Electronic Arts 2005 Annual Report Download - page 123

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(k) Revenue Recognition
We evaluate the recognition of revenue based on the criteria set forth in SOP 97-2, ""Software Revenue
Recognition'', as amended by SOP 98-9, ""ModiÑcation of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions'' and StaÅ Accounting Bulletin (""SAB'') No. 101, ""Revenue Recognition in
Financial Statements'', as revised by SAB No. 104, ""Revenue Recognition''. We evaluate revenue recognition
using the following basic criteria and recognize revenue when all four criteria are met:
‚ Evidence of an arrangement: We recognize revenue when we have evidence of an agreement with the
customer reÖecting the terms and conditions to deliver products.
‚ Delivery: Delivery is considered to occur when the products are shipped and risk of loss has been
transferred to the customer. For online games and services, revenue is recognized as the service is
provided.
‚ Fixed or determinable fee: If a portion of the arrangement fee is not Ñxed or determinable, we
recognize that amount as revenue when the amount becomes Ñxed or determinable.
‚ Collection is deemed probable: At the time of the transaction, we conduct a credit review of each
customer involved in a signiÑcant transaction to determine the creditworthiness of the customer.
Collection is deemed probable if we expect the customer to be able to pay amounts under the
arrangement as those amounts become due. If we determine that collection is not probable, we
recognize revenue when collection becomes probable (generally upon cash collection).
Determining whether and when some of these criteria have been satisÑed often involves assumptions and
judgments that can have a signiÑcant impact on the timing and amount of revenue we report. For example, for
multiple element arrangements, we must make assumptions and judgments in order to: (1) determine whether
and when each element has been delivered; (2) determine whether undelivered products or services are
essential to the functionality of the delivered products and services; (3) determine whether vendor-speciÑc
objective evidence of fair value (""VSOE'') exists for each undelivered element; and (4) allocate the total
price among the various elements we must deliver. Changes to any of these assumptions or judgments, or
changes to the elements in a software arrangement, could cause a material increase or decrease in the amount
of revenue that we report in a particular period.
Product Revenue: Product revenue, including sales to resellers and distributors (""channel partners''), is
recognized when the above criteria are met. We reduce product revenue for estimated future customer returns,
price protection, and other oÅerings, which may occur with our customers and channel partners.
Annual Report
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 amounts billed to customers for
shipping and handling as revenue. 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
TM
products. These
customers generally pay on a month-to-month basis; however, prepaid 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 services are provided.
Software Licenses: We license software rights to manufacturers of products in related industries (for
example, makers of personal computers or computer accessories) 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.
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