Metal Gear Solid V: Kanye's New Insurance Plan (FASB 606)
Channel: Adilson Candundo
Date: 25/12/2020

Technology Spotlight — Recognizing revenue from sales in a virtual world
The Bottom Line
The “freemium” gaming model is a rapidly expanding niche in the online and mobile gaming industry, providing gamers with free access to online games and the ability to purchase premium features such as virtual currency and virtual goods to progress more quickly in the games or enhance their gaming experience. Entities often apply the guidance in SAB Topic 13.A1 (codified in ASC 605-10-S99-12) in developing accounting policies on this topic, since the freemium game software is generally hosted and often outside the scope of the software accounting guidance in ASC 985-605 (although certain arrangements may still be within the scope of ASC 985-605, depending on the facts and circumstances). The SEC staff views the sale of virtual goods in a freemium environment as a service and not the sale of an actual good. Gaming entities typically recognize revenue from the sale of virtual goods over their best estimate of the life of the (1) virtual good, (2) gamer (i.e., the period during which the gamer is expected to play the game), or (3) game. An entity may have to invest in resources and technology to track the information it needs to support its revenue recognition accounting policy for virtual goods and currency. Because of the frequent involvement of third-party sellers of virtual goods and currency, an entity must carefully consider all relevant facts and circumstances when determining whether to recognize revenue on a net basis (as an agent) or a gross basis (as a principal).
Beyond the Bottom Line
This Technology Spotlight highlights various considerations associated with revenue recognition in the online and mobile gaming industry (hereinafter referred to as the “online gaming industry”), particularly the “freemium” gaming model.

Background
Online gaming is one of the most rapidly developing technologies in the market today, leading to the creation of various mediums through which more and more people can access online games and seamlessly interact with other gaming enthusiasts in real time. Online game developers and operators (collectively, “gaming entities”3) are shifting away from a subscription- or fee-based business model to a freemium model, which is quickly becoming a lucrative and popular means of harnessing a substantial market share within the online gaming community.

Under the freemium model, gamers are given access to a gaming entity’s online game free of charge (or for a nominal fee) and revenue is largely generated through “microtransactions” involving the sale of virtual goods and services (“virtual goods”). Virtual goods are nonphysical objects that enhance the gamer’s playing experience or ability to make progress in the game and may take various forms (e.g., items such as clothing, equipment, weapons, speed, power, or health). Some of these virtual goods are consumed by the gamer over a specified period or number of usages, while others offer a more lasting benefit. Virtual goods may be purchased by using real currency or the gaming entity’s virtual currency. This virtual currency can be purchased directly from the gaming entity, earned by playing the game, or purchased or received from third parties (e.g., as marketing incentives or as gifts from social network friends).

Accounting standards do not specifically address the recognition of revenue from microtransactions under the freemium model, largely because such transactions are a recent, rapidly evolving development in the industry. In determining their accounting policies for the sale of virtual goods, gaming entities take into account the nature of the virtual good and overall game, industry practices, regulator views, and other general accounting guidance.

Key Accounting Issues
The sections below discuss certain transactions under the freemium and other similar gaming models, the accounting guidance applicable to those transactions, and the various approaches industry participants are applying when recognizing revenue. They also address emerging challenges that entities in the industry are confronting when determining an accounting policy to apply to these transactions. Entities are encouraged to review all sources of guidance identified in this document and, when necessary, involve their accounting advisers in the application of the appropriate guidance.

As a result, gaming entities look to the guidance in ASC 605 and SAB Topic 13.A (codified in ASC 605-10-S99-1) when developing accounting policies on this topic. SAB Topic 13.A states that revenue should not be recognized until:

Persuasive evidence of an arrangement exists. Delivery has occurred or services have been rendered. The seller’s price to the buyer is fixed or determinable. Collectibility is reasonably assured.