Electronic Arts 2015 Annual Report Download - page 152

We separately account for the liability and equity components of the Notes. The initial 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 initial 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 initial 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 on the date of issuance was $107 million.
In accounting for $15 million of issuance costs paid in July 2011 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 interest 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.
During the fiscal quarter ended March 31, 2015, the Sales Price Condition was met. As a result, the Notes are
convertible at the option of the holder through July 4, 2015, and the carrying value of the Notes was reclassified
as a current liability and the excess of the principal amount over the carrying value of the Notes was reclassified
from permanent equity to temporary equity in the Consolidated Balance Sheets as of March 31, 2015. The
determination of whether or not the Notes are convertible is performed on a quarterly basis. If this threshold is
not met next quarter, the Notes will be reclassified back to long-term debt and the temporary equity will be
reclassified back to permanent equity.
Upon conversion of any Notes, we will deliver cash up to the principal amount of the Notes and any excess
conversion value will be delivered in shares of our common stock. As of March 31, 2015, there were no shares
issued related to the Notes. Subsequent to March 31, 2015, shares issued upon conversion of the Notes were
minimal. Based on the closing price of our common stock of $58.24 at the end of the quarter ended March 31,
2015, the if-converted value of our Notes exceeded their principal amount by $528 million.
The carrying and fair values of the Notes are as follows (in millions):
As of
March 31, 2015
As of
March 31, 2014
Principal amount of Notes ............................................ 633 633
Unamortized debt discount of the liability component ...................... (31) (53)
Net carrying value of Notes ........................................ 602 580
Fair value of Notes ................................................. $1,158 $731
The fair value of the Notes is classified as Level 2 within the fair value hierarchy. As of March 31, 2015, the
remaining life of the Notes is approximately 1.3 years.
Convertible Note Hedge and Warrants Issuance
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. We paid $107 million for the Convertible Note Hedge, which was recorded as an equity
transaction. The Convertible Note Hedge, subject to customary anti-dilution adjustments, provides us with the
option to acquire, on a net settlement basis, approximately 19.9 million shares of our common stock equal to the
number of shares of our common stock that notionally underlie the Notes at a strike price of $31.74, which
corresponds to the conversion price of the Notes. As of March 31, 2015, we have not acquired any shares under
the Convertible Note Hedge. Subsequent to March 31, 2015, we received a minimal number of shares related to
the Convertible Note Hedge.
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