THQ 2008 Annual Report Download - page 37

of our overall business and significant underperformance relative to expected historical or projected future
operating results. Although we believe the judgments and assumptions we have made in the past have been
reasonable and appropriate, there is nonetheless a high 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 a development studio, we look for ways to maximize the talent and intellectual property
within the studio. We make judgments and assumptions as to the commercial success and quantity of
games developed by a particular studio. Different judgments and assumptions could materially impact our
reported financial results. For example, if we do not develop games with the same commercial success or
the same number 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 values which 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.
Revenue Recognition. Our revenue recognition policies are in compliance with American Institute of
Certified Public Accountants Statement of Position (‘‘SOP’’) 97-2, ‘‘Software Revenue Recognition,’’ as
amended by SOP 98-9, ‘‘Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions,’’ which provide guidance on generally accepted accounting principles (‘‘GAAP’’) for
recognizing revenue on software transactions, and Staff Accounting Bulletin (‘‘SAB’’) No. 104, ‘‘Revenue
Recognition in Financial Statements,’’ which outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the Securities and Exchange Commission (‘‘SEC’’).
Some of our packaged software products are developed with the ability to be connected to, and played via,
the internet. In order for consumers to participate in online communities and play against one another via
the internet, we (either directly or through outsourced arrangements with third parties) maintain servers
that support an online service we provide to consumers for activities such as matchmaking, roster updates,
tournaments and player rankings. Generally, we consider the online service to be incidental to the overall
product offering and an inconsequential deliverable. Accordingly, we do not defer any revenue related to
products containing the limited online service.
In instances where the online service is considered a substantive deliverable in addition to the software
product, we account for the sale as a ‘‘bundled’’ sale, or multiple element arrangement, in which we sell
both the packaged software product and the online service for one combined price. Vendor specific
objective evidence for the fair value of the online service does not exist as we do not separately offer or
charge for the online service. Therefore, when the online service is determined to be a substantive
deliverable, we recognize the revenue from sales of such software products ratably over the estimated
online service period of six months, beginning the month after shipment of the software product. Costs of
sales related to such products are also deferred and recognized with the related revenues and include
product costs, software amortization and royalties, and license amortization and royalties.
Determining whether the online service for a particular game constitutes a substantive deliverable is
subjective and requires management’s judgment. Determining the estimated service period over which to
recognize the related revenue and costs of sales is also subjective and involves management’s judgment.
During fiscal 2008, we determined the online service for one of our titles, Frontlines: Fuel of War (on PC
and Xbox 360), is a substantive deliverable in addition to the packaged software, primarily because of its
significance to game play. We will recognize all of the revenue and related costs of sales from the sale of
this game ratably over the service period, which we have estimated to be six months beginning the month
after shipment. At March 31, 2008 the deferred revenue related to this game was $30.9 million and is
included within Accrued and Other Current Liabilities in our Consolidated Balance Sheet.
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