Blizzard 2011 Annual Report Download - page 54

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.
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.
Inventories
Inventories consist of materials (including manufacturing royalties paid to console manufacturers), labor and freight-
in and are stated at the lower of cost (weighted average method) or net realizable value.
Long-Lived Assets
Property and Equipment. Property and equipment are recorded at cost and depreciated on a straight-line basis over
the estimated useful life (i.e., 25 to 33 years, for buildings, and 2 to 5 years, for computer equipment, office furniture and other
equipment) of the asset. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed and
any resulting gains or losses are included in the consolidated statements of operations. Leasehold improvements are amortized
using the straight-line method over the estimated life of the asset, not to exceed the length of the lease. Repair and maintenance
costs are expensed as incurred.
Goodwill and Other Indefinite-Lived Assets. We account for goodwill using the provisions within ASC Topic 350.
Under ASC Topic 350, goodwill is considered to have an indefinite life, and is carried at cost. Acquired trade names are assessed
as indefinite lived assets as there are no foreseeable limits on the periods of time over which they are expected to contribute cash
flows. Goodwill and acquired trade names are not amortized, but are subject to an impairment test annually, as well as in
between annual tests when events or circumstances indicate that the carrying value may not be recoverable. We perform our
annual impairment testing at December 31st.
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