2K Sports 2008 Annual Report Download - page 79

completing the technical design documentation for our products and therefore record the design costs
leading up to a signed development contract as research and development expense. When we contract with
third party developers, we generally select third party developers that have proven technology and
experience in the genre of the software being developed, which often allows for the establishment of
technological feasibility early in the development cycle. In instances where the documentation of the
design and technology are not in place prior to an executed contract, we monitor the software development
process and require our third party developers to adhere to the same technological feasibility standards
that apply to our internally developed products.
Licenses consist of payments and guarantees made to holders of intellectual property rights for use of their
trademarks, copyrights or other intellectual property rights in the development of our products.
Agreements with license holders generally provide for guaranteed minimum royalty payments for use of
their intellectual property. Guaranteed minimum payments are initially recorded as an asset (licenses) and
as a liability (accrued licenses) upon execution of a licensing agreement, provided that no significant
performance remains to be completed by the licensor. When significant performance remains to be
completed by the licensor, we record payments when actually paid.
Certain licenses, especially those related to our sports products, extend over multi-year periods and
encompass multiple game titles. In addition to guaranteed minimum payments, these licenses frequently
contain provisions that could require us to pay royalties to the license holder based on pre-agreed unit
sales thresholds.
Amortization of capitalized software development costs and licenses commences when a product is
released and is recorded on a title-by-title basis in cost of goods sold. For capitalized software development
costs amortization is calculated using (1) the proportion of current year revenues to the total revenues
expected to be recorded over the life of the title or (2) the straight-line method over the remaining
estimated useful life of the title, whichever is greater. For capitalized licenses, amortization is calculated as
a ratio of (1) current period revenues to the total revenues expected to be recorded over the remaining life
of the title or (2) the contractual royalty rate based on actual net product sales as defined in the licensing
agreement, whichever is greater.
At each balance sheet date, or earlier if an indicator of impairment exists, we evaluate the recoverability of
capitalized software costs, licenses and any other unrecognized minimum commitments that have not been
paid, using an undiscounted future cash flow analysis. We use various measures to evaluate expected
product performance and estimate future revenues for our software titles including historical performance
of comparable titles; orders for titles prior to release; and the estimated performance of a sequel title
based on the performance of the title on which the sequel is based. When management determines that the
value of a title is unlikely to be recovered by product sales, capitalized costs are charged to cost of goods
sold in the period in which such determination is made.
We have established internal royalty programs that allow that certain of our employees participate in the
success of software titles that they assist in developing. Royalties earned by employees under this program
are recorded as cost of goods sold as they are incurred.
Fixed Assets, net
Office equipment, furniture and fixtures are depreciated using the straight-line method over their
estimated useful life of five years. Computer equipment and software are generally depreciated using the
straight-line method over three years. Leasehold improvements are amortized over the lesser of the term
of the related lease or seven years. The cost of additions and betterments are capitalized, and repairs and
maintenance costs are charged to operations, in the periods incurred. When depreciable assets are retired
or sold, the cost and related allowances for depreciation are removed from the accounts and the gain or
loss is recognized. The carrying amounts of these assets are recorded at historical cost.
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