Blizzard 2015 Annual Report Download - page 47

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Depending upon the agreement with the rights holder, we may obtain the right to use the intellectual property in multiple products
over a number of years, or alternatively, for a single product. Prior to a product’s release, if and when we believe capitalized costs are
not recoverable, we expense the amounts as part of “Cost of sales—intellectual property licenses.” Capitalized intellectual property
costs for products that are cancelled or are expected to be abandoned are charged to “Product development expense” in the period of
cancellation.
Commencing upon a product’s release, capitalized intellectual property license costs are amortized 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 property will be utilized. As intellectual property license contracts may extend for multiple years and can be used in
multiple products to be released over a period beyond one year, the amortization of capitalized intellectual property license costs
relating to such contracts may extend beyond one year.
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;
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