DA:Inquisition - Mark Darrah Explains Revenue Recognition

Mark Darrah tried yesterday, on Twitter, to explain Revenue Recognition.

2a. until I deliver the thing I promised, I have the cash but I can't recognize the revenue in my financial statements.

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Conal Pierce from Bioware posted this information in this thread at Bioware forums, created by DragonAgeLegend. Conal Pierce explained that:

This series of tweets from Mark Darrah provides some insight into why we can't always be as open with our community as they might like. As a publicly traded company, there are often some very specific have-a-government-official-come-kick-down-your-door reasons why you can't say certain things at certain times in a certain way.

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I'm not sure I do get the whole revenue recognition thing? maybe some of you do?

More information.

Someone should tell him that rarely anyone cares about economy, we just want to see the number of sold copies.

I wouldnt play this or any EA game unless it was free and then I would might not play.

That sounds like total CYA nonsense. An example of where this might apply would be if DA:I slipped six months and EA's revenue was going to be materially impacted.

This factor ought not to stop then discussing usability improvements to the game with its players.

The more I play PoE the more DA:I pales into memory, to the point I feel like I might not even bother finishing it, just replay PoE and move onto D:OS and WL2 which I have not touched yet. The level of combat challenge and writing quality is not even on the same planet, and boy does DA:I make you spend a lot of time fetching stuff.

SteveTownsend said:

and boy does DA:I make you spend a lot of time fetching stuff.

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It's not the fetch time that bothers me in DA:I, it's time spent on killing 542834652837458273 bears.

The real question is why anyone would try and explain anything on Twitter?

ChaosTheory said:

The real question is why anyone would try and explain anything on Twitter?

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Twitter is for wannabe celebs.

Sounds like BS....which is a shocker...BS coming from the corporate world...who woulda thunk it.

Voqar said:

Sounds like BS….which is a shocker…BS coming from the corporate world…who woulda thunk it.

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EA is the biggest bullshit gaming publisher in the world, i havent touched any of their games since they ruined Ultima online starting 2000.

Long-time lurker, reg'd to post that this isn't too far off the mark - but I'd still argue that it's entirely EA's fault.

(I have an MBA and work in Finance, and I have plenty of indirect experience with revenue recognition, including the emerging rules from FASB. I'm not a CPA, however, and don't directly manage rev rec for my company; I'm just in the same room as the people who do.)

EA wants to recognize all revenue from game sales up front, when the consumer actually makes the purchase (which somewhat simplifies the retail delivery model, but it's good enough for this discussion). That's only possible under accounting standards if there's no ongoing performance obligation for a product. If there is an ongoing performance obligation, public companies are required to withhold some portion of revenue and recognize later, once they've delivered the remainder of your product.

This doesn't have to affect private companies, which aren't required to follow US GAAP (generally accepted accounting principles) - tho they may want to follow GAAP anyway, if they expect to go public in the future. This also doesn't affect a company's cash basis, obviously; the consumer has paid in full. But it does affect a GAAP-compliant company's ability to recognize profit on financial statements, which affects investors and market valuations of the company.

It's true that this is a gray area, and companies are motivated to be very conservative in their interpretation of FASB rev rec rules. But the real problem is that EA wants to recognize all revenue up front. In essence, they're pretending that all of their games are "done" at release, and they're muzzling developers from talking about specific bugfixes or feature enhancements that might publicly give any impression of an ongoing obligation to deliver any post-release support.

In my view, EA has two reasonable and ethical alternatives: they can deliver software that's 100% complete and functional and requires no bugfixes, or they can recognize revenue over a standard period of time rather than at sale. The former alternative is probably unrealistic, given the code complexity of modern games, so I'd argue that EA has the legal and ethical obligation to take the second approach. The problem is that, right now, they're trying to have it both ways: deliver incomplete products that require ongoing patches, yet make no performance promises that would have an impact on their ability to recognize 100% of revenue up front. In a nutshell, it's crap.

The problem isn't rev rec. It's EA's accounting policies.

suibhne said:

Long-time lurker, reg'd to post that this isn't too far off the mark - but I'd still argue that it's entirely EA's fault...

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Also long time lurker here, registered just to say thanks for explaining this so it makes sense, was enlightening

But the real problem is that EA wants to recognize all revenue up front. In essence, they're pretending that all of their games are "done" at release, and they're muzzling developers from talking about specific bugfixes or feature enhancements that might publicly give any impression of an ongoing obligation to deliver any post-release support.

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Couldn't one take the view that they are providing patch fixes with the expectation of improving future sales of the game, as well as new DLC? I.e. if they publicly abandon the game, their post-release sales may be sharply curtailed. They are instead producing revised editions.

rjshae said:

Couldn't one take the view that they are providing patch fixes with the expectation of improving future sales of the game, as well as new DLC? I.e. if they publicly abandon the game, their post-release sales may be sharply curtailed. They are instead producing revised editions.

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"One" could take that view, but an auditor definitely wouldn't.

That line of reasoning might apply to feature enhancements that get developed for a sequel but are rolled into the original game, I guess, and you might even be able to mount the argument for free delivery of CDPR-style "Enhanced Editions" that were never expected by the consumer. I'm not an auditor. But this definitely wouldn't fly for any bugfixes/patches that a consumer would view as part of the product performance they actually paid for. You might recall that Apple moved to a paid incremental (point-point-version) update to its OS several years ago, for exactly this reason. (But then they moved to totally free semi-annual versions, which solves the accounting challenge in a much more consumer-friendly way.)

Again, note that this doesn't have to constrain private companies (like CDPR and HBS). Most game developers are privately-held; EA and Activision/Blizzard are two rare exceptions, and (off the top of my head) maybe the only ones relevant to our RPG-related interests. (Even ZeniMax, as large as it is, remains privately-held.) But I still think EA's accounting practices suck - they should be amortizing consumer revenue over an arbitrary product support lifetime (like 1 year, maybe) rather than recognizing it at sale, and then they'd be able to talk about their product support and consumer engagement plans in as much detail as possible. This may be outside of Mark Darrah's direct control, sure, but it's absolutely disingenuous for EA to pretend this is the way things have to be.

Huh. I seem to have wandered into some kind of weird parallel universe in which companies are making isometric top-down CRPGs and internet comments are well-informed, clearly-written and level-headed.

As long as you guys have donuts, I think I'm staying.

suibhne said:

Long-time lurker, reg'd to post that this isn't too far off the mark - but I'd still argue that it's entirely EA's fault.

It's true that this is a gray area, and companies are motivated to be very conservative in their interpretation of FASB rev rec rules. But the real problem is that EA wants to recognize all revenue up front. In essence, they're pretending that all of their games are "done" at release, and they're muzzling developers from talking about specific bugfixes or feature enhancements that might publicly give any impression of an ongoing obligation to deliver any post-release support.

In my view, EA has two reasonable and ethical alternatives: they can deliver software that's 100% complete and functional and requires no bugfixes, or they can recognize revenue over a standard period of time rather than at sale. The former alternative is probably unrealistic, given the code complexity of modern games, so I'd argue that EA has the legal and ethical obligation to take the second approach. The problem is that, right now, they're trying to have it both ways: deliver incomplete products that require ongoing patches, yet make no performance promises that would have an impact on their ability to recognize 100% of revenue up front. In a nutshell, it's crap.

The problem isn't rev rec. It's EA's accounting policies.

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Darkhawk said:

Also long time lurker here, registered just to say thanks for explaining this so it makes sense, was enlightening

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Welcome to the Watch guys. I suspect you are correct suib-nee. If everything is sales than EA wants to maximize the sales point to their investors that such and such game makes this boatload of revenue, which is such and such on par/this per cent greater than this other such and such product.

No, not entirely the fault of company folks, but they are under orders based a combination of laws and corporate hype. Still, Bio's been drinking their own kool-aid a long time. They tend to believe their own hype as fact.

Lol it's like a reverse Enron scenario.

Probably the dumbest excuse ever given by a game company to explain lack of communications.

Stingray said:

Probably the dumbest excuse ever given by a game company to explain lack of communications.

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It's not really dumb, if you run a publically traded company the shareholders will nitpick any tiny negative thing to use it against you. It's simply the realities of the market, hence why as someone else said most of these remain private. On top of the frontloading of revenue it's hard to justify to shareholders to spent money on post-game support and patches.

Humanity has risen! said:

It's not really dumb, if you run a publically traded company the shareholders will nitpick any tiny negative thing to use it against you. It's simply the realities of the market, hence why as someone else said most of these remain private. On top of the frontloading of revenue it's hard to justify to shareholders to spent money on post-game support and patches.

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Well, I think the real problem is justifying to shareholders (which really means investors) the fact that your entire business model is predicated on releasing incomplete products that require ongoing support. It isn't weird, especially in the world of software, but it is something that EA would have to adjust its accounting practices to accommodate. If they did so, shareholders would have no cause to complain.

Look at it this way: if EA recognized game sales revenue over an arbitrary support lifetime, like 1 year from a game's release, that revenue would still be 100% as predictable/reliable as it is today; instead of coming all at once, it would simply be recognized ratably over a year (meaning it would be split into 12 equal portions and recognized month by month). But this would require a big adjustment in near-term earnings forecasts, to transition from the old accounting practices to the new (more ethical and accurate) accounting practices, and that's something EA wouldn't want to touch with a 10-foot pole. Those earnings forecasts are seen as having a big effect on EA's stock price, which means its value as a company. EA's finance and accounting team presumably figures it's much cheaper to keep consumers in the dark re. patch/support plans than to manage investor expectations around a change in accounting practices.

Again, this isn't an issue of the government threatening to kick in EA's door, as Mark Darrah claims. That's just not honest. A much more accurate way of putting it is that, given EA's desire to recognize 100% of revenue at sale (and therefore pretend its products are 100% complete at release), the company's spokespeople can't say anything to give an impression that ongoing patching/bugfixes might be required.

Long term, I'm betting EA will eventually have to change. I expect much more FASB scrutiny of software accounting practices like this. But I'm not a real expert, just a dilettante who's getting a kick out of "rev rec" making headlines on gaming sites I read.

I love the fact that there's talk of sales but it's been a long time since they or pretty much anyone else actually sold software. They license software instead. Reminds of this lyric from an obscure song by an obscure band:

"It's not yours, you lease it
It's not yours, you lease it"

"Please be kind and return it to us
Within the date stated on the invoice,
Or we will have to come and claim it by force."