Electronic Arts 2007 Annual Report Download - page 158

Fiscal 2004, 2003 and 2002 Restructurings
In fiscal 2004, 2003 and 2002, we engaged in various restructurings based on management decisions. As of
March 31, 2007, all $34 million in cash had been paid out under these restructuring plans. As of March 31,
2006, the restructuring accrual was included in other accrued expenses presented in Note 8 of the Notes to
Consolidated Financial Statements.
(7) ROYALTIES AND LICENSES
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and
(3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities,
professional sports organizations, movie studios and other organizations for our use of their trademarks,
copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to indepen-
dent software developers are payments for the development of intellectual property related to our games. Co-
publishing and distribution royalties are payments made to third parties for the delivery of product.
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and
capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based
obligations are generally expensed to cost of goods sold generally at the greater of the contractual rate or an
effective royalty rate based on expected net product sales. Prepayments made to thinly capitalized independent
software developers and co-publishing affiliates 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 amortized to
research and development over the development period 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.
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 performance remains with the licensor. When
performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a
liability when incurred, rather than recording the asset and liability upon execution of the contract. Minimum
royalty payment obligations are classified as current liabilities to the extent such royalty payments are
contractually due within the next twelve months. As of March 31, 2007 and 2006, approximately $9 million of
minimum guaranteed royalty obligations had been recognized in each period and are included in the royalty-
related assets and liabilities 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. We had no impairments during fiscal 2007. During fiscal 2006 and
2005, we recorded impairment charges of $16 million and $8 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):
2007 2006
As of March 31,
Other current assets ........................................................ $ 69 $ 76
Other assets .............................................................. 40 55
Royalty-related assets ..................................................... $109 $131
At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates,
content licensors and/or independent software developers, we recognize unpaid royalty amounts owed to these
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