Activision 2010 Annual Report Download - page 51

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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.
Inventories
Inventories consist of materials (including manufacturing royalties paid to console manufacturers), labor and freight-
in and are stated at the lower of cost (weighted average method) or market value.
Long-Lived Assets
Property and Equipment. Property and equipment are recorded at cost and depreciated on a straight-line basis over
the shorter of the estimated useful lives or the lease term: buildings, 25 to 33 years; computer equipment, office furniture and
other equipment, 2 to 5 years; leasehold improvements, the shorter of estimated useful lives or the life of the lease. When
assets are retired or disposed of, the cost and accumulated depreciation thereon are removed and any resulting gains or losses
are included in the consolidated statements of operations.
Goodwill and Other Indefinite-Lived Assets. We account for goodwill using the provisions within ASC Topic 350.
Under ASC Topic 350, goodwill is considered to have an indefinite life, and is carried at cost. Acquired trade names are
assessed as indefinite lived assets as there are no foreseeable limits on the periods of time over which they are expected to
contribute cash flows. Goodwill and acquired trade names are not amortized, but are subject to an impairment test annually,
as well as in between annual tests, when events or circumstances indicate that the carrying value may not be recoverable. We
perform our annual impairment testing at December 31st.
Our annual goodwill impairment test is performed at the reporting unit level. We have determined our reporting
units based on the guidance within ASC Subtopic 350-20. As of December 31, 2010, the Company’s reporting units
consisted of Activision, Blizzard, and Distribution. We test goodwill for possible impairment by first determining the fair
value of the related reporting unit and comparing this value to the recorded net assets of the reporting unit, including
goodwill. In the event the recorded net assets of the reporting unit exceed the estimated fair values, we perform a second step
to measure the amount of the impairment, which is equal to the amount by which the recorded goodwill exceeds the implied
fair value of the goodwill after assessing the fair value of each of the assets and liabilities within the reporting unit.
Fair value is determined using a combination of discounted cash flow models and market comparable valuations of
peer companies. In determining the fair value of our reporting units, we assumed a discount rate between 11.0% and 13.5%.
The estimated fair values of each of our reporting units exceeded their carrying values by a range of approximately
$18 million to $6 billion or 24% to 422% as of December 31, 2010. As such, we have determined that no impairment has
occurred at December 31, 2010 based upon a set of assumptions regarding discounted future cash flows, which represent our
best estimate of future performance at this time.