THQ 2005 Annual Report Download - page 85

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62
Depreciation and amortization expense associated with property and equipment amounted to $8.6 million,
$6.7 million, $1.7 million, and $5.9millionfor the fiscal years ended March 31, 2005 and 2004, Transition
2003, and the year ended December 31, 2002, respectively.
Licenses. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded
on our balance sheet as an asset (licenses) and as a liability (accrued royalties) at the contractual amount
upon execution of the contract when no significant performance remains with the licensor. When
significant performance remains with the licensor, we record royalty payments as an asset (licenses) when
actually paid rather than upon execution of the contract. Royalty payments for intellectual property
licenses are classified as current assets and current liabilities to the extent such royalty payments relate to
anticipated sales during the subsequent year and long-term assets and long-term liabilities if such royalty
payments relate to anticipated sales after one year.
Licenses are expensed to license amortization and royalties at the higher of (1) the contractual royalty rate
based on actual net product sales related to such license or (2) an effective rate based upon total projected
revenue related to such license. When, in management’s estimate, future cash flows will not be sufficient to
recover previously capitalized costs, we expense these capitalized costs to license amortization and
royalties. See—“Long-Lived Assets” below. If actual revenues or revised forecasted revenues fall below the
initial forecasted revenue for a particular license, the charge to license amortization and royalties expense
may be larger than anticipated in any given quarter. As of March 31, 2005, the net carrying value of our
licenses was $88 million.
Software Development. We utilize both internal development teams and independent software developers
to develop our software. We account for software development costs in accordance with SFAS No. 86,
“ Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed.” We capitalize
software development costs once technological feasibility is established and we determine that such costs
are recoverable against future revenues. For products where proven game engine technology exists, this
may occur early in the development cycle. We capitalize the milestone payments made to independent
software developers and the direct payroll and facilities costs for our internal development teams. We
evaluate technological feasibility on a product-by-product basis. Amounts related to software development
for which technological feasibility is not yet met are charged immediately to product development expense.
Capitalized software development is expensed to software development amortization at the higher of
(1) the contractual rate based on actual net product sales for such software or (2) an effective rate based
upon total projected revenue for such software. When, in management’s estimate, future cash flows will
not be sufficient to recover previously capitalized costs, we expense these items to software development
amortization. See—“Long-Lived Assets” below. If actual revenues, or revised forecasted revenues, fall
below the initial forecasted revenue, the charge to software development amortization may be larger than
anticipated in any given quarter. As of March 31, 2005, the net carrying value of our software development
was $65.3 million.
Goodwill and Other Intangible Assets. In accordance with the adoption of SFAS No. 142, “ Goodwill and
Other Intangible Assets,” on January 1, 2002, we ceased amortizing goodwill. According to our accounting
policy, we performed an annual review during the quarter ended June 30, 2004, and found no impairment.
We will perform a similar review in future quarters ended June 30, or more frequently if indicators of
potential impairment exist. Our impairment review process is based on a discounted future cashflow
approach that uses our estimates of revenue for the reporting units,driven by assumed success of our
products and product release schedules, and estimated costs as well as appropriate discount rates. These
estimates are consistent with the plans and estimates that we use to manage the underlying businesses. We
performed similar impairment tests during the quarter ended June 30, 2004 for indefinite-lived intangible
assets and found no impairment. All identifiable intangible assets with finite lives will continue to be