Activision 2012 Annual Report Download - page 40

22
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates and assumptions. The impact and any associated risks related to these
policies on our business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial results. The estimates and assumptions discussed below are considered
by management to be critical because they are both important to the portrayal of our financial condition and results of operations and because
their application places the most significant demands on management’s judgment, with financial reporting results relying on estimates and
assumptions about the effect of matters that are inherently uncertain. Specific risks for these critical accounting estimates and assumptions are
described in the following paragraphs.
Revenue Recognition including Revenue Arrangements with Multiple Deliverables
On January 1, 2011, we adopted amendments to an accounting standard related to revenue recognition for arrangements with multiple
deliverables (which standard, as amended, is referred to herein as the “new accounting principles”). The new accounting principles establish a
selling price hierarchy for determining the selling price of a deliverable and require the application of the relative selling price method to allocate
the consideration received for an arrangement to each deliverable in a multiple deliverables revenue arrangement. Certain of our revenue
arrangements have multiple deliverables and, as such, are accounted for under the new accounting principles. These revenue arrangements
include product sales consisting of both software and hardware deliverables (such as peripherals or other ancillary collectors’ items sold together
with physical “boxed” software) and our sales of World of Warcraft boxed products, expansion packs and value-added services, each of which is
considered with the related subscription services for these purposes. Our assessment of deliverables and units of accounting does not change
under the new accounting principles.
Pursuant to the guidance of ASU 2009-13, when a revenue arrangement contains multiple elements, such as hardware and software
products, licenses and/or services, we allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable is
based on its vendor-specific-objective-evidence (“VSOE”) if it is available, third-party evidence (“TPE”) if VSOE is not available, or best
estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements where more-than-incidental software
deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software
deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price
hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as
a group is then allocated to each software deliverable using the guidance for recognizing software revenue.
As noted above, when neither VSOE nor TPE is available for a deliverable, we use BESP. We do not have significant revenue
arrangements that require BESP for the years ended December 31, 2012 and 2011. The inputs we use to determine the selling price of our
significant deliverables include the actual price charged by the Company for a deliverable that the Company sells separately, which represents the
VSOE, and the wholesale prices of the same or similar products, which represents TPE. The pattern and timing of revenue recognition for
deliverables and allocation of the arrangement consideration did not change upon the adoption of the new accounting principles. Also, the
adoption of the new accounting standard has not had a material impact on our financial statements.
Overall, we recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers and once any
performance obligations have been completed. Certain products are sold to customers with a “street date” (i.e., the earliest date these products
may be sold by retailers). For these products we recognize revenue on the later of the street date or the date the product is sold to our customer.
Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection.
For our software products with online functionality, we evaluate whether those features or functionality are more than an
inconsequential separate deliverable in addition to the software product. This evaluation is performed for each software product and any online
transaction, such as a digital download of a title with product add-ons, when it is released.
When we determine that a software title contains online functionality that constitutes a more-than-inconsequential separate service
deliverable in addition to the product, which, when we do, is principally because of its importance to gameplay, we consider our performance
obligations for this title to extend beyond the sale of the game. VSOE of fair value does not exist for the online functionality of some products, as
we do not separately charge for this component of every title. As a result, we recognize all of the software-related revenue from the sale of any
such title ratably over the estimated service period of such title. In addition, we initially defer the costs of sales for the title (excluding intangible
asset amortization), and recognize the costs of sales as the related revenues are recognized. Cost of sales includes manufacturing costs, software
royalties and amortization, and intellectual property licenses.