Electronic Arts 2001 Annual Report Download - page 43

ELECTRONIC ARTS
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ADVERTISING REVENUES Advertising revenues are derived principally from the sale of banner and in-game
advertisements. Banner and in-game advertising is typically generated from contracts in which either the
Company or AOL provides a minimum number of impressions over the term of the agreed upon commitment.
Revenue is recognized as the impressions are delivered, provided that no significant obligations remain and collec-
tion of the related receivable is probable. Advertising revenue generated on the AOL Games Channel is recorded net
of the applicable revenue share owed to AOL under the AOL agreement (see Note 5).
SOFTWARE LICENSES For those agreements which provide the customers the right to multiple copies in
exchange for guaranteed minimum royalty amounts, revenue is recognized at delivery of the product master or
the first copy. Per copy royalties on sales that exceed the guarantee are recognized as earned.
Revenue from the licensing of software was $18,944,000, $21,704,000 and $17,788,000 for the fiscal years
ended March 31, 2001, 2000, and 1999, respectively.
(d) Cash and Investments Cash equivalents consist of highly liquid investments with insignificant rate risk and
with maturities of three months or less at the date of purchase. Short-term investments include securities with
maturities greater than three months and less than one year, except for certain investments with stated maturities
greater than one year. Long-term investments consist of securities with maturities greater than one year.
The Company accounts for investments under Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities”, (“SFAS 115”). The Company’s policy is to protect
the value of its investment portfolio and to minimize principal risk by earning returns based on current interest
rates. Management determines the appropriate classification of its debt and equity securities at the time of pur-
chase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-
maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities
classified as held-to-maturity are carried at amortized cost, which is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest income. Debt securities, not classified
as held-to-maturity, are classified as available-for-sale and are stated at fair value. Securities sold are based on the
specific identification method.
(e) Prepaid Royalties Prepaid royalties consist primarily of prepayments for manufacturing royalties, original
equipment manufacturer (OEM) fees and license fees paid to celebrities and professional sports organizations for
use of their trade name. Also included in prepaid royalties are prepayments made to independent software devel-
opers under development arrangements that have alternative future uses. Prepaid royalties are expensed at the
contractual or effective royalty rate as cost of goods sold based on actual net product sales. Management evalu-
ates the future realization of prepaid royalties quarterly and charges to the Statement of Operations any amounts
that management deems unlikely to be realized through product sales. Royalty advances are classified as current
and non-current assets based upon estimated net product sales for the following year. The current portion of pre-
paid royalties, included in other current assets, was $46,264,000 and $54,970,000 at March 31, 2001 and 2000,
respectively. The long-term portion of prepaid royalties, included in other assets, was $9,664,000 and
$11,373,000 at March 31, 2001 and 2000, respectively.
(f) Software Development Costs Research and development costs, which consist primarily of software develop-
ment costs, are expensed as incurred. Statement of Financial Accounting Standards No. 86, “Accounting for the
Cost of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS 86”), provides for the capitalization of
certain software development costs incurred after technological feasibility of the software is established or for
development costs that have alternative future uses. Under the Company’s current practice of developing new
products, the technological feasibility of the underlying software is not established until substantially all product
development is complete, which generally includes the development of a working model. The software develop-
ment costs that have been capitalized to date have been insignificant.