2K Sports 2004 Annual Report Download - page 21

accommodations to customers, which includes credits and returns, when demand for specific titles falls
below expectations.
We make estimates of future product returns and price concessions related to current period product revenue.
We estimate the amount of future returns and price concessions for published titles based upon, among other
factors, historical experience, customer inventory levels, analysis of sell-through rates, market conditions and
changes in demand and acceptance of our products by consumers.
Significant management judgments and estimates must be made and used in connection with establishing
the allowance for returns and price concessions in any accounting period. We believe we can make reliable
estimates of returns and price concessions. However, actual results may differ from initial estimates as a result
of changes in circumstances, market conditions and assumptions. Adjustments to estimates are recorded in the
period in which they become known.
Prepaid Royalties
Our agreements with licensors and developers generally provide us with exclusive publishing rights and
require us to make advance royalty payments that are recouped against royalties due to the licensor or
developer based on contractual amounts on product sales, adjusted for certain costs. Prepaid royalties are
amortized as cost of sales on a title-by-title basis based on the greater of the proportion of current year sales
to total of current and estimated future sales for that title or the contractual royalty rate based on actual
net product sales as defined in the respective agreements. At each balance sheet date, we evaluate the
recoverability of prepaid royalties and charge to cost of sales the amount that management determines is
probable that will not be recouped at the contractual royalty rate based on current and future sales in the
period in which such determination is made or if we determine that we will cancel a development project.
Prepaid royalties are classified as current and non-current assets based upon estimated net product sales within
the next year. See Note 4 to Consolidated Financial Statements.
Capitalized Software Development Costs
We capitalize internal software development costs, as well as film production and other content costs
subsequent to establishing technological feasibility of a title. Capitalized software development costs represent
the costs associated with the internal development of our publishing products. Amortization of such costs as
a component of cost of sales is recorded on a title by title basis based on the greater of the proportion of
current year sales to total of current and estimated future sales for the title or the straight-line method over
the remaining estimated useful life of the title. At each balance sheet date, we evaluate the recoverability of
capitalized software costs based on undiscounted future cash flows and will charge to cost of sales any
amounts that are deemed unrecoverable or for projects that we will abandon. See Note 7 to Consolidated
Financial Statements.
Income Taxes
Income tax assets and liabilities are determined by taxable jurisdiction. We do not provide taxes on
undistributed earnings of our international subsidiaries. The total amount of undistributed earnings of foreign
subsidiaries was approximately $89,700 for fiscal 2004. It is our intention to reinvest undistributed earnings of
our foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been
made for foreign withholding taxes or United States income taxes which may become payable if undistributed
earnings of foreign subsidiaries are paid as dividends to us. The realization of deferred tax assets depends on
whether we generate future taxable income of the appropriate type. In addition, we may adopt tax planning
strategies to realize these assets. If future taxable income does not materialize or tax planning strategies are
not effective, we may be required to record a valuation allowance.
Recently Adopted Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” which revised Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. This statement supercedes APB
13