Electronic Arts 2015 Annual Report Download - page 146

on the total projected net revenue for contracts with guaranteed minimums. Prepayments made to thinly
capitalized independent software developers and co-publishing affiliates are generally made in connection with
the development of a particular product, and therefore, we are generally subject to development risk prior to the
release of the product. Accordingly, payments that are due prior to completion of a product are generally
expensed to research and development over the development period as the services are incurred. Payments due
after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.
Our contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as
an asset and as a liability at the contractual amount when no performance remains with the licensor. When
performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a
liability when incurred, rather than recording the asset and liability upon execution of the contract. Royalty
liabilities are classified as current liabilities to the extent such royalty payments are contractually due within the
next 12 months.
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.
During fiscal year 2015, we recognized a loss of $122 million on a previously unrecognized licensed intellectual
property commitment. The $122 million loss relates to the termination of certain rights we previously had to use
a licensor’s intellectual property. In addition, because the loss will be paid in installments through March 2022,
our accrued loss was computed using the effective interest method. We currently estimate recognizing in future
periods through March 2022, approximately $29 million for the accretion of interest expense related to this
obligation. This interest expense will be included in cost of revenue in our Consolidated Statement of Operations.
During fiscal year 2014, we recognized losses of $35 million, inclusive of impairment charges of $17 million on
royalty-based assets and $18 million of losses on previously unrecognized royalty-based commitments.
The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included
in other current assets and other assets, consisted of (in millions):
As of March 31,
2015 2014
Other current assets .......................................................... $ 70 $ 97
Other assets ................................................................ 59 58
Royalty-related assets ...................................................... $129 $155
At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates,
content licensors, and/or independent software developers, we classify any recognized unpaid royalty amounts
due to these parties as accrued liabilities. The current and long-term portions of accrued royalties, included in
accrued and other current liabilities and other liabilities, consisted of (in millions):
As of March 31,
2015 2014
Accrued royalties ............................................................ $119 $ 73
Other accrued expenses ....................................................... — 7
Other liabilities ............................................................. 131 53
Royalty-related liabilities ................................................... $250 $133
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