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Virtual Goods & Accounting

A recent post by Bill Gurley on his blog summarized accounting rules for virtual goods as laid out by Mick Bobroff of Ernst & Young and discussed the benefits of “rental models” for online game and virtual world companies.

The main points made are:

  • Virtual currency cannot be recognized as revenue when sold – it can only be recognized upon use (purchasing virtual goods with the currency)
  • Virtual goods should be classified as consumable or durable depending on their usage
  • To properly manage revenue recognition, companies will need to track and manage each virtual item in their system as well as customer statistics such as average customer lifetime value (ACLV)

Of course, everyone should check with their accounting team to set their own policies, but these rules are common sense and mirror the rules in use for prepaid cards.

The second part of Bill’s post talks about the major benefits of renting virtual goods, thereby transforming all virtual goods into “consumable” ones. This does help with the accounting complexity, but takes away the ability for users to collect and hoard which has proven to be an excellent motivator.

My main caution about using the rental model for virtual goods is that basing decisions on accounting rules is probably not the best route to take in the hyper-competitive online game and virtual world industries.

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