THQ 2012 Annual Report Download - page 59

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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 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 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.
Software Licenses: We also license the rights to certain of our owned intellectual property and through these agreements we
receive royalties from the licensees. 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 recognize these royalties as net sales as statements of
amounts earned are received from our licensees.
Digital and Wireless Revenue: We recognize digital and wireless revenue principally from the sale or subscription of our
products to consumers under agreements with digital distributors and wireless carriers. That revenue is recognized once fees
are fixed and determinable; we have no significant obligations remaining; and collection of the related receivable is reasonably
assured. In accordance with the agreements, the digital distributors and wireless carriers are responsible for billing, collecting
and remitting our revenue to us. We recognize as net sales, the amount reported to us by the digital distributors and wireless
carriers, net of any distribution, service or other fees earned and deducted by the digital distributors and wireless carriers. Our
digital distributors and wireless carriers provide us with monthly or quarterly statements of sales data within 10 to 45 days
following the end of each period; we recognize this revenue when it is known or estimable.
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 "Cost of sales — product costs" in our consolidated statements of
operations.
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,