Blizzard 2004 Annual Report Download - page 46

We account for software development costs in accordance with 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 determined 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.
Significant management judgments and estimates are utilized in the assessment of when technological feasibility is
established, as well as in the ongoing assessment of the recoverability of capitalized costs. In evaluating the recover-
ability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and
estimates of additional development costs to be incurred. If revised forecasted or actual product sales are less
than and/or revised forecasted or actual costs are greater than the original forecasted amounts utilized in the initial
recoverability analysis, the actual impairment charge may be larger than originally estimated in any given quarter.
Intellectual Property Licenses
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trade-
marks, copyrights, software, technology or other intellectual property or proprietary rights in the development of our
products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual
property in multiple products over multiple years, or alternatively, for a single product.
We evaluate the future recoverability of capitalized intellectual property licenses on a quarterly basis. The recoverability
of capitalized intellectual property license costs is evaluated based on the expected performance of the specific prod-
ucts in which the licensed trademark or copyright is to be used. As many of our intellectual property licenses extend for
multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs
based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing the
intellectual property, whether there are any future planned theatrical releases or television series based on the intellec-
tual property and the rights holder’s continued promotion and exploitation of the intellectual property. Prior to the related
product’s release, we expense, as part of cost of sales—intellectual property licenses, capitalized intellectual property
costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those products that
are cancelled or abandoned are charged to product development expense in the period of cancellation. 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.
Activision, Inc. — 2004 Annual Report
page 49