Activision 2014 Annual Report Download - page 32

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Our cash and cash equivalents are invested primarily in money market funds consisting of short-term, high-quality debt
instruments issued by governments and governmental organizations, financial institutions and industrial companies.
Our customer base includes retailers and distributors, including mass-market retailers, consumer electronics stores, discount
warehouses, and game specialty stores in the U.S. and other countries worldwide. We perform ongoing credit evaluations of
our customers and maintain allowances for potential credit losses. We generally do not require collateral or other security
from our customers. We did not have any single customer that accounted for 10% or more of net revenues for the years
ended December 31, 2014 and 2013. We had one customer for the Activision and Blizzard segments, GameStop, that
accounted for approximately 10% of net revenues for the year ended December 31, 2012. We had one customer, Wal-Mart,
that accounted for 11% and 24% of consolidated gross receivables at December 31, 2014 and 2013, respectively.
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. 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. Software
development costs related to hosted service revenue arrangements are also capitalized after the preliminary project phase is
complete and it is probable that the project will be completed and the software will be used to perform the function
intended. 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, or over the estimated useful life, generally
approximately one to two years.
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.
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
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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 expenses 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 net realizable value. Inventories are relieved on a
weighted-average cost method.
Long-Lived Assets
Property and Equipment. Property and equipment are recorded at cost and depreciated on a straight-line basis over the
estimated useful life (i.e., 25 to 33 years for buildings, and 2 to 5 years for computer equipment, office furniture and other
equipment) of the asset. 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. Leasehold improvements are
amortized using the straight-line method over the estimated life of the asset, not to exceed the length of the lease. Repair
and maintenance costs are expensed as incurred.
Goodwill and Other Indefinite-Lived Assets. We account for goodwill in accordance with 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 annual impairment test, as well as
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, which provides that reporting units are generally operating segments or one
reporting level below the operating segments. As of December 31, 2014 and 2013, our reporting units are the same as our
operating segments: 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. The fair value of our reporting units is determined using an income approach based on discounted cash flow
models. In the event the recorded net assets of the reporting unit exceed the estimated fair value of such assets, 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. We have determined that no impairment has occurred at December 31, 2014, 2013 and 2012 based upon a
set of assumptions regarding discounted future cash flows, which represent our best estimate of future performance at this
time.
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, 2013 and 2012 based upon a set of assumptions
regarding discounted future cash flows, which represent our best estimate of future performance at this time.
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.
Amortizable Intangible Assets. Intangible assets subject to amortization are carried at cost less accumulated amortization,
and amortized over the estimated useful life in proportion to the economic benefits received.
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. If we determine that the
carrying value may not be recoverable, we estimate the undiscounted cash flows to be generated from the use and ultimate
disposition of these assets to determine whether an impairment exists. 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