Blizzard 2011 Annual Report Download - page 40

We may permit product returns from, or grant price protection to, our customers under certain conditions. In general,
price protection refers to the circumstances in which we elect to decrease, on a short or longer term basis, the wholesale price of
a product by a certain amount and, when granted and applicable, allow customers a credit against amounts owed by such
customers to us 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 include, among other things, compliance with applicable trading and payment terms, and
consistent return of inventory and delivery of sell-through reports to us. We may also consider other factors, including the
facilitation of slow-moving inventory and other market factors.
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 on 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 franchise; console hardware life cycle; sales force and retail customer feedback; industry
pricing; weeks of on-hand retail channel inventory; absolute quantity of on-hand retail channel inventory; our warehouse on-
hand inventory levels; the title’s recent sell-through history (if available); marketing trade programs; and performance of
competing titles. The relative importance of these factors varies among titles depending upon, among other items, genre,
platform, seasonality, and sales strategy.
Based upon historical experience, we believe that 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 hardware platforms. Material differences may result in the amount and timing of our
revenue for any period if factors or market conditions change or if management makes different judgments or utilizes different
estimates in determining the allowances for returns and price protection. For example, a 1% change in our December 31, 2011
allowance for sales returns, price protection and other allowances would have impacted net revenues by approximately
$3 million.
Similarly, management must make estimates as to the collectability 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 affect management’s estimates in establishing our allowance for doubtful accounts.
We regularly review inventory quantities on-hand and in the retail channel. We write down inventory based on excess
or obsolete inventories determined primarily by future anticipated demand for our products. Inventory write-downs are measured
as the difference between the cost of the inventory and net realizable value, based upon assumptions about future demand, which
are inherently difficult to assess and dependent on market conditions. At the point of loss recognition, a new, lower cost basis for
that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that
newly established basis.
Software Development Costs and Intellectual Property Licenses
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 the FASB guidance for the costs of computer
software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”). 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, or the completed and tested
product design and working model. Significant management judgments and estimates are utilized in the assessment of when
technological feasibility is established. 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 if and when we believe such amounts are not recoverable.
Capitalized costs for those products that are cancelled or expected to be 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.”
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 for the specific product, generally
resulting in an amortization period of six months or less.
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