THQ 2007 Annual Report Download - page 67

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thelicensed trademarkor copyright is to be used.As many of ourlicenses extend formultiple products
over multipleyears,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,weexpense, 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 capitalized costs to cost
of sales—license amortization and royalties. If actual revenues or revised forecastedrevenues fall below
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 software development costs in accordancewithSFAS No. 86,
“Accountingforthe Costsof ComputerSoftwareto be Sold, Leased, or Otherwise Marketed.”We
capitalizesoftwaredevelopmentcosts once technological feasibility is established andwe determine that
such costs are recoverableagainst future revenues. For products where proven game engine technology
exists, this mayoccur earlyin the development cycle. We capitalize themilestone payments made to third-
party software developers and thedirect payroll and overhead costsfor our internal development teams.
We evaluatetechnological feasibilityonaproduct-by-productbasis. Amountsrelated to software
developmentfor which technological feasibility is notyetmet arechargedasincurred 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
netrealizablevalue is chargedtocostofsales—software amortizationand royalties. The net realizable
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 and Other Intangible Assets. When we adopted SFAS No. 142, “Goodwill and Other Intangible
Assets” (“FAS 142”) effective January 1, 2002, we elected to perform theannualreview of goodwill
impairment required by FAS 142 on June 30th of each calendar year which at that time correspondedtothe
second quarter of our fiscal year. In February 2003we changedourfiscal year end from December31st to
March 31st.Since changing ourfiscal year endto March 31st we continued to perform our annual review of
goodwill impairment on June 30th, which also changed to be theend of our first fiscal quarter. In fiscal
2007,we changed the date of our annual review of goodwill for impairment to the first day of our fourth