Blizzard 2004 Annual Report Download - page 15

other items, genre, platform, seasonality and sales strategy. 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.
Historically, total actual returns and price protection have not exceeded our allowance estimates. 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 management makes different judgments or utilizes
different estimates in determining the allowances for returns and price protection.
Similarly, management must make estimates of the uncollectibility 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 impact management’s estimates in establishing our allowance for doubtful accounts.
We value inventory at the lower of cost or market. We regularly review inventory quantities on hand and in the
retail channel and record a provision for excess or obsolete inventory based on the future expected demand for our
products. Significant changes in demand for our products would impact management’s estimates in establishing our
inventory provision.
Software Development Costs. Software development costs include payments made to independent software developers
under development agreements, as well as direct costs incurred for internally developed products.
We account for software development costs in accordance with Statement of Financial Accounting Standard (“SFAS”)
No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” Software
development costs are capitalized once technological feasibility of a product is established and such costs are deter-
mined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and
game design documentation. For products where proven technology exists, this may occur early in the development
cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product’s release, we expense,
as part of cost of sales—software royalties and amortization, capitalized costs when we believe such amounts are
not recoverable. Capitalized costs for those products that are cancelled or abandoned are charged to product
development expense in the period of cancellation. Amounts related to software development which are not capitalized
are charged immediately to product development expense. We evaluate the future recoverability of capitalized amounts
on a quarterly basis. The recoverability of capitalized software development costs is evaluated based on the expected
performance of the specific products for which the costs relate. Criteria used to evaluate expected product performance
include: historical performance of comparable products using comparable technology; orders for the product prior to
its release; and estimated performance of a sequel product based on the performance of the product on which the
sequel is based.
Commencing upon product release, capitalized software development costs are amortized to cost of sales—software
royalties and amortization based on the ratio of current revenues to total projected revenues, generally resulting in an
amortization period of six months or less. For products that have been released in prior periods, we evaluate the future
recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.
Activision, Inc. — 2004 Annual Report
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