THQ 2006 Annual Report Download - page 33

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franchise games and we’ve already built a substantial line-up of games to take advantage of the
accelerating market growth which is expected to begin in calendar 2007.
International growth. In fiscal 2006, approximately $31 million of our overall net sales increase of
$50million was attributable to international growth. The international installed base of video game
platforms continues to increase and we are focused on expanding our international presence by identifying
territories wherein we see opportunity and establishing a direct sales presence to seize such opportunities.
In addition to our sales force presence, we are focused on releasing and aggressively marketing titles with
international appeal.
Critical Accounting Estimates
The Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses
our consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. The
estimates discussed below are considered by management to be critical because they are both important to
the portrayal of our financial condition and results of operations and because their application places the
most significant demands on management’s judgment,with financial reporting results relying on estimates
about the effect of matters that are inherently uncertain. Specific risks for these critical accounting
estimates are described in the following paragraphs. For all of these estimates, management cautions that
actual results may differ materially from these estimates under different assumptions or conditions.
Allowances for price protection, returns and doubtful accounts. We derive revenue from sales of packaged
software for video game systems and personal computers and sales of content and services for wireless
devices. Product revenue is recognized net of allowances for price protection and returns and various
customer discounts. We typically only allow returns for our personal computer products; however, we may
decide to provide price protection or allow returns for our video game systems or personal computer
products after we analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-
through in the retail channel, and (3) our remaining inventory on hand. We maintain a policy of giving
credits for price protection and returns, but do not give cash refunds.
We establish sales allowances based on estimates of future price protection and returns with respect to
current period product revenue. We analyze historical price protection granted, historical returns, current
sell-through of retailer and distributor inventory of our products, current trends in the video game market
and the overall economy, changes in customer demand and acceptance of our products, and other related
factors when evaluating the adequacy of the price protection and returns allowance. In addition,
management monitors the volume of our sales to retailers and distributors and their inventories, because
slow-moving inventory in the distribution channel can result in the requirement for price protection or
returns in subsequent periods. In the past, actual price protection and returns have not generally exceeded
our reserves. However, actual price protection and returns in any future period are uncertain. While
management believes it can make reliable estimates for these matters, if we changed our assumptions and
estimates, our price protection and returns reserves would change, which would impact the net revenue we
report. In addition, if actual price protection and returns were significantly greater than the reserves we
have established, the actual results of our reported net sales would decrease. Conversely, if actual price
protection and returns were significantly less than our reserves, our reported net sales would increase.
Similarly, management must use significant judgmentand make estimates in connection with establishing
allowances for doubtful accounts in any accounting period. Management analyzes customer
concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of