THQ 2009 Annual Report Download - page 38

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At March 31, 2009 the deferred revenue related to these games was $11.6 million and is included within
accrued and other current liabilities in our consolidated balance sheet.
Although we generally sell our products on a no-return basis, in certain circumstances we may allow price
protection, returns or other allowances on a negotiated basis. We estimate such price protection, returns or
other allowances based upon management’s evaluation of our historical experience, retailer inventories,
the nature of the titles and other factors. Such estimates are deducted from gross sales. See ‘‘Note 3—
Accounts Receivable Allowances.’’ Software is sold under a limited 90-day warranty against defects in
material and workmanship. To date, we have not experienced material warranty claims.
Stock-based compensation. We account for stock-based compensation under SFAS No. 123(R) ‘‘Share-
Based Payment’’ (‘‘FAS 123R’’). Under FAS 123R, we estimate the fair value of stock options on date of
grant using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is
then amortized on a straight-line basis over the requisite service period of the award, which is generally the
option vesting term. The amount of expense recognized represents the expense associated with the stock
options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is
updated as necessary and any adjustments needed to recognize the fair value of options that actually vest
or are forfeited are recorded. The Black-Scholes option pricing model, used to estimate the fair value of an
award, requires the input of subjective assumptions, including the expected volatility of our common stock
and an option’s expected life. As a result, the financial statements include amounts that are based upon our
best estimates and judgments relating to the expenses recognized for stock-based compensation.
Income taxes. We account for income taxes in accordance with SFAS No. 109, ‘‘Accounting for Income
Taxes’’ (‘‘FAS 109’’). The provision for income taxes is computed using the asset and liability method,
under which deferred income tax assets and liabilities are measured using the currently enacted tax rates
that apply to taxable income in effect for the years in which those tax assets are expected to be realized or
settled. To the extent recovery of deferred tax assets is not likely based on our estimates of future taxable
income in each jurisdiction, a valuation allowance is established. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions
in which we operate. This process involves: (i) estimating our current tax exposure in each jurisdiction
including the impact, if any, of changes or interpretations to applicable tax laws and regulations,
(ii) estimating additional taxes resulting from tax examinations and (iii) making judgments regarding the
recoverability of deferred tax assets.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions
based on our estimate of whether, and the extent to which, additional taxes will be due. Our estimate for
the potential outcome for any uncertain tax issue, including our claims for research and development
income tax credits, requires judgment. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period in which they are resolved or when
statutes of limitation on potential assessments expire.
As of April 1, 2007, we adopted the provisions of FIN No. 48, ‘‘Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’). Previously, we had accounted for
income tax contingencies in accordance with SFAS No. 5, ‘‘Accounting for Contingencies.’’ As required by
FIN 48, we recognize the financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following an audit. For tax positions
meeting the ‘‘more likely than not’’ threshold, the amount recognized in the financial statements is the
largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, we applied FIN 48 to all income tax positions for which the
statute of limitations remained open. Our adoption of FIN 48 on April 1, 2007 had no impact on our
April 1, 2007 beginning retained earnings balance. The amount of unrecognized tax benefits as of
31