THQ 2012 Annual Report Download - page 47

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recoverability of capitalized license costs based on certain qualitative factors such as the success of other products and/or
entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television
series based on the intellectual property and the rights holder's continued promotion and exploitation of the intellectual
property. See "Note 5 — Licenses and Software Development" for further information related to license and software
development impairments.
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 such 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 limited online services.
For an individual product with an online service that is considered a deliverable and for which we have a 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.
• When vendor specific objective evidence ("VSOE") of the fair value of the online service does not exist, as we have not
separately offered or charged for the online service, we recognize the revenue from sales of such software products ratably
over the estimated online service period, generally 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.
• When VSOE of the fair value of an undelivered online service component of our games exists, generally when we
separately offer or charge for the online service, we separate the fair value of the online service component from the
revenue recognized on the sale of the boxed product. The fair value of the online service component, and the related
specifically identifiable costs of the online service, such as license and developer royalties, if any, are deferred and
recognized ratably over the estimated online service period, generally six months, beginning the month after shipment of
the software product.
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.
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.