Blizzard 2005 Annual Report Download - page 25

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฀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฀recoverability฀of฀capitalized฀costs,฀the฀assessment฀of฀expected฀product฀performance฀utilizes฀forecasted฀sales฀
amounts฀and฀estimates฀of฀additional฀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฀net฀realizable฀value฀may฀be฀lower฀than฀originally฀estimated฀in฀any฀given฀quarter,฀which฀
could฀result฀in฀an฀impairment฀charge.
Intellectual Property Licenses.฀Intellectual฀property฀license฀costs฀represent฀license฀fees฀paid฀to฀intellectual฀property฀rights฀holders฀for฀use฀of฀their฀trademarks,฀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฀products฀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฀
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Activision, Inc. — 2005 Annual Report