Blizzard 2005 Annual Report Download - page 24

requires฀ management฀ to฀ make฀ estimates฀ and฀ assumptions฀ that฀ affect฀ the฀ reported฀ amounts฀ of฀ assets฀ and฀ liabilities฀ at฀ the฀ date฀ of฀ the฀ financial฀ statements฀ and฀ the฀
reported฀amounts฀of฀revenues฀and฀expenses฀during฀the฀reporting฀period.฀Actual฀results฀could฀differ฀from฀those฀estimates.
Revenue Recognition.฀We฀recognize฀revenue฀from฀the฀sale฀of฀our฀products฀upon฀the฀transfer฀of฀title฀and฀risk฀of฀loss฀to฀our฀customers.฀Certain฀products฀are฀sold฀to฀customers฀
with฀a฀street฀date฀(the฀date฀that฀products฀are฀made฀widely฀available฀for฀sale฀by฀retailers).฀For฀these฀products฀we฀recognize฀revenue฀no฀earlier฀than฀the฀street฀date.฀Revenue฀
from฀product฀sales฀is฀recognized฀after฀deducting฀the฀estimated฀allowance฀for฀returns฀and฀price฀protection.฀With฀respect฀to฀license฀agreements฀that฀provide฀customers฀
the฀right฀to฀make฀multiple฀copies฀in฀exchange฀for฀guaranteed฀amounts,฀revenue฀is฀recognized฀upon฀delivery฀of฀such฀copies.฀Per฀copy฀royalties฀on฀sales฀that฀exceed฀the฀
guarantee฀are฀recognized฀as฀earned.฀In฀addition,฀in฀order฀to฀recognize฀revenue฀for฀both฀product฀sales฀and฀licensing฀transactions,฀persuasive฀evidence฀of฀an฀arrangement฀must฀
exist฀and฀collection฀of฀the฀related฀receivable฀must฀be฀probable.฀Revenue฀recognition฀also฀determines฀the฀timing฀of฀certain฀expenses,฀including฀cost฀of฀sales—intellectual฀
property฀licenses฀and฀cost฀of฀sales—software฀royalties฀and฀amortization.
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.
Allowances for Returns, Price Protection, Doubtful Accounts and Inventory Obsolescence.฀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฀products฀
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.฀Based฀upon฀historical฀experience,฀we฀believe฀ our฀estimates฀ are฀
reasonable.฀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฀
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Activision, Inc. — 2005 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations