WHEN IS SOMEONE GOING TO HOLD THE ACCOUNTING PROFESSION RESPONSIBLE FOR THE ECONOMIC MAYHEM THEY MAY CAUSE?
Most people confuse the difference between bookkeeping, which is a precise tally of monies paid and received, with accounting which is an more of an art than a science; a list of acceptable procedures based on rules, disclosures and interpretations.
In August, I posed a blog piece titled “ACSOI: IS THIS THE WARNING SIGN THAT WALL STREET WIZARDS ARE PLAYING YOU?” which pointed out a perfectly legal financial gambit that made a company’s prospects look better to the investing public than they actually were.
Today, we see another perfectly legal financial gambit that also makes a company’s prospects look better then they are.
In this instance, we see that Zynga – the purveyor of all those ubiquitous, and in my humble opinion obnoxious, Facebook games like Farmville has added millions to its top line … thus preserving the perception of outstanding sales and momentum.
“The accounting change, spelled out in the San Francisco company’s third amended S-1 filing with the Securities and Exchange Commission last week, shortened the estimated average life of its virtual goods to 11 months from 14 months last year.”
“The change added $27.3 million to Zynga’s top line, it said in the filing.”
“The boost from the accounting change sent Zynga over the $500 million mark in revenue for the first half of the year, putting it on pace to top $1 billion for the year.”
“Also, it meant the company reported net income of $1.8 million, instead of a loss of between $1 million and $2 million, according to Sam Hamadeh, CEO of PrivCo.com, a research firm.”
“Even the tweaked accounting couldn’t hide a 90 percent drop in profits in the quarter, to $1.3 million compared to $13.9 million a year ago.” <Source>
What it really looks like when it is reported to the Securities and Exchange Commission …
Non-GAAP Financial Measures
To provide investors with additional information about our financial results, we disclose within this prospectus bookings, a non-GAAP financial measure. We have provided below a reconciliation between bookings and revenue, the most directly comparable GAAP financial measure.
Bookings is a non-GAAP financial measure that we define as the total amount of revenue from the sale of virtual goods in our online games and from advertising that would have been recognized in a period if we recognized all revenue immediately at the time of the sale.
We record the sale of virtual goods as deferred revenue and then recognize that revenue over the estimated average life of the purchased virtual goods or as the virtual goods are consumed.
Advertising revenue consisting of certain branded virtual goods and sponsorships is also deferred and recognized over the estimated average life of the branded virtual good, similar to online game revenue.
Bookings is calculated as revenue recognized in a period plus the change in deferred revenue during the period.
For additional discussion of the estimated average life of virtual goods, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenue Recognition.”
We use bookings as one factor to evaluate the results of our operations, generate future operating plans and assess the performance of our company.
While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with GAAP.
In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure. <SEC: Third Amended S-1A Filing>
|The magic footnotes …
The estimated weighted-average life of durable and consumable virtual goods included in bookings during the six months ended June 30, 2010 was 14 months compared to 11 months for the six months ended June 30, 2011. In the six months ended June 30, 2011, online game revenue increased $27.3 million related to changes in our estimated average life of durable virtual goods.
The chances of an ordinary investor finding this through their own analytical efforts; and if found correctly interpreting what is really means is extremely small.
Bottom Line …
We are not expressing an opinion on the company, its valuation or its accounting methods, but use the above data to illustrate the diversity of thought in the accounting profession when preparing financials for companies with significant changes in their accounting and that are being potentially valued in astronomical terms.
We are also asking ourselves if this type of valuation is reminiscent of the recent dot com bubble bust when any company associated with the Internet was given an astronomical valuation even though they used manipulated financials, based much of their future on a single platform they did not control and faced significant competition with a low threshold of entry.
We should also remember that it is the accounting profession that was complicit (an unindicted co-conspirator, so to speak) in the past and current financial crises. And it was the accounting profession who unnecessarily complicates financials and who gave us “Enron-style” accounting with its off-balance-sheet Special Purpose Entities, Special Purpose Vehicles to hide the truth in the footnotes -- and then helped to accelerate the velocity of the downward market spiral with their mark-to-market procedures.
And finally, we are recommending that you take the Better Business Bureau’s long-standing mantra to heart: “Investigate BEFORE you invest.”
Reference Links …
“Nullius in verba.”-- take nobody's word for it!
“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw
“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS "The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius “A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius
“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell