THQ 2007 Annual Report Download - page 36

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the initial forecasted revenues for a particular license, the charge to cost of sales—license amortization and
royalties expense may be larger than anticipated in any given quarter. As of March 31, 2007, the net
carrying value of ourlicenses was $91.1 million. If we were required to write off licenses, dueto changes in
market conditions or product acceptance,our resultsof operations couldbe materially adversely affected.
Software Development. We utilizebothinternal development teamsand third-party software developers
to develop our software.We account for softwaredevelopment costs in accordance with Statement of
Financial AccountingStandards (“SFAS”) No. 86, “Accountingfor theCosts of Computer Software to be
Sold, Leased,or Otherwise Marketed.” We capitalize software development costs once technological
feasibility is established andwe 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 third-party softwaredevelopers and the direct payroll and
overhead 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 as incurred to product development expense in our consolidated statements of operations.
On a quarterly basis, we compare our unamortizedsoftware development costs to net realizable value, on a
product-by-product basis. The amount by which any unamortized software development costsexceed their
net realizablevalue is charged to cost of sales—software amortization and royalties. The netrealizable
value is the estimatedfuturegross revenues from the product,reduced by the estimated future costsof
completing theproduct.
Commencing upon product release, capitalized software development costs areamortized to costof
sales—software amortization and royalties based on theratio of current revenues to total projected
revenues. If actual revenues, or revised projected revenues, fall belowthe initial projections, thecharge to
cost of sales—software amortization and royalties may be largerthan anticipated in any givenquarter. As
of March 31, 2007, the net carrying value of our software development was$164.3 million.
Themilestone payments made to our third-party developers during their development of our games are
typically considered non-refundable advances against the total compensation they canearn based upon the
salesperformanceof the products. Any additionalcompensation earned beyond the milestonepayments
are expensed to cost of sales—software amortization androyalties as earned.
Goodwill. When we adoptedSFASNo. 142, “Goodwill and Other Intangible Assets” (“FAS 142”)
effective January 1, 2002, we elected to perform theannual review of goodwill impairment required by
FAS 142 on June 30th of each calendar year whichat that time corresponded to thesecondquarter of our
fiscal year.In February 2003 we changed our fiscal year endfrom December 31st to March 31st. Since
changing ourfiscal year end to March 31st we continued to perform our annual review of goodwill
impairment on June 30th,which also changedto be theendof ourfirst fiscal quarter.In fiscal 2007,we
changed the date of ourannual review of goodwill for impairment to thefirst day of our fourth fiscal
quarter. Our first fiscal quarter is generally when we arerequired to adopt recently issued accounting
pronouncements in addition to managing our annualfinancialreporting requirements,which can strain
ourpersonnel resources in that quarter. We changed the quarter in which we performour annual review of
goodwill impairment to better utilize these resources. Additionally, the first day of our fourth fiscal
quarter’sproximity to ourfiscal year endprovidesus with more comprehensive data to be included in our
review. It was not intended to delay, accelerate or avoidany impairment charge. Accordingly, we believe
that this change is preferable. Goodwill impairmenttests performed as of January 1, 2007 andJune 30,
2006, 2005 and 2004 concluded that no impairment charges were requiredas of those dates. The change in
accounting principle related to theannual testing does notresult in adjustments to our financial statements
when appliedretrospectively. We will performthis annualreviewonthefirst dayof ourfourth fiscal
quarter in future years or more frequently if indicators of potential impairment exist.
Our impairmentreview process is based on adiscounted future cash flow approachthat uses our estimates
of revenuefor the reporting units, driven by anticipated success of ourproducts and product release