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					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


                                             | 2
INTRODUCTIONS
        Taft Kortus
        Partner
        Moss Adams LLP

        Kirk Soderquist
        Partner
        Perkins Coie LLP

        Dax Hansen
        Partner
        Perkins Coie LLP


                           | 3
LOYALTY POINTS & VIRTUAL CURRENCY
Evaluation of the origination of the points/virtual currency & other characteristics


           Purchased or                                Earned from
            earned from                              interactive user
        related transaction                              activity


                                    Loyalty
                                 Points/Virtual
                                   Currency


         Contractual rights
                                                        Breakage
             & terms

                                                                                  | 4
LOYALTY POINTS
                   Revenue or Cost recognition?


          Multiple element            Cost allocation
        revenue arrangement          (generally preferred)




o Used in sales based earning     o Award earned by user or
  transaction                       through indirect revenue
                                    transaction
o Deferral of revenue
                                  o Accrual of associated costs at the
o Separate units of accounting
                                    point when revenue is
                                    recognized for the other items in
                                    the arrangement

                                                                         | 5
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


                                                  | 6
 VIRTUAL CURRENCY
• No specific guidance, economic
  substance of transaction drives
                                                               Price is fixed
  recognition                                 Persuasive             &
• Applicable guidance for gaming &             Evidence        determinable
  online entertainment
   o ASC 985-605-55-121 (formerly
      EITF 00-3)                                                Delivery has
                                             Collection is
   o Generally scoped out of ASC                                occurred or
                                             reasonably
                                                                  services
      985-605 (formerly SOP 97-2)              assured
                                                                 rendered
      on hosted and free-access sites

                                        Staff Accounting Bulletin No. 13 (SAB No. 13)



                                                                                  | 7
   VIRTUAL CURRENCY
Generally, the sale of the virtual currency is not the revenue event:

                                                         -Fuel/food
                                        Consumable in
                       Consumable           virtual      -Ammunition
                                          ecosystem      -Extended time



  $$         Virtual
              Sale


                                         Benefits user   -Unlimited assets
                         Durable          over time      -New level/status
                                                         -Personal profile




                                                                             | 8
VIRTUAL CURRENCY REVENUE MODELS




o Recognized upon           o Useful life of the durable
  consumption/purchase of     good/services
  virtual goods             o Useful life of the
o “Consumption”               game/activity
  measurement critical      o Useful life of the
                              user/customer
                                                           | 9
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



                                                            | 10
CURRENT TRENDS

• Virtual “Rental” of both consumable and
  durable goods/service
• Defined contractual terms and rights
• Inactive user account expirations
• Some public filers:
  o   Shanda Games (GAME)
  o   Perfect World (PWRD)
  o   Giant (GA)
  o   NetEase (NTES)
                                            | 11
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
                                                                   | 12
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



                                                                    | 13
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)

                                                                                      | 14
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


                                                                                 | 15
INTERACTIVE DISCUSSION




                         | 16

				
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