Electronic Arts 2011 Annual Report Download - page 165

Annual Report
We file income tax returns in the United States, including various state and local jurisdictions. Our subsidiaries
file tax returns in various foreign jurisdictions, including Canada, France, Germany, Switzerland and the United
Kingdom. The IRS has completed its examination of our federal income tax returns through fiscal year 2005, and
is currently examining our fiscal years 2006, 2007 and 2008 tax returns. We are also currently under income tax
examination in Canada for fiscal years 2004 and 2005, and in France for fiscal years 2006 through 2008. We
remain subject to income tax examination for several other jurisdictions including Canada for fiscal years after
2001, in France for fiscal years after 2008, in Germany for fiscal years after 2007, in the United Kingdom for
fiscal years after 2009, and in Switzerland for fiscal years after 2007.
On January 18, 2011, we received a Corporation Notice of Reassessment (the “Notice”) from the Canada
Revenue Agency (“CRA”) claiming that we owe additional taxes, plus interest and penalties, for the 2004 and
2005 tax years. The incremental tax liability asserted by the CRA is $44 million, excluding interest and penalties.
The Notice primarily relates to transfer pricing in connection with the reimbursement of costs for services
rendered to our U.S. parent company by one of our subsidiaries in Canada. We do not agree with the CRA’s
position and we have filed a Notice of Objection with the appeals department of the CRA. We do not believe the
CRA’s position has merit and accordingly, we have not adjusted our liability for uncertain tax positions as a
result of the Notice. If, upon resolution, we are required to pay an amount in excess of our liability for uncertain
tax positions for this matter, the incremental amounts due would result in additional charges to income tax
expense. In determining such charges, we would consider whether any correlative relief should be included in the
form of additional tax deductions in the U.S should we decide to seek such relief.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if
any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued
for each year. Although potential resolution of uncertain tax positions involve multiple tax periods and
jurisdictions, it is reasonably possible that a reduction of up to $60 million of unrecognized tax benefits may
occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of
statutes of limitations, may affect the Company’s income tax provision and therefore benefit the resulting
effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any
settlements.
(11) COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of March 31, 2011, we leased certain of our current facilities, furniture and equipment under non-cancelable
operating lease agreements. We were required to pay property taxes, insurance and normal maintenance costs for
certain of these facilities and any increases over the base year of these expenses on the remainder of our facilities.
See Note 9 regarding the purchase of our Redwood Shores headquarters facilities on July 13, 2009.
Development, Celebrity, League and Content Licenses: Payments and Commitments
The products we produce in our studios are designed and created by our employee designers, artists, software
programmers and by non-employee software developers (“independent artists” or “third-party developers”). We
typically advance development funds to the independent artists and third-party developers during development of
our games, usually in installment payments made upon the completion of specified development milestones.
Contractually, these payments are generally considered advances against subsequent royalties on the sales of the
products. These terms are set forth in written agreements entered into with the independent artists and third-party
developers.
In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee
payments and marketing commitments that may not be dependent on any deliverables. Celebrities and
organizations with whom we have contracts include: FIFA, FIFPRO Foundation, FAPL (Football Association
Premier League Limited), and DFL Deutsche Fußball Liga GmbH (German Soccer League) (professional
soccer); National Basketball Association (professional basketball); PGA TOUR and Tiger Woods (professional
golf); National Hockey League and NHL Players’ Association (professional hockey); Warner Bros. (Harry
Potter); National Football League Properties, PLAYERS Inc., and Red Bear Inc. (professional football);
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