Activision 2009 Annual Report Download - page 36

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We recognize World of Warcraft boxed product, expansion packs and other value-added service revenues each with
the related subscription service revenue ratably over the estimated service periods beginning upon activation of the software
and delivery of the services. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs
are classified as product sales and revenues attributable to subscription and other value-added services are classified as
subscription, licensing and other revenues.
Revenue for software products with more than inconsequential separate service deliverables and World of Warcraft
products are recognized over the estimated service periods, which range from a minimum of five months to a maximum of
less than a year.
For our software products with features we consider to be incidental to the overall product offering and an
inconsequential deliverable, such as products which provide limited online features at no additional cost to the consumer, we
recognize the related revenue from them upon the transfer of title and risk of loss of the product to our customer.
Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence. We may permit product
returns from, or grant price protection to, our customers under certain conditions. In general, price protection refers to the
circumstances in which we elect to decrease the wholesale price of a product by a certain amount and, when granted and
applicable, allow customers a credit against amounts owed by such customers to us with respect to open and/or future
invoices. The conditions our customers must meet to be granted the right to return products or price protection include,
among other things, compliance with applicable trading and payment terms, and consistent return of inventory and delivery
of sell-through reports to us. We may also consider other factors, including the facilitation of slow-moving inventory and
other market factors. Management must make estimates of potential future product returns and price protection related to
current period product revenue. We estimate the amount of future returns and price protection for current period product
revenue utilizing historical experience and information regarding inventory levels and the demand and acceptance of our
products by the end consumer. The following factors are used to estimate the amount of future returns and price protection
for a particular title: historical performance of titles in similar genres; historical performance of the hardware platform;
historical performance of the franchise; console hardware life cycle; sales force and retail customer feedback; industry
pricing; weeks of on-hand retail channel inventory; absolute quantity of on-hand retail channel inventory; our warehouse on-
hand inventory levels; the title’s recent sell-through history (if available); marketing trade programs; and performance of
competing titles. The relative importance of these factors varies among titles depending upon, among other items, genre,
platform, seasonality, and sales strategy. Significant management judgments and estimates must be made and used in
connection with establishing the allowance for returns and price protection in any accounting period. Based upon historical
experience, we believe that our estimates are reasonable. However, actual returns and price protection could vary materially
from our allowance estimates due to a number of reasons including, among others, a lack of consumer acceptance of a title,
the release in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence
of new hardware platforms. Material differences in the amount and timing of our revenue for any period may result if factors
or market conditions change or if management makes different judgments or utilizes different estimates in determining the
allowances for returns and price protection. For example, a 1% change in our December 31, 2010 allowance for sales returns,
price protection and other allowances would impact net revenues by approximately $4 million.
Similarly, management must make estimates as to the collectability of our accounts receivable. In estimating the
allowance for doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer
concentrations, customer creditworthiness, current economic trends, and changes in our customers’ payment terms and their
economic condition, as well as whether we can obtain sufficient credit insurance. Any significant changes in any of these
criteria would affect management’s estimates in establishing our allowance for doubtful accounts.
We regularly review inventory quantities on-hand and in the retail channel. We write down inventory based on
excess or obsolete inventories determined primarily by future anticipated demand for our products. Inventory write-downs
are measured as the difference between the cost of the inventory and net realizable value, based upon assumptions about
future demand, which are inherently difficult to assess. At the point of a loss recognition, a new, lower cost basis for that
inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that
newly established basis.
Software Development Costs and Intellectual Property Licenses. Software development costs include payments
made to independent software developers under development agreements, as well as direct costs incurred for internally
developed products.