Activision 2012 Annual Report Download - page 44

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inherently difficult and subjective, and, if any of the estimates used to determine the fair value using the income approach turns out to be
inaccurate, our financial results may be negatively impacted. Furthermore, relatively small changes in many of these estimates can have a
significant impact on the estimated fair value resulting from the financial models or the related accounting conclusion reached. For example, a
relatively small change in the estimated fair value of an asset may change a conclusion as to whether an asset is impaired. While we are required
to make certain fair value assessments associated with the accounting for several types of transactions, the following areas are the most sensitive
to the assessments:
Business Combinations. We must estimate the fair value of assets acquired and liabilities assumed in a business combination. Our
assessment of the estimated fair value of each of these can have a material effect on our reported results as intangible assets are amortized over
various lives. Furthermore, a change in the estimated fair value of an asset or liability often has a direct impact on the amount to recognize as
goodwill, which is an asset that is not amortized. Often determining the fair value of these assets and liabilities assumed requires an assessment of
expected use of the asset, the expected cost to extinguish the liability or our expectations related to the timing and the successful completion of
development of an acquired in-process technology. Such estimates are inherently difficult and subjective and can have a material impact on our
financial statements.
Assessment of Impairment of Assets. Management evaluates the recoverability of our identifiable intangible assets and other long-
lived assets in accordance with FASB literature related to accounting for the impairment or disposal of long-lived assets within ASC
Subtopic 360-10, which generally requires the assessment of these assets for recoverability when events or circumstances indicate a potential
impairment exists. We considered certain events and circumstances in determining whether the carrying value of identifiable intangible assets and
other long-lived assets, other than indefinite-lived intangible assets, may not be recoverable including, but not limited to: significant changes in
performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a
significant decline in our stock price for a sustained period of time; and changes in our business strategy. In determining whether an impairment
exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If an impairment is
indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
During 2010, we recorded an impairment charge of $326 million to our definite-lived intangible assets. See Note 11 of the Notes to
Consolidated Financial Statements included in this Annual Report for additional information regarding the determination of the impairment
charges recorded for the year ended December 31, 2010. We did not record an impairment charge to our definite-lived intangible assets as of
December 31, 2012 and 2011.
FASB literature related to the accounting for goodwill and other intangibles within ASC Topic 350 provides companies an option to
first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
value before performing a two-step approach to testing goodwill for impairment for each reporting unit. Our reporting units are determined by the
components of our operating segments that constitute a business for which both (1) discrete financial information is available and (2) segment
management regularly reviews the operating results of that component. ASC Topic 350 requires that the impairment test be performed at least
annually by applying a fair-value-based test. The qualitative assessment is optional. The first step measures for impairment by applying fair-
value-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests
to the individual assets and liabilities within each reporting unit.
To determine the fair values of the reporting units used in the first step, we use a discounted cash flow approach. Each step requires us
to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include long-term growth
rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates based on our weighted average cost of
capital, and future economic and market conditions. These estimates and assumptions have to be made for each reporting unit evaluated for
impairment. Our estimates for market growth, our market share and costs are based on historical data, various internal estimates and certain
external sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying business. If
future forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on assumptions we believe
to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
Fair value of our reporting units is determined using an income approach based on discounted cash flow models. In determining the
fair value of our reporting units, we assumed a discount rate of approximately 10.5%. The estimated fair value of the Activision Publishing
reporting unit exceeded its carrying value by approximately $3 billion or at least 25% as of December 31, 2012. The estimated fair value of the
Blizzard reporting unit substantially exceeded its carrying value as of December 31, 2012. However, changes in our assumptions underlying our
estimates of fair value, which will be a function of our future financial performance, and changes in economic conditions could result in future
impairment charges.