Virtual Currencies: Legal & Financial Reporting Issues for Entertainment Companies

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 Partner Perkins Coie LLP Dax Hansen Partner Perkins Coie LLP

4. Loyalty Points & Virtual Currency • Evaluation of the origination of the points/virtual currency & other characteristics

5. Loyalty Points 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 605-50 (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 • No specific guidance, economic substance of transaction drives recognition • Applicable guidance for gaming & online entertainment • ASC 985-605-55-121 (formerly EITF 00-3) • 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)

8. Virtual Currency Generally, the sale of the virtual currency is not the revenue event: -Fuel/food -Ammunition -Extended time -Unlimited assets -New level/status -Personal profile

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

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