IE Roundtable: Virtual Currencies Real Legal & Financial Reporting
Issues for Interactive
Entertainment Companies
Introduction - MOSS ADAMS LLP | 1
AGENDA
• Introductions
• Accounting for Points & Virtual Currency
o Operational considerations
o Revenue recognition
o Current trends
• Unclaimed Property
o Priority rules
o Exemptions for "gift certificates"
o New Jersey zip code collection law
• Interactive Discussion
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INTRODUCTIONS
Taft Kortus
Partner
Moss Adams LLP
Kirk Soderquist
Partner
Perkins Coie LLP
Dax Hansen
Partner
Perkins Coie LLP
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LOYALTY POINTS & VIRTUAL CURRENCY
Evaluation of the origination of the points/virtual currency & other characteristics
Purchased or
earned from
related transaction
Earned from
interactive user
activity
Loyalty
Points/Virtual
Currency
Contractual rights
& terms
Breakage
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LOYALTY POINTS
Revenue or Cost recognition?
Multiple element
revenue arrangement
o Used in sales based earning
transaction
o Deferral of revenue
o Separate units of accounting
Cost allocation
(generally preferred)
o Award earned by user or
through indirect revenue
transaction
o Accrual of associated costs at the
point when revenue is
recognized for the other items in
the arrangement
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LOYALTY POINT BREAKAGE
• Points/awards that will never be redeemed
• ASC 605-50 (EITF 01-9 ) for Rebate Offers
o Can be analogized to loyalty points/awards
• Reliable estimates of the expected level of
redemptions can be made
• Points should be recognized based on the
number of points expected to be redeemed
over the redemption period
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VIRTUAL CURRENCY
• No specific guidance, economic
substance of transaction drives
recognition
• Applicable guidance for gaming &
online entertainment
o ASC 985-605-55-121 (formerly
EITF 00-3)
o Generally scoped out of ASC
985-605 (formerly SOP 97-2)
on hosted and free-access sites
Persuasive
Evidence
Price is fixed
&
determinable
Collection is
reasonably
assured
Delivery has
occurred or
services
rendered
Staff Accounting Bulletin No. 13 (SAB No. 13)
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VIRTUAL CURRENCY
Generally, the sale of the virtual currency is not the revenue event:
Consumable
$$
Consumable in
virtual
ecosystem
-Fuel/food
-Ammunition
-Extended time
Virtual
Sale
Durable
Benefits user
over time
-Unlimited assets
-New level/status
-Personal profile
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VIRTUAL CURRENCY REVENUE MODELS
Consumable
o Recognized upon
consumption/purchase of
virtual goods
o “Consumption”
measurement critical
Durable
o Useful life of the durable
good/services
o Useful life of the
game/activity
o Useful life of the
user/customer
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VIRTUAL CURRENCY
Operational information vital to recognition
o User activity transparency & reporting
 Customer origination dates
 Last log-in date
 Historical trends
o Identification of type of purchases
 w/ virtual currency or cash
o Identification of purchase date and utilization date
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CURRENT TRENDS
• Virtual “Rental” of both consumable and
durable goods/service
• Defined contractual terms and rights
• Inactive user account expirations
• Some public filers:
o
o
o
o
Shanda Games (GAME)
Perfect World (PWRD)
Giant (GA)
NetEase (NTES)
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UNCLAIMED PROPERTY
• Unclaimed property laws generally apply to both
tangible and intangible property
o Prepaid cards
o Online or virtual credits
• Requires issuer to report and remit the value of the
property to the state if unclaimed or abandoned for a
statutory dormancy period
o Abandonment period begins on date of last activity of owner
o Certain activity can restart the abandonment period
• Scope and specific requirements of unclaimed property
laws vary by state
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PRIORITY RULES
Jurisdictional determination is based on priority rules.
• First priority – state of last known address of apparent
owner
o Complete physical address not necessary
 Zip code / tax location
• Second priority – state of incorporation of holder
• Third priority – state in which the transaction giving
rise to the property occurred
o Adopted by several states, but not by the U.S. Supreme Court
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EXEMPTIONS FOR "GIFT CERTIFICATES"
• A majority of states provide a complete or partial exemption from
unclaimed property laws for "gift certificates"
• Is virtual currency a "gift certificate"?
o "An instrument evidencing a promise…that consumer goods or
services will be provided to the bearer of the record to the value or
credit shown in the record and includes gift cards." (Washington,
emphasis added)
 "Gift card" is a "record…in the form of a card, or a stored value card or
other physical medium"
 No definitive guidance on virtual currency purchased online (but see
Barker v. Skype Inc. settlement)
o "…gift certificate, gift card or electronic gift card or other medium"
(Arizona, emphasis added)
o "…device constructed of paper, plastic or any other material"
(Maryland, emphasis added)
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NEW JERSEY ZIP CODE COLLECTION
LAW
• American Express Travel Related Services Co. v. Sidamon-Eristoff
o Challenged proposed requirement that stored value card issuers must
collect and maintain zip code information at the time the stored value
is issued
o Value of cards would escheat to NJ if issuer fails to comply (i.e. third
priority rule)
o "Stored value card" includes paper gift certificates, gift cards,
electronic gift cards, magnetic stripe or other means for storage of
information, and similar records or cards
• Third Circuit Court of Appeals injunction provides temporary relief
from changes
• If requirement to record and maintain zip code information is
upheld, then first priority rule would apply
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INTERACTIVE DISCUSSION
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