If you haven't already signed up for this free webcast with revenue recognition experts from McGladrey, Brian Marshall and Richard Stuart, be sure to register today!  This one hour event for accounting and financial professionals will be held on Thursday September 13, 2012.  We'll start promptly at 11:00 AM Pacific Time, and will wrap up by 12:00 PM Pacific Time.   

Webcast Agenda:

• Background and scope of the revised revenue recognition exposure draft
• Revised proposed revenue model
• Other revenue issues
• Closing remarks 

Don't miss this complimentary opportunity to learn from revenue recognition experts and earn CPE credit as well!  For more information, or to register for "The Future of Revenue Recognition - Understanding the Complexity," please click here, or contact me.                

 This topic is another great question from a Proformative reader or webcast attendee.  As a Proformative Topic Expert, I was asked to weigh in on this on that website already, but thought I'd also provide a slightly edited version here.

This is still a newer area in revenue recognition treatment, but it's a scenario that we're seeing more frequently.  E&Y has provided some good guidance in a paper called "Revenue recognition on the sale of virtual goods" - I'd recommend that as a good resource for starters. 

Essentially, there are three revenue recognition models tha may apply:

1. Game-based model (Average life of game) – Rev rec amortized over the anticipated game’s run. This is a bit tricky as it may be challenging to know how long the game will be popular among gamers if it is a new and untested title. Slowest form of revenue recognition as most companies are anticipating 5 year run rates or longer based on the investments made.
2. User-based model (Average user life) – Rev rec amortized over the average player’s gaming activity. The tricky part here is anticipating lulls when users have no activity but may come back months alter to start paying again.
3. Item-based model (Consumption model of virtual goods) – Most difficult rev rec method, but offers the quickest time to start recognizing revenue. Items need to be classified as either:

(a) "Consumable" - This meets the delivery test you mention in the post. But if the virtual item has a lasting effect on the user’s character even after physical consumption and the delivery occurred, the item may still need to be classified as durable.
(b) "Durable" – This is where the item enhances the user’s character over n extended period of time and may require amortization over the user's life (assuming the effects of the virtual item become part of the character’s attributes).

From a systems and general compliance perspective, the issue is how delivery is defined.  Is delivery giving the customer the virtual cash to spend, or is delivery the customer actually purchasing the virtual goods?  The latter has the feel for final delivery, but may necessitate very high volume percent complete / milestone delivery type revenue tracking for relatively small amounts of money.

If there is no physical effort required after the initial purchase transaction - and no additional cost incurred - you may be able to justify a revenue method based on the initial purchase of virtual cash. Options could include amortization of revenue straight line over the usual customer consumption period (sort of an inventory turns model), or on purchase, or two months after purchase. It would be helpful to find a simplifying assumption to help with the detailed revenue transaction management.

The following excerpt from the Zynga 10K (using the Item-based model) may be of interest:

“The proceeds from the sale of virtual goods are initially recorded in deferred revenue. We categorize our virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action. For the sale of consumable virtual goods, we recognize revenue as the goods are consumed, which approximates one month. Durable virtual goods represent virtual goods that are accessible to the player over an extended period of time. We recognize revenue from the sale of durable virtual goods ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the estimated average life of durable virtual goods. If we do not have the ability to differentiate revenue attributable to durable virtual goods from consumable virtual goods for a specific game we recognize revenue on the sale of durable and consumable virtual goods for that game ratably over the estimated average period that paying players typically play that game.”

Going forward, it will be interesting to see how social gaming companies deal with the issue of virtual sales in real life.  I expect that this is evolving.

 Increasingly complex regulatory requirements, along with the often challenging business models in the technology industry, may make it difficult to analyze your company's revenue recognition needs.  Because of this, it can be extremely helpful to use a framework to analyze your company revenue processes.  Categorizing and organizing the company’s business needs can help you build the processes and systems required for accurate revenue recognition.

One such framework organizes the requirements into three distinct categories.  These categories are based on an overall revenue process model consisting of: a) determining the revenue model; b) applying the revenue model to sales that occur; and, c) recognizing revenue based on the revenue recognition concepts.  These three categories are described in more detail here:

1)     Determination.  Effective revenue processes begin with identifying the appropriate compliance regulations and the revenue rules for the products sold based on these concepts. For many technology companies, an independent analysis and valuation of the items sold in multi-element models is also required.  Determination is generally completed on an annual basis and may also be monitored during the year.

2)  Application. While the determination occurs in a static environment, it is useful only if the determined revenue rules and values are applied to real company transactions as they occur.   Application considers your sales model (how sales occur), as well as the transactions that are created for which the determined revenue rules are applied, and then automates the consistent processing of the revenue.

3) Recognition. If you apply revenue rules and policy to the appropriate sales transactions as they occur, revenue recognition is much more streamlined.  However, it is still a good idea to review the sub-ledger validation, special case or exception rules needed, as well as the general processes around revenue recognition.

Arequest to understand the fair value of a single element within a multi-element sale thus becomes a Determination need.  Likewise, a need to ensure a consistent approach to revenue recognition based upon company policy and compliance requirements is an Application need.  Once the proposed framework is applied, addressing the requirements becomes significantly more manageable.

A solid, documented understanding of your company’s go-to-market model(s) is a good starting point.  "Go-to-market" means the combination of channels, sales efforts, and customer actions that result in sales.  This type of process and analysis is critical when thinking about how to best manage and implement the required revenue recognition processes and systems.

For more information about this topic, you may be interested in Tensoft's white paper, "Revenue Regulatory Compliance Considerations in Business Software Implementation," co-authored by Bob Scarborough and Jeffrey Werner.

 In this webinar, we will compare and contrast the current and proposed approaches to revenue from contracts with customers.  While there are no pre-requisites for this CPE-eligible event, the information below may be helpful to know in advance.

Under the Proposed Exposure Draft, revenue recognition will follow this new five step process:

1.      Identify the Contract with Customer

2.      Identify the Separate Performance Obligations

3.      Determine Transaction Price

4.      Allocate Transaction Price to Obligations

5.      Recognize Revenue on Satisfaction of Performance Obligation

Here are some of the differences between current US GAAP and the proposed Standard:

·         Significant use of estimates

·         Significant increase in disclosures

·         Relative selling price method

·         Delivery on “transfer of control” to customer

·         Variable and contingent revenue is estimated instead of deferred

·         Time value of money (revised to greater than 1 year)

·         Collectability is estimated and reduces revenue

·         Re-measurement and adjustments to recorded revenue

·         Warranties are revenue obligations (like software PCS)

·         Percentage of completion accounting – (based on transfer of control – continuous transfer of control issues)

·         Consideration to customer may be separable (revenue and expense)

·         Return accounting – estimated

Sound like some significant changes?  If approved as expected, they will be.  This is why many companies are planning to prepare asap to apply the new standard.  So, please join us for this informative and timely topic.

Webinar Agenda:

            ·         Overview – Who, What, When, Where, Why

·         Process and Scope

·         Exposure Draft Outline

·         Five New Principles of Revenue Recognition

·         Differences from Current US GAAP

·         Implementation Guidance

·         Effect of Changes on Technology Companies

To ensure that your questions and comments will be addressed and included in the webcast, please submit them in advance.

 The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have recently published important exposure drafts on “Revenue from Contracts with Customers.”  The proposed joint standard seeks to clarify the principles for recognizing revenue and to adopt a single revenue model for both International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP) reporters, across industries and markets.  If adopted, this would represent a significant step toward global convergence in financial reporting.

These proposed standards will likely result in significant changes in the key financial performance measures of many companies, in many industries.  For most, this will require changes to the business management systems that measure and recognize revenue, as well as updates to revenue recognition process controls.  Although the effective date is no earlier that January 1, 2015, it’s not too early to prepare, since this may take substantial planning and effort to implement, depending on your company’s current contract and revenue processes.

Tensoft will be providing further insight to our customers, partners and other interest parties, including an upcoming webcast on March 13 – just in time to help inform any additional comments that you’d like to make on the exposure drafts! 

 When software companies are interested in Tensoft's Revenue Cycle Management (RCM) product, we first try to determine a fit for their requirements, so that no one's time is wasted.  Even if they have not yet created a requirements document, we find that a lot can come out of considering these three variables:

1) Billing. How does your company go to market (eCommerce, enterprise agreement, channel model, etc.)?  You'll want to look for a billing system or a billing support system that matches your go-to-market model.

2) Revenue Recognition. The rules for software industry revenue recognition are complex and changing. For the basics, you'll need a sub-ledger for deferred and recognized revenue analysis and appropriate methods and models to support your revenue recognition models.

3) Revenue Compliance. Could be part of the above, but is often a sub-set of that, and one that not every company needs.  There is no easy way to describe this, but if you have a sales process with multiple related elements in it (like software plus maintenance), and there are different recognition periods for the elements, you are most likely subject to more complex accounting guidelines.

Tensoft Revenue Cycle Management (RCM) supports billing requirements as well as complex software revenue recognition and contract management.

  Since Tensoft President and CEO Bob Scarborough isn’t always great at blowing his own horn, I’ll do it for him. I’m proud to announce that this April Bob started fielding questions as an industry and subject matter expert on the Proformative website (www.proformative.com).

Proformative is an online resource and professional community that provides a new and effective way for corporate finance, accounting, treasury and finance-related professionals to find answers to their technical and operational questions, and easily find practical resources that serve their daily needs. On the site, financial professionals can search an ever growing knowledge-base of peer, expert and aggregated content to quickly find practical answers and relevant information.

Bob’s expert page can be found at http://www.proformative.com/ask/expert/bob-scarborough. He is listed as an expert in: 1) revenue recognition accounting; 2) manufacturing accounting; 3) cloud computing and SaaS software; 4) revenue recognition software and 5) Microsoft Dynamics GP implementation. Bob encourages questions and discussions on real-world financial issues, and enjoys the interchange of ideas and solutions that the site facilitates.

If you lose the link above, simply click on “Ask the Experts” and type in “Scarborough” to see the questions and comments that are currently under discussion. Or, send Bob a question and engage in open or private discussions (anonymously or with your real name) and get his perspective on issues on which you deal every day.