As per the scenario given, Zynga does not charge its customers for playing games instead they earn their revenue by making Sales Of Virtual Goods associated with the online games offered to the customers as well as from the sales of advertising within their games.
As per the information given Zynga Inc recognize the revenue obtained from the sale of virtual goods when the players of the games have obtained the services from the company and it is reasonably assured that the fees would be received by the company. The organization determined that the player must have an implied obligation to continue showing the purchased virtual goods within the online game for the duration of their estimated life or until it expires in order to determine when the services are provided to the player. The revenue that was received from the sale of virtual goods are recorded as deferred revenue initially by the company. The sale of virtual consumable goods is recognized when the goods are consumed on the other hand sale of virtual durable good are recognized over the estimated average playing period of the games by the customers which represent estimated life of durable virtual goods.
Virtual Item revenue is treated as rendering services rather than sales of goods by many mobile game companies whose primary business is operating games, as there is an implied obligation to provide the services that allow the Virtual Items to be displayed, used, or converted into other Virtual Items in the games. As a result, the proceed received from the sale of Virtual Items from paying players are recognized as deferred revenue at first. Thus, we can conclude that Zynga Inc has followed correct accounting method (1).
In order to better understand the accounting method used by Zynga Inc, it is recommended to the organization to provide the details of the kinds of items sold by the entity such as permanent items, time-based items or usage-based items because each kind of items has its own method of treatment.
Since it is stated that the cumulative changes in average playing period resulted in increase in the sales of the organization during the year 2011 whereas offsetting reduction by the same amount in the year 2012, indicated that there must be a decrease in the average playing period which causes a decline in the year. This reduction in average playing period indicated that there must be a reduction in the usage of games developed by the organization due to the reasons like upgrades, appearance of new games etc (2). Customers expect frequent changes in the games thus this indicated that the organization may not have updated their games or developed new games due to which the average paying period decline.
If the organization had not taken into consideration the changes mentioned in the notes, then the organization may have incurred net loss of ($458216000).
Reference
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- pwc.com. samilpwc_gamestartup-guidebook [Internet]. www.pwc.com. 2022 [cited 14 January 2022]. Available from: https://www.pwc.com/kr/ko/publications/service/samilpwc_gamestartup-guidebook_en.pdf