Electronic Arts 2002 Annual Report Download - page 19

Similarly, management must use significant judgment and make estimates in connection with establishing
allowances for doubtful accounts in any accounting period. Management analyzes 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 management made different judgments or utilized different estimates. If our customers experi-
ence financial difficulties and are not able to meet their ongoing financial obligations to us, our results of
operations may be adversely impacted. For example, in January 2002, one of our retail customers, Kmart,
declared bankruptcy.We have adequately reserved for our exposure to Kmart. Our distribution channels
have been characterized by change, including consolidations and financial difficulties of certain distributors
and retailers.
Our gross accounts receivable balance was $306,365,000 and our allowance for product returns, pric-
ing allowances and doubtful accounts was $115,870,000 as of March 31, 2002. As of March 31, 2001,
our gross accounts receivable balance was $264,282,000 and our allowance for product returns, pricing
allowances and doubtful accounts was $89,833,000.
PREPAID ROYALTIES
Prepaid royalties consist primarily of prepayments for manufacturing royalties, co-publishing and/or distri-
bution affiliates and license fees paid to celebrities, professional sports organizations and other organizations
for use of their trade name and content. Also included in prepaid royalties are prepayments made to inde-
pendent software developers 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.We evaluate the future realization of prepaid royalties quarterly and charge to research and
development expense any amounts that we deem unlikely to be realized through product sales. We rely on
forecasted revenue to evaluate the future realization of prepaid royalties. If actual revenues, or revised
forecasted sales, fall below the initial forecasted sales, the charge to research and development expense
may be larger than anticipated in any given quarter. Once the charge has been taken to research and devel-
opment expense, that amount will not be expensed in future quarters when the product has shipped.The
current portion of prepaid royalties, included in other current assets, was $65,484,000 at March 31, 2002
and $46,264,000 at March 31, 2001.The long-term portion of prepaid royalties, included in other assets,
was $1,164,000 at March 31, 2002 and $9,664,000 at March 31, 2001.
VALUATION OF LONG-LIVED ASSETS, INCLUDING
GOODWILL AND OTHER INTANGIBLE ASSETS
Under current accounting standards, we make judgments about the remaining useful lives of goodwill, pur-
chased intangible assets and other long-lived assets whenever events or changes in circumstances indicate
an other than temporary impairment in the remaining value of the assets recorded on our balance sheet. In
order to judge the remaining useful life of an asset, management makes various assumptions about the value
of the asset in the future.This may include assumptions about future prospects for the business that the
asset relates to and typically involves computations of the estimated future cash flows to be generated by
these businesses. Please refer to the Operations by Segment discussion of the Management’s Discussion and
Analysis of Financial Condition and Results of Operations for discussions of EA Core and EA.com. For our
EA Core division, our future net cash flows are primarily dependent on the sale of products for play on
proprietary video game platforms.The success of our products is affected by the ability to accurately predict
which platforms and which products we develop will be successful. Also, our revenues and earnings are
dependent on our ability to meet our product release schedules. For our EA.com division, the future net
cash flows are dependent on the success of online games. Offering games solely for online play is a substantial
departure from our traditional business of selling packaged software games. Because of our inexperience in
predicting usage patterns for our games, we may not be effective in achieving success that may otherwise be
attainable from offering our games online. Due to these and other factors described in our Risk Factors, we
may not realize the future net cash flows necessary to recover our long-lived assets. For example, our product
Majestic™ and our Platinum offering, which contained certain browser-based entertainment games, were
launched with a monthly subscription pricing model and obtained only limited commercial success. Accord-
ingly, we did not realize our projected cash flows and discontinued these offerings as part of EA.com’s
restructuring plan.
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