Electronic Arts 2007 Annual Report Download - page 118

In July 2006, FASB issued FIN No. 48 which clarifies the accounting for uncertainty in income taxes
recognized in financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return and provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. Under FIN No. 48, the evaluation of a
tax position is a two-step process. The first step is a recognition process where we are required to determine
whether it is more likely than not that a tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical merits of the position. In evaluating
whether a tax position has met the more-likely-than-not recognition threshold, it is presumed that the position
will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The
second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition
threshold is calculated to determine the amount of benefit to recognize in the financial statements. FIN No. 48
also requires new tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and
end of the reporting period. The provisions of FIN No. 48 are effective for fiscal years beginning after
December 15, 2006. As such, we are required to adopt it in our first quarter of fiscal year 2008. Any changes
to our income taxes due to the adoption of FIN No. 48 are treated as the cumulative effect of a change in
accounting principle. We are evaluating what impact the adoption of FIN No. 48 will have on our Consolidated
Financial Statements. This impact could be material and our future effective tax rates could be more volatile.
Net Income
Net income for fiscal years 2007 and 2006 was as follows (in millions):
March 31,
2007
%ofNet
Revenue
March 31,
2006
%ofNet
Revenue $ Change % Change
$76 2% $236 8% $(160) (68%)
Net income decreased by $160 million, or 68 percent, in fiscal 2007 as compared to fiscal 2006. The decrease
was due to a $395 million increase in our operating expenses primarily due to (1) an increase of $128 million
in stock-based compensation expense recognized as a result of our adoption of SFAS No. 123(R), (2) an
$83 million increase in our annual bonus expense, and (3) a $75 million increase in additional personnel-
related costs due to an increase in headcount (related in part to our acquisitions and growth in our EA Mobile
business). These increases in operating expenses were mitigated by (1) a $140 million increase in net revenue
and (2) an $81 million decrease in our income tax provision.
We expect net earnings to decrease in fiscal 2008 primarily as a result of (1) the fact that during fiscal 2008,
we expect to recognize the cost of goods sold and direct marketing and selling costs related to certain online-
enabled packaged goods for which a portion of the corresponding net revenue will be deferred and not
recognized until fiscal 2009, and (2) an increase in our research and development expense.
Comparison of Fiscal 2006 to Fiscal 2005
Net Revenue
From a geographical perspective, our total net revenue for the fiscal years ended March 31, 2006 and 2005
was as follows (in millions):
2006 2005
Increase/
(Decrease)
%
Change
Year Ended March 31,
North America.............................. $1,584 54% $1,665 53% $ (81) (5%)
Europe . . . ................................ 1,174 40% 1,284 41% (110) (9%)
Asia ..................................... 193 6% 180 6% 13 7%
International ............................... 1,367 46% 1,464 47% (97) (7%)
Total Net Revenue ........................... $2,951 100% $3,129 100% $(178) (6%)
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