Blizzard 2003 Annual Report Download - page 34

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Commencing upon product 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 rev-
enues, generally resulting in an amortization period of six months or less. For products that have been
released in prior periods, we evaluate the future recoverability of capitalized amounts on a quarterly basis.
The primary evaluation criterion is actual title performance.
Intellectual property license costs represent license fees paid to intellectual property rights holders for
use of their trademarks or copyrights in the development of our products. Depending upon the agree-
ment with the rights holder, we may obtain the rights to use acquired intellectual property in multiple
products over multiple years, or alternatively, for a single product.
We evaluate the future recoverability of capitalized intellectual property licenses on a quarterly basis. The
recoverability of capitalized intellectual property license costs is evaluated based on the expected per-
formance of the specific products in which the licensed trademark or copyright is to be used. As many of
our 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. Prior to the related
product’s release, we expense, as part of cost of sales—intellectual property licenses, capitalized intellectual
property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs
for those products that are cancelled or abandoned are charged to product development expense. 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.
Commencing upon the related product’s release, capitalized intellectual property license costs are amor-
tized 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 trademark or copyright will be
utilized. As intellectual property license contracts may extend for multiple years, the amortization of capi-
talized intellectual property license costs relating to such contracts may extend beyond one year. For
intellectual property included in products that have been released, we evaluate the future recoverability
of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.
As of March 31, 2003, capitalized software development costs included $26.0 million of internally devel-
oped software costs and $36.1 million of payments made to third-party software developers. As of March
31, 2002, capitalized software development costs included $16.0 million of internally developed software
costs and $23.5 million of payments made to third-party software developers. Capitalized intellectual
property licenses were $45.8 million and $17.2 million as of March 31, 2003 and 2002, respectively.
Amortization and write-offs of capitalized software development costs and intellectual property licenses,
combined, was $100.4 million, $62.5 million and $68.9 million for the year ended March 31, 2003, 2002 and
2001, respectively. For the year ended March 31, 2003, amortization and write-offs of capitalized software
development costs and intellectual property licenses included approximately $15.0 million recorded in
the fourth quarter as the result of the assessment of the recoverability of capitalized development costs
relating to certain projects and certain of our investments in long-term licensing agreements.
Inventories. Inventories are valued at the lower of cost (first-in, first-out) or market.
Property and Equipment. Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the shorter of the estimated useful lives or the lease
term: buildings, 25 to 33 years; computer equipment, office furniture and other equipment, 2 to 5 years;
leasehold improvements, through the life of the lease. When assets are retired or disposed of, the cost
and accumulated depreciation thereon are removed and any resultant gains or losses are recognized in
current operations.
Activision 2003