THQ 2006 Annual Report Download - page 35

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revenues, or revised projected revenues, fall below the initial projections, the charge to software
development amortization may be larger than anticipated in any given quarter. As of March 31, 2006, the
net carrying value of our software development was $109.1 million.
The milestone payments made to our third-party developers during their development of our games are
typically considered non-refundable advances against the total compensation they can earn based upon the
sales performance of the products. Any additional compensation earned beyond the milestone payments
are expensed to software development amortization as earned.
Goodwill. We perform our annual review for goodwill impairment during the quarters ending June30, or
more frequently if indicators of potential impairment exist. We performed our goodwill impairment review
for the quarters ended June30, 2005 and June30, 2004, and in both reviews we found no impairment. Our
impairment review process is based on a discounted future cash flow approach that uses our estimates of
revenue for the reporting units, driven by anticipated 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 for indefinite-lived intangible assets and found no impairment. The success of our
products is affected by the ability to accurately predict which platforms and which products we develop will
be successful. Also, our revenues and earnings are dependent on our ability to meet our product release
schedules. Due to these and other factors described in “Item 1A Risk Factors” we may not realize the
future net cash flows necessary to recover our goodwill.
Based on these judgments and assumptions, we determine whether we need to take an impairment charge
to reduce the value of the goodwill and indefinite-lived intangible assets stated on our balance sheets to
reflect their estimated fair values. Judgments and assumptions about future values are complex and often
subjective. They can be affected by a variety of factors, including, but not limited to, significant negative
industry or economic trends, significant changes in the manner or use of the acquired assets or the strategy
of our overall business and significant underperformance relative to expected historical or projected future
operating results. Although we believe the judgments and assumptions we have made in the past have been
reasonable and appropriate, there is nonetheless a high degree of uncertainty and judgment involved.
We continue to encounter the risks and difficulties faced with launching or acquiring a new business. When
the business is a development studio, we look for ways to maximize the talent and intellectual property
within the studio. We make judgments and assumptions as to the commercial success and quantity of
games developed by a particular studio. Different judgments and assumptions could materially impact our
reported financial results. For example, if we do not develop games with the same commercial success or
the same number of games as we have estimated, we may need to take an impairment charge against
goodwill in the future. More conservative assumptions of the anticipated future benefits from these
businesses would result in lower fair values which could result in impairment charges, which would
decrease net income and result in lower asset values on our balance sheets. Conversely, less conservative
assumptions would result in higher fair values which could result in lower impairment charges and higher
net income.
Income taxes. As part of the process of preparing our consolidated financial statements, we are required
to estimate our income taxes in each of the jurisdictions in which we operate. This process involves:
(1) estimating our current tax exposure in each jurisdiction including the impact, if any, of changes or
interpretations to applicable tax laws and regulations, (2) estimating additional taxes resulting from tax
examinations and (3) making judgments regarding the recoverability of deferred tax assets. To the extent
recovery of deferred tax assets is not likely based on our estimates of future taxable income in each
jurisdiction, a valuation allowance is established.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for anticipated tax audit issues inthe U.S. and other tax jurisdictions