Blizzard 2011 Annual Report Download - page 41

Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their
trademarks, copyrights, software, technology, music 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 right to use the intellectual property in
multiple products over a number of years, or alternatively, for a single product. Prior to the related product’s release, we
expense, as part of “cost of sales—intellectual property licenses,” capitalized intellectual property costs when we believe such
amounts are not recoverable. Capitalized intellectual property costs for those products that are cancelled or expected to be
abandoned are charged to product development expense in the period of cancellation.
Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to “Cost
of sales—intellectual property licenses” based on the ratio of current revenues for the specific product to total projected revenues
for all products in which the licensed property will be utilized. As intellectual property license contracts may extend for multiple
years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year.
We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on
a quarterly basis. For products that have been released in prior periods, the primary evaluation criterion is actual title
performance. For products that are scheduled to be released in future periods, recoverability is evaluated based on the expected
performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used.
Criteria used to evaluate expected product performance include: historical performance of comparable products developed with
comparable technology; orders for the product prior to its release; and, for any sequel product, estimated performance based on
the performance of the product on which the sequel is based. Further, as many of our capitalized 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 factors, such as the success of other products and/or entertainment vehicles utilizing the
intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual
property, and the rights holder’s continued promotion and exploitation of the intellectual property.
Significant management judgments and estimates are utilized in assessing 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 the originally
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. Material differences may result in the amount and timing of
expense for any period if management makes different judgments or utilizes different estimates in evaluating these qualitative
factors.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance
with FASB income tax guidance (“ASC Topic 740”), the provision for income taxes is computed using the asset and liability
method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We record a
valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Management believes it is more likely than not that forecasted income, including income that may be generated as a
result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully
recover the remaining deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be
realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination
is made. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the
application of ASC Topic 740 and other complex tax laws. Resolution of these uncertainties in a manner inconsistent with
management’s expectations could have a material impact on our business and results of operations in an interim period in which
the uncertainties are ultimately resolved.
Fair Value Estimates
The preparation of financial statements in conformity with U.S. GAAP often requires us to determine the fair value of
a particular item to fairly present our Consolidated Financial Statements. Without an independent market or another
representative transaction, determining the fair value of a particular item requires us to make several assumptions that are
inherently difficult to predict and can have a material impact on the conclusion of the appropriate accounting.
There are various valuation techniques used to estimate fair value. These include (1) the market approach where
market transactions for identical or comparable assets or liabilities are used to determine the fair value, (2) the income approach,
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