THQ 2010 Annual Report Download - page 44

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Indemnity Agreements. We have entered into indemnification agreements with the members of our Board of
Directors, our Chief Executive Officer and our Chief Financial Officer, to provide a contractual right of
indemnification to such persons to the extent permitted by law against any and all liabilities, costs, expenses,
amounts paid in settlement and damages incurred by any such person as a result of any lawsuit, or any
judicial, administrative or investigative proceeding in which such person is sued as a result of service as a
member of our Board of Directors, as Chief Executive Officer or as Chief Financial Officer. The indemnification
agreements provide specific procedures and time frames with respect to requests for indemnification and
clarify the benefits and remedies available to the indemnitees in the event of an indemnification request.
Criti cal Accounting Es timates
The Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of net sales and expenses during the reporting period. The
estimates discussed below are considered by management to be critical because they are both important to
the portrayal of our financial condition and results of operations and because their application places the
most significant demands on management’s judgment, with financial reporting results relying on estimates
about the effect of matters that are inherently uncertain. Specific risks for these critical accounting estimates
are described in the following paragraphs. For all of these estimates, we caution that actual results may differ
materially from these estimates under different assumptions or conditions.
Accounts receivable allowances. We derive revenue from sales of packaged software for video game
systems and PCs and sales of content and services over the Internet and for wireless devices. Product sales
are recognized net of allowances for price protection and returns and various customer discounts. We
typically only allow returns for our PC 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 sales. 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 industry 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 sales 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 sale 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.