Revenue Recognition for Virtual Goods
- Posted on [February 8, 2010 ] @ 10:15 pm
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I hope all the social gaming sites are using these accounting principles for virtual goods:
- When a company sells virtual currency, this is not a revenue event (even though it may clearly be a cash event). When purchased but not yet used, virtual currency sits on the balance sheet as a customer deposit or deferred revenue (i.e. a liability).
- Revenue recognition commences when virtual goods are bought with virtual currency by the consumer. Exactly how it “commences” depends on the following.
- There are two categories of virtual goods – (1) consumable items that are used once and gone, and (2) durable items that “work” over an extended period of time.
- For “consumable items” you can recognize revenue when it is consumed.
- For durable items (which many are), things are much trickier. You need to amortize the revenue (linearly) over the useful life of the good, or the average life of the actual user.
Bill Gurley also points out that renting virtual goods (as opposed to selling them) gets around the “durable” goods requirement (#5 above), which simplifies the accounting.
[ From Abovethecrowd.com ]