THQ 2008 Annual Report Download - page 70

$47.0 million and $60.3 million, respectively. The net losses recognized from foreign currency contracts in
fiscal 2008 and fiscal 2007 were $5.9 million and $0.9 million, respectively, and the net gain recognized
from foreign currency contracts in fiscal 2006 was $0.5 million, and are included in interest and other
income in our consolidated statements of operations.
Accounts Receivable Allowances. We derive revenues from sales of packaged software for video game
systems and personal computers and sales of content and services for wireless devices. Product revenue is
recognized net of allowances for price protection and returns and various customer discounts. We typically
only allow returns for our personal computer products; however, we may decide to provide price
protection or allow returns for our video games after we analyze: (i) inventory remaining in the retail
channel, (ii) the rate of inventory sell-through in the retail channel, and (iii) our remaining inventory on
hand. We maintain a policy of giving credits for price protection and returns, but do not give cash refunds.
We use significant judgment and make estimates in connection with establishing allowances for price
protection, returns, and doubtful accounts in any accounting period. Included in our accounts receivable
allowances is our allowance for co-operative advertising that we engage in with our retail channel partners.
Our co-operative advertising allowance is based upon specific contractual commitments and does not
involve estimates made by management.
Concentrations of Credit Risk. Financial instruments which potentially subject us to concentration of
credit risk consist principally of cash and cash equivalents, short-term investments, accounts receivable and
long-term investments. We place cash and cash equivalents and short-term investments with high credit-
quality financial institutions and limit the amount of credit exposure to any one financial institution. We
believe the risk related to cash and cash equivalents and accounts receivable is not material due to the
short-term nature of such assets. Our investments include significant holdings of ARS. Although there has
been recent uncertainty in the credit markets, all of the securities are investment grade securities, and we
have no reason to believe that any of the underlying issuers of our ARS are presently at risk or that the
underlying credit quality of the assets backing our ARS has been impacted by the reduced liquidity of these
investments. See ‘‘Note 2—Investment Securities’’ in the notes to the consolidated financial statements for
further information related to our investments.
Most of our sales are made directly to mass merchandisers and national retailers. Due to the increased
volume of sales to these channels, we have experienced an increased concentration of credit risk, and as a
result, may maintain individually significant receivable balances with such mass merchandisers and national
retailers. We perform ongoing credit evaluations of our customers, maintain an allowance for potential
credit losses, and most of our foreign receivables are covered by credit insurance. As of March 31, 2008
and 2007, approximately 15% and 22%, respectively, of our gross accounts receivable outstanding was with
one major customer. Our largest single customer accounted for 14% of our gross sales in fiscal 2008, 18%
of our gross sales in fiscal 2007 and 19% of our gross sales in fiscal 2006. Our second largest customer
accounted for 12% of our gross sales in fiscal 2008, 11% of our gross sales in fiscal 2007 and 10% of our
gross sales in fiscal 2006.
Inventory. Inventory, which consists principally of finished products, is stated at the lower of cost (moving
weighted average) or market. We estimate the net realizable value of slow-moving inventory on a title by
title basis, and charge the excess of cost over net realizable value to cost of sales—product costs.
Property and Equipment. Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. Leasehold improvements are
depreciated over the shorter of their useful lives or the remaining lease term.
Licenses. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded
on our balance sheet as an asset (licenses) and as a liability (accrued royalties) at the contractual amount
upon execution of the contract if no significant performance obligation remains with the licensor. When a
significant performance obligation remains with the licensor, we record royalty payments as an asset
(licenses) and as a liability (accrued royalties) when payable rather than upon execution of the contract.
Royalty payments for intellectual property licenses are classified as current assets and current liabilities to
the extent such royalty payments relate to anticipated product sales during the subsequent year and
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