THQ 2010 Annual Report Download - page 58

50
Concentrations of Credit Risk. Financial instruments which potentially subject us to concentration of credit
risk consist principally of cash and cash equivalents, short-term investments, accounts receivable and long-
term investments. We place cash and cash equivalents and short-term investments with high credit-quality
financial institutions and limit the amount of credit exposure to any one financial institution. We believe the
risk related to cash and cash equivalents, and accounts receivable is not material due to the short-term
nature of such assets. Our investments include significant holdings of ARS. Although there has been recent
uncertainty in the credit markets, all of the securities are investment grade securities, and we have no reason
to believe that any of the underlying issuers of our ARS are presently at risk or that the underlying credit
quality of the assets backing our ARS has been impacted by the reduced liquidity of these investments. See
“Note 3—Investment Securities” in the notes to the consolidated financial statements for further information
related to our investments.
Most of our sales are made directly to mass merchandisers and national retailers. Due to the increased
volume of sales to these channels, we have experienced an increased concentration of credit risk, and as a
result, may maintain individually significant receivable balances with such mass merchandisers and national
retailers. We perform ongoing credit evaluations of our customers, maintain an allowance for potential credit
losses, and most of our foreign receivables are covered by credit insurance. As of March 31, 2010 and 2009,
20% and 16%, respectively, of our gross accounts receivable outstanding was with one major customer. Our
largest single customer accounted for 17% of our gross sales in fiscal 2010, 14% of our gross sales in fiscal
2009 and 14% of our gross sales in fiscal 2008. Our second largest customer accounted for 15% of our
gross sales in fiscal 2010, 13% of our gross sales in fiscal 2009 and 12% of our gross sales in fiscal 2008.
Inventory. Inventory, which consists principally of finished products, is stated at the lower of cost (moving
weighted average) or market. We estimate the net realizable value of slow-moving inventory on a title by title
basis, and charge the excess of cost over net realizable value to cost of sales—product costs.
Property and Equipment. Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated
over the shorter of their useful lives or the remaining lease term.
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 obligation remains with the licensor. When a significant
performance obligation remains with the licensor, we record royalty payments as an asset (licenses) and as a
liability (accrued royalties) 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 product sales during the subsequent year and long-term assets and long-term
liabilities if such royalty payments relate to anticipated product sales after one year.
We evaluate the future recoverability of our capitalized licenses on a quarterly basis. The recoverability of
capitalized license costs is evaluated based on the expected performance of the specific products in which
the licensed trademark or copyright is to be used. As many of our licenses extend for multiple products over
multiple years, we also assess the recoverability of capitalized license costs based on certain qualitative
factors such as the success of other products and/or entertainment vehicles utilizing the intellectual property,
whether there are any future planned theatrical releases or television series based on the intellectual
property and the rights holder’s continued promotion and exploitation of the intellectual property. Prior to the
related product’s release, we expense, as part of cost of sales—license amortization and royalties,
capitalized license costs when we estimate such amounts are not recoverable.
Licenses are expensed to cost of sales—license amortization and royalties at the higher of (i) the contractual
royalty rate based on actual net product sales related to such license, or (ii) an effective rate based upon
total projected net sales 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 cost of sales—
license amortization and royalties. If actual net sales or revised forecasted net sales fall below the initial
forecasted net sales for a particular license, the charge to cost of sales—license amortization and royalties
expense may be larger than anticipated in any given quarter. At March 31, 2010, the net carrying value of
our licenses was $140.3 million and is reflected as “Licenses” and “Licenses, net of current portion” in the
consolidated financial statements. Additionally, as of March 31, 2010 we had commitments of $122.3 million
that are not reflected in our consolidated financial statements due to remaining performance obligations of
the licensor. If we were required to impair these licenses, due to changes in market conditions or product
acceptance, our results of operations could be materially adversely affected.