Electronic Arts 2014 Annual Report Download - page 142

the advertisement. Cooperative advertising costs are recognized when incurred and are included in marketing and
sales expense if there is a separate identifiable benefit for which we can reasonably estimate the fair value of the
benefit identified. Otherwise, they are recognized as a reduction of revenue and are generally accrued when
revenue is recognized. We then reimburse the channel partner when qualifying claims are submitted.
We are also reimbursed by our vendors for certain advertising costs incurred by us that benefit our vendors. Such
amounts are recognized as a reduction of marketing and sales expense if the advertising (1) is specific to the
vendor, (2) represents an identifiable benefit to us, and (3) represents an incremental cost to us. Otherwise,
vendor reimbursements are recognized as a reduction of cost of revenue as the related revenue is recognized.
Vendor reimbursements of advertising costs of $66 million, $45 million, and $39 million reduced marketing and
sales expense for the fiscal years ended March 31, 2014, 2013 and 2012, respectively. For the fiscal years ended
March 31, 2014, 2013 and 2012, advertising expense, net of vendor reimbursements, totaled approximately
$217 million, $240 million, and $321 million, respectively.
Software Development Costs
Research and development costs, which consist primarily of software development costs, are expensed as
incurred. We are required to capitalize software development costs incurred for computer software to be sold,
leased or otherwise marketed after technological feasibility of the software is established or for development
costs that have alternative future uses. Under our current practice of developing new games, the technological
feasibility of the underlying software is not established until substantially all product development and testing is
complete, which generally includes the development of a working model. The software development costs that
have been capitalized to date have been insignificant.
Foreign Currency Translation
For each of our foreign operating subsidiaries, the functional currency is generally its local currency. Assets and
liabilities of foreign operations are translated into U.S. dollars using month-end exchange rates, and revenue and
expenses are translated into U.S. dollars using average exchange rates. The effects of foreign currency translation
adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.
Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions
denominated in currencies other than the functional currency. Net foreign currency transaction gains (losses) of
$4 million, $2 million, and $(29) million for the fiscal years ended March 31, 2014, 2013 and 2012, respectively,
are included in interest and other income (expense), net, in our Consolidated Statements of Operations.
Income Taxes
We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial
statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. We record a valuation allowance against deferred tax assets when it
is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making
this determination, we are required to give significant weight to evidence that can be objectively verified. It is
generally difficult to conclude that a valuation allowance is not needed when there is significant negative
evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less
objective than past results, particularly in light of the economic environment. Therefore, cumulative losses weigh
heavily in the overall assessment.
In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other
possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the
reversal of existing deferred tax liabilities, the carry back of losses and credits as allowed under current tax law,
and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant
judgments. Each source of income must be evaluated based on all positive and negative evidence; this evaluation
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