Introduction - MOSS ADAMS LLP | 1

IE Roundtable: Virtual Currencies - Real Legal & Financial Reporting Issues for Interactive Entertainment Companies   

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AGENDA

• Introductions• Accounting for Points & Virtual Currency

o Operational considerationso Revenue recognitiono Current trends

• Unclaimed Propertyo Priority ruleso 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 CURRENCYEvaluation of the origination of the points/virtual currency & other characteristics

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LOYALTY POINTS

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

o Used in sales based earning transaction

o Deferral of revenueo Separate units of accounting

Revenue or Cost recognition?

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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 entertainmento 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

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

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VIRTUAL CURRENCY

-Fuel/food-Ammunition-Extended time

-Unlimited assets-New level/status-Personal profile

Generally, the sale of the virtual currency is not the revenue event:

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VIRTUAL CURRENCY REVENUE MODELS

o Recognized upon consumption/purchase of virtual goods

o “Consumption” measurement critical

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 recognitiono 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 Shanda Games (GAME)o Perfect World (PWRD)o Giant (GA)o NetEase (NTES)

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UNCLAIMED PROPERTY

• Unclaimed property laws generally apply to both tangible and intangible propertyo Prepaid cardso 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 periodo Abandonment period begins on date of last activity of ownero 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

ownero 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 occurredo 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-Eristoffo 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