THQ 2009 Annual Report Download - page 68

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.
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, 2009
and 2008, approximately 16% and 15%, 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 2009, 14%
of our gross sales in fiscal 2008 and 18% of our gross sales in fiscal 2007. Our second largest customer
accounted for 13% of our gross sales in fiscal 2009, 12% of our gross sales in fiscal 2008 and 11% of our
gross sales in fiscal 2007.
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
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
qualitative factors such as the success of other products and/or entertainment vehicles utilizing the
intellectual property, whether there are any future planned theatrical releases or television series based on
the intellectual property and the rights holder’s continued promotion and exploitation of the intellectual
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