THQ 2010 Annual Report Download - page 60

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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.” Software is sold under a limited 90-day warranty against defects in material and
workmanship. To date, we have not experienced material warranty claims.
Software Licenses: For those agreements that provide the customers the right to multiple copies in exchange
for guaranteed minimum royalty amounts, net sales are recognized at delivery of the product master or the
first copy. Per copy royalties on sales that exceed the guarantee are recognized as earned.
We also license the rights to our owned intellectual property and through these agreements we receive
royalties from the licensees. We recognize these royalties as net sales as statements of amounts earned are
received from our licensees. For those agreements which provide for guaranteed minimum royalty amounts,
we recognize such minimums as net sales when no further performance obligations exist. We recognize any
upfront licensing fee received over the term of the agreement.
Wireless Revenue: We recognize wireless revenue principally from the sale or subscription of our applications
to wireless subscribers under distribution agreements with wireless carriers in the period in which the
applications are purchased by the subscribers, assuming that: fees are fixed and determinable; we have no
significant obligations remaining and collection of the related receivable is reasonably assured. In
accordance with the distribution agreements, the wireless carriers are responsible for billing, collecting and
remitting our fees to us. The wireless carriers generally report the final sales data to us within 10 to 45 days
following the end of each month. When final sales data is not available in a timely manner for reporting
purposes, we estimate our net sales based on available sales data and historical trends. We will record
differences between estimated net sales and actual net sales in the next reporting period once the actual
amounts are determined.
We recognize as net sales the net amount the wireless carrier pays to us upon the sale of our applications,
net of any service or other fees earned and deducted by the wireless carrier.
Shipping and Handling. Shipping and handling costs, which consist primarily of packaging and
transportation charges incurred to move finished goods to customers, are included in costs of sales—product
costs.
Advertising. Advertising and sales promotion costs are generally expensed as incurred, except for television
airtime and print media costs associated with media campaigns, which are deferred and charged to expense
in the period the airtime or advertising space is used for the first time. We engage in co-operative advertising
with some of our retail channel partners. We accrue the associated costs when net sales are recognized and
such amounts are included in selling and marketing expense if there is a separate identifiable benefit for
which we can reasonably estimate the fair value of the benefit identified; otherwise, they are recognized as a
reduction of net sales. Advertising costs, included in selling and marketing expense, for fiscal 2010, 2009
and 2008 were $69.7 million, $77.6 million and $85.7 million, respectively.
Goodwill and Other Intangible Assets. In the three months ended December 31, 2008, specifically in the
latter half of that fiscal quarter, our stock price declined significantly, resulting in a market capitalization that
was substantially below the carrying value of our net assets. In addition, the unfavorable macroeconomic
conditions and uncertainties had adversely affected our environment. As a result, in connection with the
preparation of the financial statements for our fiscal quarter ended December 31, 2008, we performed an
interim goodwill impairment test.
We performed the first step of the two-step impairment test, which includes comparing the fair value of our
single reporting unit to its carrying value. Due to market conditions at the time of the test, our analysis was
weighted towards the market value approach, which is based on recent share prices, and includes a control
premium based on recent transactions that have occurred within our industry, to determine the fair value of
our single reporting unit. We concluded that the fair value of our single reporting unit was less than the
carrying value of our net assets and thus performed the second step of the impairment test. Our step two
analysis involved preparing an allocation of the estimated fair value of our reporting unit to the tangible and
intangible assets (other than goodwill) as if the reporting unit had been acquired in a business combination.
Based on our analysis, we recorded goodwill impairment charges of $118.8 million during fiscal 2009,
representing the entire amount of our previously recorded goodwill.