| Overview and Summary of Significant Accounting Policies | 1.
Overview and Summary of Significant Accounting
Policies
Organization and Description of
Business
Zynga Inc.
(“Zynga,” “we” or “the
Company”) develops, markets, and operates social games as
live services played over the Internet and on social networking
sites and mobile platforms. We generate revenue through the in-game
sale of virtual goods and through advertising. Our operations are
headquartered in San Francisco, California, and we have several
operating locations in the U.S. as well as various international
office locations in North America, Asia and Europe.
We completed
our initial public offering in December 2011 and our Class A
common stock is listed on the NASDAQ Global Select Market under the
symbol “ZNGA.”
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements are presented in
accordance with United States generally accepted accounting
principles (“U.S. GAAP”). The consolidated financial
statements include the operations of us and our wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in the consolidation.
Use of
Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts in the consolidated financial statements and
notes thereto. Significant estimates and assumptions reflected in
the financial statements include, but are not limited to, the
estimated lives of virtual goods that we use for revenue
recognition, useful lives of property and equipment and intangible
assets, accrued liabilities, income taxes, accounting for business
combinations, stock-based expense and evaluation of goodwill,
intangible assets, and long-lived assets for impairment. Actual
results could differ materially from those estimates.
Changes in
our estimated average life of durable virtual goods during the
three and twelve months ended December 31, 2015 for various
games resulted in an increase in revenue and income from operations
of $0.5 million and $1.0 million, respectively, which is the result
of adjusting the remaining recognition period of deferred revenue
generated in prior periods at the time of a change in estimate. We
also recorded $9.9 million of revenue and income from operations in
the twelve months ended December 31, 2015 due to changes in
our estimated average life of durable goods for games that have
been discontinued as there is no further service obligation after
the closure of these games. These changes in estimates and
discontinuance of games did not impact our reported earnings per
share for the three months ended December 31, 2015 and
resulted in a $0.01 per share impact on our reported earnings per
share for the twelve months ended December 31, 2015. For 2014,
changes in our estimated average life of durable virtual goods
resulted in a decrease in revenue, income from operations and net
income of $1.2 million. These changes in estimates did not impact
our reported earnings per share for the twelve months ended
December 31, 2014.
Segments
We have one
operating segment with one business activity, developing and
monetizing social games. Our Chief Operating Decision Maker
(“CODM”), our Chief Executive Officer, manages our
operations on a consolidated basis for purposes of allocating
resources. When evaluating performance and allocating resources,
the CODM reviews financial information presented on a consolidated
basis, accompanied by disaggregated bookings information for our
games.
Revenue
Recognition
We derive
revenue from the sale of virtual goods associated with our online
games and the sale of advertising.
Online
Game
We operate
our games as live services that allow players to play for free.
Within these games, players can purchase virtual currency to obtain
virtual goods to enhance their game-playing experience. Players can
pay for our virtual currency using Facebook local currency payments
when playing our games through the Facebook platform. On platforms
other than Facebook, players purchase our virtual currency and/or
virtual goods through various widely accepted payment methods
offered in the games, including PayPal, Apple iTunes accounts,
Google Wallet and credit cards. We also sell existing inventory of
game cards that are initially recorded as a customer deposit
liability which is included in other current liabilities on the
consolidated balance sheet, net of fees retained by retailers and
distributors. Upon redemption of a game card in one of our games
and delivery of the purchased virtual currency to the player, these
amounts are reclassified to deferred revenue. Advance payments from
customers that are non-refundable and relate to non-cancellable
contracts that specify our obligations are recorded to deferred
revenue. All other advance payments that do not meet these criteria
are recorded as customer deposits.
We recognize
revenue when all of the following conditions are satisfied: there
is persuasive evidence of an arrangement; the service has been
provided to the player; the collection of our fees is reasonably
assured; and the amount of fees to be paid by the player is fixed
or determinable. For purposes of determining when the service has
been provided to the player, we have determined that an implied
obligation exists to the paying player to continue displaying the
purchased virtual goods within the online game over their estimated
life or until they are consumed. Accordingly, we categorize our
virtual goods as either consumable or durable. The proceeds from
the sale of virtual goods are initially recorded in deferred
revenue. Consumable virtual goods represent goods that can be
consumed by a specific player action. Common characteristics of
consumable goods may include virtual goods that are no longer
displayed on the player’s game board after a short period of
time, do not provide the player any continuing benefit following
consumption or often times enable a player to perform an in-game
action immediately. For the sale of consumable virtual goods, we
recognize revenue as the goods are consumed, which approximates one
month. Durable virtual goods represent virtual goods that are
accessible to the player over an extended period of time. We
recognize revenue from the sale of durable virtual goods ratably
over the estimated average playing period of paying players for the
applicable game, which represents our best estimate of the average
life of durable virtual goods. If we do not have the ability to
differentiate revenue attributable to durable virtual goods from
consumable virtual goods for a specific game we recognize revenue
on the sale of durable and consumable virtual goods for that game
ratably over the estimated average period that paying players
typically play that game.
Prior to
October 1, 2009, we did not have the data to determine the
consumption dates for our consumable virtual goods or to
differentiate revenue attributable to durable virtual goods from
consumable virtual goods. Beginning in October 2009, we had
sufficient data to separately account for consumable and durable
virtual goods in one of our games, thus allowing us to recognize
revenue related to consumable goods upon consumption. Since January
2010, we have had this data for substantially all of our web games,
thus allowing us to recognize revenue related to consumable goods
upon consumption for our web-based games. However, for our
standalone mobile games, we do not have the requisite data to
separately account for consumable and durable virtual goods and
have therefore recorded mobile revenue ratably over the estimated
average payer life. We expect that in future periods there will be
changes in the mix of durable and consumable virtual goods sold,
reduced virtual good sales in some existing games, changes in
estimates in average paying payer life and/or changes in our
ability to make such estimates. When such changes occur, and in
particular if more of our revenue in any period is derived from
goods for which revenue is recognized over the estimated average
playing period, or that period increases on average, the amount of
revenue that we recognize in a future period may be reduced,
perhaps significantly.
On a
quarterly basis, we determine the estimated average playing period
for paying players by game beginning at the time of a payer’s
first purchase in that game and ending on a date when that paying
player is no longer playing the game. To determine when paying
players are no longer playing a given game, we analyze monthly
cohorts of paying players for that game who made their first
in-game payment between six and 18 months prior to the beginning of
each quarter and determine whether each player within the cohort is
an active or inactive player as of the date of our analysis. To
determine which players are inactive, we analyze the dates that
each paying player last logged into that game. We determine a
paying player to be inactive once they have reached a period of
inactivity for which it is probable (defined as at least 80%) that
a player will not return to a specific game. For the payers deemed
inactive as of our analysis date we analyze the dates they last
logged into that game to determine the rate at which inactive
players stopped playing. Based on these dates we then project a
date at which all paying players for each monthly cohort are
expected to cease playing our games. We then average the time
periods from first purchase date and the date the last player is
expected to cease playing the game for each of the monthly cohorts
to determine the total playing period for that game. To determine
the estimated average playing period we then divide this total
playing period by two. The use of this “average”
approach is supported by our observations that paying players
typically become inactive at a relatively consistent rate for our
games. If future data indicates paying players do not become
inactive at a relatively consistent rate, we will modify our
calculations accordingly. When a new game is launched and only a
limited period of paying player data is available for our analysis,
then we also consider other factors, such as the estimated average
playing period for other recently launched games with similar
characteristics, to determine the estimated average playing
period.
Future usage
patterns may differ from historical usage patterns and therefore
the estimated average playing periods may change in the future. We
assess the estimated average playing period for paying players and
the estimated average life of our virtual goods quarterly. Changes
in our estimated average life of durable virtual goods during the
twelve months ended December 31, 2015 for various games
resulted in an increase in revenue, income from operations and net
income of $1.0 million, which is the result of adjusting the
remaining recognition period of deferred revenue generated in prior
periods at the time of a change in estimate. These changes in
estimates did not impact our reported earnings per share for the
twelve months ended December 31, 2015.
From July
2010 through the third quarter of 2013, Facebook’s
proprietary virtual currency, Facebook Credits, was the primary
in-game payment method for our games played on the Facebook
platform. Under the terms of our agreement with Facebook, Facebook
set the price our players pay for Facebook Credits and collected
the funds from the sale of Facebook Credits. Facebook’s
stated face value of a Facebook Credit was $0.10. For each Facebook
Credit purchased by our players and redeemed in our games, Facebook
remitted to us $0.07, which is the amount we recognized as revenue.
Accordingly, we recognized revenue net of the amounts retained by
Facebook related to Facebook Credits transactions because we did
not set the pricing of Facebook Credits sold to the players of our
games on Facebook. In July 2013, Facebook began to transition
payments made on the Facebook platform from Facebook Credits to
Facebook’s local currency-based payments program. This
transition was completed in the fourth quarter of 2013. Under the
terms of our agreement, Facebook remits to us 70% of the price we
request to be charged to the game player for each transaction. We
recognize revenue net of the amounts retained by Facebook related
to Facebook local currency-based payments because Facebook may
choose to alter our recommended price, for example by offering a
discount or other incentives to players playing on their platform.
Additionally, we do not receive information from Facebook
indicating the amount of such discounts offered to our paying
players or regarding the actual cash paid by our players to
Facebook. Accordingly, we are unable to determine the gross amount
paid by our players to Facebook.
For revenue
earned through certain mobile platforms, including Apple iOS and
Google Android, we recognize online game revenue based on the gross
amount paid by the player because we are the primary obligor and we
have the contractual right to determine the price to be paid by the
player. We record the related platform and payment processing fees
as cost of revenue in the period incurred.
We estimate
chargebacks from our third-party web and mobile payment processors
to account for potential future chargebacks based on historical
data and record such amounts as a reduction of revenue.
Advertising
We have
contractual relationships with agencies, advertising brokers and
certain advertisers for advertisements within our games. We
generally report our advertising revenue net of amounts retained by
advertising networks, agencies, and brokers because we are not the
primary obligor in our arrangements, we do not set the pricing, and
we do not establish or maintain the relationship with the
advertiser. Certain advertising arrangements that are directly
between us and end advertisers are recognized gross equal to the
price paid to us by the end advertiser since we are the primary
obligor and we determine the price.
We recognize
advertising revenue for branded virtual goods and sponsorships,
engagement advertisements and offers, mobile advertisements and
other advertisements as advertisements are delivered to customers
as long as evidence of the arrangement exists (executed contract),
the price is fixed or determinable, and we have assessed
collectability as reasonably assured. Certain branded in-game
sponsorships that involve virtual goods are deferred and recognized
over the estimated life of the branded virtual good or as consumed,
similar to online game revenue. Price is determined to be fixed and
determinable when there is a fixed price in the applicable evidence
of the arrangement, which may include a master contract, insertion
order, or a third party statement of activity. For branded virtual
goods and sponsorships, we determine the delivery criteria has been
met based on delivery information primarily from third parties. For
engagement advertisements and offers, mobile advertisements, and
other advertisements, delivery occurs when the advertisement has
been displayed or the offer has been completed by the customer, as
evidenced by third party verification reports supporting the number
of advertisements displayed or offers completed.
Multiple-element Arrangements
We allocate
arrangement consideration in multiple-deliverable revenue
arrangements at the inception of an arrangement to all deliverables
based on the relative selling price method, generally based on our
best estimate of selling price. We offer certain promotions to
customers from time to time that include the sale of in-game
virtual currency via the sale of a game card and also other
deliverables such as a limited edition in-game virtual
good.
Cost of
Revenue
Amounts
recorded as cost of revenue relate to direct expenses incurred in
order to generate online game revenue. Such costs are recorded as
incurred. Our cost of revenue consists primarily of hosting and
data center costs related to operating our games, including
depreciation, consulting costs primarily related to third-party
provisioning of customer support services, payment processing fees,
licensing fees, salaries, benefits and stock-based expense for our
customer support and infrastructure teams. Cost of revenue also
includes amortization expense related to purchased technology of
$23.9 million, $21.4 million and $11.3 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
Cash
and Cash Equivalents
Cash
equivalents consist of cash on hand, money market funds, commercial
paper, corporate bonds and U.S. government-issued obligations with
maturities of 90 days or less from the date of purchase.
Marketable Securities and Non-Marketable
Securities
Marketable
securities consist of U.S. government-issued obligations and
corporate debt securities. Management determines the appropriate
classification of marketable securities at the time of purchase and
evaluates such determination at each balance sheet date. The fair
value of marketable securities is determined as the exit price in
the principal market in which we would transact. Based on our
intentions regarding our marketable securities, all marketable
securities are classified as available-for-sale and are carried at
fair value with unrealized gains and losses recorded as a separate
component of other comprehensive income, net of income taxes.
Realized gains and losses are determined using the
specific-identification method and are reflected as a component of
other income (expense), net in the consolidated statements of
operations when they are realized. When we determine that a decline
in fair value is other than temporary, the cost basis of the
individual security is written down to the fair value as a new cost
basis and the amount of the write-down is accounted for as a
realized loss in other income (expense), net. The new cost basis
will not be adjusted for subsequent recoveries in fair value.
Determination of whether declines in fair value are other than
temporary requires judgment regarding the amount and timing of
recovery. No such impairments of marketable securities have been
recorded in any of the periods presented.
For
non-marketable securities in which we exercise significant
influence on the equity to which these non-marketable securities
relate, we apply the equity method of accounting. Our
non-marketable securities are subject to periodic impairment
reviews. In the first quarter of 2015, we sold our only equity
method investment and recorded a $6.2 million gain in other income
in our consolidated statement of operations. As of
December 31, 2015, we did not have any other equity method
investments.
Restricted Cash
Restricted
cash consists of collateral for royalty agreements and funds held
in escrow in accordance with the terms of certain of our business
acquisition agreements.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts
receivable are recorded and carried at the original invoiced amount
less an allowance for any potential uncollectible amounts. We
review accounts receivable regularly and make estimates for the
allowance for doubtful accounts when there is doubt as to our
ability to collect individual balances. In evaluating our ability
to collect outstanding receivable balances, we consider many
factors, including the age of the balance, the customer’s
payment history and current creditworthiness, and current economic
trends. Bad debts are written off after all collection efforts have
ceased. We do not require collateral from our customers.
Property and Equipment
Property and
equipment are stated at cost less accumulated depreciation.
Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the estimated useful lives of the
improvements or the lease term.
Business Combinations
We account
for acquisitions of entities that include inputs and processes and
have the ability to create outputs as business combinations. We
allocate the purchase price of the acquisition, which includes the
estimated acquisition date fair value of contingent consideration,
to the tangible assets, liabilities, and identifiable intangible
assets acquired based on their estimated fair values. The excess of
the purchase price over those fair values is recorded as goodwill.
Acquisition-related expenses and restructuring costs are expensed
as incurred. During the measurement period, we record adjustments
to the assets acquired and liabilities assumed with the
corresponding offset to goodwill. After the measurement period,
which could be up to one year after the transaction date,
subsequent adjustments are recorded to our consolidated statements
of operations. We record changes in the fair value of contingent
consideration liabilities within operating expenses in our
consolidated statement of operations each reporting
period.
Goodwill and Indefinite-Lived Intangible
Assets
Goodwill and
indefinite-lived intangible assets are carried at cost and are
evaluated annually for impairment, or more frequently if
circumstances exist that indicate that impairment may exist. When
conducting our annual goodwill impairment assessment, we perform a
quantitative evaluation of whether goodwill is impaired using the
two-step impairment test. The first step is comparing the fair
value of our reporting unit to its carrying value. We consider the
enterprise to be the reporting unit for this analysis. If step one
indicates that impairment potentially exists, the second step is
performed to measure the amount of impairment, if any. We record
the amount by which the carrying value of the goodwill exceeds its
implied fair value, if any, as impairment.
We test
recoverability of indefinite-lived intangible assets using a
qualitative approach on whether it is more likely than not that the
fair value of the intangible asset exceeds its carrying value. If
the asset is considered to be impaired, the amount of any
impairment is measured as the difference between the carrying value
and the fair value of the impaired asset.
Other
Intangible Assets
Other
intangible assets are carried at cost less accumulated
amortization. Amortization is recorded over the estimated useful
lives of the assets, generally 12 to 60 months.
Impairment of Long-Lived Assets
Long-lived
assets, including other intangible assets (excluding
indefinite-lived intangible assets), are reviewed for impairment
whenever events or changes in circumstances indicate an
asset’s carrying value may not be recoverable. If such
circumstances are present, we assess the recoverability of the
long-lived assets by comparing the carrying value to the
undiscounted future cash flows associated with the related assets.
If the future net undiscounted cash flows are less than the
carrying value of the assets, the assets are considered impaired
and an expense, equal to the amount required to reduce the carrying
value of the assets to the estimated fair value, is recorded as
impairment of intangible assets in the consolidated statements of
operations. Significant judgment is required to estimate the amount
and timing of future cash flows and the relative risk of achieving
those cash flows.
Assumptions
and estimates about future values and remaining useful lives are
complex and often subjective. They can be affected by a variety of
factors, including external factors such as industry and economic
trends, and internal factors such as changes in our business
strategy and our internal forecasts. For example, if our future
operating results do not meet current forecasts, we may be required
to record future impairment charges for acquired intangible assets.
Impairment charges could materially decrease our future net income
and result in lower asset values on our balance sheet. There were
no impairment charges in 2015 and 2014. In 2013, we recorded a
$10.2 million impairment charge related to certain games associated
with intangible assets previously acquired through various business
combinations.
Stock-Based Expense
Prior to our
IPO in December 2011, we granted ZSUs to our employees that
generally vest upon the satisfaction of both a service-based
condition of up to four years and a liquidity condition, the latter
of which was satisfied in connection with our IPO in December 2011.
Because the liquidity condition was not satisfied until our IPO, in
prior periods, we had not recorded any expense relating to the
granting of our ZSUs. In the fourth quarter of 2011, after the IPO,
we recognized $510 million of stock-based expense associated with
ZSUs that vested in connection with our IPO. This expense is in
addition to the stock-based expense we recognize related to
outstanding equity awards other than ZSUs as well as expenses
related to ZSUs or other equity awards that may be granted in the
future.
For ZSUs
granted prior to the IPO, and for awards subject to performance
conditions, we recognize stock-based expense based on grant date
fair value using the accelerated attribution method in which
compensation cost for each vesting tranche in an award is
recognized ratably from the service inception date to the vesting
date for that tranche. For ZSUs granted after the IPO, which are
only subject to a service condition, we recognize stock-based
expense based on grant date fair value on a ratable basis over the
requisite service period for the entire award.
We estimate
the fair value of stock options using the Black-Scholes
option-pricing model. This model requires the use of the following
assumptions: expected volatility of our Class A common stock,
which is based on our own calculated 3 year historical rate;
expected life of the option award, which we elected to calculate
using the simplified method; expected dividend yield, which is 0%,
as we have not paid and do not have any plans to pay dividends on
our common stock; and the risk-free interest rate, which is based
on the U.S. Treasury yield curve in effect at the time of grant
with maturities equal to the grant’s expected life. We
changed the basis of estimating our expected volatility in the
fourth quarter of 2015 from using peer group data in the industry
in which we do business to using our own calculated rate as we now
have sufficient historical data (3 years of historical trading
activity) that we believe provides a reasonable basis for our
estimate. Option grants generally vest over four years, with 25%
vesting after one year and the remainder vesting monthly thereafter
over 36 months. The options have a contractual term of 10 years. If
any of the assumptions used in the Black-Scholes model changes
significantly, stock-based expense for future awards may differ
materially compared with the awards granted previously. We record
stock-based expense for stock options on a ratable basis over the
vesting term.
For stock
options issued to non-employees, including consultants, we record
expense related to stock options equal to the fair value of the
options calculated using the Black-Scholes model over the service
performance period. The fair value of options granted to
non-employees is remeasured over the vesting period and recognized
as an expense over the period the services are received.
Stock-based
expense is recorded net of estimated forfeitures so that expense is
recorded for only those stock-based awards that we expect to vest.
We estimate forfeitures based on our historical forfeiture of
equity awards adjusted to reflect future changes in facts and
circumstances, if any. We will revise our estimated forfeiture rate
if actual forfeitures differ from our initial estimates.
Income
Taxes
We account
for income taxes using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future
tax consequences of events that have been recognized in our
financial statements or tax returns. The measurement of current and
deferred tax assets and liabilities is based on provisions of
enacted tax laws; the effects of future changes in tax laws or
rates are not anticipated. If necessary, the measurement of
deferred tax assets is reduced by the amount of any tax benefits
that are not expected to be realized based on available evidence.
We account for uncertain tax positions by reporting a liability for
unrecognized tax benefits resulting from uncertain tax positions
taken or expected to be taken in a tax return. We recognize
interest and penalties, if any, related to unrecognized tax
benefits in the provision for income taxes.
Foreign
Currency Transactions
Generally,
the functional currency of our international subsidiaries is the
U.S. dollar or the local currency that the international subsidiary
operates in. For these subsidiaries where the U.S. dollar is not
the functional currency, foreign currency denominated monetary
assets and liabilities are remeasured into U.S. dollars at current
exchange rates and foreign currency denominated nonmonetary assets
and liabilities are remeasured into U.S. dollars at historical
exchange rates. Gains or losses from foreign currency remeasurement
and settlements are included in other income (expense), net in the
consolidated statements of operations. For foreign subsidiaries
where the functional currency is the local currency, we use the
period-end exchange rates to translate assets and liabilities, and
the average exchange rates to translate revenues and expenses into
U.S. dollars. We record translation gains and losses in accumulated
other comprehensive income (loss) as a component of
stockholders’ equity.
Concentration of Credit Risk and Significant
Customers
Financial
instruments, which potentially expose us to concentrations of
credit risk, consist primarily of cash and cash equivalents,
short-term and long-term marketable securities, and accounts
receivable. Substantially all of our cash, cash equivalents and
short-term marketable securities are maintained with two financial
institutions with high credit standings. We perform periodic
evaluations of the relative credit standing of these
institutions.
Accounts
receivable are unsecured and represent amounts due to us based on
contractual obligations where a signed and executed contract or
click-through agreement exists. In cases where we are aware of
circumstances that may impair a specific customer’s ability
to meet its financial obligations, we record a specific allowance
as a reduction to the accounts receivable balance to reduce it to
its net realizable value.
Facebook,
Apple, and Google are significant distribution, marketing,
promotion and payment platforms for our social games. A significant
portion of our 2015, 2014 and 2013 revenue was generated from
players who accessed our games through these platforms. As of
December 31, 2015 and December 31, 2014, 17% and 22% of
our accounts receivable, respectively, were amounts owed to us by
Facebook. Additionally, as of December 31, 2015 and
December 31, 2014, 17% and 23% of our accounts receivable,
respectively, were amounts owed to us by Apple and 14% and 8% of
our accounts receivable, respectively, were amounts owed to us by
Google.
Advertising Expense
Costs for
advertising are expensed as incurred. Advertising costs, which are
included in sales and marketing expense, primarily consisting of
player acquisition costs, totaled $128.9 million, $101.7 million
and $60.6 million for the years ended December 31, 2015, 2014
and 2013, respectively.
Recent
Accounting Pronouncements
In May 2014,
the Financial Accounting Standards Board issued Accounting
Standards Update (“ASU”) 2014-09, “ Revenue
from Contracts with Customers Revenue Recognition (Topic 605)
In September
2015, the FASB issued an ASU 2015-16, “ Business
Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments
In November
2015, the Financial Accounting Standards Board issued Accounting
Standards Update 2015-17, “ Balance Sheet Classification of
Deferred Taxes |
