THQ 2010 Annual Report Download - page 59

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51
Software Development.
We utilize both internal development teams and third-party software developers to
develop our software. We capitalize software development costs once technological feasibility is established
and we determine that such costs are recoverable against future net sales. We evaluate technological
feasibility on a product-by-product basis. For products where proven game engine technology exists, the
establishment of technological feasibility may occur early in the development cycle. We capitalize the
milestone payments made to third-party software developers and the direct payroll and overhead costs for
our internal development teams. Amounts related to software development for which technological feasibility
is not yet met are charged as incurred to product development expense in our consolidated statements of
operations.
On a quarterly basis, we compare our unamortized software development costs to net realizable value, on a
product-by-product basis. The amount by which any unamortized software development costs exceed their
net realizable value is charged to cost of sales—software amortization and royalties. The net realizable value
is the estimated future net sales from the product, reduced by the estimated future direct costs associated
with the product such as completion costs, cost of sales and advertising.
Commencing upon product release, capitalized software development costs are amortized to cost of sales—
software amortization and royalties based on the ratio of current gross sales to total projected gross sales. In
fiscal 2010, we recorded $10.8 million of additional amortization expense related to the cancellation of
certain games. As of March 31, 2010, the net carrying value of our software development was $159.0 million.
The milestone payments made to our third-party developers during their development of our games are
typically considered non-refundable advances against the total compensation they can earn based upon the
sales performance of the products. Any additional compensation earned beyond the milestone payments is
expensed to cost of sales—software amortization and royalties as earned. Additionally, we have a studio
bonus plan that allows for our internal product development staff to participate in the success of the games
they develop. As certain performance targets are reached, any additional compensation earned under the
studio bonus plan is expensed to cost of sales—software amortization and royalties.
Revenue Recognition.
We recognize net sales for packaged software when title and risk of loss transfers to
the customer, provided that no significant vendor support obligations remain outstanding 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 net sales 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.