Activision 2012 Annual Report Download - page 41

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Determining whether the online functionality for a particular game constitutes more than an inconsequential deliverable, as well as the
estimated service periods and product life over which to recognize the revenue and related costs of sales, is subjective and require management’s
judgment.
We recognize revenues from World of Warcraft boxed product, expansion packs and value-added services, in each case with the
related subscription service revenue, ratably over the estimated service period beginning upon activation of the software and delivery of the
related services. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs are classified as “Product
sales,” whereas revenues attributable to subscriptions and other value-added services are classified as “Subscription, licensing, and other
revenues.”
Revenue for software products with more than inconsequential separate service deliverables and World of Warcraft products are
recognized over the estimated service periods, which range from a minimum of five months to a maximum of less than a year.
For our software products with features we consider to be incidental to the overall product offering and an inconsequential deliverable,
such as products which provide limited online features at no additional cost to the consumer, we recognize the related revenue from them upon
the transfer of title and risk of loss of the product to our customer.
Allowances for Returns, Price Protection, Doubtful Accounts and Inventory Obsolescence
We closely monitor and analyze the historical performance of our various titles, the performance of products released by other
publishers, market conditions, and the anticipated timing of other releases to assess future demand of current and upcoming titles. Initial volumes
shipped upon title launch and subsequent reorders are evaluated with the goal of ensuring that quantities are sufficient to meet the demand from
the retail markets, but at the same time are controlled to prevent excess inventory in the channel. We benchmark units to be shipped to our
customers using historical and industry data.
We may permit product returns from, or grant price protection to, our customers under certain conditions. In general, price protection
refers to the circumstances in which we elect to decrease, on a short or longer term basis, the wholesale price of a product by a certain amount
and, when granted and applicable, allow customers a credit against amounts owed by such customers to us with respect to open and/or future
invoices. The conditions our customers must meet to be granted the right to return products or price protection include, among other things,
compliance with applicable trading and payment terms, and consistent return of inventory and delivery of sell-through reports to us. We may also
consider other factors, including the facilitation of slow-moving inventory and other market factors.
Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns
and price protection in any accounting period based on estimates of potential future product returns and price protection related to current period
product revenue. We estimate the amount of future returns and price protection for current period product revenue utilizing historical experience
and information regarding inventory levels and the demand and acceptance of our products by the end consumer. The following factors are used
to estimate the amount of future returns and price protection for a particular title: historical performance of titles in similar genres; historical
performance of the hardware platform; historical performance of the franchise; console hardware life cycle; sales force and retail customer
feedback; industry pricing; future pricing assumptions; weeks of on-hand retail channel inventory; absolute quantity of on-hand retail channel
inventory; our warehouse on-hand inventory levels; the title’s recent sell-through history (if available); marketing trade programs; and
performance of competing titles. The relative importance of these factors varies among titles depending upon, among other items, genre,
platform, seasonality, and sales strategy.
Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and price protection could
vary materially from our allowance estimates due to a number of reasons including, among others, a lack of consumer acceptance of a title, the
release in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence of new hardware
platforms. Material differences may result in the amount and timing of our revenue for any period if factors or market conditions change or if
management makes different judgments or utilizes different estimates in determining the allowances for returns and price protection. For
example, a 1% change in our December 31, 2012 allowance for sales returns, price protection and other allowances would have impacted net
revenues by approximately $3 million.
Similarly, management must make estimates as to the collectability of our accounts receivable. In estimating the allowance for
doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends, and changes in our customers’ payment terms and their economic condition, as well as whether we can
obtain sufficient credit insurance. Any significant changes in any of these criteria would affect management’s estimates in establishing our
allowance for doubtful accounts.