THQ 2010 Annual Report Download - page 46

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Revenue Recognition. We recognize net sales for packaged software when title and risk of loss transfers to
the customer, provided that we have no significant remaining support obligations and that collection of the
resulting receivable is deemed probable by management. Certain products are sold to customers with a
street date (the earliest date these products may be sold by retailers). For these products we recognize net
sales on the later of the street date or the sale date.
Some of our packaged software products are developed with the ability to be connected to, and played via,
the Internet. In order for consumers to participate in online communities and play against one another via the
Internet, we (either directly or through outsourced arrangements with third parties) maintain servers that
support an online service we provide to consumers for activities such as matchmaking, roster updates,
tournaments and player rankings. Generally, we do not consider the online service to be a deliverable as it is
incidental to the overall product offering. Accordingly, we do not defer any net sales related to products
containing the limited online service.
In instances where the online service is considered a deliverable and where we have significant continuing
involvement in addition to the software product, we account for the sale as a “bundled” sale, or multiple
element arrangement, in which we sell both the packaged software product and the online service for one
combined price. Vendor specific objective evidence for the fair value of the online service does not exist as
we have not separately offered or charged for the online service. Therefore, when the online service is
determined to be a deliverable, we recognize the revenue from sales of such software products ratably over
the estimated online service period of six months, beginning the month after shipment of the software
product. Costs of sales related to such products are also deferred and recognized with the related net sales
and include product costs, software amortization and royalties, and license amortization and royalties. At
March 31, 2010 the deferred revenue related to these games was $1.4 million and is included within accrued
and other current liabilities in our consolidated balance sheet.
Determining whether the online service for a particular game constitutes a deliverable is subjective and
requires management’s judgment. Determining the estimated service period over which to recognize the
related net sales and costs of sales is also subjective and involves management’s judgment.
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 5—Accounts
Receivable Allowances” in the notes to the consolidated financial statements included in Item 8. 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 estimate the fair value of stock options and our employee stock purchase
plan on date of grant using the Black-Scholes option pricing model which requires the input of subjective
assumptions, including the expected volatility of our common stock and an option’s expected life. The fair
value of our restricted stock and restricted stock units is determined based on the closing trading price of our
common stock on the grant date. The amount of expense recognized represents the expense associated
with the stock-based awards we expect to ultimately vest based upon an estimated rate of forfeitures. Our
estimate of forfeitures is based on historical forfeiture behavior as well as any expected trends in future
forfeiture behavior; 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 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. 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. 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.