Electronic Arts 2008 Annual Report Download - page 113

estimates involve complex issues and require us to make judgments, such as anticipating the positions that we
will take on tax returns prior to our actually preparing the returns and the outcomes of disputes with tax
authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by
tax authorities and statutes of limitations. We are also required to make determinations of the need to record
deferred tax liabilities and the recoverability of deferred tax assets. A valuation allowance is established to the
extent that it is more likely than not that certain deferred tax assets will not be realized based on our
estimation of future taxable income in each jurisdiction.
In addition, changes in our business, including acquisitions, changes in our international corporate structure,
changes in the geographic location of business functions or assets, changes in the geographic mix and amount
of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable
accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax
audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect
the overall effective income tax rate.
The calculation of our tax liabilities involves accounting for uncertainties in the application of complex tax
rules, regulations and practices. As a result of the implementation of FIN No. 48, we recognize benefits for
uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition
of a benefit (or the absence of a liability) by determining if the weight of available evidence indicates that it is
more likely than not that the position taken will be sustained upon audit, including resolution of related
appeals or litigation processes, if any. If it is not, in our judgment, “more likely than not” that the position will
be sustained, then we do not recognize any benefit for the position. If it is more likely than not that the
position will be sustained, a second step in the process is required to estimate how much of the benefit we
will ultimately receive. This second step requires that we estimate and measure the tax benefit as the largest
amount that is more than 50 percent likely of being realized upon ultimate settlement. It is inherently difficult
and subjective to estimate such amounts. We reevaluate these uncertain tax positions on a quarterly basis. This
evaluation is based on a number of factors including, but not limited to, changes in facts or circumstances,
changes in tax law, new facts, correspondence with tax authorities during the course of an audit, effective
settlement of audit issues, and commencement of new audit activity. Such a change in recognition or
measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the
period. As a result of the adoption of FIN No. 48, we expect our tax rate to be more volatile.
We historically have considered undistributed earnings of our foreign subsidiaries to be indefinitely reinvested
outside of the United States and, accordingly, no U.S. taxes have been provided thereon. Although we
repatriated funds under the American Jobs Creation Act of 2004 in fiscal 2006, we currently intend to continue
to indefinitely reinvest the undistributed earnings of our foreign subsidiaries outside of the United States.
RESULTS OF OPERATIONS
Our fiscal year is reported on a 52 or 53-week period that ends on the Saturday nearest March 31. For
simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end. Our results of
operations for the fiscal years ended March 31, 2008 and 2007 contained 52 weeks and ended on March 29,
2008 and March 31, 2007, respectively. Our results of operations for the fiscal year ended March 31, 2006
contained 53 weeks and ended on April 1, 2006.
Comparison of Fiscal 2008 to Fiscal 2007
Net Revenue
Net revenue consists of sales generated from (1) video games sold as packaged goods and designed for play
on hardware consoles (such as the PlayStation 2, PLAYSTATION 3, Xbox 360 and Wii), PCs and handheld
game players (such as the Sony PSP, Nintendo DS and Nintendo Game Boy Advance), (2) video games for
cellular handsets, (3) interactive online-enabled packaged goods, digital content, and online services associated
with these games, (4) services in connection with some of our online games, (5) programming third-party web
sites with our game content, (6) allowing other companies to manufacture and sell our products in conjunction
with other products, and (7) advertisements on our online web pages and in our games.
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