Electronic Arts 2014 Annual Report Download - page 102

current trends in retail and the video game industry, changes in customer demand, acceptance of our software
products, and other related factors. In addition, we monitor the volume of sales to our channel partners and their
inventories, as substantial overstocking in the distribution channel could result in high returns or higher price
protection in subsequent periods.
In the future, actual returns and price protections may materially exceed our estimates as unsold software
products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or
technological obsolescence due to new platforms, product updates or competing software products. While we
believe we can make reliable estimates regarding these matters, these estimates are inherently subjective.
Accordingly, if our estimates change, our returns and price protection allowances would change and would
impact the total net revenue, accounts receivable and deferred net revenue that we report.
We determine our allowance for doubtful accounts by evaluating the following: customer creditworthiness,
current economic trends, historical experience, age of current accounts receivable balances, changes in financial
condition or payment terms of our customers. Significant management judgment is required to estimate our
allowance for doubtful accounts in any accounting period. The amount and timing of our bad debt expense and
cash collection could change significantly as a result of a change in any of the evaluation factors mentioned
above.
Fair Value Estimates
The preparation of financial statements in conformity with U.S. GAAP 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 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 value 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, 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 expected receipt or payment of such cash flows, and
(4) the inherent risk associated with the cash flows (risk premium). Making these cash flow estimates is
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 these assessments:
Business Combinations. We must estimate the fair value of assets acquired, liabilities and contingencies
assumed, acquired in-process technology, and contingent consideration issued 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 estimated useful lives. Furthermore, the estimated fair value assigned
to an acquired asset or liability has a direct impact on the amount we recognize as goodwill, which is an asset that
is not amortized. Determining the fair value of assets acquired requires an assessment of the highest and best use
or the expected price to sell the asset and the related expected future cash flows. Determining the fair value of
acquired in-process technology also requires an assessment of our expectations related to the use of that
technology. Determining the fair value of an assumed liability requires an assessment of the expected cost to
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