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Virtual World Valuation
Accounting, valuation, taxation and legal issues in virtual worlds
November 2007
Melanie Swan
MS Futures Group
melanieswan.com
Virtual World Valuation 2
Valuation summary
 Virtual worlds are becoming increasingly
routine for business, academic and
government use
 Financial professionals and regulators are now getting involved;
there is an opportunity for a leading accountancy to define and
lead virtual world accounting and valuation practices
 Demand for advisory services is growing along with strategic
investment and M&A activity in all areas of the value chain
 Doing business in a virtual world is similar to doing business in
a foreign country
Virtual World Valuation 3
Agenda
 Virtual worlds
 What are virtual worlds?
 Who is using virtual worlds?
 Second Life
 Financial perspective
 Accounting issues
 Valuation issues
 Tax issues
 Legal and other issues
 Industry leadership opportunities
Virtual World Valuation 4
What are virtual worlds?
 Definition: 3D online persistent world
with a sense of presence and
simultaneous experience in context
 Examples (over 30 worlds):
 Second Life
 ActiveWorlds
 BrandGames
 Entropia Universe
 There
 Kaneva
 MultiVerse
 Club Penguin (pre-teen)
 WebKins (pre-teen)
Source: http://www.virtualworldsreview.com
Virtual World Valuation 5
 Game
 World
Virtual world vs. MMORPG
Source: Linden Lab
Virtual World Valuation 6
Who is using virtual worlds?
IBM
Dr. Dobbs Life 2.0 Conference
Princeton
International Spaceflight Museum
US Congress
Second Health Operating Theater
Showtime “The L Word”CBS “CSI New York”
Vodafone “Inside Out”
SLCN “Metanomics”
Virtual World Valuation 7
Second Life is the biggest virtual world
 40,000 concurrency (at any time)
 475,000 active users (last 7 days)
 1.5 m active users (last 2 months)
 11 m total accounts
 2 m assets created per day
 35 TB of user-created data
 800,000 unique items sold or
traded per month
 500 events per day
 15 m concurrent scripts
 10 Gbps peak bandwidth
Source: http://secondlife.com/whatis/economy-graphs.php
Million Square Meters of
Second Life Land
Total User
Hours (millions)
Source: Linden Lab
Virtual World Valuation 8
Diverse Second Life residents
0
5
10
15
20
25
30
35
40
18-24 25-34 35-44 45+
0
10
20
30
40
50
60
70
18-24 25-34 35-44 45+
 43% female
 60% international
 Top 5 countries:
US, Germany,
Brazil, Japan, UK
Source: http://static.secondlife.com/economy/stats_200710.xls
Resident market share by age tier Average monthly hours by age tier
%
Virtual World Valuation 9
Currency: Linden$
 LindeX exchange operated by
Linden Lab
 Buy: USD $.30 transaction fee
 Sell: 3.5% transaction fee
 Monetary policy
Sources: http://secondlife.com/whatis/economy-market.php,
http://secondlife.com/whatis/economy-graphs.php, http://secondlife.reuters.com
270 L$ =
$1 USD
US$ Spent by Users
(in Millions)
US $ Exchanged on
Lindex (in Millions)
Virtual World Valuation 10
Economy
 Reuters
 Banking and credit
 Stock markets
 SL Capital Exchange (US, 20 listings)
 World Stock Exchange (Australia, 15 listings)
 VSTEX (Italy, 7 listings)
 Ancapex (US, 3 listings)
Source: http://secondlife.reuters.com
Virtual World Valuation 11
Advisory firm presence in virtual worlds
H&R Block Island
BDO Stoy Hayward Island
KAWG&F (Baltimore MD CPA firm), CPA Island
Accenture
Virtual World Valuation 12
Virtual world accounting issues
 Asset and liability accounting
 Precedent by analogy:
software and websites
 Revenue recognition
 Currency related issues
 Revaluations and gain/loss
 International and regulatory
issues
Virtual World Valuation 13
Traditional accounting asset definitions
 Asset
 Any item of economic value owned by an individual or
corporation, especially that which could be converted
to cash
 Tangible Assets
 Assets having a physical existence, such as cash,
equipment, and real estate
 Intangible Assets
 Identifiable non-monetary assets without physical substance
 Examples: computer software, licenses, patents, brands and
copyrights
Source: International Financial Reporting Standards (IFRS)
Virtual World Valuation 14
Are virtual world assets different?
 Non-physical, like software
 Multi-state / non-persistent
 Specific risks of impairment,
destruction, infringement
 World disappearance
 Economic disturbance
 Ease of copying
 International environment
 Low transparency
• Physical identity obscured,
limited reporting infrastructure
Virtual World Valuation 15
Virtual world asset and liability classification
 Intangible assets
 Land and real estate
 Objects
 Scripts and animations
 Intellectual property
• Patent, trademark,
copyright
 Liabilities
 Loans payable, bonds
Virtual World Valuation 16
Land is the most significant virtual asset
 Purchase via auction or resale
 Premium membership required
($9.95/mo)
 USD $13 + $5 monthly for 512 sq m
 USD $1,675 + $295 monthly for
65,536 sq m island
Source: http://www.secondlife.com
200720052003
Available plots
Available island areas
Raw
Land
Growth of
Second Life
Virtual World Valuation 17
Real estate
Anshe Chung
Second Life real estate developer
 Virtual homes, offices and meeting spaces
Virtual World Valuation 18
Objects and scripts
Virtual World Valuation 19
Asset recognition and measurement
 An asset is recognized when it
meets all of the following criteria
 it is identifiable
 the entity has control over the asset
 it is probable that economic benefits
will flow to the entity
 the cost of the asset can be
measured reliably
 Initial measurement at cost of
generation or acquisition or other
assessment of fair value
Holly Kai Golf and Country Club
Sun Microsystems Pavilion
Virtual World Valuation 20
Asset useful life, depreciation, disposition
 Useful life
 Shorter life
 Amortization
 Software: purchased vs. developed
 Non-software: amortized over useful life
 Impairment
 More frequent reassessment
 Retirement and disposal
 Disclosure
Virtual World Valuation 21
Revenue recognition and currency issues
 Services
 Developer
• Initial project
• Maintenance / support
 Other
 Site allowance/stipend
 Currency issues
 Not different from high-risk
international currencies
IBM’s Forbidden City Sim
Virtual World Valuation 22
Rapidly developing virtual world ecosystem
Virtual World Providers
Linden Lab/Second Life, ActiveWorlds, Entropia Universe, There, Kaneva, Muse,
MultiVerse, vastpark, metaplace, Cybertown, Habbo Hotel, Whyville, Voodoo Chat,
Taatu, Traveler, Sims Online, Club Penguin, WebKins, Hipihi, Uonenet, Noviking
Virtual Businesses and Brands
Anshe Chung Studios, DeCuir Creations, FairChang, Etopia, Hunter’s Cove, SL
Boutique, Preen, House of Nyla, Second Life Cable Network, Rezzable, caLLie
cLine, PeoplePool, Raven Pennyfeather, Lapointe & Bastchild Designs, InStyle,
Vista Animations, Chai Skins, Acedia Albion, AV Puli Animations, Reel
Expression, J&S Aviation, SZ Designs, Vindy Vindaloo, Esoterica Couture
Virtual World Developers and Agencies
Electric Sheep Company, Millions of Us, Rivers Run Red, CMP, Aimee Weber
Studio, depo consulting, Forterra, Metaversatility, Wish Farmers, Virtual
Worldlets, Icarus Studios, Proton Media, NGI Group 3Di, DAZ 3D, Code 4
3D Physics Engines and 3D Modeling Platforms
Havok, Ageia PhysX, Unreal Engine, Open GL, Maya, 3D Studio, Croquet,
SoftimageIXSI, Form Z, Strata 3D CX, RenderMan, Blender, Wings3D
Investment transaction in 2007 or acquisition
Virtual World Valuation 23
Virtual world valuation issues
 Valuation situations
 Asset transfer, purchase or sale
 Internal accounting
 Settlement: legal, estate, divorce, etc.
 Valuation considerations
 Ownership
 Portability to other virtual worlds
 Virtual business risks
 Intangibles
• Intellectual property
• Brand value: reputation, management,
innovation and human capital
Virtual World Valuation 24
Virtual world valuation issues
 Assets to be valued
 In-world business: product, service
 Brand: sim, business, avatar
 Account: avatars/characters, assets
 World, economy
 Valuation techniques
 DCF: emphasize near-term flows, low TV
 Sales comparison: Second Life classifieds,
stores, eBay
 Recent transactions
 Multiples: assets, sales, EBITDA, trading
 Metrics: customers, contracts, sim and web
traffic, conversion
Motorati SpokesAvatar:
caLLie cLine
Coke’s virtual branding
Virtual World Valuation 25
Virtual world tax issues
 VAT, sales tax
 Income tax
 1099 contractors
 Gains tax
 Challenges of levying tax
 Identity verification
 Identification of activity
 Monitoring, tracking and enforcement
 Highly international environment
Virtual World Valuation 26
Legal and other issues
 Key rules
 Linden Lab: Terms of Service Agreement,
Community Standards, Privacy Policy,
Digital Millennium Copyright Act Policy
 Sim covenants
 Dispute resolution
 Metaverse Republic
 Recent cases
 Eros, LLC v. Doe (pending)
• Copyright infringement (US $2,250)
 Marc Bragg v. Linden Lab (Oct 2007)
• Land acquisition via landbots (US $8,000)
 Money laundering
Virtual World Valuation 27
The future of finance and virtual worlds
 Growth: participants, breadth, size
 Formalization of the financial sector
 Stock indices and mutual funds
 In-world stock market crash
 Third-party audit and analyst function
 Regulatory initiatives
 In-world GAAP
 Explicit banking, securities and tax laws
 Technical initiatives
 Cross-world avatar portability
Virtual World Valuation 28
Industry leadership opportunities
 Provide industry leadership
 Accounting and valuation white paper
 Implement international GAAP / IFRS
 In-world third-party audit infrastructure
 Client earnings announcements
 Audit, valuation, tax, SOX checklists
 Support clients in the virtual medium
 Accounting and business advisory, virtual
dispute resolution
 Facilitate internal initiatives
 Recruiting, telepresence, collaboration
Virtual World Valuation 29
Valuation summary
 Virtual worlds are becoming increasingly
routine for business, academic and
government use
 Financial professionals and regulators are now getting involved;
there is an opportunity for a leading accountancy to define and
lead virtual world accounting and valuation practices
 Demand for advisory services is growing along with strategic
investment and M&A activity in all areas of the value chain
 Doing business in a virtual world is similar to doing business in
a foreign country
Thank you
Melanie Swan
MS Futures Group
Palo Alto, CA
melanieswan.com
Slides: http//www.melanieswan.com/presentations/Virtual_World_Valuation.ppt
Virtual World Valuation
Provided under an open source Creative Commons 3.0 license
http://creativecommons.org/licenses/by-nc-sa/3.0/
Virtual World Valuation 31
Resources
 Getting started in Second Life
 http://sl.nmc.org/wiki/Getting_Started
 Second Life SLURL Directories
 http://nbhorizons.com/list.htm (companies)
 http://npsl.wikispaces.com/Tenant+Directory (non-profit commons)
 http://edumuve.com/tour/ (international locations)
 Event listings
 http://secondlife.com/events
 http://metaversed.com/ *
 http://www.metanomics.metaversed.com/ *
 News, blogs, etc.
 http://secondlife.reuters.com/ *
 http://www.ugotrade.com/
 http://www.virtualworldsreview.com/
 http://www.metaversemessenger.com/
 http://dwellonit.blogspot.com/ (most visited locations)
* Finance and
Economics

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Virtual worlds economy

  • 1. Virtual World Valuation Accounting, valuation, taxation and legal issues in virtual worlds November 2007 Melanie Swan MS Futures Group melanieswan.com
  • 2. Virtual World Valuation 2 Valuation summary  Virtual worlds are becoming increasingly routine for business, academic and government use  Financial professionals and regulators are now getting involved; there is an opportunity for a leading accountancy to define and lead virtual world accounting and valuation practices  Demand for advisory services is growing along with strategic investment and M&A activity in all areas of the value chain  Doing business in a virtual world is similar to doing business in a foreign country
  • 3. Virtual World Valuation 3 Agenda  Virtual worlds  What are virtual worlds?  Who is using virtual worlds?  Second Life  Financial perspective  Accounting issues  Valuation issues  Tax issues  Legal and other issues  Industry leadership opportunities
  • 4. Virtual World Valuation 4 What are virtual worlds?  Definition: 3D online persistent world with a sense of presence and simultaneous experience in context  Examples (over 30 worlds):  Second Life  ActiveWorlds  BrandGames  Entropia Universe  There  Kaneva  MultiVerse  Club Penguin (pre-teen)  WebKins (pre-teen) Source: http://www.virtualworldsreview.com
  • 5. Virtual World Valuation 5  Game  World Virtual world vs. MMORPG Source: Linden Lab
  • 6. Virtual World Valuation 6 Who is using virtual worlds? IBM Dr. Dobbs Life 2.0 Conference Princeton International Spaceflight Museum US Congress Second Health Operating Theater Showtime “The L Word”CBS “CSI New York” Vodafone “Inside Out” SLCN “Metanomics”
  • 7. Virtual World Valuation 7 Second Life is the biggest virtual world  40,000 concurrency (at any time)  475,000 active users (last 7 days)  1.5 m active users (last 2 months)  11 m total accounts  2 m assets created per day  35 TB of user-created data  800,000 unique items sold or traded per month  500 events per day  15 m concurrent scripts  10 Gbps peak bandwidth Source: http://secondlife.com/whatis/economy-graphs.php Million Square Meters of Second Life Land Total User Hours (millions) Source: Linden Lab
  • 8. Virtual World Valuation 8 Diverse Second Life residents 0 5 10 15 20 25 30 35 40 18-24 25-34 35-44 45+ 0 10 20 30 40 50 60 70 18-24 25-34 35-44 45+  43% female  60% international  Top 5 countries: US, Germany, Brazil, Japan, UK Source: http://static.secondlife.com/economy/stats_200710.xls Resident market share by age tier Average monthly hours by age tier %
  • 9. Virtual World Valuation 9 Currency: Linden$  LindeX exchange operated by Linden Lab  Buy: USD $.30 transaction fee  Sell: 3.5% transaction fee  Monetary policy Sources: http://secondlife.com/whatis/economy-market.php, http://secondlife.com/whatis/economy-graphs.php, http://secondlife.reuters.com 270 L$ = $1 USD US$ Spent by Users (in Millions) US $ Exchanged on Lindex (in Millions)
  • 10. Virtual World Valuation 10 Economy  Reuters  Banking and credit  Stock markets  SL Capital Exchange (US, 20 listings)  World Stock Exchange (Australia, 15 listings)  VSTEX (Italy, 7 listings)  Ancapex (US, 3 listings) Source: http://secondlife.reuters.com
  • 11. Virtual World Valuation 11 Advisory firm presence in virtual worlds H&R Block Island BDO Stoy Hayward Island KAWG&F (Baltimore MD CPA firm), CPA Island Accenture
  • 12. Virtual World Valuation 12 Virtual world accounting issues  Asset and liability accounting  Precedent by analogy: software and websites  Revenue recognition  Currency related issues  Revaluations and gain/loss  International and regulatory issues
  • 13. Virtual World Valuation 13 Traditional accounting asset definitions  Asset  Any item of economic value owned by an individual or corporation, especially that which could be converted to cash  Tangible Assets  Assets having a physical existence, such as cash, equipment, and real estate  Intangible Assets  Identifiable non-monetary assets without physical substance  Examples: computer software, licenses, patents, brands and copyrights Source: International Financial Reporting Standards (IFRS)
  • 14. Virtual World Valuation 14 Are virtual world assets different?  Non-physical, like software  Multi-state / non-persistent  Specific risks of impairment, destruction, infringement  World disappearance  Economic disturbance  Ease of copying  International environment  Low transparency • Physical identity obscured, limited reporting infrastructure
  • 15. Virtual World Valuation 15 Virtual world asset and liability classification  Intangible assets  Land and real estate  Objects  Scripts and animations  Intellectual property • Patent, trademark, copyright  Liabilities  Loans payable, bonds
  • 16. Virtual World Valuation 16 Land is the most significant virtual asset  Purchase via auction or resale  Premium membership required ($9.95/mo)  USD $13 + $5 monthly for 512 sq m  USD $1,675 + $295 monthly for 65,536 sq m island Source: http://www.secondlife.com 200720052003 Available plots Available island areas Raw Land Growth of Second Life
  • 17. Virtual World Valuation 17 Real estate Anshe Chung Second Life real estate developer  Virtual homes, offices and meeting spaces
  • 18. Virtual World Valuation 18 Objects and scripts
  • 19. Virtual World Valuation 19 Asset recognition and measurement  An asset is recognized when it meets all of the following criteria  it is identifiable  the entity has control over the asset  it is probable that economic benefits will flow to the entity  the cost of the asset can be measured reliably  Initial measurement at cost of generation or acquisition or other assessment of fair value Holly Kai Golf and Country Club Sun Microsystems Pavilion
  • 20. Virtual World Valuation 20 Asset useful life, depreciation, disposition  Useful life  Shorter life  Amortization  Software: purchased vs. developed  Non-software: amortized over useful life  Impairment  More frequent reassessment  Retirement and disposal  Disclosure
  • 21. Virtual World Valuation 21 Revenue recognition and currency issues  Services  Developer • Initial project • Maintenance / support  Other  Site allowance/stipend  Currency issues  Not different from high-risk international currencies IBM’s Forbidden City Sim
  • 22. Virtual World Valuation 22 Rapidly developing virtual world ecosystem Virtual World Providers Linden Lab/Second Life, ActiveWorlds, Entropia Universe, There, Kaneva, Muse, MultiVerse, vastpark, metaplace, Cybertown, Habbo Hotel, Whyville, Voodoo Chat, Taatu, Traveler, Sims Online, Club Penguin, WebKins, Hipihi, Uonenet, Noviking Virtual Businesses and Brands Anshe Chung Studios, DeCuir Creations, FairChang, Etopia, Hunter’s Cove, SL Boutique, Preen, House of Nyla, Second Life Cable Network, Rezzable, caLLie cLine, PeoplePool, Raven Pennyfeather, Lapointe & Bastchild Designs, InStyle, Vista Animations, Chai Skins, Acedia Albion, AV Puli Animations, Reel Expression, J&S Aviation, SZ Designs, Vindy Vindaloo, Esoterica Couture Virtual World Developers and Agencies Electric Sheep Company, Millions of Us, Rivers Run Red, CMP, Aimee Weber Studio, depo consulting, Forterra, Metaversatility, Wish Farmers, Virtual Worldlets, Icarus Studios, Proton Media, NGI Group 3Di, DAZ 3D, Code 4 3D Physics Engines and 3D Modeling Platforms Havok, Ageia PhysX, Unreal Engine, Open GL, Maya, 3D Studio, Croquet, SoftimageIXSI, Form Z, Strata 3D CX, RenderMan, Blender, Wings3D Investment transaction in 2007 or acquisition
  • 23. Virtual World Valuation 23 Virtual world valuation issues  Valuation situations  Asset transfer, purchase or sale  Internal accounting  Settlement: legal, estate, divorce, etc.  Valuation considerations  Ownership  Portability to other virtual worlds  Virtual business risks  Intangibles • Intellectual property • Brand value: reputation, management, innovation and human capital
  • 24. Virtual World Valuation 24 Virtual world valuation issues  Assets to be valued  In-world business: product, service  Brand: sim, business, avatar  Account: avatars/characters, assets  World, economy  Valuation techniques  DCF: emphasize near-term flows, low TV  Sales comparison: Second Life classifieds, stores, eBay  Recent transactions  Multiples: assets, sales, EBITDA, trading  Metrics: customers, contracts, sim and web traffic, conversion Motorati SpokesAvatar: caLLie cLine Coke’s virtual branding
  • 25. Virtual World Valuation 25 Virtual world tax issues  VAT, sales tax  Income tax  1099 contractors  Gains tax  Challenges of levying tax  Identity verification  Identification of activity  Monitoring, tracking and enforcement  Highly international environment
  • 26. Virtual World Valuation 26 Legal and other issues  Key rules  Linden Lab: Terms of Service Agreement, Community Standards, Privacy Policy, Digital Millennium Copyright Act Policy  Sim covenants  Dispute resolution  Metaverse Republic  Recent cases  Eros, LLC v. Doe (pending) • Copyright infringement (US $2,250)  Marc Bragg v. Linden Lab (Oct 2007) • Land acquisition via landbots (US $8,000)  Money laundering
  • 27. Virtual World Valuation 27 The future of finance and virtual worlds  Growth: participants, breadth, size  Formalization of the financial sector  Stock indices and mutual funds  In-world stock market crash  Third-party audit and analyst function  Regulatory initiatives  In-world GAAP  Explicit banking, securities and tax laws  Technical initiatives  Cross-world avatar portability
  • 28. Virtual World Valuation 28 Industry leadership opportunities  Provide industry leadership  Accounting and valuation white paper  Implement international GAAP / IFRS  In-world third-party audit infrastructure  Client earnings announcements  Audit, valuation, tax, SOX checklists  Support clients in the virtual medium  Accounting and business advisory, virtual dispute resolution  Facilitate internal initiatives  Recruiting, telepresence, collaboration
  • 29. Virtual World Valuation 29 Valuation summary  Virtual worlds are becoming increasingly routine for business, academic and government use  Financial professionals and regulators are now getting involved; there is an opportunity for a leading accountancy to define and lead virtual world accounting and valuation practices  Demand for advisory services is growing along with strategic investment and M&A activity in all areas of the value chain  Doing business in a virtual world is similar to doing business in a foreign country
  • 30. Thank you Melanie Swan MS Futures Group Palo Alto, CA melanieswan.com Slides: http//www.melanieswan.com/presentations/Virtual_World_Valuation.ppt Virtual World Valuation Provided under an open source Creative Commons 3.0 license http://creativecommons.org/licenses/by-nc-sa/3.0/
  • 31. Virtual World Valuation 31 Resources  Getting started in Second Life  http://sl.nmc.org/wiki/Getting_Started  Second Life SLURL Directories  http://nbhorizons.com/list.htm (companies)  http://npsl.wikispaces.com/Tenant+Directory (non-profit commons)  http://edumuve.com/tour/ (international locations)  Event listings  http://secondlife.com/events  http://metaversed.com/ *  http://www.metanomics.metaversed.com/ *  News, blogs, etc.  http://secondlife.reuters.com/ *  http://www.ugotrade.com/  http://www.virtualworldsreview.com/  http://www.metaversemessenger.com/  http://dwellonit.blogspot.com/ (most visited locations) * Finance and Economics

Editor's Notes

  1. 51, 51, 153
  2. 1000/1000 Virtual world economic activity is substantial (Second Life is over $1m USD/day)
  3. Public or private worlds ActiveWorlds (supports 400 concurrent av present & chat; private label world platform; 47,000 active in their demo world; Tourist, Citizen, World Owner; can be accessed from FB (TEST VIA MOBILE) Entropia Universe – Swedish, 360,000 residents, MM virtual universe, own economy, sold banking licenses to RL banks Kaneva: only human avatars, completely modeled after the physical world In Aug, Disney acquired Club Penguin for $700m
  4. Not MMORPGs because open-ended, no universal goals MMORPG examples: World of Warcraft, Ultima Online, Star Wars Games have structure, beginnings and endings, Second Life does not. There are many games within Second Life, but the platform and reason for being there is not the game. It’s about the community and knowledge that on the other side of every avatar is another human being. Another difference is that the content in games is created by large teams of developers and “consumed” by the customers. In Second Life, the customer creates all of the content and shares it with others in a variety of ways.
  5. Variety of individuals and organizations, many people are familiar with the recreational uses, but there is perhaps just as much serious or professional activity 1000 businesses and 1000 academic institutions; no analyst firm officially following this yet Millions of ‘residents’ Entertainment Enterprise: Traditional physical world business migrates in-world + In-world emergent brands Academic and educational organizations: Extension of existing eLearning mechanisms Science: Intl spaceflight museum, AFM demo, molecule, weather, plane traffic, data visualization platform=google earth Government: info, personalized face, modeling disease spread Non-profit: Etopia eco-sim with water treatment plant replica Using virtual worlds to collaborate, create, interact, enjoy, experience, recruit, demonstrate, prototype
  6. SL: the world SL grid: the underlying platform
  7. Create an avatar, a visual representation of your presence. This is how you will appear to others in the world. Who uses the virtual world? Ordinary people Context re: TV hrs/month
  8. The only tool is monetary policy http://www.benchmark.com/news/sv/2006/10_16_2006.php
  9. Banks been around 3 yrs; mostly failed or reorganized; related to casino gambling My Second Bank.com “Unable to pay depositors, Ginko ceases banking operations” The bank, which as of last week claimed to have 18,000 accounts worth a total of L$190 million (US$700,000), said it would issue what it called a “Ginko Perpetual Bonds,” a security on the World Stock Exchange, in an attempt to compensate depositors. A gambling ban, insider theft at the World Stock Exchange and a bank run on Ginko Financial within the past week have combined to threaten confidence in the integrity of the Second Life financial sector. Financial exchange platforms Anshe Chung: Second Life, Entropia exchange Stock markets Completely unregulated Nothing qualifying SL stocks for a registration exemption Accounting, valuation and tax issues 1099 issue, depreciation (software, website precedents)
  10. Presence to hold meetings, consultations with clients/potential clients
  11. Conceptually, like doing business in another country; the usual risks are higher, there are additional risks. There are currency issues.
  12. Different conceptually not fundamentally; we account for them in the same way but with a deeper application of risk, like foreign country Not yet fully proven that these are “real assets” though implicitly standing up as so in US legal cases. Not universally tested worldwide. \ Multi-state / non-persistent Ones and zeros stored on a computer server Chinese MMORPG case re: physical world murder over an uncompleted VW transaction Non-persistent / multi-state Virtual asset = pixels, ones and zeros stored on a computer somewhere, in a different “un-asset-like” format until rezzed on someone’s screen Similar examples: webpage is also stored one way & rendered another; also digital pic sharing sites like flickr. Is a website an asset if no one visits it? Non-physical, like software Specific risks of impairment, destruction, infringement World disappearance, market disappearance Easily copied, like software Difficult to identify physical entity that is the creator/owner; 1:many avatars (alts) Enforcement mechanisms more challenging massively international Low transparency: frail reporting infrastructure, anonymity of Paypal, difficulty/lack of recordkeeping,
  13. Issues: 1) VW asset = an asset? 2) Tangible or intangible? Could have accruals, wouldn’t be any different in the virtual worlds application
  14. Looking at an example: Land & RE market: 75 yr / 6 mo; 5000 yr / 450 mo; 13/mo = 150 /yr Reserved; moved to eBay enabled auction system mid-Sept 3 mo grace period then reservations lapse Island is about 16 acres Develop the sim Structures, landscape, FF&E, functionality Development firm, independent contractor(s), self-develop Anything else to place the asset into servicee
  15. Homes and offices
  16. Appearance more important b/c area for exploration, fun, personalization, more emphasis and expectation b/c can change it Shop.onrez.com Group: shopping emergency Blogs: SL Men, ??
  17. These parts are the same Initial measurement…plus placing in service
  18. Software (sophisticated programming languages): Shorter lives from the risk and pace of change of the medium; given the lack of precedent, slot virtual world sim costs in the annual $108,000 Section 179 write-down The useful life of an intangible asset: Is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity.To an entity shall be based on an analysis of all pertinent factors, in particular:        o   The expected use of the asset by the entity.        o   The level of maintenance expenditures required to obtain the              expected future cash flows from the asset (for example, a material level of             required maintenance in relation to the carrying amount of the             asset may suggest a very limited useful life).Shall be considered indefinite, if no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity.  The term indefinite does not mean infinite.    Externally purchased software; 3 or 5 year; external website designer who guarantees the product; 3 year Internally developed sw, including website dvpt, can be expensed under R&D In audit or SOX work, need to be asking about virtual world sim presence, internally/externally developed and maintained. For some companies its just a virtual office (non-software) but others (Eolus) use it as a data platform (software); scripts make it sw 3 yrs, longer for government or non-profit organizations Disclosure Lower threshold
  19. Talked a lot about virtual world assets – services are another large chunk of the economy but more straightforward from an accounting standpoint Life cycle issues with software in perpetual betas, still have significant releases Depreciation – when you are outfitting your virtual office with some PP&E, FF&E….depreciate it?
  20. http://www.news.com/8301-10784_3-6161999-7.html (Feb 2007 CBS invests $7m in ESC) http://secondlife.reuters.com/stories/2007/10/11/omnicom-buys-stake-in-millions-of-us/ Intel acq Havok Sep 2007 (gaming, movies) trend to high-end chips, graphics processors
  21. World longevity risk: technical, M&A or fad, migration from the Sims Online to SL Ownership: of what is being valued, of the world Reputation, knowledge & skills Sim brand (virtual laguna beach, the l word, csi) Internal accounting purposes (initial measurement when placing in service, re-assessment, disposition) Overall valuation of a virtual economy Difficult to size, no vetted published metrics Difficult to know full activity: transaction mix of local currency/Linden$ and PayPal
  22. X $’s now plus a % of forth-coming profits over the first six months with more emphasis on the % of profits portion Software as part of a business purchase: Finally, let's say you buy a business and, as part of the purchase, you get software. This software is likely to be considered a Section 197 intangible (yes, Section 197, not Section 179 — again, go to the IRS Web site). That means it is either not generally available to the public, is subject to an exclusive license, or has been substantially changed. In this case, you have intangible property. And the property will have to be amortized over not 36 months or 60 months, but 15 years. Usual business valuation methods No problem with an entity valuation; WACC
  23. Virtual world owner imposes VAT (at the source) When a web development shop builds a website for the NY Times do they charge sales tax? No Identification of activity – sex related Current status – congress and IRS comment summary Monitoring – attractiveness as a money laundering platform Taxing Linden-denominated transactions would just shift the activity to PayPal/surrogates Identity verification (1:many avatars)
  24. http://secondlife.reuters.com/stories/2007/10/25/eros-lawyers-id-john-doe-avatar-youth-denies-hes-catteneo/ Robert Leatherwood, 19, of North Richland Hills, Tx., as Second Life avatar “Volkov Catteneo.” Sold 50 copies illegally obtained of Stroker Serpentine’s EROS LLC SexGen bed with 150 sex animations (L$12,000; USD $45 Alderman’s team subpoenaed Linden Lab and PayPal for Catteneo’s Internet Protocol addresses, and then subpoenaed Internet service providers AT&T and Charter Communications to determine the real-world billing addresses associated with the IP information. Taney, lawyer for Alderman. He said Leatherwood has 20 days to reach a settlement agreement, or he’ll move forward with discovery, where legal depositions will be collected from members of the two households that Catteneo’s IP addresses trace to. Linden Lab ejected Bragg from Second Life after he allegedly used an exploit in the real estate auction system to purchase land below market value, and Bragg sued in response. The case recently settled out of court. Terms were not disclosed. LL’s TOS ruled not legally binding. 5 land bots currently operating.
  25. Analyst – both market research and securities analyst Growth: like eBay, more people will earn supplemental and eventually replacement income Formalization of banking, securities and insurance sectors Reuters/other to develop stock index Virtual worlds index mutual fund (in-world and physical world listings) First widespread in-world stock market crash Third-party verified digital identity systems; Secure identity identification mechanism (though still waiting for this on the web)
  26. Accounting and business advisory services International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB). Provide industry leadership White paper: accounting, valuation and tax issues Implement IFRS / international GAAP in virtual worlds Setup in-world independent third-party audit infrastructure In-world client earnings announcements, analyst conferences: short-term wins; Reuters, others will cover it Virtual worlds items included on audit, valuation and tax checklists Support clients in the virtual medium Accounting, audit, tax, valuation, securities advisory, consulting, SOX compliance, virtual dispute resolution, security Facilitate internal initiatives Recruiting, conferences and events Internal collaboration, teleconferencing substitute Accounting, audit, tax, valuation, securities advisory, consulting, SOX compliance, virtual dispute resolution, security
  27. 1000/1000 Virtual world economic activity is substantial (Second Life is over $1m USD/day)
  28. When a web development shop builds a website for the NY Times do they charge sales tax? No