Activision 2013 Annual Report Download - page 45

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programs; and performance of competing titles. The relative importance of these factors varies among titles depending upon,
among other items, genre, platform, seasonality, and sales strategy.
Based upon historical experience, we believe that our estimates are reasonable. However, actual returns and price
protection could vary materially from our allowance estimates due to a number of reasons including, among others, a lack of
consumer acceptance of a title, the release in the same period of a similarly themed title by a competitor, or technological
obsolescence due to the emergence of new hardware platforms. Material differences may result in the amount and timing of our
revenues for any period if factors or market conditions change or if management makes different judgments or utilizes different
estimates in determining the allowances for returns and price protection. For example, a 1% change in our December 31, 2013
allowance for sales returns, price protection and other allowances would have impacted net revenues by approximately
$4 million.
Similarly, management must make estimates as to the collectability of our accounts receivable. In estimating the
allowance for doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer
concentrations, customer creditworthiness, current economic trends, and changes in our customers’ payment terms and their
economic condition, as well as whether we can obtain sufficient credit insurance. Any significant changes in any of these criteria
would affect management’s estimates in establishing our allowance for doubtful accounts.
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 ASC Subtopic 985-20, the guidance for costs of
computer software to be sold, leased, or otherwise marketed. 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, if and when we believe
capitalized costs are not recoverable, we expense the amounts as part of “Cost of sales—software royalties and amortization.”
Capitalized costs for products that are cancelled or are 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 a product’s 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 a product’s release, if and when we
believe capitalized costs are not recoverable, we expense the amounts as part of “Cost of sales—intellectual property licenses.”
Capitalized intellectual property costs for products that are cancelled or are expected to be abandoned are charged to “Product
development expense” in the period of cancellation.
Commencing upon a 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 and can be used in multiple products to be released over a period beyond one year, the amortization of capitalized
intellectual property license costs relating to such contracts may extend beyond one year.