A tale of two books

Regulators are cracking down on a longstanding practice by video game companies like Electronic Arts to report two sets of quarterly revenue.

One follows generally accepted accounting principles, or GAAP, required of all publicly traded companies.

The other — and the one more closely followed by analysts — accounts for the effects of deferring revenue and related costs for games with online components. In this adjusted figure, these sales and expenses are spread out over time, while the game is played, rather than recorded at once, when the game is sold.

This way, companies can avoid having revenue coming in at once, while expenses are ongoing, giving it a huge profit in one quarter and smaller losses the rest of the year. Over time, the deferrals even out.

But the U.S. Securities and Exchange Commission is discouraging that and reminded companies in May of existing rules. The new guidance affects the current round of earnings.

Cowen analyst Doug Creutz says having to abandon deferred revenue will introduce “significant and unnecessary volatility” into quarterly numbers. There are plenty of “dodgy” adjusted figures companies put out, Creutz notes, but “this is not one of them.”

He urges the SEC to reconsider, adding that “mandating this change will not help investors understand company results.”