Blizzard 2003 Annual Report Download - page 33

page 32
Notes to Consolidated Financial Statements
Financial Instruments. The estimated fair values of financial instruments have been determined using
available market information and valuation methodologies described below. However, considerable judg-
ment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates
presented herein may not be indicative of the amounts that we could realize in a current market exchange.
The use of different market assumptions or valuation methodologies may have a material effect on the
estimated fair value amounts.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value due to their short-term nature. Short-term investments are carried at fair
value with fair values being estimated based on quoted market prices.
We account for derivative instruments in accordance with Statement of Financial Accounting Standard
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 138,
“Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133.”
SFAS No. 133 and 138 require that all derivatives, including foreign exchange contracts, be recognized in
the balance sheet at their fair value.
We utilize forward contracts in order to reduce financial market risks. These instruments are used to
hedge foreign currency exposures of underlying assets, liabilities, or certain forecasted foreign currency
denominated transactions. Our accounting policies for these instruments are based on whether they
meet the criteria for designation as hedging transactions. Changes in fair value of derivatives that are des-
ignated as cash flow hedges, are highly effective, and qualify as hedging instruments, are recorded in
other comprehensive income until the underlying hedged item is recognized in earnings. Any ineffective
portion of a derivative change in fair value is immediately recognized in earnings. Changes in fair value of
derivatives that do not qualify as hedging instruments are recorded in earnings. The fair value of foreign
currency contracts is estimated based on the spot rate of the various hedged currencies as of the end of
the period. As of March 31, 2003 and 2002, we had no outstanding foreign exchange forward contracts.
Equity Investments. From time to time, we may make a capital investment and hold a minority interest in
a third-party developer in connection with entertainment software products to be developed by such
developer for us. We account for those capital investments in which we have a 20% or greater ownership
interest or over which we have the ability to exercise significant influence using the equity method. For
those investments in which we hold less than a 20% ownership interest or over which we do not have the
ability to exercise significant influence, we account for our investment using the cost method.
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 SFAS No. 86, “Accounting for the 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. 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 when we believe such
amounts are not recoverable. Capitalized costs for those products that are cancelled or abandoned are
charged to product development expense. Amounts related to software development which are not cap-
italized are charged immediately to product development expense. We evaluate the future recoverability
of capitalized amounts on a quarterly basis. The recoverability of capitalized software development costs
is evaluated based on the expected performance of the specific products for which the costs relate. The
following criteria are used to evaluate expected product performance: historical performance of compa-
rable products using comparable technology; orders for the product prior to its release; and estimated
performance of a sequel product based on the performance of the product on which the sequel is based.