Activision 2015 Annual Report Download - page 45

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Under ASC Topic 605 and ASU 2009-13, when a revenue arrangement contains multiple elements, such as hardware and software
products, licenses and/or services, we allocate revenue to each element based on a selling price hierarchy. The selling price for a
deliverable is based on its vendor-specific-objective-evidence (“VSOE”) if it is available, third-party evidence (“TPE”) if VSOE is not
available, or best estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements where
more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the
non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the
arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the
arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the
guidance for recognizing software revenue.
As noted above, when neither VSOE nor TPE is available for a deliverable, we use BESP. We did not have significant revenue
arrangements that require BESP for the years ended December 31, 2015, 2014 and 2013. The inputs we use to determine the selling
price of our significant deliverables include the actual price charged by the Company for a deliverable that the Company sells
separately, which represents the VSOE, and the wholesale prices of the same or similar products, which represents TPE.
For product sales, which include the sale of physical products and digital full-game downloads, we consider the product or service to
have been provided to the customer upon the transfer of title and risk of loss to our customers, for physical products, or when the
product is available for download or is activated for gameplay, for digital full-game downloads. Revenues from product sales are
recognized after deducting the estimated allowance for returns and price protection.
For our software products with online functionality or that are a part of a hosted service arrangement, we evaluate whether that
functionality constitutes a more-than-inconsequential separate deliverable in addition to the software product. This evaluation is
performed for each software product or product add-on (including digital downloadable content), when it is released. Determining
whether the online functionality for a particular game constitutes a more-than-inconsequential deliverable is subjective and requires
management’s judgment. When we determine that the online functionality constitutes a more-than-inconsequential separate service
deliverable in addition to the product, which is principally because of the online functionality’s importance to gameplay, we consider
our performance obligation for this title to extend beyond the sale of the game. VSOE of fair value does not exist for the online
functionality of some products, as we do not separately charge for this component of every title. As a result, we initially defer all of
the software-related revenues from the sale of any such title (including digital downloadable content) and recognize the revenues
ratably over the estimated service period of the title. In addition, we initially defer the costs of sales for the title and recognize the
costs of sales as the related revenues are recognized. The costs of sales include manufacturing costs, software royalties and
amortization, and intellectual property licenses and excludes intangible asset amortization.
For our software products with online functionality that are considered to be incidental to the overall product offering and are
inconsequential deliverables, we recognize the related revenues when the revenue recognition criteria described above have been met.
For our World of Warcraft boxed products, expansion packs and value-added services, we recognize revenues in each case with the
related subscription service revenues, ratably over the estimated service period beginning upon activation of the software and delivery
of the related services. Revenues attributed to the sale of World of Warcraft boxed software and related expansion packs are classified
as “Product sales,” whereas revenues attributable to subscriptions and other value-added services are classified as “Subscription,
licensing, and other revenues.”
Certain of our games are offered to players on a free-to-play basis. Players can purchase virtual goods, or microtransactions, to
enhance their gameplay experience. We categorize our virtual goods as either consumable or durable. Consumable virtual goods
represent goods that can be consumed by a specific player action; accordingly, we recognize revenues from the sale of consumable
virtual goods as the goods are consumed. Durable virtual goods represent virtual goods that are accessible to the player over an
extended period of time. We recognize revenues from the sale of durable virtual goods ratably over the period of time the goods are
available to the player, generally the estimated service period of the game.
We determine the estimated service period for our games with consideration of various data points, including the weighted-average
number of days between players’ first and last date played online, the average total hours played, the average number of days in which
player activity stabilizes, and the weighted-average number of days between players’ first purchase date and last date played online.
We also consider known online trends and the service periods of our previously released games and disclosed service periods for our
competitors’ games that are similar in nature. Determining the estimated service period is subjective and requires management’s
judgment. Future usage patterns may differ from historical usage patterns and therefore the estimated service period may change in the
future. The estimated service periods for our current games is generally less than twelve months.
Allowances for Returns, Price Protection, Doubtful Accounts and Inventory Obsolescence
We closely monitor and analyze the historical performance of our various titles, the performance of products released by other
publishers, market conditions, and the anticipated timing of other releases to assess future demand of current and upcoming titles.
Initial volumes shipped upon title launch and subsequent reorders are evaluated with the goal of ensuring that quantities are sufficient
to meet the demand from the retail markets, but at the same time are controlled to prevent excess inventory in the channel. We
benchmark units to be shipped to our customers using historical and industry data.
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