Blizzard 2011 Annual Report Download - page 55

Our annual goodwill impairment test is performed at the reporting unit level. We have determined our reporting units
based on the guidance within ASC Subtopic 350-20, which provides that reporting units are generally operating segments or one
reporting level below the operating segments. As of December 31, 2011, the Company’s reporting units are the same as our
operating segments: Activision, Blizzard, and Distribution. We test goodwill for possible impairment by first determining the
fair value of the related reporting unit and comparing this value to the recorded net assets of the reporting unit, including
goodwill. In the event the recorded net assets of the reporting unit exceed the estimated fair value of such assets, we perform a
second step to measure the amount of the impairment, which is equal to the amount by which the recorded goodwill exceeds the
implied fair value of the goodwill after assessing the fair value of each of the assets and liabilities within the reporting unit.
Fair value of our reporting units is determined using an income approach based on discounted cash flow models. In
determining the fair value of our reporting units, we assumed a discount rate between 10.0% and 13.0%. During our 2011 annual
impairment testing, the Company identified and recorded a $12 million impairment of goodwill to “General and administrative”
in the statement of operations related to the Distribution reporting unit. The impairment was due to declines in our expected
future performance of the distribution companies based on growing industry trends towards digital distribution and online
gaming. The estimated fair values of the remaining reporting units exceeded their carrying values by at least $4 billion or 40% as
of December 31, 2011. 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.
We have determined that no impairment has occurred at December 31, 2011 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 10%, 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, and 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 11 of the Notes to Consolidated Financial Statements)
Revenue Recognition
Revenue Arrangements with Multiple Deliverables
Effective January 1, 2011, we adopted amendments to an accounting standard related to revenue recognition for
arrangements with multiple deliverables (which standard, as amended, is referred to herein as the “new accounting principles”).
The new accounting principles establish a selling price hierarchy for determining the selling price of a deliverable and requires
the application of the relative selling price method to allocate the consideration received for an arrangement to each deliverable
in a multiple deliverables revenue arrangement. Certain of our revenue arrangements have multiple deliverables and, as such, are
accounted for under the new accounting principles. These revenue arrangements include product sales consisting of both
software and hardware deliverables (such as peripherals or other ancillary collectors’ items sold together with physical “boxed”
software) and our sales of World of Warcraft boxed products, expansion packs and value-added services, each of which is
considered with the related subscription services for these purposes. Our assessment of deliverables and units of accounting does
not change under the new accounting principles.
Pursuant to the guidance of ASU 2009-13, when a revenue arrangement contains multiple elements, such as hardware
and software products, licenses and/or services, we allocate revenue to each element based on a selling price hierarchy. The
selling price for a deliverable is based on its vendor- specific-objective-evidence (“VSOE”) if it is available, third-party evidence
(“TPE”) if VSOE is not available, or best estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple
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