Quick Accounting Review: Activision/Blizzard
Deferred Income. Also known as unearned income
Example: A customer buys a year-long MMO subscription for $120 ($10/month prepaid for twelve months)
In classical double-booking accounting, on day one:
- Debit the asset account, “cash” for $120. The company receives the full amount immediately and this is a cash asset.
- Credit a liability account, “Deferred Income” (sometimes called “Unearned uncome”) for $120. The company is obligated to provide $120 of service that the client has already paid for.
At this point, there is no recognized revenue yet for the above transaction and this wouldn’t show up under revenue or income statements in a financial report. However, it would affect the cash asset account and cash flow statements.
At the end of each of the twelve months of the subscription term:
- Debit the liability account, “Deferred Income” for $10 (total year subscription cost divided by twelve months)
- Credit the Equity account, “Revenue” for $10
These monthly transactions *do* affect revenue and income reports, but do not affect cash holdings or cashflow statements.
In Activision/Blizzard’s quaterly report, their official figures for Q4 2008 were:
|Total Revenues for Calendar Q4, 2008||$1,639|
|Net income (loss)||$(72)|
You can also see their deferred revenue balance. This is the money for unused portions of MMO subscriptions that’s not yet recognized as revenue.
You can also see that their MMO revenues dropped from 62% of total revenues in Q4, 2007 to 22% of total revenues in 2008. Since Wrath of the Lich King shipped late in Q4 2008, I’d imagine that subscriptions have shot way up since then, but that is mostly unrecognized revenue as of the end of the quarter.
The company said net income excluding deferred revenue and other charges would have been $429 million […] Revenue excluding deferred game sales was $2.2 billion
What they are saying is saying is that if they could treat all the new year-long subscription sales as day-one revenue instead of using the classical deferred revenue accounting (and a few other adjustments that they detail in the full report), they would be able to report much better numbers.
At face value, it’s shocking that the publisher behind World of Warcraft, Call of Duty, and Guitar Hero didn’t turn a profit. Those three products are all selling huge unexpected numbers. One other thing to consider is that they bought the Guitar Hero rights after that was already big, and they got the World of Warcraft product in a merger, so it’s possible that some of the money being made on those products is going to the previous property owners through some kind of royalty deals.