THQ 2011 Annual Report Download - page 56

expense and other current assets" or "Accrued and other current 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 interactive software games designed for play on video game
consoles, handheld devices and PCs, including via the Internet, and from sales of uDraw. 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.
For further information, see "Note 5 — Accounts Receivable Allowances."
Concentrations of Credit Risk. Financial instruments which potentially subject us to concentration of credit risk generally consist
principally of cash and cash equivalents, short-term investments, accounts receivable and long-term investments. We place cash
and cash equivalents and short-term investments with high credit-quality financial institutions and limit the amount of credit
exposure to any one financial institution. We believe the risk related to cash and cash equivalents, and accounts receivable is not
material due to the short-term nature of such assets.
Most of our sales are made directly to mass merchandisers and national retailers. Due to the increased volume of sales to these
channels, we have experienced an increased concentration of credit risk, and as a result, may maintain individually significant
receivable balances with such mass merchandisers and national retailers. We perform ongoing credit evaluations of our customers,
maintain an allowance for potential credit losses, and most of our foreign receivables are covered by credit insurance. As of
March 31, 2011 and 2010, 20% of our gross accounts receivable outstanding was with one major customer. Excluding changes
in deferred net revenue, which do not impact our cash collections, our largest single customer accounted for 18%, 17%, and 14%
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