Electronic Arts 2007 Annual Report Download - page 144

• 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.
Product Revenue: 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.
Shipping and Handling: In accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-10,
“Accounting for Shipping and Handling Fees and Costs”, we recognize amounts billed to customers for
shipping and handling as revenue. Additionally, shipping and handling costs incurred by us are included in
cost of goods sold.
Online Subscription Revenue: Online subscription revenue is derived principally from subscription revenue
collected from customers for online play related to our massively multiplayer online games and Pogo-branded
online games services. These customers generally pay on an annual basis or a month-to-month basis and
prepaid subscription revenue, including revenue collected from credit card sales, is recognized ratably over the
period for which the services are provided.
Software Licenses: We license software rights to manufacturers of products in related industries (for example,
makers of personal computers or computer accessories) to include certain of our products with the
manufacturer’s product, or offer our products to consumers who have purchased the manufacturer’s product.
We call these combined products “OEM bundles”. These OEM bundles generally require the customer to pay
us an upfront nonrefundable fee, which represents the guaranteed minimum royalty amount. Revenue is
generally recognized upon delivery of the product master or the first copy. Per-copy royalties on sales that
exceed the minimum guarantee are recognized as earned.
(l) Sales Returns and Allowances and Bad Debt Reserves
We estimate potential future product returns, price protection and stock-balancing programs related to current-
period product revenue. We analyze historical returns, current sell-through of distributor and retailer inventory
of our products, current trends in retail and the video game segment, changes in customer demand and
acceptance of our products and other related factors when evaluating the adequacy of our sales returns and
price protection allowances. In addition, we monitor the volume of sales to our channel partners and their
inventories as substantial overstocking in the distribution channel could result in high returns or higher price
protection costs in subsequent periods.
Similarly, significant judgment is required to estimate our allowance for doubtful accounts in any accounting
period. We analyze customer concentrations, customer credit-worthiness, current economic trends, and
historical experience when evaluating the adequacy of the allowance for doubtful accounts.
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