THQ 2008 Annual Report Download - page 36

of sales—license amortization and royalties. If actual revenues or revised forecasted revenues fall below
the initial forecasted revenue 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, 2008, the net
carrying value of our licenses was $86.8 million. If we were required to write off licenses, due to changes in
market conditions or product acceptance, our results of operations could be materially adversely affected.
Software Development. We utilize both internal development teams and third-party software developers
to develop our software. We account for software development costs in accordance with Financial
Accounting Standards Board (‘‘FASB’’) Statement of Financial Accounting Standard (‘‘SFAS’’) No. 86,
‘‘Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed’’ (‘‘FAS 86’’).
We capitalize software development costs once technological feasibility is established and we 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 software developers 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 unamortized software development costs to net realizable value, on a
product-by-product basis. The amount by which any unamortized software development costs exceed their
net realizable value is charged to cost of sales—software amortization and royalties. The net realizable
value is the estimated future net revenues from the product, reduced by the estimated future direct costs
associated with the product such as completion costs, cost of sales and advertising.
Commencing upon product release, capitalized software development costs are amortized to cost of
sales—software amortization and royalties based on the ratio of current gross revenues to total projected
gross revenues. If actual gross revenues, or revised projected gross revenues, fall below the initial
projections, the charge to cost of sales—software amortization and royalties may be larger than anticipated
in any given quarter. In fiscal 2008, we recorded approximately $35.4 million of accelerated amortization
due to the underperformance of certain previously released games and approximately $23.9 million of
additional amortization expense related to the cancellation of certain games. As of March 31, 2008, the net
carrying value of our software development was $181.2 million.
The milestone payments made to our third-party developers during their development of our games are
typically considered non-refundable advances against the total compensation they can earn based upon the
sales performance of the products. Any additional compensation earned beyond the milestone payments is
expensed to cost of sales—software amortization and royalties as earned.
Goodwill and Other Intangible Assets. We perform our annual review for goodwill impairment on the first
day of our fourth fiscal quarter, or more frequently if indicators of potential impairment exist. We
performed an annual review of goodwill impairment in each of the fiscal years ended March 31, 2008, 2007
and 2006 and found no impairment. Our impairment review process is based on a discounted future cash
flow approach that uses our estimates of revenue for our reporting unit, driven by anticipated success of
our products and product release schedules, and estimated costs as well as appropriate discount rates.
These estimates are consistent with the plans and estimates that we use to manage the underlying business.
All identifiable intangible assets with finite lives will continue to be amortized over their estimated useful
lives and assessed for impairment under SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of
Long-Lived Assets.’’
Based on these judgments and assumptions, we determine whether we need to take an impairment charge
to reduce the value of the goodwill and indefinite-lived intangible assets stated on our balance sheets to
reflect their estimated fair values. Judgments and assumptions about future values are complex and 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 use of the acquired assets or the strategy
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