Electronic Arts 2012 Annual Report Download - page 119

Annual Report
whether it is necessary to perform the two-step goodwill impairment test. If an entity concludes it is more likely
than not that the fair value of a reporting unit exceeds its carrying amount, it need not perform the two-step
impairment test. If based on that assessment, we believe it is more likely than not that the fair value of its
reporting units is less than its carrying value, a two-step goodwill impairment test is required to be performed.
The first step measures for impairment by applying fair value-based tests at the reporting unit level. The second
step (if necessary) measures the amount of impairment by applying fair value-based tests to the individual assets
and liabilities within each reporting unit. Our reporting units are determined by the components of our operating
segments that constitute a business for which discrete financial information is available and segment
management regularly reviews the operating results of that component.
To determine the fair value of each reporting unit used in the first step, we use the market approach, which
utilizes comparable companies’ data, the income approach, which utilizes discounted cash flows, or a
combination thereof. Determining whether an event or change in circumstances does or does not indicate that the
fair value of a reporting unit is below its carrying amount is inherently subjective. Each step requires us to make
judgments and involves the use of significant estimates and assumptions. These estimates and assumptions
include long-term growth rates, tax rates, and operating margins used to calculate projected future cash flows,
risk-adjusted discount rates based on a weighted average cost of capital, future economic and market conditions
and determination of appropriate market comparables. These estimates and assumptions have to be made for each
reporting unit evaluated for impairment. As of our last annual assessment of goodwill in the fourth quarter of
fiscal year 2012, we concluded that the estimated fair values of each of our reporting units significantly exceeded
their carrying amounts and we have not identified any indicators of impairment since. Our estimates for market
growth, our market share and costs are based on historical data, various internal estimates and certain external
sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage
the underlying business. Our business consists of developing, marketing and distributing video game software
using both established and emerging intellectual properties and our forecasts for emerging intellectual properties
are based upon internal estimates and external sources rather than historical information and have an inherently
higher risk of inaccuracy. If future forecasts are revised, they may indicate or require future impairment charges.
We base our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable and
inherently uncertain. Actual future results may differ from those estimates.
Assessment of Impairment of Short-Term Investments and Marketable Equity Securities. We periodically
review our short-term investments and marketable equity securities for impairment. Our short-term investments
consist of securities with remaining maturities greater than three months at the time of purchase and our
marketable equity securities consist of investments in common stock of publicly traded companies, both are
accounted for as available-for-sale securities. Unrealized gains and losses on our short-term investments and
marketable equity securities are recorded as a component of accumulated other comprehensive income in
stockholders’ equity, net of tax, until either (1) the security is sold, (2) the security has matured, or (3) we
determine that the fair value of the security has declined below its adjusted cost basis and the decline is other-
than-temporary. Realized gains and losses on our short-term investments and marketable equity securities are
calculated based on the specific identification method and are reclassified from accumulated other
comprehensive income to interest and other income, net, and gains (losses) on strategic investments, net,
respectively. Determining whether the decline in fair value is other-than-temporary requires management
judgment based on the specific facts and circumstances of each security. The ultimate value realized on these
securities is subject to market price volatility until they are sold. We consider various factors in determining
whether we should recognize an impairment charge, including the credit quality of the issuer, the duration that
the fair value has been less than the adjusted cost basis, severity of the impairment, reason for the decline in
value and potential recovery period, the financial condition and near-term prospects of the investees, and our
intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated
recovery in market value, any contractual terms impacting the prepayment or settlement process, as well as, if we
would be required to sell an investment due to liquidity or contractual reasons before its anticipated recovery.
Our ongoing consideration of these factors could result in impairment charges in the future, which could have a
material impact on our financial results.
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