THQ 2010 Annual Report Download - page 57

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The assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair
value in other current assets or liabilities, respectively, on our consolidated balance sheets. As discussed
below, gains and losses resulting from 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.
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 we 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.