Blizzard 2007 Annual Report Download - page 69

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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
notified by the online retailer that the product has been downloaded. In addition, in order to
recognize revenue for both product sales and licensing transactions, persuasive evidence of an
arrangement must exist and collection of the related receivable must be probable. Revenue recogni-
tion also determines the timing of certain expenses, including “cost of sales—intellectual property
licenses” and “cost of sales—software royalties and amortization.”
Sales incentives or other consideration given by us to our customers are accounted for in accordance
with the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) Issue 01-9,
“Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s
Products).” In accordance with EITF Issue 01-9, sales incentives and other consideration that are
considered adjustments of the selling price of our products, such as rebates and product placement
fees, are reflected as reductions of revenue. Sales incentives and other consideration that represent
costs incurred by us for assets or services received, such as the appearance of our products in a
customer’s national circular ad, are reflected as sales and marketing expenses.
Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence
In determining the appropriate unit shipments to our customers, we benchmark our titles using
historical and industry data. We closely monitor and analyze the historical performance of our
various titles, the performance of products released by other publishers, and the anticipated timing
of other releases in order to assess future demands of current and upcoming titles. Initial volumes
shipped upon title launch and subsequent reorders are evaluated to ensure that quantities are
sufficient to meet the demands from the retail markets, but at the same time are controlled to
prevent excess inventory in the channel.
We may permit product returns from, or grant price protection to, our customers under certain
conditions. In general, price protection refers to the circumstances when we elect to decrease the
wholesale price of a product by a certain amount and, when granted and applicable, allows cus-
tomers a credit against amounts owed by such customers to us with respect to open and/or future
invoices. The conditions our customers must meet to be granted the right to return products
or price protection are, among other things, compliance with applicable payment terms, and
consistent delivery to us of inventory and sell-through reports. We may also consider other factors,
including the facilitation of slow-moving inventory and other market factors. Management must
make estimates of potential future product returns and price protection related to current period
product revenue. We estimate the amount of future returns and price protection for current period
product revenue utilizing historical experience and information regarding inventory levels and the
demand and acceptance of our products by the end consumer. The following factors are used
to estimate the amount of future returns and price protection for a particular title: historical per-
formance of titles in similar genres; historical performance of the hardware platform; historical
performance of the brand; console hardware life cycle; Activision sales force and retail customer
feedback; industry pricing; weeks of on-hand retail channel inventory; absolute quantity of on-hand
retail channel inventory; our warehouse on-hand inventory levels; the title’s recent sell-through
history (if available); marketing trade programs; and competing titles. The relative importance of
these factors varies among titles depending upon, among other items, genre, platform, seasonality,
and sales strategy. Significant management judgments and estimates must be made and used in
connection with establishing the allowance for returns and price protection in any accounting period.
Based upon historical experience we believe our estimates are reasonable. However, actual returns
and price protection could vary materially from our allowance estimates due to a number of reasons
including, among others, a lack of consumer acceptance of a title, the release in the same period of
Notes to Consolidated Financial Statements