THQ 2005 Annual Report Download - page 44

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was $65.3 million. If we were required to write off software development due to changes in market
condition or product quality our results of operations could be materially adversely affected.
Goodwill. We perform our annual review for goodwill impairment during the quarters ending June 30, or
more frequently if indicators of potential impairment exist. We performed our goodwill impairment review
for the quarters ended June 30, 2004 and June30, 2003, and in both reviews we found no impairment. Our
impairment review process is based on a discounted future cash flow approach that uses our estimates of
revenue for the reporting units, driven by anticipated success of our products and product release
schedules, and estimated costs as well as appropriate discount rates. These estimates are consistent with
the plans and estimates that we use to manage the underlying businesses. We performed similar
impairment tests for indefinite-lived intangible assets and found no impairment. The success of our
products is affected by the ability to accurately predict which platforms and which products we develop will
be successful. Also, our revenues and earnings are dependent on our ability to meet our product release
schedules. Due to these and other factors described in the subsection entitled “Risk Factors” in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” we may not
realize the future net cash flows necessary to recover our goodwill.
Based on these judgments and assumptions, we determine whether we need to take an impairment charge
to reduce the value of the goodwill and indefinite-lived intangible assets stated on our balance sheets to
reflect their estimated fair values. Judgments and assumptions about future values are complex and often
subjective. They can be affected by a variety of factors, including, but not limited to, significant negative
industry or economic trends, significant changes in the manner or use of the acquired assets or the strategy
of our overall business and significant underperformance relative to expected historical or projected future
operating results. Although we believe the judgments and assumptions we have made in the past have been
reasonable and appropriate, there is nonetheless a high degree of uncertainty and judgment involved.
We continue to encounter the risks and difficulties faced with launching or acquiring a new business. When
the business is a development studio, we look for ways to maximize the talent and intellectual property
within the studio. We make judgments and assumptions as to the commercial success and quantity of
games developed by a particular studio. Different judgments and assumptions could materially impact our
reported financial results. For example, if we do not develop games with the same commercial success or
the same number of games as we have estimated, we may need to take an impairment charge against
goodwill in the future. More conservative assumptions of the anticipated future benefits from these
businesses would result in lower fair values which could result in impairment charges, which would
decrease net income and result in lower asset values on our balance sheets. Conversely, less conservative
assumptions would result in higher fair values which could result in lower impairment charges and higher
net income.
Long-Lived Assets. We evaluate long-lived assets, including, but not limited to, licenses, software
development, property and equipment and identifiable intangible assets with finite lives, for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Factors we consider in deciding when to perform an impairment review include significant
under-performance of a product or platform in relation to expectations, significant negative industry or
economic trends, and significant changes or planned changes in our use of the assets. Potential impairment
of the assets is measured by a comparisonof the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds
its fair value.
Judgments and assumptions about future values are complex and often subjective. They can be affected by
a variety of factors, including, but not limited to, significant negative industry or economic trends,
significant changes in the manner or use of the acquired assets or the strategy of our overall business, and