Activision 2009 Annual Report Download - page 38

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expected to be recovered or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is
believed more likely than not to be realized.
Management believes it is more likely than not that forecasted income, including income that may be generated as a
result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully
recover the remaining deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be
realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such
determination is made. The calculation of tax liabilities involves significant judgment in estimating the impact of
uncertainties in the application of ASC Topic 740 and other complex tax laws. Resolution of these uncertainties in a manner
inconsistent with management’s expectations could have a material impact on our financial condition and operating results.
Fair Value Estimates
The preparation of financial statements in conformity with U.S. GAAP often requires us to determine the fair value
of a particular item to fairly present our Consolidated Financial Statements. Without an independent market or another
representative transaction, determining the fair value of a particular item requires us to make several assumptions that are
inherently difficult to predict and can have a material impact on the conclusion of the appropriate accounting.
There are various valuation techniques used to estimate fair value. These include (1) the market approach where
market transactions for identical or comparable assets or liabilities are used to determine the fair value, (2) the income
approach, which uses valuation techniques to convert future amounts (for example, future cash flows or future earnings) to a
single present amount, and (3) the cost approach, which is based on the amount that would be required to replace an asset.
For many of our fair value estimates, including our estimates of the fair value of acquired intangible assets, we use the
income approach. Using the income approach requires the use of financial models, which require us to make various
estimates including, but not limited to (1) the potential future cash flows for the asset, liability or equity instrument being
measured, (2) the timing of receipt or payment of those future cash flows, (3) the time value of money associated with the
delayed receipt or payment of such cash flows, and (4) the inherent risk associated with the cash flows (risk premium).
Making these cash flow estimates is inherently difficult and subjective, and, if any of the estimates used to determine the fair
value using the income approach turns out to be inaccurate, our financial results may be negatively impacted. Furthermore,
relatively small changes in many of these estimates can have a significant impact on the estimated fair value resulting from
the financial models or the related accounting conclusion reached. For example, a relatively small change in the estimated
fair value of an asset may change a conclusion as to whether an asset is impaired. While we are required to make certain fair
value assessments associated with the accounting for several types of transactions, the following areas are the most sensitive
to the assessments:
Business Combinations. We must estimate the fair value of assets acquired and liabilities assumed in a business
combination. Our assessment of the estimated fair value of each of these can have a material effect on our reported results as
intangible assets are amortized over various lives. Furthermore, a change in the estimated fair value of an asset or liability
often has a direct impact on the amount to recognize as goodwill, which is an asset that is not amortized. Often determining
the fair value of these assets and liabilities assumed requires an assessment of expected use of the asset, the expected cost to
extinguish the liability or our expectations related to the timing and the successful completion of development of an acquired
in-process technology. Such estimates are inherently difficult and subjective and can have a material impact on our financial
statements.
Assessment of Impairment of Assets. Management evaluates the recoverability of our identifiable intangible assets
and other long-lived assets in accordance with FASB literature related to accounting for the impairment or disposal of long-
lived assets within ASC Subtopic 360-10, which generally requires the assessment of these assets for recoverability when
events or circumstances indicate a potential impairment exists. We considered certain events and circumstances in
determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable
including, but not limited to: significant changes in performance relative to expected operating results; significant changes in
the use of the assets; significant negative industry or economic trends; a significant decline in our stock price for a sustained
period of time; and changes in our business strategy. In determining whether an impairment exists, we estimate the
undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If an impairment is indicated
based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the assets.