Electronic Arts 2009 Annual Report Download - page 113

Annual Report
Significant management judgment is required to estimate our allowance for doubtful accounts in any accounting
period. We determine our allowance for doubtful accounts by evaluating customer creditworthiness in the
context of current economic trends and historical experience. Depending upon the overall economic climate and
the financial condition of our customers, the amount and timing of our bad debt expense and cash collection
could change significantly.
Fair Value Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States often requires us to determine the fair value of a particular item in order to fairly present our financial
statements. Without an independent market or another representative transaction, determining the fair value of a
particular item requires us to make several assumptions that are inherently difficult to predict and can have a
material impact on the conclusion on the appropriate accounting.
There are various valuation techniques used to estimate fair value. These include (1) the market approach where
market transactions for identical or comparable assets or liabilities are used to determine the fair value, (2) the
income approach, which uses valuation techniques to convert future amounts (for example, future cash flows or
future earnings) to a single present amount, and (3) the cost approach, which is based on the amount that would
be required to replace an asset. For many of our fair value estimates, including our estimates of the fair value of
acquired intangible assets and acquired in-process technology, we use the income approach. Using the income
approach requires the use of financial models, which require us to make various estimates including, but not
limited to (1) the potential future cash flows for the asset or liability being measured, (2) the timing of receipt or
payment of those future cash flows, (3) the time value of money associated with the delayed receipt or payment
of such cash flows, and (4) the inherent risk associated with the cash flows (risk premium). Making these cash
flow estimates are inherently difficult and subjective, and, if any of the estimates used to determine the fair value
using the income approach turns out to be inaccurate, our financial results may be negatively impacted.
Furthermore, relatively small changes in many of these estimates can have a significant impact to the estimated
fair value resulting from the financial models or the related accounting conclusion reached. For example, a
relatively small change in the estimated fair value of an asset may change a conclusion as to whether an asset is
impaired.
While we are required to make certain fair value assessments associated with the accounting for several types of
transactions, the following areas are the most sensitive to the assessments:
Business Combinations. We must estimate the fair value of assets acquired, liabilities assumed and acquired
in-process technology in a business combination. Our assessment of the estimated fair value of each of these can
have a material effect on our reported results as intangible assets are amortized over various lives and acquired
in-process technology is expensed upon consummation. Furthermore, a change in the estimated fair value of an
asset or liability often has a direct impact on the amount to recognize as goodwill, an asset that is not amortized.
Determining the fair value of acquired assets requires an assessment of the expected use of the asset and the
related expected future cash flows. Determining the fair value of an assumed liability requires an assessment of
the expected cost to extinguish the liability and determining the fair value of acquired in-process technology
requires an assessment of our expectations related to the timing and the successful completion of development of
an acquired in-process technology. Such estimates are inherently difficult and subjective and can have a material
impact on our financial statements.
Assessment of Impairment of Goodwill and Other Long-Lived Assets. Current accounting standards require that
we assess the recoverability of purchased intangible assets and other long-lived assets whenever events or
changes in circumstances indicate the remaining value of the assets recorded on our Consolidated Balance Sheets
is potentially impaired. In order to determine if a potential impairment has occurred, management must make
various assumptions about the estimated fair value of the asset by evaluating future business prospects and
estimated cash flows. For some assets, our estimated fair value is dependent upon predicting which of our
products will be successful. This success is dependent upon several factors, which are beyond our control, such
as which operating platforms will be successful in the marketplace. Also, our revenue and earnings are dependent
on our ability to meet our product release schedules.
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