Activision 2012 Annual Report Download - page 42

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We regularly review inventory quantities on-hand and in the retail channels. 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 and
dependent on market conditions. At the point of 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.
We account for software development costs in accordance with the Financial Accounting Standards Board (“FASB”) guidance for the
costs of computer software to be sold, leased, or otherwise marketed (“Accounting Standards Codification (“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 right to use the intellectual property in multiple products over a number of 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; market performance of comparable titles; orders for the product
prior to its release; general market conditions; 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 assessing 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 originally 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 expense for any period if management makes different judgments or utilizes
different estimates in evaluating these qualitative factors.