THQ 2005 Annual Report Download - page 45

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significant underperformance relative to expected historical or projected future operating results.
Although we believe the judgments and assumptions management has made in the past have been
reasonable and appropriate, there is nonetheless a high degree of uncertainty and judgment involved.
More conservative assumptions of the anticipated future cash flows from these assets would result in lower
fair values which could result in impairment charges, which would in turn 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.
We also make judgments about the remaining useful lives of long-lived assets. When we determine that the
useful lives of assets are shorter than we had originally estimated, and there are sufficient cash flows to
support the carrying value of the assets, we accelerate the rate of depreciation charges in order to fully
depreciate the assets over their new shorter useful lives.
Income taxes. As part of the process of preparing our consolidated financial statements, we are required
to estimate our income taxes in each of the jurisdictions in which we operate. This process involves:
(1) estimating our current tax exposure in each jurisdiction including the impact, if any, of changes or
interpretations to applicable tax laws and regulations, (2) estimatingadditional taxes resulting from tax
examinationsand (3) making judgments regarding the recoverability of deferred tax assets. To the extent
recovery of deferred tax assets is not likely based on our estimates of future taxable income in each
jurisdiction, a valuation allowance is established.
The calculation of our tax liabilities involves dealing withuncertainties in the application of complex tax
regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions
based on our estimate of whether, and the extent to which, additional taxes will be due. Our estimate for
the potential outcome for any uncertain tax issue, including our recent claim for research and development
income tax credits, requires judgment. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved
or when statutes of limitation on potential assessments expire.
As a result of the items discussed above, our actual effective income tax rates can differ from the projected
effective income tax rates used when preparing our consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment ” (“SFAS
No. 123R”), which replaces SFAS No. 123, “ Accountingfor Stock-Based Compensation,” (“SFAS No. 123”)
and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R
originally required all share-based payments to employees, including grants of employee stock options, to
be recognized in the financial statements based on their fair values beginning with the first quarter or
annual period after June15, 2005. On April 21, 2005 the SEC issued a rule that amends the date of
compliance with SFAS No. 123R (“the SEC amendment”). Under the SEC amendment, SFAS No. 123R
must be adopted beginning with the first interim or annual reporting period of the registrant’s first fiscal
year beginning on or after June15, 2005, which means that we must adopt SFAS No. 123R by April 1,
2006. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative
to financial statement recognition. Under SFAS No. 123R, we must determine the appropriate fair value
model to be used for valuing share-based payments, the amortization method for compensation cost and
the transition method to be used at date of adoption. The transition methods include prospective and
retroactive adoption. Under the retroactive method, prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation
expense for all unvested stock options and restricted stock beginning with the first period restated. We are