Electronic Arts 2015 Annual Report Download - page 135

Annual Report
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any
unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through
product and service sales. Any impairments or losses determined before the launch of a product are generally
charged to research and development expense. Impairments or losses determined post-launch are charged to cost
of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when
impairment indicators exist. If impairment exists, then the assets are written down to fair value. Unrecognized
minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on
these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the
contractual rights to use the intellectual property are terminated.
Advertising Costs
We generally expense advertising costs as incurred, except for production costs associated with media
campaigns, which are recognized as prepaid assets (to the extent paid in advance) and expensed at the first run of
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 $43 million, $66 million, and $45 million reduced marketing and
sales expense for the fiscal years ended March 31, 2015, 2014 and 2013, respectively. For the fiscal years ended
March 31, 2015, 2014 and 2013, advertising expense, net of vendor reimbursements, totaled approximately $228
million, $217 million, and $240 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
$(62) million, $4 million, and $2 million for the fiscal years ended March 31, 2015, 2014 and 2013, respectively,
are included in interest and other income (expense), net, in our Consolidated Statements of Operations. These net
foreign currency transaction gains (losses) are partially offset by net gains (losses) on our foreign currency
forward contracts of $59 million, $(5) million, and $(2) million for the fiscal years ended March 31, 2015, 2014
and 2013, respectively. See Note 4 for additional information on our foreign currency forward contracts.
65