Electronic Arts 2012 Annual Report Download - page 180

We separately account for the liability and equity components of the Notes. The carrying amount of the equity
component representing the conversion option is equal to the fair value of the Convertible Note Hedge, as
described below, which is a substantially identical instrument and was purchased on the same day as the Notes.
The carrying amount of the liability component was determined by deducting the fair value of the equity
component from the par value of the Notes as a whole, and represents the fair value of a similar liability that does
not have an associated convertible feature. A liability of $525 million as of the date of issuance was recognized
for the principal amount of the Notes representing the present value of the Notes’ cash flows using a discount
rate of 4.54 percent. The excess of the principal amount of the liability component over its carrying amount is
amortized to interest expense over the term of the Notes using the effective interest method. The equity
component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for $15 million of issuance costs related to the Notes issuance, we allocated $13 million to the
liability component and $2 million to the equity component. Debt issuance costs attributable to the liability
component are being amortized to expense over the term of the Notes, and issuance costs attributable to the
equity component were netted with the equity component in additional paid-in capital.
The carrying values of the liability and equity components of the Notes are reflected in our Consolidated Balance
Sheets as follows (in millions):
As of
March 31, 2012
Principal amount of Notes ......................................................... $633
Unamortized discount of the liability component ....................................... (94)
Net carrying amount of Notes .................................................... $539
Equity component, net .......................................................... $105
Interest expense recognized related to the Notes are as follows (in millions):
Year Ended
March 31, 2012
Amortization of debt discount ...................................................... $ 14
Amortization of debt issuance costs ................................................. 2
Coupon interest expense .......................................................... 3
Total interest expense related to Notes ............................................. $ 19
As of March 31, 2012, the remaining life of the Notes is 4.3 years.
Convertible Note Hedge and Warrants Issuance
In addition, in July 2011, we entered into privately-negotiated convertible note hedge transactions (the
“Convertible Note Hedge”) with certain counterparties to reduce the potential dilution with respect to our
common stock upon conversion of the Notes. The Convertible Note Hedge, subject to customary anti-dilution
adjustments, provide us with the option to acquire, on a net settlement basis, approximately 19.9 million shares
of our common stock at a strike price of $31.74, which corresponds to the conversion price of the Notes and is
equal to the number of shares of our common stock that notionally underlie the Notes. As of March 31, 2012, we
have not purchased any shares under the Convertible Note Hedge. We paid $107 million for the Convertible Note
Hedge, which was recorded as an equity transaction.
Separately, we have also entered into privately-negotiated warrant transactions with the certain counterparties
whereby we sold to independent third parties warrants (the “Warrants”) to acquire, subject to customary anti-
dilution adjustments that are substantially the same as the anti-dilution provisions contained in the Notes, up to
19.9 million shares of our common stock (which is also equal to the number of shares of our common stock that
96