Activision 2014 Annual Report Download - page 25

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Assessment of Impairment of Assets.
Management evaluates the recoverability of our identifiable intangible assets and
other long-lived assets in accordance with 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, other
than indefinite-lived intangible 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. We did not record an impairment charge to our definite-lived intangible assets
as of December 31, 2014, 2013 and 2012.
Financial Accounting Standards Board (“FASB”) literature related to the accounting for goodwill and other intangibles
within ASC Topic 350 provides companies an option to first perform a qualitative assessment to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying value before performing a two-step
approach to testing goodwill for impairment for each reporting unit. Our reporting units are determined by the components
of our operating segments that constitute a business for which both (1) discrete financial information is available and
(2) segment management regularly reviews the operating results of that component. ASC Topic 350 requires that the
impairment test be performed at least annually by applying a fair-value-based test. The qualitative assessment is optional.
The first step measures for impairment by applying fair-value-based tests at the reporting unit level. The second step (if
necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities
within each reporting unit.
To determine the fair values of the reporting units used in the first step, we use a discounted cash flow approach. Each step
requires us to make judgments and involves the use of significant estimates and assumptions. These estimates and
assumptions include long-term growth rates and operating margins used to calculate projected future cash flows,
risk-adjusted discount rates based on our weighted average cost of capital, and future economic and market conditions.
These estimates and assumptions have to be made for each reporting unit evaluated for impairment. Our estimates for
market growth, our market share and costs are based on historical data, various internal estimates and certain external
sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the
underlying business. If future forecasts are revised, they may indicate or require future impairment charges. We base our
fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual
future results may differ from those estimates.
The fair value of our reporting units is determined using an income approach based on discounted cash flow models. In
determining the fair value of our reporting units, we assumed a discount rate of approximately 10.0%. The estimated fair
value of both the Activision and Blizzard reporting units exceeded their carrying values by approximately $4 billion, or at
least 25%, as of December 31, 2014. However, changes in our assumptions underlying our estimates of fair value, which
will be a function of our future financial performance, and changes in economic conditions could result in future
impairment charges.
We test acquired trade names for possible impairment by using a discounted cash flow model to estimate fair value. We
have determined that no impairment has occurred at December 31, 2014 and 2013 based upon a set of assumptions
regarding discounted future cash flows, which represent our best estimate of future performance at this time. In determining
the fair value of our trade names, we assumed a discount rate of 10.0%, and royalty saving rates of approximately 1.5%—
2.0%. A one percentage point increase in the discount rate would not yield an impairment charge to our trade names.
Changes in our assumptions underlying our estimates of fair value, which will be a function of our future financial
performance and changes in economic conditions, could result in future impairment charges.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation, and
ASC Subtopic 505-50, Equity-Based Payments to Non-Employees. Stock-based compensation expense is recognized during
the requisite service periods (that is, the period for which the employee is being compensated) and is based on the value of
stock-based payment awards after a reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We estimate the value of stock-based payment awards on the measurement date using a binomial-lattice model. Our
determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by
our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected
employee stock option exercise behaviors.
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We generally determine the fair value of restricted stock rights (including restricted stock units, restricted stock awards and
performance shares) based on the closing market price of the Company’s common stock on the date of grant. Certain
restricted stock rights granted to our employees and senior management vest based on the achievement of pre-established
performance or market conditions. We estimate the fair value of performance-based restricted stock rights at the closing
market price of the Company’s common stock on the date of grant. Each quarter, we update our assessment of the
probability that the specified performance criteria will be achieved. We amortize the fair values of performance-based
restricted stock rights over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche
of the award. We estimate the fair value of market-based restricted stock rights at the date of grant using a Monte Carlo
valuation methodology and amortize those fair values over the requisite service period adjusted for estimated forfeitures for
each separately vesting tranche of the award. The Monte Carlo methodology that we use to estimate the fair value of
market-based restricted stock rights at the date of grant incorporates into the valuation the possibility that the market
condition may not be satisfied. Provided that the requisite service is rendered, the total fair value of the market-based
restricted stock rights at the date of grant must be recognized as compensation expense even if the market condition is not
achieved. However, the number of shares that ultimately vest can vary significantly with the performance of the specified
market criteria.
For a detailed discussion of the application of these and other accounting policies, see Note 2 of the Notes to Consolidated
Financial Statements included in this Annual Report.
Recently Issued Accounting Pronouncements
Revenue recognition
In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all
current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition
standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company
should recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the
consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be
effective beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a
cumulative-effect adjustment as of the date of adoption. We are evaluating the adoption method as well as the impact of this
new accounting guidance on our financial statements.
Stock-based compensation
In June 2014, the FASB issued new guidance related to stock compensation. The new standard requires that a performance
target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance
condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This
update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the
performance target will be achieved and should represent the compensation cost attributable to the periods for which the
requisite service has already been rendered. The new standard is effective for fiscal years beginning after December 15,
2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest
annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. We are evaluating the
impact, if any, of adopting this new accounting guidance on our financial statements.