Blizzard 2007 Annual Report Download - page 21

23
A C T I V I S I O N , I N C . • • 2 0 0 7 A N N U A L R E P O R T
cancellation. Amounts related to software development which are not capitalized 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.
Criteria used to evaluate expected product performance include: historical performance of com-
parable 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 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 revenues, 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.
Significant management judgments and estimates are utilized in the assessment of when tech-
nological feasibility is established, as well as in the ongoing assessment of the recoverability of
capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected
product performance utilizes forecasted sales amounts and estimates of additional costs to be
incurred. If revised forecasted or actual product sales are less than and/or revised forecasted or
actual costs are greater than the original 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.
Intellectual Property Licenses. Intellectual property license costs represent license fees paid to intellec-
tual property rights holders for use of their trademarks, copyrights, software, technology, 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 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 performance 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 in the period of cancellation.
Criteria used to evaluate expected product performance include: historical performance of com-
parable 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.