Electronic Arts 2016 Annual Report Download - page 70

consideration to be paid in an acquisition, and the impairment of accounting goodwill created as a result of an
acquisition when future events indicate there has been a decline in its value. When analyzing the operating
performance of an acquired entity, our management focuses on the total return provided by the investment (i.e.,
operating profit generated from the acquired entity as compared to the purchase price paid including the final
amounts paid for contingent consideration) without taking into consideration any allocations made for accounting
purposes. When analyzing the operating performance of an acquisition in subsequent periods, the Company’s
management excludes the GAAP impact of any adjustments to the fair value of these acquisition-related balances
to its financial results.
Amortization of Debt Discount and Loss on Conversion of Notes. In July 2011, we issued $632.5 million of
0.75% convertible senior notes in a private placement offering, which mature in July 2016 (the “Convertible
Notes”). As of March, 31, 2016, $163 million remained outstanding. Under GAAP, certain convertible debt
instruments that may be settled in cash on conversion are required to be separately accounted for as liability
(debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-
convertible debt borrowing rate. Accordingly, for GAAP purposes, we amortize as a debt discount an amount
equal to the fair value of the conversion option on the Convertible Notes over their term. The debt discount is
classified as interest expense. Upon settlement of our Convertible Notes, we attribute the fair value of the
consideration transferred to the liability and equity components. The difference between the fair value of the
consideration attributed to the liability component and the carrying value of the liability is recorded as a non-cash
loss in the statement of the operations. Our management excludes the effect of the amortization of debt discount
and the non-cash loss on the early conversion of debt in its non-GAAP financial measures.
Change in Deferred Net Revenue (Online-enabled Games). The majority of our software games can be
connected to the Internet whereby a consumer may be able to download unspecified content or updates on a
when-and-if-available basis (“unspecified updates”) for use with the original game software. In addition, we may
also offer an online matchmaking service that permits consumers to play against each other via the Internet.
GAAP requires us to account for the consumer’s right to receive unspecified updates or the matchmaking service
for no additional fee as a “bundled” sale, or multiple-element arrangement. We are not able to objectively
determine the fair value of these unspecified updates or online service included in certain of its online-enabled
games. As a result, the Company recognizes the revenue from the sale of these online-enabled games on a
straight-line basis over the estimated offering period. Our management excludes the impact of the change in
deferred net revenue related to online-enabled games in its non-GAAP financial measures for the reasons stated
above and also to facilitate an understanding of our operations because all related costs of revenue are expensed
as incurred instead of deferred and recognized ratably.
Income Tax Adjustments. The Company uses a fixed, long-term projected tax rate internally to evaluate its
operating performance, to forecast, plan and analyze future periods, and to assess the performance of its
management team. Accordingly, the Company applies the same tax rate to its non-GAAP financial results.
During fiscal year 2017, the Company will apply a tax rate of 21 percent to its non-GAAP financial results.
During fiscal year 2016, the Company applied a tax rate of 22 percent. For fiscal years 2014 and 2015, a 25
percent tax rate was applied, and through fiscal year 2013, the Company applied a 28 percent tax rate.
Shares from Convertible Bond Hedge. The Convertible Notes were issued with an initial conversion price of
approximately $31.74 per share. When the quarterly average trading price of EA’s common stock is above
$31.74 per share, the potential conversion of the Convertible Notes has a dilutive impact on the Company’s
earnings per share. At the time they were issued, the Company entered into convertible note hedge transactions
(the “Convertible Bond Hedge”) to offset the dilutive effect of the Convertible Notes. The Company includes the
anti-dilutive effect of the Convertible Bond Hedge in determining its non-GAAP dilutive shares.
Stock-Based Compensation. When evaluating the performance of its individual business units, the Company
does not consider stock-based compensation charges. Likewise, the Company’s management teams exclude
stock-based compensation expense from their short and long-term operating plans. In contrast, the Company’s
management teams are held accountable for cash-based compensation and such amounts are included in their
operating plans. Further, when considering the impact of equity award grants, we place a greater emphasis on
overall stockholder dilution rather than the accounting charges associated with such grants.
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