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42
packs do not have standalone value and to account for fees from sales of expansion packs over the
remaining estimated useful life of the customer. This method recognizes revenue over the period
during which the customer is expected to utilize the intended full functionality of the expansion
pack. The Company believes that it is preferable to recognize revenue from sales of expansion
packs over the remaining estimated useful life of the customers, because this is consistent with the
accounting for the World of Warcraft license and the evolution of accounting for online enabled
video games in the console industry. In accordance with Statement of Financial Accounting
Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), this change
has been applied retrospectively to our Consolidated Financial Statements for all prior periods.
In addition to the above, the Company also identified certain ancillary fees charged to
World of Warcraft subscribers that had been recognized immediately rather than deferred over the
estimated remaining subscription life. Accordingly, the Company has also retrospectively adjusted
subscription revenues for the year ended December 31, 2007, and such adjustments are immaterial
to all periods presented.
As a result of these changes, cost of sales—product costs and software royalties and
amortization were also impacted, as cost of sales—product costs and software royalties and
amortization are recognized in relation to the related revenues. The effects of these changes were
as follows (amounts in millions):
For the year ended December 31, 2007
As
reported As
adjusted Effect of
change
As adjusted
and
reclassified*
Consolidated Statement of Operations:
Product sales........................................................................ $539 $505 $(34) $457
Subscription, licensing, and other revenues ........................ 857 843 (14) 892
Cost of sales—product costs ............................................... 388 382 (6) 171
Cost of sales—software royalties and amortization ............ 10 10 — 52
Operating income (loss) ...................................................... 220 180 (40) 179
Income (loss) before income tax benefit ............................. 215 175 (40) 175
Income tax benefit............................................................... (36) (52) (16) (52)
Net income (loss)................................................................. $251 $227 $(24) $227
Net income (loss) per share—basic and diluted .................. $0.43 $0.38 $(0.05) $0.38
At December 31, 2007
As
reported As
adjusted
Effect
of
change
As adjusted
and
reclassified*
Consolidated Balance Sheet:
Software development..................................................... $1 $1 $— $25
Deferred income taxes..................................................... 126 142 16 143
Deferred revenues............................................................ 137 190 53 197
Accrued expenses and other liabilities ............................ 374 362 (12) 282
Accumulated deficit......................................................... (343) (367) (24) (367)