Activision 2009 Annual Report Download - page 37

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We account for software development costs in accordance with the FASB guidance for the costs of computer
software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”). Software development costs are capitalized
once technological feasibility of a product is established and such costs are determined to be recoverable. Technological
feasibility of a product encompasses both technical design documentation and game design documentation, or the completed
and tested product design and working model. Significant management judgments and estimates are utilized in the
assessment of when technological feasibility is established. For products where proven technology exists, this may occur
early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product’s
release, we expense, as part of “cost of sales—software royalties and amortization,” capitalized costs if and when we believe
such amounts are not recoverable. Capitalized costs for those products that are cancelled or expected to be 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 expected to
be 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 capitalized
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. Material differences may result in the amount
and timing of charges for any period if management makes different judgments or utilizes different estimates in evaluating
these qualitative factors.
Income Taxes. We record a tax provision for the anticipated tax consequences of the reported results of operations.
In accordance with FASB income tax guidance (“ASC Topic 740”), the provision for income taxes is computed using the
asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are