Blizzard 2004 Annual Report Download - page 48

Sales incentives or other consideration given by us to our customers is accounted for in accordance with the Financial
Accounting Standards Board’s Emerging Issues Task Force (“EITF”) Issue 01-9, “Accounting for Consideration Given by
a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” In accordance with EITF Issue 01-9, sales
incentives and other consideration that are considered adjustments of the selling price of our products, such as rebates
and product placement fees, are reflected as reductions of revenue. Sales incentives and other consideration that
represent costs incurred by us for assets or services received, such as the appearance of our products in a customer’s
national circular ad, are reflected as sales and marketing expenses.
Allowance for Returns and Price Protection
In determining the appropriate unit shipments to our customers, we benchmark our titles using historical and industry
data. We closely monitor and analyze the historical performance of our various titles, the performance of products
released by other publishers and the anticipated timing of other releases in order to assess future demands of current
and upcoming titles. Initial volumes shipped upon title launch and subsequent reorders are evaluated to ensure that
quantities are sufficient to meet the demands from the retail markets but at the same time, are controlled to prevent
excess inventory in the channel.
We may permit product returns from, or grant price protection to, our customers under certain conditions. In general,
price protection refers to the circumstances when we elect to decrease the wholesale price of a product by a certain
amount and, when granted and applicable, allows customers a credit against amounts owed by such customers to
Activision with respect to open and/or future invoices. The conditions our customers must meet to be granted the right
to return products or price protection are, among other things, compliance with applicable payment terms, delivery to us
of weekly inventory and sell-through reports, and consistent participation in the launches of our premium title releases.
We may also consider other factors, including the facilitation of slow-moving inventory and other market factors.
Management must make estimates of potential future product returns and price protection related to current period
product revenue. We estimate the amount of future returns and price protection for current period product revenue
utilizing historical experience and information regarding inventory levels and the demand and acceptance of our prod-
ucts by the end consumer. The following factors are used to estimate the amount of future returns and price protection
for a particular title: historical performance of titles in similar genres, historical performance of the hardware platform,
historical performance of the brand, console hardware life cycle, Activision sales force and retail customer feedback,
industry pricing, weeks of on-hand retail channel inventory, absolute quantity of on-hand retail channel inventory,
Activision warehouse on-hand inventory levels, the title’s recent sell-through history (if available), marketing trade
programs and competing titles. The relative importance of these factors varies among titles depending upon, among
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.
Shipping and Handling
Shipping and handling costs, which consist primarily of packaging and transportation charges incurred to move finished
goods to customers, are included in cost of sales—product costs.
Activision, Inc. — 2004 Annual Report
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