Question

Analyzing Unearned Revenue Changes
Electronic Arts Inc. (EA) 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 EA has developed this capability in many of its products. In addition, EA maintains servers (or arranges for servers) for the online activities of its customers. When customers purchase online subscriptions, revenue is recognized ratably over the subscription period.

EA treats a significant portion of its software sales as “multiple-element arrangements” and—through fiscal 2007—deferred a portion of customer purchases based on the estimated value of the online services offered. Beginning in fiscal 2008, it was not possible to estimate the separate value of the software and the online services, so EA began to defer all such revenue over a six-month period. Starting July 1, 2013, based on an analysis by the company, revenue continues to be recognized over six months for games distributed online, but for physical games purchased at retailers revenue will be recognized over a nine-month period. EA’s 2014 10-K states that U.S. GAAP requires the company to account for the consumer’s right to receive unspecified updates or their matchmaking service for no additional fee as a “bundled” sale, or multiple-element arrangement. Information from Electronic Arts’ financial statements is given below. Prior to fiscal year 2006, no revenue was deferred. All amounts are in $millions.

Fiscal year end Mar. 31	Net revenue	Deferred net revenue (liability)
2005	$3,129	$0
2006	2,951	9
2007	3,091	32
2008	3,665	387
2009	4,212	261
2010	3,654	766
2011	3,589	1,005
2012	4,143	1,048
2013	3,797	1,044
2014	3,575	1,490

a. Calculate the growth rates in net revenue over the years in the table.
Round answers to one decimal place. (Ex. 0.2345 = 23.5%).
Use negative signs with answers, when appropriate.

Fiscal Year	Growth Rate
2006	-5.7
2007	4.7
2008	18.6
2009	14.9
2010	-13.2
2011	-1.8
2012	15.4
2013	-8.4
2014	-5.8

b. What are the purchases by customers in each of these years? What are the growth rates?
Round answers to one decimal place. (Ex. 0.2345 = 23.5%).
Use negative signs with answers, when appropriate.

Fiscal Year	Purchase	Growth Rate
2005	$3129	-
2006	$2960	-5.4 %
2007
2008
2009
2010
2011
2012
2013
2014

Answer 1

Answer a: The question contains answer of question a.

Answer b:

Deferred revenue of a year will be recognized as revenue in next year. As such Net Revenue of each year includes revenue which was deferred previous year.

As such, to get Purchase (by customers) for a year we have to reduce the deferred revenue of previous year from Net revenue of that year and add deferred revenue of same year. For example to get purchase for 2008 , we have to add deferred revenue (of 2008) of 387 to net revenue (of 2008) of 3,665 and reduce deferred revenue of (of previous year 2007) 32.

Purchases by customers for fiscal years 2005 to 2014 are calculated below:  

Purchases by customers in each of these years and the growth rates: