Electronic Arts 2007 Annual Report Download - page 175

misstatements based on the effects of correcting the misstatements existing in the balance sheet at the end of
the reporting period. Prior to our application of the guidance in SAB No. 108, we used the rollover approach.
We elected to recognize the cumulative effect of adoption as adjustments to assets and liabilities as of the
beginning of fiscal 2007 and the offsetting adjustment to the opening balance of retained earnings for fiscal
2007.
Property and Equipment Capitalization Adjustment
We adjusted the beginning retained earnings balance for fiscal 2007 related to the correction of our historical
accounting treatment of certain property and equipment purchases. We capitalize property and equipment
purchases when certain quantitative thresholds are met; otherwise, they are expensed when purchased. Our
internal review of our capitalization thresholds suggested that certain property and equipment should have
been capitalized and not expensed. We believe the impact of the property and equipment capitalization errors
were not material to prior years’ income statements under the rollover approach. However, under the iron
curtain method, the cumulative property and equipment capitalization errors were material to our fiscal 2007
financial statements and, therefore, we recognized the following cumulative adjustment to our fiscal 2007
opening balance sheet (in millions):
Increase in property and equipment, net ................................................. $13
Increase in deferred income tax liabilities ............................................... 3
Increase in retained earnings . ........................................................ 10
The impact on retained earnings is comprised of the following amounts (in millions):
Fiscal 2007 Beginning
Balance Adjustment 2006 2005 2004
Year Ended March 31,
Increase in operating income ............................ $13 $— $10 $3
Tax effect........................................... (3) — (2) (1)
Increase in net income ................................. $10 $— $ 8 $2
Business Tax Expense Adjustment
We adjusted the beginning retained earnings balance for fiscal 2007 related to the correction of our historical
accounting of certain business tax expenses. Our internal review indicated that we had inadvertently not
accrued for approximately $7 million in probable business tax obligations related to prior years. We believe
the impact of these adjustments were not material to prior years’ income statements under the rollover
approach. However, under the iron curtain method, the cumulative business tax expense adjustments were
material to our fiscal 2007 financial statements and, therefore, we recognized the following cumulative
adjustment to our fiscal 2007 opening balance sheet (in millions):
Increase in accrued and other liabilities ................................................. $7
Decrease in deferred income tax liabilities ............................................... (3)
Decrease in retained earnings ......................................................... (4)
The impact on retained earnings is comprised of the following amounts (in millions):
Fiscal 2007 Beginning
Balance Adjustment 2006 2005 2004 2003
Year Ended March 31,
Decrease in operating income ...................... $(7) $(3) $(2) $ (1) $ (1)
Tax effect ..................................... 3 1 1 1 —
Decrease in net income ........................... $(4) $(2) $(1) $ — $ (1)
Annual Report
101