Electronic Arts 2007 Annual Report Download - page 106

Revenue Recognition, Sales Returns, Allowances and Bad Debt Reserves
We principally derive revenue from sales of interactive software games designed for play on video game
consoles (such as the PLAYSTATION 3, Xbox 360 and Wii), PCs and mobile platforms including handheld
game players (such as the Sony PSP, Nintendo DS and Nintendo Game Boy Advance) and cellular handsets.
We evaluate the recognition of revenue based on the criteria set forth in Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions” and Staff Accounting Bulletin (“SAB”) No. 104, “Reve-
nue Recognition”. We evaluate revenue recognition using the following basic criteria and recognize revenue
when all four of the following criteria are met:
•Evidence of an arrangement. Evidence of an agreement with the customer that reflects the terms and
conditions to deliver products must be present in order to recognize revenue.
•Delivery. Delivery is considered to occur when a product is shipped and the risk of loss and rewards of
ownership have been transferred to the customer. For online game services, delivery is considered to
occur as the service is provided.
•Fixed or determinable fee. If a portion of the arrangement fee is not fixed or determinable, we
recognize revenue as the amount becomes fixed or determinable.
•Collection is deemed probable. We conduct a credit review of each customer involved in a significant
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 satisfied often involves assumptions and
judgments that can have a significant 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-specific
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. For example, some of our packaged goods products are sold with online
services. Prior to, and through fiscal 2007, we had been able to determine VSOE for the online services to be
delivered; therefore, we have been able to allocate the total price received from the combined product and
online service sale between these two elements and recognize the related revenue separately. However, starting
in fiscal 2008, VSOE will not exist for the online services to be delivered for certain platforms and all revenue
from these transactions will be recognized over the estimated online service period. More specifically, we will
begin to recognize the revenue from sales of certain online-enabled packaged goods on a straight-line basis
over six months after the month of sale. Accordingly, this relatively small change (from having VSOE for
online hosting services to no longer having VSOE) will have a significant effect on our reported results.
Determining whether a transaction constitutes an online game service transaction or a download of a product
requires judgment and can be difficult. The accounting for these transactions is significantly different. Revenue
from product downloads is recognized when the download occurs (assuming all other recognition criteria are
met). Revenue from online game services is recognized as the services are rendered. If the service period is
not defined, we recognize the revenue over the estimated service period. Determining the estimated service
period is inherently subjective and is subject to regular revision based on historical online usage.
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 returns, price protection, and other
offerings, which may occur with our customers and channel partners. In certain countries, we have stock-
balancing programs for our PC and video game system products, which allow for the exchange of these
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