Activision 2012 Annual Report Download - page 43

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Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with FASB income
tax guidance (“ASC Topic 740”), the provision for income taxes is computed using the asset and liability method, under which deferred tax assets
and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the
period that includes the enactment date. We evaluate deferred tax assets each period for recoverability. For those assets that do not meet the
threshold of “more likely than not” that they will be realized in the future, a valuation allowance is recorded.
Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain
tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax
assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation
allowance would be charged to tax expenses in the period such determination is made. The calculation of tax liabilities involves significant
judgment in estimating the impact of uncertainties in the application of ASC Topic 740 and other complex tax laws. Resolution of these
uncertainties in a manner inconsistent with management’s expectations could have a material impact on our business and results of operations in
an interim period in which the uncertainties are ultimately resolved.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although
we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which
is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the
closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts
recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for
income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest
and penalties.
Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated in
foreign regions where taxes are levied at relatively lower statutory rates and/or higher than anticipated in the United States where taxes are levied
at relatively higher statutory rates; by changes in the valuation of our deferred tax assets and liabilities; by expiration of or lapses in the R&D tax
credit laws; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; by differences between amounts
included in our tax filings and the estimate of such amounts included in our tax expenses; by changes in accounting principles; or by changes in
tax laws and regulations including possible U.S. changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses
attributable to foreign income, or the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement
attributes prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies
to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our
provision for income taxes or additional paid-in capital. In addition, we are subject to the continuous examination of our income tax returns by
the Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous
examinations will not have an adverse impact on our operating results and financial condition.
Fair Value Estimates
The preparation of financial statements in conformity with U.S. GAAP often requires us to determine the fair value of a particular
item to fairly present our Consolidated Financial Statements. Without an independent market or another representative transaction, determining
the fair value of a particular item requires us to make several assumptions that are inherently difficult to predict and can have a material impact on
the conclusion of the appropriate accounting.
There are various valuation techniques used to estimate fair value. These include (1) the market approach where market transactions
for identical or comparable assets or liabilities are used to determine the fair value, (2) the income approach, which uses valuation techniques to
convert future amounts (for example, future cash flows or future earnings) to a single present amount, and (3) the cost approach, which is based
on the amount that would be required to replace an asset. For many of our fair value estimates, including our estimates of the fair value of
acquired intangible assets, we use the income approach. Using the income approach requires the use of financial models, which require us to
make various estimates including, but not limited to (1) the potential future cash flows for the asset, liability or equity instrument being measured,
(2) the timing of receipt or payment of those future cash flows, (3) the time value of money associated with the delayed receipt or payment of
such cash flows, and (4) the inherent risk associated with the cash flows (that is, the risk premium). Determining these cash flow estimates is