Electronic Arts 2007 Annual Report Download - page 145

(m) Advertising Costs
We generally expense advertising costs as incurred, except for production costs associated with media
campaigns which are recognized as prepaid assets (to the extent paid in advance) and expensed at the first run
of the advertisement. Cooperative advertising with our channel partners is accrued when revenue is recognized
and such amounts are included in marketing and sales expense if there is a separate identifiable benefit for
which we can reasonably estimate the fair value of the benefit identified. Otherwise, they are recognized as a
reduction of net revenue. We then reimburse the channel partner when qualifying claims are submitted. We
sometimes receive reimbursements for advertising costs from our vendors, and such amounts are recognized as
a reduction of marketing and sales expense if the advertising (1) is specific to the vendor, (2) represents an
identifiable benefit to us and (3) represents an incremental cost to us. Otherwise, vendor reimbursements are
recognized as a reduction of cost of goods sold as the related revenue is recognized. Vendor reimbursements
of advertising costs of $28 million, $41 million and $42 million reduced marketing and sales expense for the
fiscal years ended March 31, 2007, 2006 and 2005, respectively. For the fiscal years ended March 31, 2007,
2006 and 2005, advertising expenses, net of vendor reimbursements, totaled approximately $163 million,
$180 million and $174 million, respectively.
(n) Software Development Costs
Research and development costs, which consist primarily of software development costs, are expensed as
incurred. SFAS No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed”, provides for the capitalization of certain software development costs incurred after technological
feasibility of the software is established or for development costs that have alternative future uses. Under our
current practice of developing new products, the technological feasibility of the underlying software is not
established until substantially all product development is complete, which generally includes the development
of a working model. The software development costs that have been capitalized to date have been
insignificant.
(o) Stock-based Compensation
On April 1, 2006, we adopted SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”), “Share-Based Payment”,
and applied the provisions of SAB No. 107, “Share-Based Payment”, on our adoption of SFAS No. 123(R).
SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in
the financial statements using a fair-value-based method. We elected to use the modified prospective transition
method of adoption. SFAS No. 123(R) requires us to measure compensation cost for all outstanding unvested
stock-based awards made to our employees and directors based on estimated fair values and recognize
compensation over the service period for awards expected to vest.
For stock options and purchases through our employee stock purchase plan, we use the Black-Scholes option
valuation model to determine the grant date fair value. The Black-Scholes option valuation model requires us
to make certain assumptions about the future. The determination of fair value is affected by our stock price as
well as assumptions regarding subjective and complex variables such as expected employee exercise behaviors
and our expected stock price volatility over the term of the award. Generally, our assumptions are based on
historical information and judgment is required to determine if historical trends may be indicators of future
outcomes.
As required by SFAS No. 123(R), employee stock-based compensation expense is calculated based on awards
ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates and an adjustment is recognized at that
time.
Changes to our underlying stock price, our assumptions used in the Black-Scholes option valuation calculation
and our forfeiture rate, as well as future grants of equity, could significantly impact compensation expense to
be recognized in fiscal 2008 and future periods.
Annual Report
71