THQ 2006 Annual Report Download - page 66

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in Financial Statements,” which outlines the basic criteria that must be met to recognize revenue and
provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in
financial statements filed with the Securities and Exchange Commission (“SEC”).
Product Sales: We recognize revenue for packaged software when title and risk of loss transfers to the
customer, provided that no significant vendor support obligations remain outstanding and that collection
of the resulting receivable is deemed probable by management. Although we generally sell our products on
a no-return basis, in certain circumstances we may allow price protection, returns or other allowances on a
negotiated basis. We estimate such price protection, returns or other allowances based upon
management’s evaluation of our historical experience, retailer inventories, the nature of the titles and
other factors. Such estimates are deducted from gross sales. See “Note 3—Allowance for Price Protection,
Returns and Doubtful Accounts.” Software is sold under a limited 90-day warranty against defects in
material and workmanship. To date, we have not experienced material warranty claims.
Software Licenses: For those agreements that provide the customers the right to multiple copies in
exchange for guaranteed minimum royalty amounts, revenue is recognized at delivery of the product
master or the first copy. Per copy royalties on sales that exceed the guarantee are recognized as earned.
Revenue from the licensing of software for the fiscal years ended March 31, 2006, 2005 and 2004 was
$6.3 million, $8.1 million and $8.3 million, respectively.
Wireless Revenue:We recognize wireless revenues principally from the sale or subscription of our
applications to wireless subscribers under distribution agreements with wireless carriers in the period in
which the applications are purchased by the subscribers, assuming that: fees are fixed and determinable; we
have no significant obligations remaining and collection of the related receivable is reasonably assured. In
accordance with the distribution agreements, the wireless carriers are responsible for billing, collecting and
remitting our fees to us. The wireless carriers generally report the final sales data to us within10 to 45 days
following the end of each month. When final sales data is not available in a timely manner for reporting
purposes, we estimate our revenues based on available sales data and historical trends. We will record
differences between estimated revenues and actual revenues in the next reporting period once the actual
amounts are determined.
Also, in accordance with Emerging Issues Task Force (“EITF”) No. 99-19, “Reporting Revenue Gross as a
Principal Versus Net as an Agent,” we recognize as revenues the net amount the wireless carrier pays to us
upon the sale of our applications, net of any service or other fees earned and deducted by the wireless
carrier.
Advertising.Advertising and sales promotion costs are generally expensed as incurred, except for
television airtime and print media costs associated with media campaigns, which are deferred and charged
to expense in the period the airtime or advertising space is used for the first time. Advertising costs for the
fiscal years ended March 31, 2006, 2005 and 2004 were $61 million, $57 million and $45.3 million,
respectively.
Employee Stock-Based Compensation. Under SFAS No. 123 “Accounting for Stock-Based
Compensation,” compensation expense is recorded for the issuance of employee stock-based
compensation, including stock options and restricted stock, based on the fair value of the employee stock-
based compensation on the date of grant or measurement date. Alternatively, SFAS No. 123 allows
companies to continue to account for the issuance of employee stock-based compensation in accordance
with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”
Under APB Opinion No. 25, compensation expense is recorded for employee stock-based compensation
based on the intrinsic value of the employee stock-based compensation on the date of grant or
measurement date. Under the intrinsic value method, compensation expense is recorded on the date of
grant or measurement date only if the current market price of the underlying stock exceeds the employee
stock-based compensation exercise price. We account for our employee stock-based compensation under