Blizzard 2010 Annual Report Download - page 52

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In completing our goodwill impairment analysis, we test the appropriateness of our reporting units’ estimated fair
value by reconciling the aggregate reporting units’ fair values with our market capitalization. Our impairment analysis
indicated that the aggregate fair values of our reporting units exceeded our December 31, 2010 market capitalization by
approximately $4.6 billion or 30%.
The fair value of an entity can be greater than its market capitalization for various reasons, one of which is the
concept of control premium. A control premium is the amount that a buyer is willing to pay over the current market price of a
company to acquire a controlling interest. Substantial value may arise from the ability to take advantages of synergies, such
as the expected increase in cash flow resulting from cost savings and revenue enhancements, and other benefits could be
achieved by controlling another entity. However, changes in our assumptions underlying our estimates of fair value, which
will be a function of our future financial performance and changes in economic conditions, could result in future impairment
charges.
We test acquired trade names for possible impairment by using a discounted cash flow model to estimate fair value.
As of December 31, 2010, the estimated fair values of each of our acquired trade names exceeded their carrying values by a
range of approximately $143 million to $251 million, which exceeds their respective carrying values by a range of
approximately 37% to 534%. As such, we have determined that no impairment has occurred at December 31, 2010 based
upon a set of assumptions regarding discounted future cash flows, which represent our best estimate of future performance at
this time. In determining the fair value of our trade names, we assumed a discount rate of 11%, and royalty saving rates of
approximately 1.5%. A one percentage point increase in the discount rate would not yield an impairment charge to our trade
names. Changes in our assumptions underlying our estimates of fair value, which will be a function of our future financial
performance and changes in economic conditions, could result in future impairment charges.
Amortizable Intangible Assets. Intangible assets subject to amortization are carried at cost less accumulated
amortization. Intangible assets subject to amortization are amortized over the estimated useful life in proportion to the
economic benefits received.
Management evaluates the recoverability of our identifiable intangible assets and other long-lived assets in
accordance with FASB guidance within ASC Subtopic 360-10, which generally requires the assessment of these assets for
recoverability when events or circumstances indicate a potential impairment exists. We considered certain events and
circumstances in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not
be recoverable including, but not limited to: significant changes in performance relative to expected operating results;
significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in our stock
price for a sustained period of time; and changes in our business strategy. In determining whether an impairment exists, we
estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If an impairment
is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is
measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
In the fourth quarter of 2010, we recorded impairment charges of $67 million, $9 million and $250 million to license
agreements, game engines and internally developed franchises intangible assets, respectively. In the fourth quarter of 2009,
we recorded impairment charges of $24 million, $12 million and $373 million to license agreements, game engines and
internally developed franchises intangible assets, respectively. (See Note 12 of the notes to consolidated financial statements)
Revenue Recognition
Product Sales
We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers and
once any performance obligations have been completed. Certain products are sold to customers with a street date (i.e., the
earliest date these products may be sold by retailers). For these products we recognize revenue on the later of the street date
or the sale date. Revenue from product sales is recognized after deducting the estimated allowance for returns and price
protection.
For our software products with online functionality, we evaluate whether those features or functionality are more
than an inconsequential separate deliverable in addition to the software product. This evaluation is performed for each
software product and any online transaction, such as an electronic download of a title or product add-ons, when it is released.