We offer our games on mobile and social platforms, whereby players can play games for free, though they can purchase in-game virtual items. Virtual items provide various game enhancements such as boosting player ability or extending gameplay and are not transferable between different games. Virtual items are classified into two categories: consumable or durable, depending on whether the virtual item's value is consumed immediately or if the item has an ongoing value in gameplay. Our data systems can differentiate between the revenue generated from durable and consumable items for games offered on mobile and social platforms. 

Consumable items provide a benefit to the player that is consumed by specific player action, after which the consumable items are no longer available for reuse in future gameplay. Consumable goods are eliminated from the player's game board after they have been consumed and do not provide the player with any continuing benefit following their consumption. Consumable items can be purchased in a single item format or a multiple item pack. Revenue is recognized at the time the item is consumed for single-item formats and is recognized at the time the final item in a multiple item pack is consumed, which approximates its time of purchase.

 Durable items are used by players from the time of purchase onward. They provide game enhancement throughout the play and do not immediately expire. The enhancement or benefit ends at the earliest of a player completing or abandoning the game. We recognize revenue from the sale of durable virtual items ratably over the estimated average playing period of paying players on that specific game, which is typically between two and nine months depending on the game. The average playing period of paying players on a specific game is our best estimate of the average life of a durable item sold in that game. We reassess the estimated average life of durable items on a periodic basis, which is typically every quarter. We determine, on a game by game basis, the estimated average playing period begins when a player makes the first purchase and ends when a player is determined to be inactive.

 Based on an assessment of the historical pattern of players' gameplay, we consider a paying player inactive if that player has not logged on to a game in any one month. The rate by which paying players become inactive for any given month is calculated to be the proportion of players who have purchased at least one virtual item in any previous month, who were active in the previous month and who have not logged in to the gaming environment during that given month. Through this analysis, we have determined that players become inactive at a relatively consistent rate. Based on this consistent rate, we determine the estimated average playing period of a paying player by computing the average amount of time that a paying playing will remain active. If future data indicates paying players do not become inactive at a relatively consistent rate, we revise our method of calculation accordingly.

Based on this statement from the virtual gaming company (King Digital Entertainment):

1. What do you think about the credibility of this stated revenue recognition policy for consumable goods and for durable goods? Does it correctly report the true underlying economics of the transaction to stakeholders?
2. Additionally, what adjustments could the top executives of this company make to boost the companies revenues and so, earn a larger annual bonus?. What methods are available to try and prevent this type of unethical illegal behavior?.

Answer rating: 100% (QA)

The revenue recognition policy for consumable goods and for durable goods is not credible because revenue accounting is fairly straightforward when a product is sold and the revenue is recognized when ... View the full answer