Activision 2008 Annual Report Download - page 61

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Capitalized costs for those products that are cancelled or abandoned are charged to product
development expense in the period of cancellation. Amounts related to software development
which are not capitalized are charged immediately to product development expense.
Commencing upon product release, capitalized software development costs are amortized
to “cost of sales—software royalties and amortization” based on the ratio of current revenues to
total projected revenues for the specific product, generally resulting in an amortization period of
six months or less.
Intellectual property license costs represent license fees paid to intellectual property
rights holders for use of their trademarks, copyrights, software, technology, music or other
intellectual property or proprietary rights in the development of our products. Depending upon the
agreement with the rights holder, we may obtain the rights to use acquired intellectual property in
multiple products over multiple years, or alternatively, for a single product. Prior to the related
product’s release, we expense, as part of “cost of sales—intellectual property licenses,” capitalized
intellectual property costs when we believe such amounts are not recoverable. Capitalized
intellectual property costs for those products that are cancelled or abandoned are charged to
product development expense in the period of cancellation.
Commencing upon the related product’s release, capitalized intellectual property license
costs are amortized to “cost of sales—intellectual property licenses” based on the ratio of current
revenues for the specific product to total projected revenues for all products in which the licensed
property will be utilized. As intellectual property license contracts may extend for multiple years,
the amortization of capitalized intellectual property license costs relating to such contracts may
extend beyond one year.
We evaluate the future recoverability of capitalized software development costs and
intellectual property licenses on a quarterly basis. For products that have been released in prior
periods, the primary evaluation criterion is actual title performance. For products that are
scheduled to be released in future periods, recoverability is evaluated based on the expected
performance of the specific products to which the costs relate or in which the licensed trademark
or copyright is to be used. Criteria used to evaluate expected product performance include:
historical performance of comparable products developed with comparable technology; orders for
the product prior to its release; and, for any sequel product, estimated performance based on the
performance of the product on which the sequel is based. Further, as many of our intellectual
property licenses extend for multiple products over multiple years, we also assess the
recoverability of capitalized intellectual property 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.
Significant management judgments and estimates are utilized in the assessment of the
recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the
assessment of expected product performance utilizes forecasted sales amounts and estimates of
additional costs to be incurred. If revised forecasted or actual product sales are less than the
original forecasted amounts utilized in the initial recoverability analysis, the net realizable value
may be lower than originally estimated in any given quarter, which could result in an impairment
charge. Additionally, as noted above, as many of our intellectual property licenses extend for