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

2. Agenda Introductions Accounting for Points & Virtual Currency
Operational considerations
Revenue recognition
Current trends
Unclaimed Property
Priority rules
Exemptions for "gift certificates"
New Jersey zip code collection law
Interactive Discussion

3. Introductions Taft Kortus Partner Moss Adams LLP Kirk Soderquist
Perkins Coie LLP
Dax Hansen

4. 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
Contractual rights & terms
Breakage
Loyalty Points/Virtual Currency

5. Revenue or Cost recognition?
Loyalty Points
Multiple element revenue arrangement
Cost allocation (generally preferred)
Revenue or Cost recognition?
Award earned by user or through indirect revenue transaction
Accrual of associated costs at the point when revenue is recognized for the other items in the arrangement
Used in sales based earning transaction
Deferral of revenue
Separate units of accounting

6. Loyalty Point Breakage
Points/awards that will never be redeemed
ASC (EITF 01-9 ) for Rebate Offers
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

7. Virtual Currency
Persuasive Evidence
Price is fixed & determinable
Collection is reasonably assured
Delivery has occurred or services rendered
No specific guidance, economic substance of transaction drives recognition
Applicable guidance for gaming & online entertainment
ASC (formerly EITF 00-3)
Generally scoped out of ASC (formerly SOP 97-2) on hosted and free-access sites
Staff Accounting Bulletin No. 13 (SAB No. 13)

8. Virtual Currency
Generally, the sale of the virtual currency is not the revenue event: $$
Virtual Sale
Consumable
Consumable in virtual ecosystem
Durable
Benefits user over time
-Fuel/food
-Ammunition
-Extended time
-Unlimited assets
-New level/status
-Personal profile

9. Virtual Currency Revenue Models
Consumable
Durable
Useful life of the durable good/services
Useful life of the game/activity
Useful life of the user/customer
Recognized upon consumption/purchase of virtual goods
“Consumption” measurement critical

10. Virtual Currency Operational information vital to recognition
User activity transparency & reporting
Customer origination dates
Last log-in date
Historical trends
Identification of type of purchases
w/ virtual currency or cash
Identification of purchase date and utilization date

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

12. UNCLAIMED PROPERTY
Unclaimed property laws generally apply to both tangible and intangible property
Prepaid cards
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
Abandonment period begins on date of last activity of owner
Certain activity can restart the abandonment period
Scope and specific requirements of unclaimed property laws vary by state

13. PRIORITY RULES
Jurisdictional determination is based on priority rules.
First priority – state of last known address of apparent owner
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
Adopted by several states, but not by the U.S. Supreme Court

14. 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"?
"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)
"…gift certificate, gift card or electronic gift card or other medium" (Arizona, emphasis added)
"…device constructed of paper, plastic or any other material" (Maryland, emphasis added)

15. NEW JERSEY ZIP CODE COLLECTION LAW
American Express Travel Related Services Co. v. Sidamon-Eristoff
Challenged proposed requirement that stored value card issuers must collect and maintain zip code information at the time the stored value is issued
Value of cards would escheat to NJ if issuer fails to comply (i.e. third priority rule)
"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

16. INTERACTIVE DISCUSSION