THQ 2009 Annual Report Download - page 67

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changes in fair value are accounted for depending on the use of the derivative and whether it is designated
and qualifies for hedge accounting.
We utilize forward contracts in order to reduce financial market risks. These instruments are used to hedge
foreign currency exposures of underlying assets, liabilities, or certain forecasted foreign currency
denominated transactions. Our accounting policies for these instruments are based on whether they meet
the criteria for designation as hedging transactions. Changes in fair value of derivatives that are designated
as cash flow hedges, are highly effective, and qualify as hedging instruments, are recorded in other
comprehensive income until the underlying hedged item is recognized in earnings within the financial
statement line item consistent with the hedged item. Any ineffective portion of a derivative change in fair
value is immediately recognized in earnings. During the periods presented we did not have any derivatives
that qualify for hedge accounting. Changes in the fair value of derivatives that do not qualify for hedge
accounting treatment are recorded in earnings. The fair value of foreign currency contracts is estimated
based on the forward rate of the various hedged currencies as of the end of the period. As of March 31,
2009, 2008 and 2007, we had foreign exchange forward contracts in the notional amount of $67.2 million,
$97.0 million and $47.0 million, respectively. The net losses recognized from foreign currency contracts in
fiscal 2009, 2008, and 2007 were $2.3 million, $5.9 million and $0.9 million, respectively, and are included
in interest and other income, net, 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.
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
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