Electronic Arts 2011 Annual Report Download - page 159

Annual Report
Other Restructurings and Reorganization
We also engaged in various other restructurings and a reorganization based on management decisions made prior
to April 1, 2008. From April 1, 2008 through March 31, 2011, $31 million in cash has been paid out under these
restructuring plans. $7 million of the accrual as of March 31, 2009 was reclassified during the three months
ended June 30, 2009, from accrued and other current liabilities to other liabilities on our Consolidated Balance
Sheet. We do not expect to incur any additional charges under these plans.
(8) 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 independent
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 products.
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 for contracts with
guaranteed minimums, or an effective royalty rate based on the total projected net revenue. Prepayments made to
thinly capitalized independent software developers and co-publishing affiliates are generally made 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
expensed 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. Royalty
liabilities are classified as current liabilities to the extent such royalty payments are contractually due within the
next 12 months.
Each quarter, we also evaluate the expected 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 or losses determined before the launch of a product are charged to research and
development expense. Impairments or losses determined post-launch are charged to cost of goods sold. We evaluate
long-lived royalty-based assets for impairment generally using undiscounted cash flows when impairment indicators
exist. Unrecognized minimum royalty-based commitments are accounted for as executory contracts and, therefore,
any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease
use) or the contractual rights to use the intellectual property are terminated. During fiscal year 2011, we recognized
losses of $85 million, inclusive of $75 million related to the fiscal 2011 restructuring, on previously unrecognized
minimum royalty-based commitments. In addition, we recognized impairment charges of $40 million, inclusive of
$27 million related to the fiscal 2011 restructuring, on royalty-based assets. During fiscal year 2010, we recognized
impairment charges of $10 million, inclusive of $9 million related to the fiscal 2010 restructuring, on royalty-based
assets. During fiscal year 2009, we recognized losses of $43 million on previously unrecognized minimum royalty-
based commitments. The losses in fiscal year 2009 primarily related to an amendment of a licensor agreement in
which we terminated certain rights we previously had to use the licensor’s intellectual property. The losses and
impairment charges related to restructuring and other restructuring plan-related activities are presented in Note 7 of
the Notes to Consolidated Financial Statements.
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