Electronic Arts 2005 Annual Report Download - page 135

Activity (Including Certain Costs Incurred in a Restructuring)'', EITF No. 95-03, ""Recognition of Liabilities
in Connection with a Purchase Business Combination'', and SAB No. 100, ""Restructuring and Impairment
Charges''. All restructuring charges recorded subsequent to December 31, 2002, were recorded in accordance
with SFAS No. 146, ""Accounting for Costs Associated with Exit or Disposal Activities''. Adjustments to the
restructuring reserves will be made in future periods, if necessary, based upon the then-current events and
circumstances.
(7) ROYALTIES AND LICENSES
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and
(3) co-publishing and/or distribution aÇliates. License royalties consist of payments made to celebrities,
professional sports organizations, movie studios and other organizations for our use of their trademarks,
copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to
independent software developers are payments for the development of intellectual property related to our
games. Co-publishing and distribution royalties are payments made to third parties for delivery of product.
Royalty-based payments made to content licensors and distribution aÇliates are generally capitalized as
prepaid royalties and expensed to cost of goods sold at the greater of the contractual or eÅective royalty rate
based on net product sales. Prepayments made to thinly capitalized independent software developers and co-
publishing aÇliates are generally made in connection with the development of a particular product and,
therefore, we are generally subject to development risk prior to the general release of the product. Accordingly,
payments that are due prior to completion of a product are generally expensed as research and development as
the services are incurred. Payments due after completion of the product (primarily royalty-based in nature)
are generally expensed as cost of goods sold at the higher of the contractual or eÅective royalty rate based on
net product sales.
Minimum guaranteed royalty obligations are initially recorded as an asset and as a liability at the contractual
amount when no signiÑcant performance remains with the licensor. When signiÑcant performance remains
with the licensor, we record royalty payments as an asset when actually paid and as a liability when incurred
rather than upon execution of the contract. Minimum royalty payment obligations are classiÑed as current
liabilities to the extent such royalty payments are contractually due within the next twelve months. As of
March 31, 2005 and 2004, approximately $51 million and $63 million, respectively, of minimum guaranteed
royalty obligations had been recognized and are included in the tables below.
Each quarter, we also evaluate the future realization of our royalty-based assets as well as any unrecognized
minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product
Annual Report
sales. Any impairments determined before the launch of a product are charged to research and development
expense. Impairments determined post-launch are charged to cost of goods sold. In either case, we rely on
estimated revenue to evaluate the future realization of prepaid royalties. If actual sales or revised revenue
estimates fall below the initial revenue estimates, then the actual charge taken may be greater in any given
quarter than anticipated.
The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets,
included in other current assets and other assets, consisted of (in millions):
As of
March 31,
2005 2004
Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 59 $ 31
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76 55
Royalty-related assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $135 $ 86
At any given time, depending on the timing of our payments to our co-publishing and/or distribution aÇliates,
content licensors and/or independent software developers, we recognize unpaid royalty amounts due to these
79