Case Study:
The following business situation has been presented to your firm for advice.
AlyZac Games Ltd (AlyZac) is a company that writes and sells computer games. AlyZac have just moved to Australia from California. In the past, Alyzac have used the American ‘free-to-play' model where players can download and play the game for free, but then purchase virtual goods while in the game. Alyzac's games always offer the players to opportunity to purchase durable items such as ‘costumes' and ‘equipment', as well as consumable items such as ‘coins' and ‘points'.
Alyzac have several games in the development stage, and they have just released a new computer cooking levels game. Alyzac are looking to hire a team of programmers to develop and finalise the company's new games. They have an appointment with a bank to discuss financing options to fund their expansion. Coming up to their meeting with the bank, Alyzac are trying increase sales by encouraging new players to purchase virtual goods while in the ‘kitchen'. In order to attract new players, Alyzac have put together an ‘apprentice chef package'. The terms of this package are:
• After downloading the game for free, new players can make an up-front cash payment of $10 which entitles the player to 10 cookies, 2000 points and access to 12 exclusive levels of the game. Cookies and points can be used within the game to purchase additional virtual goods. The $10 is non refundable. AlyZac plan on selling this package for $12 after the promotion period ends.
• In addition, after completing each of the first three levels, players will receive a ‘free' kitchen appliance upgrade. Three upgrades such as these would normally cost $3 per upgrade.
• And wait, there's more! As an added incentive, apprentice cooks who complete all 12 levels within 3 months will receive a premium (virtual) ‘gold chef hat' for free. Alyzac's prior experience with such offers is that 50% of players receive the ‘bonus' items at the end of the qualifying period. The ‘gold chef hat' usually retails in the game store for 5 cookies and 500 points, which in turn would cost $2 to purchase through the app store. Other information from AlyZac includes:
• Each app store (Apple iTunes, Google Play Store, etc) keeps 20% of any products sold through the platform.
• Their friend, Martina from mi amigo GAMES Inc, has suggested that they use the ‘item-based revenue model' (IBRM) to record their revenue because she thinks this will result in more revenue being recorded immediately, which will persuade the bank to lend Alyzac the money they need. AlyZac have come to you before their bank meeting for advice on how they should treat the revenue from their online game sales.
Required:
You represent the accounting firm advising AlyZac Games Ltd as to its compliance with AASB 15 Revenue from Contracts with Customers. Comment on all matters relating to the US GAAP versus AASB accounting treatment of the revenue described above, providing clear explanations to support your answers.
You recommendations should provide a clear explanation of:
a) The accounting treatment of revenue in Australia and the options for recording ‘in-app' purchases under AASB 15.
b) Whether the IBRM is appropriate for AlyZac Games Ltd.
c) A clear recommendation of when you think AlyZac should recognise the revenue from the sale of the ‘apprentice chef package'.