THQ 2009 Annual Report Download - page 35

Accounts receivable allowances. We derive revenue 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.
We establish sales allowances based on estimates of future price protection and returns with respect to
current period product revenue. We analyze historical price protection granted, historical returns, current
sell-through of retailer and distributor inventory of our products, current trends in the video game market
and the overall economy, changes in customer demand and acceptance of our products, and other related
factors when evaluating the adequacy of the price protection and returns allowance. In addition, we
monitor the volume of our sales to retailers and distributors and their inventories, because slow-moving
inventory in the distribution channel can result in the requirement for price protection or returns in
subsequent periods. Actual price protection and returns in any future period are uncertain. While we
believe we can make reliable estimates for these matters, if we changed our assumptions and estimates, our
price protection and returns reserves would change, which would impact the net revenue we report. In
addition, if actual price protection and returns were significantly greater than the reserves we have
established, the actual results of our reported net sales would decrease. Conversely, if actual price
protection and returns were significantly less than our reserves, our reported net sales would increase. In
circumstances when we do not have a reliable basis to estimate returns and price protection or are unable
to determine that collection of a receivable is probable, we defer the revenue until such time as we can
reliably estimate any related returns and allowances and determine that collection of the receivable is
probable.
Similarly, we must use significant judgment and make estimates in connection with establishing allowances
for doubtful accounts in any accounting period. We analyze customer concentrations, customer credit-
worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful
accounts. Material differences may result in the amount and timing of our bad debt expense for any period
if we made different judgments or utilized different estimates. If our customers experience financial
difficulties and are not able to meet their ongoing financial obligations to us, our results of operations may
be adversely impacted.
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
long-term assets and long-term liabilities if such royalty payments relate to anticipated product sales after
one year.
We evaluate the future recoverability of our capitalized licenses on a quarterly basis. The recoverability of
capitalized license costs is evaluated based on the expected performance of the specific products in which
the licensed trademark or copyright is to be used. As many of our licenses extend for multiple products
over multiple years, we also assess the recoverability of capitalized license costs based on certain
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