Electronic Arts 2004 Annual Report Download - page 78

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protection, and other oÅerings, which may occur under programs we have with our customers and channel
partners.
Shipping and Handling: In accordance with Emerging Issues Task Force (""EITF'') Issue No. 00-10,
""Accounting for Shipping and Handling Fees and Costs'', we recognize as revenue amounts billed to
customers for shipping and handling. Additionally, shipping and handling costs incurred by us are included in
cost of goods sold.
Online Subscription Revenue: Online subscription revenue is derived principally from subscription revenue
collected from customers for online play related to our persistent state world and Pogo products. These
customers are contractually obligated to pay on a month-to-month basis. Prepaid monthly subscription
revenue, including revenue collected from credit card sales as well as sales of Gametime subscription cards, are
recognized ratably over the period for which the hosting services are provided.
Software Licenses: we license to manufacturers of products in related industries (for example, makers of
personal computers or computer accessories) rights to include certain of our products with the manufacturer's
product, or oÅer our products to consumers who have purchased the manufacturer's product. We call these
combined products ""OEM bundles''. These OEM bundles generally require the customer to pay us an
upfront nonrefundable fee, which represents the guaranteed minimum royalty amount. Revenue is generally
recognized upon delivery of the product master or the Ñrst copy. Per copy royalties on sales that exceed the
minimum guarantee are recognized as earned.
(l) Sales Returns and Allowances and Bad Debt Reserves
We estimate potential future product returns, price protection and stock-balancing programs related to current
period product revenue. We analyze historical returns, current sell-through of distributor and retailer
inventory of our products, current trends in the software games business segment and the overall economy,
changes in customer demand and acceptance of our products and other related factors when evaluating the
adequacy of the sales returns and price protection allowances. In addition, we monitor and manage the volume
of sales to retailers and distributors and monitor their inventories as substantial overstocking in the
distribution channel can result in high returns or the requirement for substantial price protection in
subsequent periods.
Similarly, signiÑcant judgment is required to estimate our allowance 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.
(m) Advertising Costs
We generally expense advertising costs as incurred, except for production costs associated with media
campaigns which are recognized as prepaid assets (to the extent paid in advance) and expensed at the Ñrst run
of the advertisement. Cooperative advertising with distributors and retailers is accrued when revenue is
recognized and such amounts are included in sales and marketing expense if there is a separate identiÑable
beneÑt for which we can reasonably estimate the fair value of the beneÑt identiÑed. Otherwise, they are
recognized as a reduction of net revenue. We then reimburse the distributor or retailer when qualifying claims
are submitted. For the Ñscal years ended March 31, 2004, 2003 and 2002, advertising expenses totaled
approximately $182.8 million, $151.6 million and $105.7 million, respectively.
(n) Software Development Costs
Research and development costs, which consist primarily of software development costs, are expensed as
incurred. SFAS No. 86, ""Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed'', 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 our
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 development costs that have been capitalized to date have been
insigniÑcant.
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