THQ 2007 Annual Report Download - page 37

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29
schedules, and estimated costs as well as appropriatediscount rates. These estimatesare consistent with
theplans and estimates that we use to manage the underlying businesses. The success of ourproducts is
affected by the ability to accurately predict which platforms and which products we develop willbe
successful. Also,ourrevenuesand earnings are dependent on ourability to meet our product release
schedules. Dueto these and other factors described in “Item 1A Risk Factors” we may not realize the
future net cash flowsnecessary to recoverour goodwill.
Based on these judgments and assumptions, we determinewhether we need to take an impairment charge
to reduce the value of thegoodwill and indefinite-lived intangible assets stated on our balance sheets to
reflect their estimated fair values. Judgments and assumptions about future values are complexand 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 useof theacquired assets or the strategy
of our overall business and significant underperformance relative to expected historical or projectedfuture
operating results. Although we believe the judgments and assumptions we have made in thepast have been
reasonable and appropriate, there is nonetheless ahigh 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 adevelopment studio, we look for waysto maximize thetalent and intellectual property
within thestudio. We make judgments and assumptions as to the commercial success and quantity of
gamesdeveloped by aparticular studio.Differentjudgments andassumptions couldmaterially impact our
reported financial results. For example, if we do notdevelop games with the samecommercial success or
thesamenumber 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 valueswhich 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.
Stock-based compensation. We adopted SFAS No. 123(R) “Share-Based Payment”(“FAS 123R”) in our
first quarteroffiscal 2007 andaccordingly, we now record stock-based compensation expense for allof our
stock-based awards.The adoption of this accounting pronouncement had amaterial impact on our
consolidated statement of operations andour cash flows from operating and financing activities for fiscal
2007.See“Note14-Stock-based Compensation” in the notes to the consolidated financial statements.
Under FAS 123R, we estimate thefair value of stock options granted using the Black-Scholes option
pricingmodel. The fair value for awards that areexpected to vest is then amortized on astraight-linebasis
overtherequisite service period of the award, which is generally theoption vesting term. The amount of
expenserecognized represents theexpense associated with thestock options we expect to ultimately vest
based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any
adjustments needed to recognize thefairvalue of options that actually vest or areforfeited arerecorded.
TheBlack-Scholes option pricing model, used to estimate thefair value of an award, requires the input of
subjective assumptions,including the expectedvolatility of our common stock and an option’s expected
life. As aresult, thefinancial statements include amounts that are based upon ourbest estimates and
judgments relating to the expenses recognized for stock-based compensation. We adopted FAS 123R
underthemodified prospective transition methodwherein no priorperiod financial statementinformation
was affected. Allprior period financial statements include stock-based compensation accounted for under
Accounting Principles BoardOpinion (“APB”) No.25, “Accounting forStockIssued to Employees”
(“APB 25”) and thedisclosure only provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended (“FAS 123”). The financial statements for fiscal 2007, includestock-based
compensation accounted for under FAS 123R.There were no material differences in valuation
methodologies or assumptions compared to those that were used in estimatingthefair valueof stock
options under the disclosure only provisions of FAS 123.