Reference no: EM133415753

Question: March 26, 2015, A San Francisco federal judge allowed Zynga Inc. shareholders to proceed with their class-action lawsuit alleging the online gaming company failed to disclose slumping revenue growth before its market value declined by several billion dollars in 2012. According to the plaintiffs, Zynga concealed declining user activity, masked how changes in a Facebook platform for its games would affect demand, and inflated its 2012 revenue forecast. The shares fell from a peak of $15.91 on March 2, 2012 to below $3 on July 26, 2012, when Zynga posted disappointing earnings and cut its outlook. Zynga says it recognizes revenue after it determines that a service has been provided to a player and the collection of fees is "reasonably assured." But determining that a service has been provided seems a little more complicated than it would appear, because Zynga needs to differentiate between the types of goods it sells its players. Zynga, which makes games like FarmVille and Mafia Wars for social networking platforms like Facebook, classifies the game items it sells to players as either "consumable" or "durable" goods. The former category is for goods that players can immediately use, like energy in the game CityVille; the latter is for goods that players buy and keep for the duration of the game, such as tractors in FarmVille. The company recognizes revenue for the consumable goods as soon as they are consumed. The durable goods present a problem, however, because things like virtual tractors don't depreciate, but potentially live forever, and the company is obligated to ensure that the virtual game pieces continue to exist in the game world. That's forced Zynga to come up with a system of determining how long that may be. Discuss the challenges of recognizing revenue for the online products/services Zynga provides to its customers. Draw an analogy between how Zynga should go about recognizing revenue and when gift cards are sold to be used at a later date. (Hint: you may find the content from Chapter 7 helpful in analyzing this case)