2K Sports 2009 Annual Report Download - page 42

make accommodations to customers, which include 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 and performance of the titles in similar genres, historical
performance of the hardware platform, customer inventory levels, analysis of sell-through rates, sales force
and retail customer feedback, industry pricing, 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.
Software Development Costs and Licenses
Capitalized software development costs include direct costs incurred for internally developed titles and
payments made to third party software developers under development agreements.
We capitalize internal software development costs (including stock-based compensation, specifically
identifiable employee payroll expense and incentive compensation costs related to the completion and
release of titles), third party production and other content costs, subsequent to establishing technological
feasibility of a software title. Technological feasibility of a product includes the completion of both
technical design documentation and game design documentation. Significant management judgment and
estimates are utilized in establishing technological feasibility.
We enter into agreements with third party developers that require us to make payments for game
development and production services. In exchange for these payments, we receive the exclusive publishing
and distribution rights to the finished game title as well as, in some cases, the underlying intellectual
property rights. Such agreements allow us to fully recover these payments to the developers at an agreed
upon royalty rate earned on the subsequent retail sales of such software, net of any agreed upon costs. We
capitalize all development and production service payments to third party developers as software
development costs. On a product-by-product basis, we reduce software development costs and record a
corresponding amount of research and development expense for any costs incurred by third party
developers prior to establishing technological feasibility of a product. We typically enter into agreements
with third party developers after 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.
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