Electronic Arts 2008 Annual Report Download - page 145

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 $54 million, $28 million and $41 million reduced marketing and sales expense for the
fiscal years ended March 31, 2008, 2007 and 2006, respectively. For the fiscal years ended March 31, 2008,
2007 and 2006, advertising expense, net of vendor reimbursements, totaled approximately $234 million,
$163 million and $180 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
We recognize the cost resulting from all share-based payment transactions in our financial statements using a
fair-value-based method. Upon adoption of SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”), “Share-Based
Payment”, we elected to use the modified prospective transition method of adoption. We measure compensa-
tion 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.
The estimated fair value of stock options and stock purchase rights granted pursuant to our employee stock
purchase plan is determined using the Black-Scholes valuation model. The Black-Scholes valuation model
requires us to make certain assumptions about the future. Estimation of these equity instruments’ fair value is
affected by our stock price as well as assumptions regarding subjective and complex variables such as
expected employee exercise behavior 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.
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 equity granted or assumed through acquisitions could significantly
impact compensation expense to be recognized in fiscal 2009 and future periods.
(p) Acquired In-Process Technology
The value assigned to acquired in-process technology is determined by identifying those acquired specific in-
process research and development projects that would be continued and for which (1) technological feasibility
had not been established as of the acquisition date, (2) there is no alternative future use, and (3) the fair value
is estimable with reasonable reliability.
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