Accounting for potions: This is fairly easy. If you sell someone a potion, revenue is recognized when they drink the potion. Or use their speed boost. Or skip the progress gate to get to the next dungeon. The fiction doesn’t matter. Reality matters, and the economic reality of the situation is that performance has happened after the temporary thing you’ve promised is delivered. (Technically speaking you do have to recognize the revenue over time if your potions last long enough to be close to monthly SaaS contracts, but practically speaking most are over with in a day and most accounting systems lose precision below that.)
Accounting for swords: If you trade gems for swords then you can ratably recognize the purchase price of the gems when you satisfy your obligation by giving the player a new sword.
Hah, just kidding. That would be way too easy.
You actually need to recognize the prorated cost of the gems exchanged for the sword over the economically useful life of the imaginary sword. “Economically useful life” is a concept with a lot of prior art on it in accounting. You are obligated to, and accountants can point to substantial work on, estimating the economically useful life of factories, cruise ships, CNC machines, bunk beds, Bitcoin miners, dairy cattle, and almost everything else that depreciates.
But there is not a huge amount of prior art on imaginary swords. So you get to pick one of two methods. [...]
As an employee in a SaaS business, I simply track ARR. Annual Recurring Revenue. As an investor in public SaaS companies, I much prefer free cash flow. FCFF adds back in the deferred revenue and...
As an employee in a SaaS business, I simply track ARR. Annual Recurring Revenue.
As an investor in public SaaS companies, I much prefer free cash flow.
FCFF adds back in the deferred revenue and lets you understand if they are burning cash to grow, or growing cash while growing.
Beautiful essay by Patrick as usual. One which highlights why I find accounting so fascinating. Accounting is the practical philosophy of money.
From the article:
As an employee in a SaaS business, I simply track ARR. Annual Recurring Revenue.
As an investor in public SaaS companies, I much prefer free cash flow.
FCFF adds back in the deferred revenue and lets you understand if they are burning cash to grow, or growing cash while growing.