THQ 2007 Annual Report Download - page 35

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and(3) ourremaining inventoryon hand. We maintainapolicy of giving credits forprice protectionand
returns, but do notgive cash refunds. Included in ouraccounts receivable allowances is our allowance for
co-operativeadvertising thatwe engage in with our retail channel partners. Our co-operative advertising
allowance is based upon specific contractual commitments and does not involveestimates made by
management.
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-throughof retailer and distributor inventory of our products, current trends in the video game market
and the overall economy, changesin customer demand andacceptanceof our products, and other related
factors when evaluating the adequacy of the price protection andreturns allowance. In addition,
management monitors the volumeofoursales to retailers and distributors and their inventories, because
slow-moving inventory in the distribution channel can result in therequirement for price protection or
returns in subsequent periods. In the past, actual price protection and returns have notgenerally exceeded
our reserves. However, actualprice protection andreturns in any future period areuncertain. While
management believes it canmake reliable estimatesforthesematters, if we changed ourassumptions and
estimates, our priceprotectionand returnsreserves would change,which would impact thenet revenuewe
report. In addition, if actual price protection andreturns were significantly greaterthan the reserves we
have established, the actual results of our reported net sales would decrease. Conversely, if actual price
protection andreturns were significantly less than our reserves, ourreportednetsales wouldincrease.
Similarly, management must use significant judgmentand make estimatesinconnection with establishing
allowances for doubtful accountsin any accounting period. Management analyzes customer
concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of
the allowance for doubtfulaccounts. Material differences may result in the amount and timing of our bad
debt expensefor any period if management made different judgments or utilized different estimates. If our
customersexperience financial difficultiesand arenot able to meet their ongoing financial obligations to
us, our results of operations may be adversely impacted.
Licenses. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded
on ourbalance sheet as an asset(licenses) and as a liability (accruedroyalties) at the contractual amount
upon execution of the contract if no significant performanceobligation remains with the licensor. When a
significant performance obligation remains with the licensor, we record royalty payments as an asset
(licenses) when payable 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 anticipatedsales during the subsequent year and long-term assets and long-term liabilities if such
royalty payments relate to anticipated sales after one year.
We evaluate the future recoverability of ourcapitalized licenses on a quarterly basis.The recoverability of
capitalized licensecosts is evaluated based on the expected performanceof the specific products in which
thelicensed trademarkor copyright is to be used.As many of ourlicenses extend formultiple products
over multiple years, we also assess the recoverability of capitalizedlicense costs basedon certain
qualitative factors such as the success of otherproducts and/or entertainment vehicles utilizing the
intellectual property, whether there are any future planned theatrical releases or television series based on
theintellectual property and the rights holder’s continued promotion andexploitation of theintellectual
property.Prior to the related product’srelease, we expense, as part of cost of sales—licenseamortization
and royalties, capitalizedlicense costs when we believe such amounts are not recoverable.
Licenses areexpensed to cost of sales—licenseamortization and royalties at thehigher of (1) the
contractual royalty rate based on actual net product sales related to such licenseor (2) an effective rate
based upon total projected revenuerelatedto such license. When, in management’s estimate, futurecash
flows will not be sufficient to recover previously capitalized costs, we expense these capitalizedcosts to cost
of sales—license amortization and royalties. If actual revenues or revised forecastedrevenues fall below