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20
report. In addition, if actual price protection and returns were significantly greater than the reserves we
have established, the actual results of our reported net sales would decrease. Conversely, if actual price
protection and returns were significantly less than our reserves, our reported net sales would increase.
Similarly, management must use significant judgment and make estimates in connection with establishing
allowances for doubtful accounts in any accounting period. Management analyzes customer
concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of
the allowance for doubtful accounts. Material differences may result in the amount and timing of our bad
debt expense for any period if management made different judgments or utilized different estimates. If our
customers experience financial difficulties and are not able to meet their ongoing financial obligations to
us, our results of operations may be adversely impacted.
Licenses. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded
on our balance sheet as an asset (licenses) and as a liability (accrued royalties) at the contractual amount
upon execution of the contract if no significant performance remains with the licensor. When significant
performance remains with the licensor, we record royalty payments as an asset (licenses) when payable
rather than upon execution of the contract. Royalty payments for intellectual property licenses are
classified as current assets and current liabilities to the extent such royalty payments relate to anticipated
sales during the subsequent year and long-term assets and long-term liabilities if such royalty payments
relate to anticipated sales after one year.
Licenses are expensed to license amortization and royalties at the higher of (1) the contractual royalty rate
based on actual net product sales related to such license or (2) an effective rate based upon total projected
revenue related to such license. When, in management’s estimate, future cash flows will not be sufficient to
recover previously capitalized costs, we expense these capitalized costs to license amortization and
royalties. See—“Long-Lived Assets” below. If actual revenues or revised forecasted revenues fall below the
initial forecasted revenues for a particular license, the charge to license amortization and royalties expense
may be larger than anticipated in any given quarter. As of March 31, 2005, the net carrying value of our
licenses was $88 million. If we were required to write off licenses, due to changes in market conditions or
product acceptance, our results of operations could be materially adversely affected. In the fiscal year
ended March 31, 2005, we wrote off $4.0 million related to a license for which we no longer plan to develop
games.
Software Development. We utilize bothinternal development teams and independent software developers
to develop our software. We account for software development costs in accordance with SFAS No. 86,
“ Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed.” We capitalize
software development costs once technological feasibility is established and we determine that such costs
are recoverable against future revenues. For products where proven game engine technology exists,
capitalization of expenses may occur early in the development cycle. We evaluate technological feasibility
on a title-by-title basis. We capitalize the milestone payments made to independent software developers
and the direct payroll and facilities costs for our internal development teams. Amounts related to software
development for which technological feasibility is not yet met are charged immediately to product
development expense.
Capitalized software development is expensed to software development amortization at the higher of
(1) the contractual rate based on actual net product sales for such software or (2) an effective rate based
upon total projected revenue for such software. When, in management’s estimate, future cash flows will
not be sufficient to recover previously capitalized costs, we expense these costs to software development
amortization. See—“Long-Lived Assets” below. If actual revenues, or revised forecasted revenues, fall
below the initial forecasted revenue, the charge to software development amortization may be larger than
anticipated in any given quarter. As of March 31, 2005, the net carrying value of our software development