Electronic Arts 2016 Annual Report Download - page 143

Annual Report
loss is identified. Losses are written off against the allowance when the receivable is determined to be
uncollectible. At March 31, 2016, we had two customers who accounted for approximately 26 percent and 24
percent of our consolidated gross receivables. At March 31, 2015, we had two customers who accounted for 26
percent and 10 percent of our consolidated gross receivables.
A majority of our sales are made to major retailers, distributors, and digital resellers. During the fiscal year ended
March 31, 2016, approximately 62 percent of our net revenue was derived from our top ten customers. Though
our products and services are available to consumers through a variety of retailers and directly through us, the
concentration of our sales in one, or a few, large customers could lead to a short-term disruption in our sales if
one or more retailers or distributors significantly reduced their purchases or ceased to carry our products and
services, and could make us more vulnerable to collection risk if one or more of these large customers became
unable to pay for our products or declared bankruptcy.
A significant portion of our revenue has historically been derived from games and services based on a few
popular franchises. For example, in fiscal year 2016, net revenue generated from the sale of products and services
associated with our three largest franchises accounted for approximately 55 percent of our net revenue.
Currently, a majority of our revenue is derived through sales of products and services on hardware consoles from
Sony and Microsoft. For the fiscal years ended March 31, 2016, 2015 and 2014, our net revenue for products and
services on Sony’s PlayStation 3 and 4, and Microsoft’s Xbox 360 and One consoles (combined across all four
platforms) was 67 percent, 66 percent, and 55 percent, respectively. These platform partners have significant
influence over the products and services that we offer on their platforms. Our agreements with Sony and
Microsoft typically give significant control to them over the approval, manufacturing and distribution of our
products and services, which could, in certain circumstances, leave us unable to get our products and services
approved, manufactured and provided to customers.
Short-term investments are placed with high quality financial institutions or in short-duration, investment-grade
securities. We limit the amount of credit exposure in any one financial institution or type of investment
instrument.
Royalties and Licenses
Royalty-based obligations with content licensors and distribution affiliates are either paid in advance and
capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations
are generally expensed to cost of revenue generally at the greater of the contractual rate or an effective royalty
rate based on the total projected net revenue for contracts with guaranteed minimums.
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
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