Electronic Arts 2006 Annual Report Download - page 160

an eÅective royalty rate based on expected net product sales. Prepayments made to thinly capitalized
independent software developers and co-publishing aÇliates are generally in connection with the
development of a particular product and, therefore, we are generally subject to development risk prior to
the 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
generally at the greater of the contractual rate or an eÅective royalty rate based on expected net product
sales.
Our contracts with some licensors include minimum guaranteed royalty payments which 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, 2006 and 2005,
approximately $9 million and $51 million, respectively, of minimum guaranteed royalty obligations had
been recognized and are included in the royalty-related assets and accrual 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 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 and commitments.
If actual sales or revised revenue estimates fall below the initial revenue estimate, then the actual charge
taken may be greater in any given quarter than anticipated. During Ñscal 2006, 2005 and 2004, we
recorded impairment charges of $16 million, $8 million and $2 million, respectively.
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,
2006 2005
Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 76 $ 59
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55 76
Royalty-related assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $131 $135
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 parties as either accounts payable or accrued liabilities. The current and long-term portions of
accrued royalties, included in accrued and other current liabilities as well as other liabilities, consisted of
(in millions):
As of
March 31,
2006 2005
Accrued and other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 82 $ 88
Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 33
Royalty-related liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 89 $121
In addition, as of March 31, 2006, we were committed to pay approximately $1,557 million to co-
publishing and/or distribution aÇliates and content licensors, but signiÑcant performance remained with
the counterparty (i.e., delivery of the product or content or other factors) and such commitments were
therefore not recorded in our Consolidated Financial Statements. See Note 9 of the Notes to Consolidated
Financial Statements.
88