Question

Rovio Entertainment is a Finnish developer, publisher and distributor of video games headquartered in Espoo, Finland. Rovio was founded in 2003 by three students from Helsinki University of Technology following a victory in a developers’ competition with a multiplayer game called King of the Cabbage World, later renamed Mole War. Rovio’s games include Angry Birds, Bad Piggies, Shakira and Fruit Nibblers. Rovio produced The Angry Birds Movie and launched an entertainment channel, Toons.TV (discontinued in 2017). Rovio licenses its Angry Birds content to other distributors such as Activision and obtains licenses to produce games such as Angry Birds Star Wars. Rovio trades on the NASDAQ Helsinki stock exchange and reports in Euro. All amounts are in millions of Euro, rounded to hundreds of thousands. Please round to hundreds of thousands of euro (€XX.X million). Assume a 25% tax rate throughout. Rovio’s fiscal yearend is December 31. The following italicized text explains the basics of Rovio’s expense and revenue recognition based on their accounting policies footnote. Please read carefully! REVENUES Games: Rovio’s games are free to play, but Rovio makes money from in-application purchases. There are two different kinds of in-application purchases in Rovio games: consumables and durables. Consumables benefit the user immediately, while benefits from durables last across the user lifetime. Consumables satisfy revenue recognition “at a point in time”, i.e., when purchased by the player. Durables are recognized as revenue “over time”, i.e., over the estimated player lifetime. Durables always have a two-year life with half of the revenue recognized in the year of purchase and the other half in the following year. Broadcasting: Broadcasting royalties are from The Angry Birds Movie and TV shows such as Piggy Tales and Angry Birds Blues. Columbia Pictures acts as a paymaster and manages all money flows in the broadcasting value chain. Rovio recognises its revenue earned from end-users when it is reported to Rovio by Columbia. Since Rovio is the residual receiver in the value chain, there is a significant delay between Columbia reporting the end-user purchase and Rovio receiving the cash, during which time the amounts are included in Broadcasting Receivables. COSTS Movie: Rovio’s only movie to date is The Angry Birds Movie, released in 2016. The amortisation schedule of capitalised development costs (Development Costs, Movies, on the balance sheet) related to the Angry Birds Movie is based on the ratio of the revenue from the movie in a given period relative to the total expected revenue throughout the movie’s entire lifecycle. The total development costs of The Angry Birds Movie was €100. Games: Early stage “research” costs associated with games are expensed as incurred. “Development” costs are recognised as an intangible asset when Rovio can demonstrate the technical feasibility and intent to complete and market the project, as well as the probability of the asset generating future economic benefits. Game Development Costs are amortized straight-line over a two-year estimated useful life.

3. Revenues from The Angry Birds Movie during 2018 (included in the €125.0 broadcasting royalties in part 2), totaled €50.0 out of a total lifetime estimated revenue of €500.0. Recall that the original cost of the movie was €100.0. (Note that you’ve already recorded the revenue in part 2—this part is about the cost.)

Journal entry please

Answer 1

As per IAS 38 dealing with Intangible Assets, “research” costs associated with games are expensed as incurred. “Development” costs are recognised as an intangible asset when Rovio can demonstrate the technical feasibility and intent to complete and market the project, as well as the probability of the asset generating future economic benefits. Game Development Costs are amortized straight-line over a two-year estimated useful life.. Thus, development costs of €100 shall be amortized over a period of two years. Corresponding entries would be:

Debit Games Development by  € 100

Credit Cash by  € 100

At the year end, amortization entry would be passed as follows:

Debit Amortization Expenses - Games Development by  € 50

Credit Games Development by  € 50