. Anticipating when players like Lucia will move on is an essential part of recording revenue in the mobilegame industry, where the sale of "virtual durable goods," such as cows and tractors in "FarmVille" or cannons and dark barracks in "Clash of Clans" is a major source of income. 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 onetime 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. "The thing that's so weird is if people lose interest, and start playing for a shorter period, it drives faster revenue recognition. The shorter playing period is a negative for the business, but it is going to drive higher revenue," said Jill Lehman, head of technology, media and telecom research for forensicaccounting analysis firm CFRA. 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. Zynga declined requests to be interviewed for this article. The SEC declined to comment beyond its letters. Companies that make similar games might make different choices in booking sales and costs, which can make it tough for investors to make comparisons. "Candy Crush" maker King Digital Entertainment PLC, which went public in February, used to sell virtual durable goods and spread its revenue over the estimated life of its games, which it put at between two and nine months. The company stopped selling durable goods more than a year ago. "We have no more durables in our games today" said Melissa Nussbaum, King's senior director, finance. In March, the SEC asked King Digital to explain why it was recognizing sales from packs of nondurable virtual items at the time the final item in the pack was consumed, rather than as each item was consumed. King Digital responded that it waits because the average time between a player using the first and last item in a pack is four days, but that it reassesses that estimate periodically. The U.S. Financial Accounting Standards Board is considering whether to issue further guidance to "reduce the potential diversity" in revenue recognition for virtual goods in electronic games, said FASB Chairman Russell Golden. Mr. Golden added that "to be fully honest, I had to consult with my 10-year old son to be better informed about these types of transactions--and then I consulted with my wife on how we control the spending on his iPhone." Gamers are expected to spend more than $20 billion on mobile games this year, about a third more than last year, according to research firm Gartner Inc. But players are fickle. Six of the games among the industry's top 10 revenue generators in September weren't on last year's list, according to data tracker App Annie. And a small percentage of players account for the bulk of purchases. "A lot of companies struggle until they put in good systems to track information" in specific detail, said Bryan Anderson, a partner at accounting firm Deloitte & Touche LLP. Investors and analysts say they get around the confusion by looking to other performance benchmarks that don't adhere to U.S. accounting rules. Analysts look more at bookings than revenue, said Chris Merwin, a senior U.S. Internet analyst at Barclays PLC. Bookings include all the cash paid for any virtual item, consumable or durable, and independently of whether those items have been used or not. "The booking is realized right away, and people are really focused on that metric," Mr. Merwin said. "Kim Kardashian: Hollywood" has been a flashy success for Glu Mobile Inc. since its launch in June. The game, which invites players to try to become A-list celebrities by doing things like wearing the latest fashion to attending parties, raked in more than $43 million in third-quarter revenue, or about $470,000 a day, more than half the company's total. "We are in the business of doing all we can, and our power to keep the title where it is in the grossing chart and keep extending its popularity," CEO Niccolo de Masi told analysts last month. "We are in uncharted territory for this title." Last year the SEC asked the company, which makes more than 50 games, to explain the assumptions and judgments it uses to determine the average playing period of its paying customers, and it applies those estimates to its various games. Glu told the SEC it would improve disclosures in the future. It declined to elaborate. 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." Credit: By Emily Chasan, Noelle Knox and Tiziana Barghini (c) 2014 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission
