Blizzard 2013 Annual Report Download - page 46

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We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on
a quarterly basis. For products that have been released in prior periods, the primary evaluation criterion is actual title
performance. For products that are scheduled to be released in future periods, recoverability is evaluated based on the expected
performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used.
Criteria used to evaluate expected product performance include: historical performance of comparable products developed with
comparable technology; market performance of comparable titles; orders for the product prior to its release; general market
conditions; and, for any sequel product, estimated performance based on the performance of the product on which the sequel is
based. Further, as many of our capitalized 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.
Significant management judgments and estimates are utilized in assessing 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 the originally
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. Material differences may result in the amount and timing of
expenses for any period if management makes different judgments or utilizes different estimates in evaluating these qualitative
factors.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance
with ASC Topic 740, the provision for income taxes is computed using the asset and liability method, under which deferred tax
assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate
deferred tax assets each period for recoverability. For those assets that do not meet the threshold of “more likely than not” that
they will be realized in the future, a valuation allowance is recorded.
Management believes it is more likely than not that forecasted income, including income that may be generated as a
result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully
recover the remaining deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be
realizable in the future, an adjustment to the valuation allowance would be charged to tax expenses in the period such
determination is made. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in
the application of ASC Topic 740 and other complex tax laws. Resolution of these uncertainties in a manner inconsistent with
management’s expectations could have a material impact on our business and results of operations in an interim period in which
the uncertainties are ultimately resolved.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income
taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters
will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in
light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that
the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for
income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve
provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than
anticipated in foreign regions where taxes are levied at relatively lower statutory rates and/or higher than anticipated in the
United States where taxes are levied at relatively higher statutory rates; by changes in the valuation of our deferred tax assets and
liabilities; by expiration of, or lapses in, the R&D tax credit laws; by tax effects of nondeductible compensation; by tax costs
related to intercompany realignments; by differences between amounts included in our tax filings and the estimate of such
amounts included in our tax expenses; by changes in accounting principles; or by changes in tax laws and regulations including
possible U.S. changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses attributable to foreign
income, or the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement attributes
prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes
applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could