2K Sports 2008 Annual Report Download - page 44

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and judgments on historical experience, current trends and other factors that management believes to be
relevant at the time our consolidated financial statements are prepared. On a regular basis, management
reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial
statements are fairly presented in accordance with GAAP. However, because future events and their effects
cannot be determined with certainty, actual amounts could differ significantly from these estimates.
We have identified the policies below as critical to our business operations and the understanding of our
financial results and they require management’s most difficult, subjective or complex judgments, resulting
from the need to make estimates about the effect of matters that are inherently uncertain. The impact and
any associated risks related to these policies on our business operations is discussed throughout
Management’s Discussion and Analysis of Financial Condition and Results of Operations where such
policies affect our reported and expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 1 to the Consolidated Financial Statements included in
Item 8. Management has reviewed these critical accounting estimates and related disclosures with the
Audit Committee of our Board of Directors.
Revenue Recognition
We recognize revenue upon the transfer of title and risk of loss to our customers. We apply the provisions
of Statement of Position 97-2, ‘‘Software Revenue Recognition,’’ in conjunction with the applicable
provisions of Staff Accounting Bulletin No. 104, ‘‘Revenue Recognition.’’ Accordingly, we recognize
revenue for software titles when there is (1) persuasive evidence that an arrangement with the customer
exists, which is generally a customer purchase order, (2) the product is delivered, (3) the selling price is
fixed or determinable and (4) collection of the customer receivable is deemed probable. Our payment
arrangements with customers typically provide net 30 and 60 day terms. Advances received for licensing
and exclusivity arrangements are reported on the balance sheet as deferred revenue until we meet our
performance obligations, at which point we recognize the revenue.
Some of our software products provide limited online functionality at no additional cost to the consumer.
Generally, we consider such features to be incidental to the overall product offering and an
inconsequential deliverable. Accordingly, we do not defer revenue related to products containing such
online features. We determine whether our products contain substantial online functionality by evaluating
the significance of the development effort and the nature of the online features, the extent of anticipated
marketing focus on the online features; the significance of the online features to the customers’ anticipated
overall gameplay experience, and the significance of our post sale obligations to customers. Overall, online
play functionality is still an emerging area for us, and we continue to monitor this developing functionality
and its significance to our products.
Certain of our software products include in-game advertising for third party products. Advance payments
received for in-game advertising are reported on the balance sheet as deferred revenue until we meet our
performance obligations, at which point we recognize the revenue, which is generally at the time of the
initial release of the product.
Revenue is recognized after deducting estimated reserves for returns, price concessions and other
allowances. In circumstances when we do not have a reliable basis to estimate returns and price
concessions or are unable to determine that collection of a receivable is probable, we defer the revenue
until such time as we can reliably estimate any related returns and allowances and determine that
collection of the receivable is probable.
Allowances for Returns, Price Concessions and Other Allowances
We accept returns and grant price concessions in connection with our publishing arrangements. Following
reductions in the price of our products, we grant price concessions to permit customers to take credits
against amounts they owe us with respect to merchandise unsold by them. Our customers must satisfy
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