Activision 2012 Annual Report Download - page 59

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Long-Lived Assets
Property and Equipment. Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated
useful life (i.e., 25 to 33 years, for buildings, and 2 to 5 years, for computer equipment, office furniture and other equipment) of the asset. When
assets are retired or disposed of, the cost and accumulated depreciation thereon are removed and any resulting gains or losses are included in the
consolidated statements of operations. Leasehold improvements are amortized using the straight-line method over the estimated life of the asset,
not to exceed the length of the lease. Repair and maintenance costs are expensed as incurred.
Goodwill and Other Indefinite-Lived Assets. We account for goodwill using the provisions within ASC Topic 350. Under ASC Topic
350, goodwill is considered to have an indefinite life, and is carried at cost. Acquired trade names are assessed as indefinite lived assets as there
are no foreseeable limits on the periods of time over which they are expected to contribute cash flows. Goodwill and acquired trade names are not
amortized, but are subject to an impairment test annually, as well as in between annual tests when events or circumstances indicate that the
carrying value may not be recoverable. We perform our annual impairment testing at December 31st.
Our annual goodwill impairment test is performed at the reporting unit level. We have determined our reporting units based on the
guidance within ASC Subtopic 350-20, which provides that reporting units are generally operating segments or one reporting level below the
operating segments. As of December 31, 2012 and 2011, the Company’s reporting units are the same as our operating segments: Activision,
Blizzard, and Distribution. We test goodwill for possible impairment by first determining the fair value of the related reporting unit and
comparing this value to the recorded net assets of the reporting unit, including goodwill. In the event the recorded net assets of the reporting unit
exceed the estimated fair value of such assets, we perform a second step to measure the amount of the impairment, which is equal to the amount
by which the recorded goodwill exceeds the implied fair value of the goodwill after assessing the fair value of each of the assets and liabilities
within the reporting unit.
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.
We test acquired trade names for possible impairment by using a discounted cash flow model to estimate fair value. We have
determined that no impairment has occurred at December 31, 2012 and 2011 based upon a set of assumptions regarding discounted future cash
flows, which represent our best estimate of future performance at this time. In determining the fair value of our trade names, we assumed a
discount rate of 10.5%, and royalty saving rates of approximately 1.5%. A one percentage point increase in the discount rate would not yield an
impairment charge to our trade names. 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.
Amortizable Intangible Assets. Intangible assets subject to amortization are carried at cost less accumulated amortization, and
amortized over the estimated useful life in proportion to the economic benefits received.
Management evaluates the recoverability of our identifiable intangible assets and other long-lived assets in accordance with FASB
guidance 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).