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Revenue Recognition of Virtual Items - Best Practice in Hong Kong

Publications Fidinam Hong Kong

If you have ever been commuting through the busy streets of Hong Kong, you probably have already noticed that every bus or MTR available seat can easily become a comfortable station for hundreds of passionate online game players.

Even though commuting time is relatively short in Hong Kong, players may spend several hundreds or even thousands of HK dollars on games each month.
High smartphone penetration rate in the City has indeed made mobile game playing very popular among the young generations.

This trend has given rise to a number of successful mobile game developers in recent years that contributed to create a wide offer of games (ranging from fantasy, to war, adventure and even kids’ entertainment) which are sold through third party online platforms.

Revenue Recognition and Industry best practice

If we take a closer look at the business model of these game companies, we notice that users normally download the game for free from different distribution platforms (i.e., Google Play or Apple Store), whereas developers generally derive revenues from the sale of in-game “Virtual Items”, defined as virtual currency, goods and services, which are sold to the player throughout the game.

Now, a question that all mobile game companies have to face at a certain point is: “Based on this business model, how do I recognize my revenue in my financial statements?
According to the “Hong Kong Financial Reporting Standard 15 (“HKFRS 15”) - Revenue from Contracts with Customers”, an entity shall recognize its revenue when the entity satisfies a performance obligation by transferring a given good or service (i.e., an asset) to a customer. An asset is deemed as transferred when the customer obtains control of that asset.

Depending on the terms of the contract, control of the good or service may be transferred from one party to the other over time or at a given point in time.

If control of the good or service is transferred over time, revenue is recognized over the period of the contract by reference to the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognized at the point in time when the customer obtains control of the good or service.

For the specific case of mobile games, the period over which the performance obligation is satisfied depends on the duration of the hosting period of the individual virtual good purchased. In other words, revenue from sales of virtual items is recognized over the period during which the paying players are expected to access and consume the benefits acquired though virtual items.

Virtual items are therefore distinguished between two items’ categories, (i) Consumable in-game virtual items and (ii) Durable in-game virtual items.

  • Consumable in-game virtual items represent items that are immediately extinguished / consumed after a specific game action (e.g., a virtual bomb that a soldier throws during a war game). The player will not be able to continue benefitting from the in-game virtual items thereafter. When these items are consumed, the relevant services are rendered and revenue is immediately recognized by mobile game companies.
  • Durable in-game virtual items represent items that are accessible and beneficial to players over an extended gaming period. Durable virtual items are often purchased to enhance the player’s game experience over an extended period of time (e.g., an enhanced vehicle or a shelter that the player uses to protect his army during the game). Revenue from these items is normally recognized by mobile game companies ratably over the estimated life of durable virtual items. Game developers need to use judgement and should have enough data to support the estimation of the average game playing period (also referred as “period of performance”) of players, i.e., how long a player will continue to play a particular game.


When applying revenue recognition for mobile games, there are significant issues and challenges that mobile game developers have to face.

First of all, companies are expected to collect and maintain sufficient data to properly estimate the period of performance. This may not be an easy task, especially when the game becomes more popular and thanks to a multitude of new players, new gaming features are added to the game.
As a result, the size of data becomes large and sophisticated, whereas advanced analytical tools may be needed to process the data.

Finally, a significant level of judgement is required to assess whether a virtual item should be categorized as “durable” or “consumable”.

The mobile game industry is young, dynamic and fast changing. It is likely that new internal control and accounting systems will be needed in order to comply with the financial reporting requirements as stated under HKFRS 15.

When dealing with these challenges, assistance from accounting experts is highly recommended, mobile game companies are therefore encouraged to start their HKFRS 15 assessment in due course.

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