Activision 2010 Annual Report Download - page 49

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On November 14, 2008, we accepted an offer from UBS AG (“UBS”), providing us with rights related to our ARS
held through UBS (the “Rights”). The Rights permitted us to require UBS to purchase our ARS held through UBS at par
value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or
interest, at any time during the period between June 30, 2010 and July 2, 2012. Conversely, UBS had the right, in its
discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at par value upon any
sale or disposition.
At December 31, 2009, we held ARS through UBS, which were classified as trading securities. Investments
designated as trading securities are reported at fair value, with unrealized gains and losses recognized in earnings.
The Rights represented a firm agreement in accordance with the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 815, regarding derivatives and hedging (“ASC Topic 815”), which
defines a firm agreement as an agreement binding on both parties and usually legally enforceable, with the following
characteristics: (a) the agreement specifies all significant terms, including the quantity to be exchanged, the fixed price, and
the timing of the transaction, and (b) the agreement includes a disincentive for nonperformance that is sufficiently large to
make performance probable. The enforceability of the Rights was recognized as a free standing asset separate from the ARS.
The Rights did not meet the definition of a derivative instrument under ASC Topic 815, because the underlying securities
were not readily convertible to cash. Therefore, we had elected to measure the Rights at fair value under ASC Subtopic 825-
10 regarding the fair value option for financial assets and financial liabilities, which permits an entity to measure certain
items at fair value, to mitigate volatility in reported earnings from the changes in the fair value of the ARS. As a result,
unrealized gains and losses were included in earnings during 2009 and 2008. At December 31, 2009, we had classified our
investment in ARS held through UBS as a current asset and we exercised the Rights on June 30, 2010.
Restricted Cash—Compensating Balances
Most of our restricted cash relates to a standby letter of credit required by one of our inventory manufacturers to
qualify for payment terms on our inventory purchases. Under the terms of this arrangement, we are required to maintain with
the issuing bank a compensating balance, restricted as to use, of not less than the sum of the available amount of the letter of
credit plus the aggregate amount of any drawings under the letter of credit that have been honored thereunder, but not
reimbursed. Restricted cash is included in short-term investments on the consolidated balance sheets.
Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses is a
reasonable approximation of fair value due to their short-term nature. Our U.S. treasuries and government agency securities
and mortgage-backed securities are carried at fair value, with fair values estimated based on quoted market prices or
estimated based on quoted market prices of financial instruments with similar characteristics. Both short-term and long-term
ARS are carried at fair value, with fair values estimated using an income-approach model (specifically, a discounted cash-
flow analysis). We carry derivative instruments, primarily foreign exchange contracts, in the balance sheet as other assets or
liabilities at their fair value. The fair value of foreign currency contracts is estimated based on the prevailing exchange rates
of the various hedged currencies as of the end of the period.
Activision Blizzard transacts business in various foreign currencies and has significant international sales and
expenses denominated in foreign currencies, subjecting Activision Blizzard to foreign currency risk. Activision Blizzard
utilizes foreign exchange forward contracts and swaps to mitigate foreign currency exchange rate risk associated with foreign
currency denominated assets and liabilities. The foreign exchange forward contracts generally have contractual terms of less
than a year. Activision Blizzard does not use foreign exchange forward contracts for speculative or trading purposes. None of
Activision Blizzard’s foreign exchange forward contracts are designated as hedging instruments under ASC Topic 815.
Accordingly, gains or losses resulting from changes in the fair values of the foreign exchange contracts are reported as
general and administrative expenses or investment and other income, net in the consolidated statements of operations
depending on the nature of derivatives.
Other-Than-Temporary Impairments
On April 1, 2009, we adopted prospectively a new accounting standard addressing the evaluation of fixed maturity
securities for other-than-temporary impairments. These requirements have altered our policies and procedures for
determining impairment charges recognized through earnings. The new standard requires a company to recognize a credit
component (a credit impairment) of an other-than-temporary impairment of a fixed maturity security in earnings and the non-