Electronic Arts 2006 Annual Report Download - page 119

We historically have considered undistributed earnings of our foreign subsidiaries to be indeÑnitely
reinvested and, accordingly, no U.S. taxes have been provided thereon. With the exception of taking
advantage of the one-time opportunity aÅorded to us by the Jobs Act, we currently intend to continue to
indeÑnitely reinvest the undistributed earnings of our foreign subsidiaries.
In July 2005, the Financial Accounting Standards Board (""FASB'') issued an exposure draft of a
proposed interpretation of SFAS No. 109, ""Accounting for Income Taxes'' which addresses the accounting
for uncertain tax positions. Including subsequent updates issued by the FASB, the proposed interpretation
provides that the best estimate of the impact of a tax position would be recognized in an entity's Ñnancial
statements only if it is more likely than not that the position will be sustained on audit based solely on its
technical merits. This proposed interpretation also would provide guidance on recognition and
measurement, balance sheet presentation, disclosure, accrual of interest and penalties, accounting in
interim periods and transition. We cannot predict what actions the FASB will take or how any such
actions might ultimately aÅect our Ñnancial position or results of operations. In January 2006, the FASB
announced that companies would not have to apply the proposed interpretation until Ñscal years beginning
after December 31, 2006. An exposure draft of proposed amendments to SFAS No. 109 is expected in the
third quarter of calendar year 2006.
Our eÅective income tax rates for Ñscal 2007 and future periods will depend on a variety of factors. For
example, changes in our business, including acquisitions and intercompany transactions, changes in our
international structure, changes in the geographic location of business functions or assets, changes in the
geographic mix of income, as well as changes in, or termination of, our agreements with tax authorities,
valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and
interpretations thereof, developments in tax audit and other matters, and variations in the estimated and
actual level of annual pre-tax income can aÅect the overall eÅective income tax rate for future Ñscal years.
We incur certain tax expenses that do not decline proportionately with declines in our consolidated
income. As a result, in absolute dollar terms, our tax expense will have a greater inÖuence on our eÅective
tax rate at lower levels of pre-tax income than higher levels. In addition, at lower levels of pre-tax income,
our eÅective tax rate will be more volatile.
Net Income
Net income for Ñscal years 2006 and 2005 was as follows (in millions):
March 31, % of Net March 31, % of Net
2006 Revenue 2005 Revenue $ Change % Change
$236 8% $504 16% $(268) (53%)
Annual Report
Reported net income decreased by $268 million, or 53 percent, in Ñscal 2006 as compared to Ñscal 2005.
The decrease was primarily due to a decrease in our net revenue and growth in our operating expenses.
The growth in our operating expenses was primarily driven by an increase in research and development
expenses as we increased our internal development eÅorts and invested in next-generation tools,
technologies and titles, while at the same time we continued to support current-generation product
development.
We expect our net income to decline in Ñscal 2007 as a result of (1) the eÅect of stock-based
compensation charges required by our adoption of SFAS No. 123R, and (2) our continued support of
current-generation product development while at the same time making signiÑcant investments in next-
generation consoles, online and mobile platforms.
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