Square Enix 2006 Annual Report Download - page 52

S Q U A R E E N IX C O . , L T D .
Concentration of Credit Risk
If the financial condition and operations of the Company’s
customers deteriorate, the risk of collection could increase
substantially. As of March 31, 2006 and 2005, the receivable
balances from the Company’s five largest customers amounted
to approximately 22.5% and 60.1% of the Company’s net
accounts and notes receivable balance, respectively. For the
years ended March 31, 2006, 2005 and 2004, the Company’s
five largest customers accounted for 13.3% , 25.4% , and
21.6% of net sales, respectively. The Company sets the credit
limit to each customer and monitors its solvency continuously.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts
and notes receivable, accounts and notes payable and accrued
expenses and approximate fair value because of their short
maturity. Investments in marketable securities are stated at their
fair value based on quoted market prices. Investments in non-
marketable securities for which there are no quoted market
price are stated at cost because reasonable estimates of their
fair value could not be made without incurring excessive costs
and it was not practicable to estimate their fair value of com-
mon stock representing certain closely held companies. The
face value of long-term debt approximates its fair value because
the debt is with zero coupon and the difference between its
face value and the greater of its straight bond value or conver-
sion value constitutes a premium of the embedded conversion
right therein provided by the debt holder. The carrying amount
of the Company’s lines of credit approximates fair value
because the interest rates of the lines of credit are based on
floating rates identified by reference to market rates.
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instruments. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Inventories
Inventories are stated at the lower of cost or market. The Com-
pany periodically evaluates the carrying value of its inventories
and makes adjustments as necessary. Cost is determined
primarily by the monthly average method for finished goods,
merchandise and work in progress, by the specific identification
method for amusement equipment and, by the last purchase
price method for other supplies.
Software Development Costs
The Company applies Statement of Financial Accounting Stan-
dards (“ SFAS” ) No.86, “ Accounting for the Cost of Computer
Softw are to be Sold, Leased, or Otherw ise M arketed” , pursuant
to which, the Company capitalizes internal software develop-
ment cost, as well as content cost, subsequent to establishment
of technological feasibility of certain video game software.
Capitalized software development costs on the accompanying
consolidated balance sheets include the payment to an outside
independent contactor as well as costs associated with internal
development of the video game products. Software develop-
ment costs are amortized as a component of “ Cost of sales”
over the expected life of each video game product, starting
from its initial delivery to the market. The Company continually
evaluates the recoverability of capitalized software costs and will
charge to earnings any amounts that are deemed unrecoverable
or for projects that it will abandon.
Property and Equipment
Depreciation of property and equipment is computed on the
declining-balance method for the Company and domestic sub-
sidiaries, and the straight-line method for foreign subsidiaries
over the estimated useful lives of the assets, ranging from 3 to
65 years for buildings, 3 to 15 years for machinery and equip-
ment, and 3 to 8 years for amusement equipment. The cost
of additions and betterments are capitalized, and repairs and
maintenance costs are charged to earnings in the periods
incurred. When depreciable assets are retired or sold, the cost
and related allowances for depreciation are removed from the
accounts and the gain or loss is recognized.
Intangible Assets
Intangible assets consist of identifiable intangibles and the
remaining excess purchase price paid over identified intangible
and tangible net assets of acquired companies (goodwill). The
Company applies the provisions of SFAS No. 141, “ Business
Combinations” in its entirety and SFAS No. 141 requires all busi-
ness combinations be accounted for using the purchase method
of accounting and that certain intangible assets acquired in a
business combination shall be recognized as assets apart from
goodwill. SFAS No. 142, “ Goodw ill and Other Intangible Assets”
addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS
No. 142 provides that intangible assets with finite useful lives
be amortized and that intangible assets with indefinite lives and
goodwill not be amortized but tested for impairment annually.
SFAS No. 142 requires an annual test for impairment of
goodwill, and between annual tests if events occur or circum-
stances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. In assessing
potential impairment of goodwill, the Company determines the