Question

Analyzing Unearned Revenue Changes Take-Two Interactive Software, Inc. (TTWO) is a developer, marketer, publisher, and distributor of video game software and content to be played on a variety of platforms. There is an increasing demand for the ability to play these games in an online environment, and TTWO has developed this capability in many of its products. In addition, TTWO maintains servers (or arranges for servers) for the online activities of its customers. TTWO considers that its products have multiple performance obligations. The first performance obligation is to provide software to the customer that enables the customer to play the game offline or online. That performance obligation is fulfilled at the point at which the software is provided to the customer. In addition, TTWO’s customers benefit from “online functionality that is dependent on our online support services and/or additional free content updates.” This second performance obligation is fulfilled over time, and the estimated time period for which an average user plays the software product is judged to be a faithful depiction of the fulfillment of this performance obligation. At the beginning of the first quarter of fiscal year 2018, TTWO had a deferred net revenue liability of $509,527 thousand. When that quarter ended on June 30, 2018, the deferred net revenue liability was $419,786 thousand. Revenue for the quarter was $349,184 thousand.

a. What would cause the deferred net revenue liability to go down over the quarter?

-TTWO must have recognized less in revenue than it sold during the quarter.

- TTWO must have recognized the same amount in revenue as it sold during the quarter.

- TTWO must have recognized more in revenue than it sold during the quarter.

- None of these are correct.

b. What was the amount of online-enabled games purchased by TTWO’s customers in the first quarter ended June 30, 2018? Answer (in thousands)

Were the purchases greater or less than the revenue recognized in the income statement?

- Purchases were less than the revenue recognized in the income statement.

- Purchases were greater than the revenue recognized in the income statement.

- Purchases were equal to the revenue recognized in the income statement.

- Not enough information is provided to answer the question.

Answer 1

a.) None of the option is correct as there is a decrease in revenue liability and not in revenue. Only 1st obligation is posted under revenue at the time of sale. The 2nd obligation is first posted to deferred revenue and then proportionately transferred to reveune in the period when the 2nd obligation is serviced. Deferred Revenue liability is a monetary measure of outstanding 2nd obligations towards the consumers. The decrease means that the second obligation over time is getting serviced more than the generation of newer 2nd obligations on new sales.

b.) In income statement (measure of flow variables during the period), income and expenses for the particualr period is recognised. The balance if any on these fronts is taken to the Balance Sheet (measure of stock variable as on a given date, for eg, as at end of the fiscal year). Revenue is posted to Income statement and deferred revenue liability is posted to Balance Sheet.

Since Consumer Purchases = Payments for both obligations. Payment for second obligation in the current year is whch is not serviced in the current year is moved to deferred revenue liability (Balance Sheet). Similarly proportionate deferred revenue liability from earlier years for 2nd obligations serviced during the current year is moved to income statement (revenue recognition).

Therefore the correct option is the last alternative as service obligations met of earlier years deferred revenue is not provided. If the opening balance of 2nd service obligation is ignored, customer purchases will always be more than revenue recognised in a given period, as customers are paying for both obligations but the TTWO is booking revenue for only that part which strictly pertains to the current period.