NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Electronic Arts is a global leader in digital interactive entertainment. We develop, market, publish and deliver games, content and services that can be played and watched on game consoles, PCs, mobile phones and tablets. We believe that the breadth and depth of our portfolio, live services offerings, and our use of multiple business models and distribution channels provide us with strategic advantages. Our foundation is a collection of intellectual property from which we create innovative games and content that enables us to build on-going and meaningful relationships with a community of players, creators and viewers. Our portfolio includes brands that we either wholly own (such as Battlefield, The Sims, Apex Legends, Need for Speed and Plants v. Zombies) or license from others (such as FIFA, Madden NFL and Star Wars). We also offer our players high-quality experiences designed to provide value to players and to extend and enhance gameplay. These live services include extra content, subscription offerings and other revenue generated outside of the sale of our base games. And we are focused on reaching more players whenever and wherever they want to play. We believe that we can add value to our network by making it easier for players to connect to a world of play by offering choice of business model, distribution channel and device.
Consolidation
The accompanying Consolidated Financial Statements include the accounts of Electronic Arts Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
Our fiscal year is reported on a 52- or 53-week period that ends on the Saturday nearest March 31. Our results of operations for the fiscal years ended March 31, 2020, 2019 and 2018 contained 52 weeks each and ended on March 28, 2020, March 30, 2019 and March 31, 2018 respectively. For simplicity of disclosure, all fiscal periods are referred to as ending on a calendar month end.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Such estimates include sales returns and allowances, provisions for doubtful accounts, accrued liabilities, offering periods for deferred net revenue, relative stand-alone selling price for identified performance obligations in our revenue transactions, losses on royalty commitments, estimates regarding the recoverability of prepaid royalties, inventories, long-lived assets, discount rates used in the measurement and recognition of lease liabilities, assets acquired and liabilities assumed in business combinations, certain estimates related to the measurement and recognition of costs resulting from our stock-based payment awards, unrecognized tax benefits, deferred income tax assets and associated valuation allowances, as well as estimates used in our goodwill, intangibles and short-term investment impairment tests. These estimates generally involve complex issues and require us to make judgments, involve analysis of historical and future trends, can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from our estimates.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 842, Leases (the “New Lease Standard” or “ASC 842”). The FASB issued this standard to increase transparency and comparability among organizations by recognizing right-of-use (“ROU”) lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.
We adopted the New Lease Standard on April 1, 2019, the beginning of fiscal year 2020, using the optional transition method which allows us to use the effective date of the New Lease Standard as the date of initial application on transition, instead of at the beginning of the earliest comparative period presented. Accordingly, we did not adjust prior periods for the effects of the New Lease Standard. Additionally, we elected to apply the package of practical expedients, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our assessment of initial direct costs for any leases that exist prior to adoption of the new lease standard.
The adoption of the New Lease Standard on April 1, 2019 resulted in the recognition of operating lease ROU assets of $215 million, current operating lease liabilities of $50 million, and noncurrent operating lease liabilities of $197 million on our Consolidated Balance Sheets. In addition, upon transition, we eliminated prepaid rent assets of $6 million and deferred rent
liabilities of $38 million. Operating lease ROU assets, operating lease liabilities, and noncurrent operating lease liabilities are included in other assets, accrued and other current liabilities, and other liabilities, respectively. The adoption of the New Lease Standard did not have an impact on our Consolidated Statements of Operations or Cash Flows.
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BALANCE SHEETS
(In millions)
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Balance at March 31, 2019
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Adjustments due to New Lease Standard Adoption
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Balance at April 1, 2019
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Assets
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Other current assets
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$
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313
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$
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(6)
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$
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307
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Other assets
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114
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215
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329
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Liabilities
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Accrued and other current liabilities
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$
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1,052
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$
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47
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$
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1,099
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Other liabilities
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132
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162
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294
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In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update is intended to make more financial and nonfinancial hedging strategies eligible for hedge accounting, simplify the application of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness, and increase transparency around the scope and results of hedging programs. We adopted ASU 2017-12 in the first quarter of fiscal 2020, using a modified-retrospective approach. Upon adoption of ASU 2017-12, we no longer measure and report hedge ineffectiveness separately. We instead present the entire change in the fair value of a hedging instrument in the same Consolidated Statements of Operations line as the hedged item. Additionally, the amount historically excluded from the assessment of hedge effectiveness for our cash flow hedges is now recognized into the Consolidated Statements of Operations in the period when the forecasted transaction is recognized. The cumulative-effect adjustment from the adoption had a de minimis impact on our Consolidated Financial Statements. See Note 5 — Derivative Financial Instruments.
Other Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This update replaces the existing incurred loss impairment model with an expected loss model. It also requires credit losses related to available-for-sale debt securities to be recognized as an allowance for credit losses rather than as a reduction to the carrying value of the securities. This update is effective for us beginning in the first quarter of fiscal year 2021. We continue to monitor the economic implications of the COVID-19 pandemic; however based on current market conditions, we do not expect the adoption to have a material impact on our Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This update eliminates, adds, and modifies certain fair value measurement disclosure requirements. This update is effective for us beginning in the first quarter of fiscal 2021. We do not expect the adoption to have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update requires a customer in a cloud computing service arrangement to follow the internal-use software guidance in order to determine which implementation costs to defer and recognize as an asset. This update is effective for us beginning in the first quarter of fiscal year 2021. We do not expect the adoption to have a material impact on our Consolidated Financial Statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for us beginning in the first quarter of fiscal year 2022. Early adoption is permitted. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements and related disclosures.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents, and Short-Term Investments
Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original or remaining maturities of three months or less at the time of purchase.
Short-term investments consist of debt securities with original or remaining maturities of greater than three months at the time of purchase, and are accounted for as available-for-sale securities and are recorded at fair value. Cash, cash equivalents and short-term investments are available for use in current operations or other activities such as capital expenditures, business combinations and share repurchases.
Unrealized gains and losses on our short-term investments are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity, net of tax, until either (1) the security is sold, (2) the security has matured, or (3) we determine that the fair value of the security has declined below its adjusted cost basis and the decline is other-than-temporary. Realized gains and losses on our short-term investments are calculated based on the specific identification method and are reclassified from accumulated other comprehensive income (loss) to interest and other income (expense), net. Determining whether a decline in fair value is other-than-temporary requires management judgment based on the specific facts and circumstances of each security. The ultimate value realized on these securities is subject to market price volatility until they are sold.
Our short-term investments are evaluated for impairment quarterly. We consider various factors in determining whether we should recognize an impairment charge, including the credit quality of the issuer, the duration that the fair value has been less than the adjusted cost basis, severity of the impairment, reason for the decline in value and potential recovery period, the financial condition and near-term prospects of the investees, our intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and any contractual terms impacting the prepayment or settlement process. If we conclude that an investment is other-than-temporarily impaired, we recognize an impairment charge at that time in our Consolidated Statements of Operations. Based on our evaluation, we did not consider any of our investments to be other-than-temporarily impaired as of March 31, 2020 and 2019.
Property and Equipment, Net
Property and equipment, net, are stated at cost. Depreciation is calculated using the straight-line method over the following useful lives:
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Buildings
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20 to 25 years
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Computer equipment and software
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3 to 6 years
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Equipment, furniture and fixtures, and other
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3 to 5 years
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Leasehold improvements
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Lesser of the lease term or the estimated useful lives of the improvements, generally 1 to 15 years
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We capitalize costs associated with internal-use software development once a project has reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the software, and payroll and payroll-related expenses for employees who are directly associated with the development of the software. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose. Once the internal-use software is ready for its intended use, the assets are depreciated on a straight-line basis over each asset’s estimated useful life, which is generally three years. The net book value of capitalized costs associated with internal-use software was $56 million and $37 million as of March 31, 2020 and 2019, respectively.
Acquisition-Related Intangibles and Other Long-Lived Assets
We recognize acquisition-related intangible assets, such as acquired developed and core technology, in connection with business combinations. We amortize the cost of acquisition-related intangible assets that have finite useful lives on a straight-line basis over the lesser of their estimated useful lives or the agreement terms, currently from one to five years. We evaluate acquisition-related intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset group. This includes assumptions about future prospects for the business that the asset relates to and typically involves computations of the estimated future cash flows to be generated by these businesses. Based on these judgments and assumptions, we determine whether we need to take an impairment charge to reduce the value of the asset stated on our Consolidated Balance Sheets to reflect its estimated fair value. When we consider such assets to be impaired, the amount of impairment we recognize is measured by the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill Impairment
In assessing impairment on our goodwill, we first analyze qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a goodwill impairment test. The qualitative factors we assess include long-term prospects of our performance, share price trends and market capitalization, and Company specific events. If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we do not need to perform an impairment test. If based on that assessment, we believe it is more likely than not that the fair value of the reporting unit is less than its carrying value we will measure goodwill for impairment by applying fair value-based tests at the reporting unit level. Reporting units are determined by the components of operating segments that constitute a business for which (1) discrete financial information is available, (2) segment management regularly reviews the operating results of that component, and (3) whether the component has dissimilar economic characteristics to other components. As of March 31, 2020, we have only one reportable segment, which represents our only operating segment.
Revenue Recognition
We adopted ASC Topic 606, Revenue From Contracts with Customers (the “New Revenue Standard” or “ASC 606”), on April 1, 2018, the beginning of fiscal year 2019, using the modified retrospective method. The comparative information for periods prior to April 1, 2018 has not been restated and continues to be reported under the accounting standards in effect for those periods.
We derive revenue principally from sales of our games, and related extra content and services that can be played by customers on a variety of platforms which include game consoles, PCs, mobile phones and tablets. Our product and service offerings include, but are not limited to, the following:
•full games with both online and offline functionality (“Games with Services”), which generally includes (1) the initial game delivered digitally or via physical disc at the time of sale and typically provide access to offline core game content (“software license”); (2) updates on a when-and-if-available basis, such as software patches or updates, and/or additional free content to be delivered in the future (“future update rights”); and (3) a hosted connection for online playability (“online hosting”);
•full games with online-only functionality which require an Internet connection to access all gameplay and functionality (“Online-Hosted Service Games”);
•extra content related to Games with Services and Online-Hosted Service Games which provides access to additional in-game content;
•subscriptions, such as Origin Access, Origin Access Premier and EA Access, that generally offers access to a selection of full games, in-game content, online services and other benefits typically for a recurring monthly or annual fee; and
•licensing to third parties to distribute and host our games and content.
We evaluate and recognize revenue by:
•identifying the contract(s) with the customer;
•identifying the performance obligations in the contract;
•determining the transaction price;
•allocating the transaction price to performance obligations in the contract; and
•recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”).
Certain of our full game and/or extra content are sold to resellers with a contingency that the full game and/or extra content cannot be resold prior to a specific date (“Street Date Contingency”). We recognize revenue for transactions that have a Street Date Contingency when the Street Date Contingency is removed and the full game and/or extra content can be resold by the reseller. For digital full game and/or extra content downloads sold to customers, we recognize revenue when the full game and/or extra content is made available for download to the customer.
Online-Enabled Games
Games with Services. Our sales of Games with Services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of Games with Services are generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting.
Since we do not sell the performance obligations on a stand-alone basis, we consider market conditions and other observable inputs to estimate the stand-alone selling price for each performance obligation. For Games with Services, generally 75 percent of the sales price is allocated to the software license performance obligation and recognized at a point in time when control of the license has been transferred to the customer (which is usually at or near the same time as the booking of the transaction). The remaining 25 percent is allocated to the future update rights and the online hosting performance obligations and recognized ratably as the service is provided (over the Estimated Offering Period).
Online-Hosted Service Games. Sales of our Online-Hosted Service Games are determined to have one distinct performance obligation: the online hosting. We recognize revenue from these arrangements as the service is provided.
Extra Content. Revenue received from sales of downloadable content are derived primarily from the sale of virtual currencies and digital in-game content designed to provide value to players and to extend and enhance gameplay. Sales of extra content are accounted for in a manner consistent with the treatment for our Games with Services and Online-Hosted Service Games as discussed above, depending upon whether or not the extra content has offline functionality. That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service offering.
Subscriptions
Sales of our subscriptions are deemed to be one performance obligation and we recognize revenue from these arrangements ratably over the subscription term as the performance obligation is satisfied.
Licensing Revenue
In certain countries, we utilize third-party licensees to distribute and host our games and content in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and/or sales-based royalties. These arrangements typically include multiple performance obligations, such as a time-based license of software and future update rights. We recognize as revenue a portion of the minimum guarantee when we transfer control of the license of software (generally upon commercial launch) and the remaining portion ratably over the contractual term in which we provide the licensee with future update rights. Any sales-based royalties are generally recognized as the related sales occur by the licensee.
Significant Judgments around Revenue Arrangements
Identifying performance obligations. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, (i.e., the customer can benefit from the
goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, we must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation.
Determining the transaction price. The transaction price is determined based on the consideration that we will be entitled to receive in exchange for transferring our goods and services to the customer. Determining the transaction price often requires judgment, based on an assessment of contractual terms and business practices. It further includes review of variable consideration such as discounts, sales returns, price protection, and rebates, which is estimated at the time of the transaction. See below for additional information regarding our sales returns and price protection reserves. In addition, the transaction price does not include an estimate of the variable consideration related to sales-based royalties. Sales-based royalties are recognized as the sales occur.
Allocating the transaction price. Allocating the transaction price requires that we determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where we do not sell the performance obligation on a stand-alone basis (which occurs in the majority of our transactions). In those situations, we determine the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include: historical internal pricing data, cost plus margin analyses, third-party external pricing of similar or same products and services such as software licenses and maintenance support within the enterprise software industry. The results of our analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation.
Determining the Estimated Offering Period. The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We also consider the estimated period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer (i.e., time in channel). Based on these two factors, we then consider the method of distribution. For example, games sold at retail would have a composite offering period equal to the online gameplay period plus time in channel as opposed to digitally-distributed software licenses which are delivered immediately via digital download and therefore, the offering period is estimated to be only the online gameplay period.
Additionally, we consider results from prior analyses, known and expected online gameplay trends, as well as disclosed service periods for competitors’ games in determining the Estimated Offering Period for future sales. We believe this provides a reasonable depiction of the transfer of future update rights and online hosting to our customers, as it is the best representation of the time period during which our games are played. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. These performance obligations are generally recognized over an estimated nine-month period beginning in the month after shipment for software licenses sold through retail and an estimated six-month period for digitally-distributed software licenses beginning in the month of sale.
Deferred Net Revenue
Because the majority of our sales transactions include future update rights and online hosting performance obligations, which are subject to a recognition period of generally six to nine months, our deferred net revenue balance is material. This balance increases from period to period by the revenue being deferred for current sales with these service obligations and is reduced by the recognition of revenue from prior sales that were deferred. Generally, revenue is recognized as the services are provided.
Principal Agent Considerations
We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Apple App Store, and Google Play Store, in order to determine whether or not we are acting as the principal in the sale to the end customer, which we consider in determining if revenue should be reported gross or net of fees retained by the third-party storefront. An entity is the principal if it controls a good or service before it is transferred to the end customer. Key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following:
•the underlying contract terms and conditions between the various parties to the transaction;
•which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
•which party has inventory risk before the specified good or service has been transferred to the end customer; and
•which party has discretion in establishing the price for the specified good or service.
Based on an evaluation of the above indicators, except as discussed below, we have determined that generally the third party is considered the principal to end customers for the sale of our full games and related content. We therefore report revenue related to these arrangements net of the fees retained by the storefront. However, for sales arrangements via Apple App Store and Google Play Store, EA is considered the principal to the end customer and thus, we report revenue on a gross basis and mobile platform fees are reported within cost of revenue.
Payment Terms
Substantially all of our transactions have payment terms, whether customary or on an extended basis, of less than one year; therefore, we generally do not adjust the transaction price for the effects of any potential financing components that may exist.
Sales and Value-Added Taxes
Revenue is recorded net of taxes assessed by governmental authorities that are imposed at the time of the specific revenue-producing transaction between us and our customer, such as sales and value-added taxes.
Sales Returns and Price Protection Reserves
Sales returns and price protection are considered variable consideration under ASC 606. We reduce revenue for estimated future returns and price protection which may occur with our distributors and retailers (“channel partners”). Price protection represents our practice to provide our channel partners with a credit allowance to lower their wholesale price on a particular game unit that they have not resold to customers. The amount of the price protection for permanent markdowns is the difference between the old wholesale price and the new reduced wholesale price. Credits are also given for short-term promotions that temporarily reduce the wholesale price. In certain countries we also have a practice for allowing channel partners to return older products in the channel in exchange for a credit allowance.
When evaluating the adequacy of sales returns and price protection reserves, we analyze the following: historical credit allowances, current sell-through of our channel partners’ inventory of our products, current trends in retail and the video game industry, changes in customer demand, acceptance of our products, and other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories, as substantial overstocking in the distribution channel could result in high returns or higher price protection in subsequent periods.
Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our customers are presented on a net basis in our Consolidated Statements of Operations.
Concentration of Credit Risk and Significant Customers
We extend credit to various customers. Collection of trade receivables may be affected by changes in economic or other industry conditions and may, accordingly, impact our overall credit risk. Although we generally do not require collateral, we perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. Invoices are aged based on contractual terms with our customers. The provision for doubtful accounts is recorded as a charge to general and administrative expense when a potential loss is identified. Losses are written off against the allowance when the receivable is determined to be uncollectible. At March 31, 2020, we had two customers who accounted for approximately 31 percent and 27 percent of our consolidated gross receivables, respectively. At March 31, 2019, we had two customers who accounted for 34 percent and 33 percent of our consolidated gross receivables, respectively.
A majority of our sales are made via digital resellers, channel and platform partners. During the fiscal years 2020, 2019, and 2018, approximately 68 percent, 65 percent, and 67 percent, respectively, of our net revenue was derived from our top ten customers and/or platform partners.
Currently, a majority of our revenue is derived through sales of products and services playable on hardware consoles from Sony and Microsoft. For the fiscal years ended March 31, 2020, 2019 and 2018, 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 70 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 that are distributed through their platform, which could, in certain circumstances, leave us unable to get our products and services approved, manufactured or distributed 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. 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.
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 future revenue. 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 an impairment exists, then the related 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 classified as 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 classified 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 the cost incurred with the same vendor. Vendor reimbursements of advertising costs of $38 million, $46 million, and $45 million reduced marketing and sales expense for the fiscal years ended March 31, 2020, 2019 and 2018, respectively. For the fiscal years ended March 31, 2020, 2019 and 2018, advertising expense, net of vendor reimbursements, totaled approximately $195 million, $271 million, and $261 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. Software development costs that have been capitalized to date have been insignificant.
Foreign Currency Translation
Generally, the functional currency for our foreign operating subsidiaries is 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 (loss) 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 $11 million, $(9) million, and $18 million for the fiscal years ended March 31, 2020, 2019 and 2018, 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 $(4) million, $50 million, and $(16) million for the fiscal years ended March 31, 2020, 2019 and 2018, respectively. See Note 5 for additional information on our foreign currency forward contracts.
Income Taxes
We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards.
During the fiscal year ended March 31, 2020, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered (the “Swiss intra-entity sale”). The transaction did not result in a taxable gain. Under U.S. GAAP, any profit resulting from this intercompany transaction will be eliminated upon consolidation. However, the transaction resulted in a step-up of the Swiss tax-deductible basis in the transferred intellectual property rights and, accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights (“Swiss Deferred Tax Asset”). The Swiss Deferred Tax Asset and the one-time tax benefit was measured and will be periodically remeasured based on the Swiss tax rate in effect for the years the asset will be recovered.
During the fiscal year ended March 31, 2020, we recognized $1.840 billion of tax benefits related to the Swiss Deferred Tax Asset, which is net of the impact of a $131 million valuation allowance and a $393 million reduction due to the impact of the decision of the Ninth Circuit Court of Appeals in Altera Corp. v Commissioner (“the Altera opinion”). The Altera opinion also resulted in the recognition of a one-time charge of $80 million related to prior period U.S. uncertain tax positions during the fiscal year ended March 31, 2020. In total, during the fiscal year ended March 31, 2020, we recognized one-time tax benefits of $1.760 billion related to the $1.840 billion Swiss Deferred Tax Asset, partially offset by the $80 million one-time Altera opinion charge.
Every quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. As of March 31, 2020, we have recognized a $131 million valuation allowance related to our Swiss deferred tax assets. Our Swiss deferred tax asset realizability analysis relies upon future Swiss taxable income as the primary source of taxable income but considers all available sources of Swiss income based on the positive and negative evidence. We give more weight to evidence that can be objectively verified. However, there is significant judgment involved in estimating future Swiss taxable income over the 20-year period over which the Swiss deferred tax asset will reverse, specifically related to assumptions about expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance. Any significant changes to such interest rates could result in a material impact to the valuation allowance. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. We do not recognize any deferred taxes related to the U.S. taxes on foreign earnings as we recognize these taxes as a period cost.
Share Repurchases
Shares of our common stock repurchased pursuant to our repurchase program, if any, are retired. The purchase price of such repurchased shares of common stock is recorded as a reduction to additional paid-in capital. If the balance in additional paid-in capital is exhausted, the excess is recorded as a reduction to retained earnings.
(3) FAIR VALUE MEASUREMENTS
There are various valuation techniques used to estimate fair value, the primary one being the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. We measure certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
•Level 1. Quoted prices in active markets for identical assets or liabilities.
•Level 2. Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
•Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 2020 and 2019, our assets and liabilities that were measured and recorded at fair value on a recurring basis were as follows (in millions):
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
As of
March 31, 2020
|
|
Quoted Prices in
Active Markets for Identical
Financial Instruments
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Balance Sheet Classification
|
Assets
|
|
|
|
|
|
|
|
|
|
Bank and time deposits
|
$
|
78
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash equivalents
|
Money market funds
|
1,599
|
|
|
1,599
|
|
|
—
|
|
|
—
|
|
|
Cash equivalents
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
687
|
|
|
—
|
|
|
687
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
U.S. Treasury securities
|
603
|
|
|
603
|
|
|
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
U.S. agency securities
|
8
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
Short-term investments
|
Commercial paper
|
414
|
|
|
—
|
|
|
414
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
Foreign government securities
|
42
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
Short-term investments
|
Asset-backed securities
|
269
|
|
|
—
|
|
|
269
|
|
|
—
|
|
|
Short-term investments
|
Certificates of deposit
|
56
|
|
|
—
|
|
|
56
|
|
|
—
|
|
|
Short-term investments
|
Foreign currency derivatives
|
76
|
|
|
—
|
|
|
76
|
|
|
—
|
|
|
Other current assets and other assets
|
Deferred compensation plan assets (a)
|
13
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
Total assets at fair value
|
$
|
3,845
|
|
|
$
|
2,293
|
|
|
$
|
1,552
|
|
|
$
|
—
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
Accrued and other current liabilities and other liabilities
|
Deferred compensation plan liabilities (a)
|
14
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
Other liabilities
|
Total liabilities at fair value
|
$
|
50
|
|
|
$
|
14
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
As of
March 31, 2019
|
|
Quoted Prices in
Active Markets for Identical
Financial Instruments
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Balance Sheet Classification
|
Assets
|
|
|
|
|
|
|
|
|
|
Bank and time deposits
|
$
|
23
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash equivalents
|
Money market funds
|
2,704
|
|
|
2,704
|
|
|
—
|
|
|
—
|
|
|
Cash equivalents
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
327
|
|
|
—
|
|
|
327
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
U.S. Treasury securities
|
294
|
|
|
294
|
|
|
—
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
U.S. agency securities
|
57
|
|
|
—
|
|
|
57
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
Commercial paper
|
233
|
|
|
—
|
|
|
233
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
Foreign government securities
|
58
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
Asset-backed securities
|
55
|
|
|
—
|
|
|
55
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
Certificates of deposit
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Short-term investments and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
33
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
Other current assets and other assets
|
Deferred compensation plan assets (a)
|
11
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
Total assets at fair value
|
$
|
3,797
|
|
|
$
|
3,032
|
|
|
$
|
765
|
|
|
$
|
—
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent consideration (b)
|
$
|
136
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
136
|
|
|
Accrued and other current liabilities
|
Foreign currency derivatives
|
16
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
Accrued and other current liabilities and other liabilities
|
Deferred compensation plan liabilities (a)
|
12
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
Other liabilities
|
Total liabilities at fair value
|
$
|
164
|
|
|
$
|
12
|
|
|
$
|
16
|
|
|
$
|
136
|
|
|
|
(a)The Deferred Compensation Plan assets consist of various mutual funds. See Note 15 for additional information regarding our Deferred Compensation Plan.
(b)The contingent consideration represented the estimated fair value of the additional variable cash consideration payable in connection with our acquisition of Respawn Entertainment, LLC (“Respawn”) that was contingent upon the achievement of certain performance milestones. At March 31, 2019, we estimated fair value using a probability-weighted income approach combined with a real options methodology, and applied a discount rate that appropriately captures the risk associated with the obligation, ranging from 2.9 percent to 3.1 percent. As of March 31, 2020, all performance milestones have been achieved and a total of $140 million in payments for performance milestones was made. See Note 7 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019 for additional information regarding the Respawn acquisition.
(4) FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
As of March 31, 2020 and 2019, our cash and cash equivalents were $3,768 million and $4,708 million, respectively. Cash equivalents were valued using quoted market prices or other readily available market information.
Short-Term Investments
Short-term investments consisted of the following as of March 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
|
|
|
|
|
|
Cost or
Amortized
Cost
|
|
Gross Unrealized
|
|
|
|
Fair
Value
|
|
Cost or
Amortized
Cost
|
|
Gross Unrealized
|
|
|
|
Fair
Value
|
|
|
|
Gains
|
|
Losses
|
|
|
|
|
|
Gains
|
|
Losses
|
|
|
Corporate bonds
|
$
|
684
|
|
|
$
|
1
|
|
|
$
|
(4)
|
|
|
$
|
681
|
|
|
$
|
325
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
324
|
|
U.S. Treasury securities
|
530
|
|
|
4
|
|
|
—
|
|
|
534
|
|
|
153
|
|
|
—
|
|
|
—
|
|
|
153
|
|
U.S. agency securities
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
44
|
|
|
—
|
|
|
—
|
|
|
44
|
|
Commercial paper
|
377
|
|
|
—
|
|
|
—
|
|
|
377
|
|
|
112
|
|
|
—
|
|
|
—
|
|
|
112
|
|
Foreign government securities
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
50
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Asset-backed securities
|
273
|
|
|
—
|
|
|
(4)
|
|
|
269
|
|
|
53
|
|
|
—
|
|
|
—
|
|
|
53
|
|
Certificates of deposit
|
56
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Short-term investments
|
$
|
1,970
|
|
|
$
|
5
|
|
|
$
|
(8)
|
|
|
$
|
1,967
|
|
|
$
|
738
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
737
|
|
The following table summarizes the amortized cost and fair value of our short-term investments, classified by stated maturity as of March 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
As of March 31, 2019
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Short-term investments
|
|
|
|
|
|
|
|
Due within 1 year
|
$
|
1,568
|
|
|
$
|
1,567
|
|
|
$
|
449
|
|
|
$
|
448
|
|
Due 1 year through 5 years
|
395
|
|
|
393
|
|
|
287
|
|
|
287
|
|
Due after 5 years
|
7
|
|
|
7
|
|
|
2
|
|
|
2
|
|
Short-term investments
|
$
|
1,970
|
|
|
$
|
1,967
|
|
|
$
|
738
|
|
|
$
|
737
|
|
(5) DERIVATIVE FINANCIAL INSTRUMENTS
Assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
We transact business in various foreign currencies and have significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency forward contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily related to fluctuations in the Euro, British pound sterling, Canadian dollar, Swedish krona, Australian dollar, Chinese yuan, South Korean won and Polish zloty. In addition, we utilize foreign currency forward contracts to mitigate foreign currency exchange risk associated with foreign-currency-denominated monetary assets and liabilities, primarily intercompany receivables and payables. The foreign currency forward contracts not designated as hedging instruments generally have a contractual term of approximately three months or less and are transacted near month-end. We do not use foreign currency forward contracts for speculative trading purposes.
Cash Flow Hedging Activities
Certain of our forward contracts are designated and qualify as cash flow hedges. The effectiveness of the cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other timing and probability criteria. To qualify for hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets/other assets, or accrued and other current liabilities/other liabilities, respectively, on our Consolidated Balance Sheets. The gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The gross amount of gains or losses resulting from changes in the fair value of these hedges is subsequently reclassified into net revenue or research and development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Consolidated Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other comprehensive income (loss) to net revenue or research and development expenses, in our Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
|
As of March 31, 2019
|
|
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
|
|
|
|
Asset
|
|
Liability
|
|
|
|
Asset
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts to purchase
|
$
|
316
|
|
|
$
|
1
|
|
|
$
|
19
|
|
|
$
|
295
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts to sell
|
$
|
1,371
|
|
|
$
|
61
|
|
|
$
|
1
|
|
|
$
|
1,355
|
|
|
$
|
31
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of cash flow hedge accounting in our Consolidated Statements of Operations for the fiscal years ended March 31, 2020 and 2019 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in the Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
Net revenue
|
|
Research and development
|
|
Net revenue
|
|
Research and development
|
|
Net revenue
|
|
Research and development
|
Total amounts presented in our Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
|
$
|
5,537
|
|
|
$
|
1,559
|
|
|
$
|
4,950
|
|
|
$
|
1,433
|
|
|
$
|
5,150
|
|
|
|
$
|
1,320
|
|
Gains (losses) on foreign currency forward contracts designated as cash flow hedges
|
$
|
71
|
|
|
$
|
(9)
|
|
|
$
|
18
|
|
|
$
|
(10)
|
|
|
$
|
(10)
|
|
|
|
$
|
5
|
|
The amount excluded from the assessment of hedge effectiveness and recognized in interest and other income (expense) was a gain of $25 million and $10 million during fiscal year ended March 31, 2019 and 2018.
Balance Sheet Hedging Activities
Our foreign currency forward contracts that are not designated as hedging instruments are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or accrued and other current liabilities on our Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other income (expense), net, in our Consolidated Statements of Operations. The gains and losses on these foreign currency forward contracts generally offset the gains and losses in the underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and other income (expense), net, in our Consolidated Statements of Operations.
Total gross notional amounts and fair values for currency derivatives that are not designated as hedging instruments are accounted for as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
|
As of March 31, 2019
|
|
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
|
|
|
|
Asset
|
|
Liability
|
|
|
|
Asset
|
|
Liability
|
Forward contracts to purchase
|
$
|
388
|
|
|
$
|
1
|
|
|
$
|
16
|
|
|
$
|
449
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts to sell
|
$
|
292
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
394
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of foreign currency forward contracts not designated as hedging instruments in our Consolidated Statements of Operations for the fiscal years ended March 31, 2020, 2019 and 2018, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in the Statements of Operations
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Interest and other income (expense), net
|
|
|
|
|
Total amounts presented in our Consolidated Statements of Operations in which the effects of balance sheet hedges are recorded
|
|
$
|
63
|
|
|
$
|
83
|
|
|
$
|
15
|
|
Gain (losses) on foreign currency forward contracts not designated as hedging instruments
|
|
$
|
(4)
|
|
|
$
|
25
|
|
|
$
|
(26)
|
|
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the fiscal years ended March 31, 2020, 2019 and 2018 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Net Gains (Losses) on Available-for-Sale Securities
|
|
Unrealized Net Gains (Losses) on Derivative Instruments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Balances as of March 31, 2017
|
$
|
(3)
|
|
|
$
|
32
|
|
|
$
|
(48)
|
|
|
$
|
(19)
|
|
Other comprehensive income (loss) before reclassifications
|
(9)
|
|
|
(126)
|
|
|
28
|
|
|
(107)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
4
|
|
|
5
|
|
|
(10)
|
|
|
(1)
|
|
Total other comprehensive income (loss), net of tax
|
(5)
|
|
|
(121)
|
|
|
18
|
|
|
(108)
|
|
Balances as of March 31, 2018
|
$
|
(8)
|
|
|
$
|
(89)
|
|
|
$
|
(30)
|
|
|
$
|
(127)
|
|
Cumulative-effect adjustment from the adoption of ASC 606
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
Cumulative-effect adjustment from the adoption of ASU 2018-02
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Balances as of April 1, 2018
|
$
|
(8)
|
|
|
$
|
(66)
|
|
|
$
|
(30)
|
|
|
$
|
(104)
|
|
Other comprehensive income (loss) before reclassifications
|
6
|
|
|
96
|
|
|
(21)
|
|
|
81
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
1
|
|
|
(8)
|
|
|
—
|
|
|
(7)
|
|
Total other comprehensive income (loss), net of tax
|
7
|
|
|
88
|
|
|
(21)
|
|
|
74
|
|
Balances as of March 31, 2019
|
$
|
(1)
|
|
|
$
|
22
|
|
|
$
|
(51)
|
|
|
$
|
(30)
|
|
Other comprehensive income (loss) before reclassifications
|
(1)
|
|
|
79
|
|
|
(34)
|
|
|
44
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(2)
|
|
|
(62)
|
|
|
—
|
|
|
(64)
|
|
Total other comprehensive income (loss), net of tax
|
(3)
|
|
|
17
|
|
|
(34)
|
|
|
(20)
|
|
Balances as of March 31, 2020
|
$
|
(4)
|
|
|
$
|
39
|
|
|
$
|
(85)
|
|
|
$
|
(50)
|
|
The effects on net income of amounts reclassified from accumulated other comprehensive income (loss) for the fiscal years ended March 31, 2020, 2019 and 2018 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Classification
|
|
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
(Gains) losses on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
$
|
(2)
|
|
|
$
|
1
|
|
|
$
|
4
|
|
Total, net of tax
|
|
(2)
|
|
|
1
|
|
|
4
|
|
|
|
|
|
|
|
|
(Gains) losses on foreign currency forward contracts designated as cash flow hedges
|
|
|
|
|
|
|
Net revenue
|
|
(71)
|
|
|
(18)
|
|
|
10
|
|
Research and development
|
|
|
9
|
|
|
10
|
|
|
(5)
|
|
Total, net of tax
|
|
(62)
|
|
|
(8)
|
|
|
5
|
|
|
|
|
|
|
|
|
(Gains) losses on foreign currency translation:
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
—
|
|
|
—
|
|
|
(10)
|
|
Total, net of tax
|
|
—
|
|
|
—
|
|
|
(10)
|
|
|
|
|
|
|
|
|
Total net (gain) loss reclassified, net of tax
|
|
$
|
(64)
|
|
|
$
|
(7)
|
|
|
$
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7) GOODWILL AND ACQUISITION-RELATED INTANGIBLES, NET
The changes in the carrying amount of goodwill for the fiscal year ended March 31, 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2019
|
|
Activity
|
|
Effects of Foreign Currency Translation
|
|
As of
March 31, 2020
|
Goodwill
|
$
|
2,260
|
|
|
$
|
—
|
|
|
$
|
(7)
|
|
|
$
|
2,253
|
|
Accumulated impairment
|
(368)
|
|
|
—
|
|
|
—
|
|
|
(368)
|
|
Total
|
$
|
1,892
|
|
|
$
|
—
|
|
|
$
|
(7)
|
|
|
$
|
1,885
|
|
The changes in the carrying amount of goodwill for the fiscal year ended March 31, 2019 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2018
|
|
Activity
|
|
Effects of Foreign Currency Translation
|
|
As of
March 31, 2019
|
Goodwill
|
$
|
2,251
|
|
|
$
|
14
|
|
|
$
|
(5)
|
|
|
$
|
2,260
|
|
Accumulated impairment
|
(368)
|
|
|
—
|
|
|
—
|
|
|
(368)
|
|
Total
|
$
|
1,883
|
|
|
$
|
14
|
|
|
$
|
(5)
|
|
|
$
|
1,892
|
|
Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets.
Acquisition-related intangibles consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
|
As of March 31, 2019
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Acquisition-
Related
Intangibles, Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Acquisition-
Related
Intangibles, Net
|
Developed and core technology
|
$
|
474
|
|
|
$
|
(450)
|
|
|
$
|
24
|
|
|
$
|
469
|
|
|
$
|
(427)
|
|
|
$
|
42
|
|
Trade names and trademarks
|
161
|
|
|
(132)
|
|
|
29
|
|
|
161
|
|
|
(121)
|
|
|
40
|
|
Registered user base and other intangibles
|
5
|
|
|
(5)
|
|
|
—
|
|
|
5
|
|
|
(5)
|
|
|
—
|
|
Carrier contracts and related
|
85
|
|
|
(85)
|
|
|
—
|
|
|
85
|
|
|
(85)
|
|
|
—
|
|
In-process research and development
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Total
|
$
|
725
|
|
|
$
|
(672)
|
|
|
$
|
53
|
|
|
$
|
725
|
|
|
$
|
(638)
|
|
|
$
|
87
|
|
Amortization of intangibles for the fiscal years ended March 31, 2020, 2019 and 2018 are classified in the Consolidated Statements of Operations as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cost of revenue
|
$
|
12
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
|
|
|
|
|
Operating expenses
|
22
|
|
|
23
|
|
|
9
|
|
Total
|
$
|
34
|
|
|
$
|
27
|
|
|
$
|
11
|
|
There were no impairment charges for acquisition-related intangible assets during fiscal years 2020, 2019 and 2018.
Acquisition-related intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, currently from 1 to 5 years. As of March 31, 2020 and 2019, the weighted-average remaining useful life for acquisition-related intangible assets was approximately 2.4 and 3.2 years, respectively.
As of March 31, 2020, future amortization of finite-lived acquisition-related intangibles that will be recorded in the Consolidated Statements of Operations is estimated as follows (in millions):
|
|
|
|
|
|
Fiscal Year Ending March 31,
|
|
2021
|
|
$
|
22
|
|
2022
|
|
22
|
|
2023
|
9
|
|
2024 and thereafter
|
—
|
|
|
|
|
|
Total
|
$
|
53
|
|
(8) ROYALTIES AND LICENSES
Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers, and (3) co-publishing and distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for the delivery of products.
During fiscal years 2020, 2019 and 2018 we did not recognize any material losses or impairment charges on 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,
|
|
|
|
2020
|
|
2019
|
Other current assets
|
$
|
74
|
|
|
$
|
53
|
|
Other assets
|
25
|
|
|
30
|
|
Royalty-related assets
|
$
|
99
|
|
|
$
|
83
|
|
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,
|
|
|
|
2020
|
|
2019
|
Accrued royalties
|
$
|
171
|
|
|
$
|
144
|
|
|
|
|
|
Other liabilities
|
26
|
|
|
51
|
|
Royalty-related liabilities
|
$
|
197
|
|
|
$
|
195
|
|
As of March 31, 2020, we were committed to pay approximately $665 million to content licensors, independent software developers, and co-publishing and/or distribution affiliates, but performance remained with the counterparty (i.e., delivery of the product or content or other factors) and such commitments were therefore not recorded in our Consolidated Financial Statements. See Note 13 for further information on our developer and licensor commitments.
(9) BALANCE SHEET DETAILS
Property and Equipment, Net
Property and equipment, net, as of March 31, 2020 and 2019 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2020
|
|
2019
|
Computer, equipment and software
|
$
|
722
|
|
|
$
|
710
|
|
Buildings
|
340
|
|
|
343
|
|
Leasehold improvements
|
161
|
|
|
139
|
|
Equipment, furniture and fixtures, and other
|
83
|
|
|
80
|
|
Land
|
65
|
|
|
66
|
|
Construction in progress
|
20
|
|
|
21
|
|
|
1,391
|
|
|
1,359
|
|
Less: accumulated depreciation
|
(942)
|
|
|
(911)
|
|
Property and equipment, net
|
$
|
449
|
|
|
$
|
448
|
|
Depreciation expense associated with property and equipment was $120 million, $121 million and $120 million for the fiscal years ended March 31, 2020, 2019 and 2018, respectively.
Accrued and Other Current Liabilities
Accrued and other current liabilities as of March 31, 2020 and 2019 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2020
|
|
2019
|
Other accrued expenses
|
$
|
273
|
|
|
$
|
290
|
|
Accrued compensation and benefits
|
326
|
|
|
238
|
|
Accrued royalties
|
171
|
|
|
144
|
|
Sales returns and price protection reserves
|
109
|
|
|
150
|
|
Contingent consideration
|
—
|
|
|
136
|
|
Deferred net revenue (other)
|
104
|
|
|
94
|
|
Operating lease liabilities (See Note 12)
|
69
|
|
|
—
|
|
Accrued and other current liabilities
|
$
|
1,052
|
|
|
$
|
1,052
|
|
Deferred net revenue (other) includes the deferral of subscription revenue, advertising revenue, licensing arrangements, and other revenue for which revenue recognition criteria has not been met.
Deferred net revenue
Deferred net revenue as of March 31, 2020 and 2019, consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2020
|
|
As of
March 31, 2019
|
|
|
|
|
Deferred net revenue (online-enabled games)
|
$
|
945
|
|
|
$
|
1,100
|
|
|
|
|
|
Deferred net revenue (other)
|
104
|
|
|
94
|
|
|
|
|
|
Deferred net revenue (noncurrent)
|
8
|
|
|
23
|
|
|
|
|
|
Total Deferred net revenue
|
$
|
1,057
|
|
|
$
|
1,217
|
|
|
|
|
|
During the fiscal years ended March 31, 2020 and 2019, we recognized $1,178 million and $1,054 million of revenues, respectively, that were included in the deferred revenue balance at the beginning of the period.
Remaining Performance Obligations
As of March 31, 2020, revenue allocated to remaining performance obligations consists of our deferred revenue balance of $1,057 million. These balances exclude any estimates for future variable consideration as we have elected the optional exemption to exclude sales-based royalty revenue. We expect to recognize substantially all of these balances as revenue over the next 12 months.
(10) INCOME TAXES
The components of our income before provision for (benefit from) income taxes for the fiscal years ended March 31, 2020, 2019 and 2018 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
380
|
|
|
$
|
170
|
|
|
$
|
440
|
|
Foreign
|
1,128
|
|
|
909
|
|
|
1,009
|
|
Income before provision for (benefit from) income taxes
|
$
|
1,508
|
|
|
$
|
1,079
|
|
|
$
|
1,449
|
|
Provision for (benefit from) income taxes for the fiscal years ended March 31, 2020, 2019 and 2018 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Deferred
|
|
Total
|
Year Ended March 31, 2020
|
|
|
|
|
|
Federal
|
$
|
258
|
|
|
$
|
(14)
|
|
|
$
|
244
|
|
State
|
39
|
|
|
(2)
|
|
|
37
|
|
Foreign
|
48
|
|
|
(1,860)
|
|
|
(1,812)
|
|
|
$
|
345
|
|
|
$
|
(1,876)
|
|
|
$
|
(1,531)
|
|
Year Ended March 31, 2019
|
|
|
|
|
|
Federal
|
$
|
29
|
|
|
$
|
(18)
|
|
|
$
|
11
|
|
State
|
5
|
|
|
—
|
|
|
5
|
|
Foreign
|
42
|
|
|
2
|
|
|
44
|
|
|
$
|
76
|
|
|
$
|
(16)
|
|
|
$
|
60
|
|
Year Ended March 31, 2018
|
|
|
|
|
|
Federal
|
$
|
138
|
|
|
$
|
197
|
|
|
$
|
335
|
|
State
|
4
|
|
|
9
|
|
|
13
|
|
Foreign
|
61
|
|
|
(3)
|
|
|
58
|
|
|
$
|
203
|
|
|
$
|
203
|
|
|
$
|
406
|
|
The differences between the statutory tax rate and our effective tax rate, expressed as a percentage of income before provision for (benefit from) income taxes, for the fiscal years ended March 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Statutory federal tax expense rate
|
21.0
|
%
|
|
21.0
|
%
|
|
31.5
|
%
|
State taxes, net of federal benefit
|
1.0
|
%
|
|
0.7
|
%
|
|
0.8
|
%
|
Differences between statutory rate and foreign effective tax rate
|
(8.4)
|
%
|
|
(14.4)
|
%
|
|
(19.1)
|
%
|
|
|
|
|
|
|
Tax reform
|
—
|
%
|
|
(0.4)
|
%
|
|
16.2
|
%
|
Excess tax benefit
|
(0.1)
|
%
|
|
(1.9)
|
%
|
|
(3.0)
|
%
|
Research and development credits
|
(1.2)
|
%
|
|
(2.4)
|
%
|
|
(1.4)
|
%
|
|
|
|
|
|
|
Swiss Deferred Tax Asset
|
(122.1)
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
The Altera opinion
|
5.4
|
%
|
|
—
|
%
|
|
—
|
%
|
Non-deductible stock-based compensation
|
2.3
|
%
|
|
2.3
|
%
|
|
2.7
|
%
|
Other
|
0.6
|
%
|
|
0.7
|
%
|
|
0.3
|
%
|
Effective tax rate
|
(101.5)
|
%
|
|
5.6
|
%
|
|
28.0
|
%
|
Our effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2020 were significantly impacted by the Swiss Deferred Tax Asset. During the fiscal year ended March 31, 2020, we recognized total one-time tax benefits of $1.760 billion related to the $1.840 billion Swiss Deferred Tax Asset, partially offset by the $80 million one-time Altera opinion charge.
We generated income in lower tax jurisdictions primarily related to our European, Latin American, and Asia Pacific businesses that are headquartered in Switzerland.
Our effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2018 were significantly impacted by the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Act”), enacted on December 22, 2017. The U.S. Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering U.S. corporate income tax rate to 21 percent, generally implementing a territorial tax system and imposing a one-time transition tax on the deemed repatriation of undistributed earnings of foreign subsidiaries (the “Transition Tax”).
Our foreign subsidiaries will generally be subject to U.S. tax, and to the extent earnings from these subsidiaries can be repatriated without a material tax cost, such earnings will not be indefinitely reinvested. As of March 31, 2020, approximately
$4.4 billion of our cash, cash equivalents, and short-term investments were domiciled in foreign tax jurisdictions, of which approximately $2.7 billion is available for immediate repatriation without a material tax cost.
The components of net deferred tax assets, as of March 31, 2020 and 2019 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Accruals, reserves and other expenses
|
$
|
141
|
|
|
$
|
101
|
|
Tax credit carryforwards
|
137
|
|
|
140
|
|
Stock-based compensation
|
37
|
|
|
33
|
|
|
|
|
|
|
|
|
|
Net operating loss and capital loss carryforwards
|
195
|
|
|
22
|
|
Swiss intra-entity tax asset
|
1,818
|
|
|
—
|
|
Total
|
2,328
|
|
|
296
|
|
Valuation allowance
|
(288)
|
|
|
(162)
|
|
Deferred tax assets, net of valuation allowance
|
2,040
|
|
|
134
|
|
Deferred tax liabilities:
|
|
|
|
Amortization and depreciation
|
(85)
|
|
|
(28)
|
|
ASC 606 Revenue Recognition
|
(43)
|
|
|
(66)
|
|
Other
|
(10)
|
|
|
(7)
|
|
Total
|
(138)
|
|
|
(101)
|
|
Deferred tax assets, net of valuation allowance and deferred tax liabilities
|
$
|
1,902
|
|
|
$
|
33
|
|
As of March 31, 2020, the ending Swiss intra-entity tax asset balance is $1.818 billion, which is net of a $393 million reduction due to the Altera opinion.
As of March 31, 2020, we maintained a total valuation allowance of $288 million related to certain U.S. state deferred tax assets, Swiss deferred tax assets, and foreign capital loss carryovers, due to uncertainty about the future realization of these assets.
Every quarter, we perform a realizability analysis to evaluate whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. As of March 31, 2020, we have recognized a $131 million valuation allowance related to our Swiss deferred tax assets. Our Swiss deferred tax assets realizability analysis relies upon future Swiss taxable income as the primary source of taxable income but considers all available sources of Swiss income based on the positive and negative evidence. We give more weight to evidence that can be objectively verified. However, there is significant judgment involved in estimating future Swiss taxable income over the 20-year period over which the Swiss deferred tax assets will reverse, specifically related to assumptions about expected growth rates of future Swiss taxable income, which are based primarily on third party market and industry growth data. Actual results that differ materially from those estimates could have a material impact on our valuation allowance assessment. Although objectively verifiable, Swiss interest rates have an impact on the valuation allowance and are based on published Swiss guidance. Any significant changes to such interest rates could result in a material impact to the valuation allowance. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. We do not recognize any deferred taxes related to the U.S. taxes on foreign earnings as we recognize these taxes as a period cost.
As of March 31, 2020, we have net operating loss carry forwards of approximately $1.5 billion of which approximately $5 million is attributable to various acquired companies. These carryforwards, if not fully realized, will begin to expire in 2027. Switzerland has a seven-year carryforward period and does not permit the carry back of losses. We also have California and Canada tax credit carryforwards of $131 million and $5 million, respectively. The California and Canada tax credit carryforwards can be carried forward indefinitely.
The total unrecognized tax benefits as of March 31, 2020, 2019 and 2018 were $983 million, $417 million and $457 million, respectively. A reconciliation of the beginning and ending balance of unrecognized tax benefits is summarized as follows (in millions):
|
|
|
|
|
|
Balance as of March 31, 2017
|
$
|
389
|
|
Increases in unrecognized tax benefits related to prior year tax positions
|
10
|
|
Decreases in unrecognized tax benefits related to prior year tax positions
|
(12)
|
|
Increases in unrecognized tax benefits related to current year tax positions
|
75
|
|
Decreases in unrecognized tax benefits related to settlements with taxing authorities
|
(7)
|
|
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations
|
(2)
|
|
Changes in unrecognized tax benefits due to foreign currency translation
|
4
|
|
Balance as of March 31, 2018
|
457
|
|
Increases in unrecognized tax benefits related to prior year tax positions
|
—
|
|
Decreases in unrecognized tax benefits related to prior year tax positions
|
(41)
|
|
Increases in unrecognized tax benefits related to current year tax positions
|
43
|
|
Decreases in unrecognized tax benefits related to settlements with taxing authorities
|
(16)
|
|
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations
|
(21)
|
|
Changes in unrecognized tax benefits due to foreign currency translation
|
(5)
|
|
Balance as of March 31, 2019
|
417
|
|
Increases in unrecognized tax benefits related to prior year tax positions
|
111
|
|
Decreases in unrecognized tax benefits related to prior year tax positions
|
(4)
|
|
Increases in unrecognized tax benefits related to current year tax positions
|
468
|
|
Decreases in unrecognized tax benefits related to settlements with taxing authorities
|
—
|
|
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations
|
(5)
|
|
Changes in unrecognized tax benefits due to foreign currency translation
|
(4)
|
|
Balance as of March 31, 2020
|
$
|
983
|
|
As of March 31, 2020, approximately $722 million of the unrecognized tax benefits would affect our effective tax rate, a portion of which would be impacted by a valuation allowance.
Interest and penalties related to estimated obligations for tax positions taken in our tax returns are recognized in income tax expense in our Consolidated Statements of Operations. The combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current other liabilities was approximately $34 million as of March 31, 2020 and $17 million as of March 31, 2019.
We file income tax returns in the United States, including various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions, including Sweden, Italy, Canada, France, Germany, Switzerland and the United Kingdom. We remain subject to income tax examination by the IRS for fiscal years after 2015. In addition, as of the period ended March 31, 2020, we remain subject to income tax examination for several other jurisdictions including in Sweden for fiscal years after 2013, Italy for fiscal years after 2015, Germany for fiscal years after 2012, France for fiscal years after 2016, the United Kingdom for fiscal years after 2017, Canada for fiscal years after 2012, and Switzerland for fiscal years after 2010.
We are also currently under income tax examination in the United States for fiscal year 2017, Germany for fiscal years 2013 through 2016, Sweden for fiscal years 2016 through 2017, and Italy for fiscal year 2016.
We are subject to income tax examinations in various jurisdictions with respect to fiscal years after 2010. The timing and potential resolution of income tax examinations is highly uncertain. While we continue to measure our uncertain tax positions, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued. A final determination of Altera is reasonably possible within the next 12 months. If the Altera opinion stands, it would result in a $541 million reduction of our gross unrecognized tax benefits; approximately $148 million of which relates to gross U.S. uncertain tax positions recognized as of March 31, 2020 and approximately $393 million of which reduced the Swiss Deferred Tax Asset recognized as of March 31, 2020.
It is also reasonably possible that an additional reduction of up to $25 million of unrecognized tax benefits may occur within the next 12 months, unrelated to the Altera opinion, a portion of which would impact our effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements and tax interpretations.
(11) FINANCING ARRANGEMENTS
Senior Notes
In February 2016, we issued $600 million aggregate principal amount of 3.70% Senior Notes due March 1, 2021 (the “2021 Notes”) and $400 million aggregate principal amount of 4.80% Senior Notes due March 1, 2026 (the “2026 Notes,” and together with the 2021 Notes, the “Senior Notes”). Our proceeds were $989 million, net of discount of $2 million and issuance costs of $9 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2021 Notes and the 2026 Notes using the effective interest rate method. The effective interest rate is 3.94% for the 2021 Notes and 4.97% for the 2026 Notes. Interest is payable semiannually in arrears, on March 1 and September 1 of each year.
The carrying and fair values of the Senior Notes are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2020
|
|
As of
March 31, 2019
|
Senior Notes:
|
|
|
|
3.70% Senior Notes due 2021
|
$
|
600
|
|
|
$
|
600
|
|
4.80% Senior Notes due 2026
|
400
|
|
|
400
|
|
Total principal amount
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Unaccreted discount
|
(1)
|
|
|
(1)
|
|
Unamortized debt issuance costs
|
(3)
|
|
|
(5)
|
|
Net carrying value of Senior Notes
|
$
|
996
|
|
|
$
|
994
|
|
|
|
|
|
Fair value of Senior Notes (Level 2)
|
$
|
1,030
|
|
|
$
|
1,039
|
|
As of March 31, 2020, the remaining life of the 2021 Notes and 2026 Notes is approximately 0.9 years and 5.9 years, respectively.
The Senior Notes are senior unsecured obligations and rank equally with all our other existing and future unsubordinated obligations and any indebtedness that we may incur from time to time under our Credit Facility.
The 2021 Notes and the 2026 Notes are redeemable at our option at any time prior to February 1, 2021 or December 1, 2025, respectively, subject to a make-whole premium. Within one and three months of maturity, we may redeem the 2021 Notes or the 2026 Notes, respectively, at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest. In addition, upon the occurrence of a change of control repurchase event, the holders of the Senior Notes may require us to repurchase all or a portion of the Senior Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Senior Notes also include covenants that limit our ability to incur liens on assets and to enter into sale and leaseback transactions, subject to certain allowances.
Credit Facility
On August 29, 2019, we entered into a $500 million unsecured revolving credit facility (“Credit Facility”) with a syndicate of banks. The Credit Facility terminates on August 29, 2024 unless the maturity is extended in accordance with its terms. The Credit Facility contains an option to arrange with existing lenders and/or new lenders to provide up to an aggregate of $500 million in additional commitments for revolving loans. Proceeds of loans made under the Credit Facility may be used for general corporate purposes.
The loans bear interest, at our option, at the base rate plus an applicable spread or an adjusted LIBOR rate plus an applicable spread, in each case with such spread being determined based on our debt credit ratings. We are also obligated to pay other customary fees for a credit facility of this size and type. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Principal, together with all accrued
and unpaid interest, is due and payable at maturity. We may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions.
The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur subsidiary indebtedness, grant liens, and dispose of all or substantially all assets, in each case subject to customary exceptions for a credit facility of this size and type. We are also required to maintain compliance with a debt to EBITDA ratio. As of March 31, 2020, we were in compliance with the debt to EBITDA ratio.
The credit agreement contains customary events of default, including among others, non-payment defaults, covenant defaults, cross-defaults to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults and a change of control default, in each case, subject to customary exceptions for a credit facility of this size and type. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Facility and an increase in the applicable interest rate.
As of March 31, 2020 and 2019, no amounts were outstanding under the Credit Facility. $2 million of debt issuance costs that were paid in connection with obtaining this credit facility are being amortized to interest expense over the 5-year term of the Credit Facility.
Interest Expense
The following table summarizes our interest expense recognized for fiscal years 2020, 2019, and 2018 that is included in interest and other income (expense), net on our Consolidated Statements of Operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Amortization of debt discount
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
—
|
|
Amortization of debt issuance costs
|
(2)
|
|
|
(2)
|
|
|
(2)
|
|
Coupon interest expense
|
(42)
|
|
|
(41)
|
|
|
(42)
|
|
Other interest expense
|
—
|
|
|
(1)
|
|
|
—
|
|
Total interest expense
|
$
|
(44)
|
|
|
$
|
(45)
|
|
|
$
|
(44)
|
|
(12) LEASES
Our leases primarily consist of facility leases for our offices and development studios, data centers, and server equipment, with remaining lease terms up to 15 years. Our lease terms may include options to extend or terminate the lease. When it is reasonably certain that we will exercise that option, we include the renewals or reduced lease terms in our calculation of operating lease liabilities. All of our leases are classified as operating leases.
We determine if an arrangement is or contains a lease at contract inception. The contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining if a contract is or contains a lease, we apply judgment whether the contract provides the right to obtain substantially all of the economic benefits, the right to direct, or control the use of the identified asset throughout the period of use.
Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of future lease payments over the lease term. In determining the present value of the future lease payments, we use our incremental borrowing rate as none of our leases provide an implicit rate. Our incremental borrowing rate is an assumed rate based on our credit rating, credit history, current economic environment, and the lease term. Operating lease ROU assets are further adjusted for any payments made, incentives received, and initial direct costs incurred prior to the commencement date.
Operating lease ROU assets are amortized on a straight-line basis over the lease term and recognized as lease expense within cost of revenue or operating expenses on our Consolidated Statements of Operations. Operating lease liabilities decrease by lease payments we make over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Some of our operating leases contain lease and non-lease components. Non-lease components primarily include fixed payments for common area maintenance and utilities. We elected to account for lease and non-lease components as a single lease component. Variable lease and non-lease components are recognized on our Consolidated Statements of Operations as incurred.
The components of lease expense are as follows (in millions):
|
|
|
|
|
|
|
Year Ended March 31, 2020
|
Operating lease costs
|
$
|
70
|
|
Variable lease costs
|
37
|
|
Short-term lease costs
|
14
|
|
Total lease expense
|
$
|
121
|
|
Supplemental cash and noncash information related to our operating leases are as follows (in millions):
|
|
|
|
|
|
|
Year Ended March 31, 2020
|
Cash paid for amounts included in the measurement of lease liability
|
$
|
69
|
|
ROU assets obtained in exchange for new lease obligations
|
$
|
52
|
|
Weighted average remaining lease term and discount rate are as follows:
|
|
|
|
|
|
|
At March 31, 2020
|
Lease term
|
4.5 years
|
Discount rate
|
3.2
|
%
|
Operating lease ROU assets and liabilities recorded on our Consolidated Balance Sheets as of April 1, 2019 and March 31, 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2019
|
|
Balance as of March 31, 2020
|
|
Balance Sheet Classification
|
Operating lease ROU assets
|
$
|
215
|
|
|
$
|
193
|
|
|
Other assets
|
|
|
|
|
|
|
Operating lease liabilities
|
$
|
50
|
|
|
$
|
69
|
|
|
Accrued and other current liabilities
|
Noncurrent operating lease liabilities
|
197
|
|
|
155
|
|
|
Other liabilities
|
Total operating lease liabilities
|
$
|
247
|
|
|
$
|
224
|
|
|
|
Future minimum lease payments under operating leases as of March 31, 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
Fiscal Years Ending March 31,
|
|
|
2021
|
|
$
|
74
|
|
2022
|
|
58
|
|
2023
|
|
33
|
|
2024
|
|
28
|
|
2025
|
|
21
|
|
|
|
|
Thereafter
|
|
28
|
|
Total future lease payments
|
|
242
|
|
Less imputed interest
|
|
(18)
|
|
Total operating lease liabilities
|
|
$
|
224
|
|
Future minimum lease payments as of March 31, 2019, prior to our adoption of the New Lease Standard, were as follows (in millions):
|
|
|
|
|
|
|
|
|
Fiscal Years Ending March 31,
|
|
|
2020
|
|
$
|
52
|
|
2021
|
|
54
|
|
2022
|
|
44
|
|
2023
|
|
36
|
|
2024
|
|
28
|
|
Thereafter
|
|
50
|
|
Total future lease payments
|
|
$
|
264
|
|
As of March 31, 2020, we have entered into two office leases that have not yet commenced with aggregate future lease payments of approximately $169 million. These office leases are expected to commence in fiscal year 2021 and 2023, and will have lease terms of 15 and 12 years, respectively.
(13) COMMITMENTS AND CONTINGENCIES
Development, Celebrity, League and Content Licenses: Payments and Commitments
The products we produce in our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers.
In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments that may not be dependent on any deliverables. Celebrities and organizations with whom we have contracts include, but are not limited to: FIFA (Fédération Internationale de Football Association), FIFPRO Foundation, FAPL (Football Association Premier League Limited), and DFL Deutsche Fußball Liga E.V. (German Soccer League) (professional soccer); Liga Nacional De Futbol Profesional (professional soccer); National Basketball Association and National Basketball Players Association (professional basketball); National Hockey League and NHL Players’ Association (professional hockey); National Football League Properties and PLAYERS Inc. (professional football); William Morris Endeavor Entertainment LLC (professional mixed martial arts); ESPN (content in EA SPORTS games); Disney Interactive (Star Wars); and Fox Digital Entertainment, Inc. (The Simpsons). These developer and content license commitments represent the sum of (1) the cash payments due under non-royalty-bearing licenses and services agreements and (2) the minimum guaranteed payments and advances against royalties due under royalty-bearing licenses and services agreements, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.
The following table summarizes our minimum contractual obligations as of March 31, 2020 (in millions):
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Fiscal Year Ending March 31,
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Total
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2021
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2022
|
|
2023
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|
2024
|
|
2025
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Thereafter
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Unrecognized commitments
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Developer/licensor commitments
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$
|
665
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|
$
|
178
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|
|
$
|
248
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|
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$
|
90
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|
|
$
|
87
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|
|
$
|
58
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$
|
4
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|
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|
Marketing commitments
|
|
282
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|
|
95
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|
|
85
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|
|
39
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|
37
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|
|
26
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|
|
—
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Senior Notes interest
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134
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|
38
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|
|
20
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|
19
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19
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19
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19
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Operating lease imputed interest
|
18
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6
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4
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3
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|
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2
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1
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2
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|
Operating leases not yet commenced
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169
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—
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—
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8
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|
|
12
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|
12
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|
137
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Other purchase obligations
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105
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|
46
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|
45
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10
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|
2
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|
2
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—
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Total unrecognized commitments
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1,373
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|
363
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|
|
402
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|
|
169
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|
|
159
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|
|
118
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|
162
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Recognized commitments
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Senior Notes principal and interest
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1,003
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|
603
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—
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—
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—
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—
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400
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Operating leases
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224
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|
68
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54
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|
30
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26
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20
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26
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Transition Tax and other taxes
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66
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|
22
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|
24
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3
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4
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4
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9
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Licensing commitments
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53
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|
|
26
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|
|
27
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|
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—
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|
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—
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—
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—
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Total recognized commitments
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1,346
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|
719
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|
|
105
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|
|
33
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|
|
30
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|
|
24
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|
|
435
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Total Commitments
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$
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2,719
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$
|
1,082
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$
|
507
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$
|
202
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$
|
189
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$
|
142
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$
|
597
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|
The unrecognized amounts represented in the table above reflect our minimum cash obligations for the respective fiscal years, but do not necessarily represent the periods in which they will be recognized and expensed in our Consolidated Financial Statements.
In addition, the amounts in the table above are presented based on the dates the amounts are contractually due as of March 31, 2020; however, certain payment obligations may be accelerated depending on the performance of our operating results. Furthermore, up to $20 million of the unrecognized amounts in the table above may be payable, at the licensor’s election, in shares of our common stock, subject to a $10 million maximum during any fiscal year. The number of shares to be issued will be based on their fair market value at the time of issuance.
In addition to what is included in the table above, as of March 31, 2020, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $352 million, of which we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Legal Proceedings
We are subject to claims and litigation arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our Consolidated Financial Statements.
(14) PREFERRED STOCK
As of March 31, 2020 and 2019, we had 10 million shares of preferred stock authorized but unissued. The rights, preferences, and restrictions of the preferred stock may be designated by our Board of Directors without further action by our stockholders.
(15) STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Valuation Assumptions
We recognize compensation cost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. We account for forfeitures as they occur.
The estimation of the fair value of market-based restricted stock units, stock options and ESPP purchase rights is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We estimate the fair value of our stock-based awards as follows:
•Restricted Stock Units and Performance-Based Restricted Stock Units. The fair value of restricted stock units and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant.
•Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is estimated using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.
•Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan, as amended (“ESPP”), respectively, is estimated using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility and implied volatility of publicly-traded options on our common stock. An expected term is estimated based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
There were an insignificant number of stock options granted during fiscal years 2020, 2019, and 2018.
The estimated assumptions used in the Black-Scholes valuation model to value our ESPP purchase rights were as follows:
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ESPP Purchase Rights
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Year Ended March 31,
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2020
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2019
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2018
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Risk-free interest rate
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1.5 - 1.9%
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2.2 - 2.5%
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1.1 - 2.0%
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Expected volatility
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23 - 37%
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29 - 33%
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28 - 30%
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Weighted-average volatility
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26
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%
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|
33
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%
|
|
29
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%
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Expected term
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6 - 12 months
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|
6 - 12 months
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6 - 12 months
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Expected dividends
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None
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None
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None
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The assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows:
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Year Ended March 31,
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2020
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2019
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2018
|
Risk-free interest rate
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1.6 - 1.8%
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2.6
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%
|
|
1.5 - 1.6%
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Expected volatility
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14 - 65%
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16 - 47%
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17 - 46%
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Weighted-average volatility
|
29
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%
|
|
28
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%
|
|
28
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%
|
Expected dividends
|
None
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|
None
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|
|
None
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|
Summary of Plans and Plan Activity
Equity Incentive Plans
At our Annual Meeting of Stockholders, held on August 8, 2019, our stockholders approved the 2019 Equity Incentive Plan (the “2019 Equity Plan”), which replaced our 2000 Equity Incentive Plan, as amended (the “2000 Equity Plan”). Our 2019 Equity Plan allows us to grant options to purchase our common stock and to grant restricted stock, restricted stock units and stock appreciation rights to our employees, officers, and directors, up to a maximum of 13.5 million shares, plus any shares authorized for grant or subject to awards under the 2000 Equity Plan that are not delivered to participants for any reason. Pursuant to the 2019 Equity Plan, incentive stock options may be granted to employees and officers and non-qualified options may be granted to employees, officers, and directors, at not less than 100 percent of the fair market value on the date of grant.
Approximately 22.4 million options or 15.7 million restricted stock units were available for grant under our 2019 Equity Plan as of March 31, 2020.
Stock Options
Options granted under the 2019 Equity Plan and the 2000 Equity Plan generally expire ten years from the date of grant. All outstanding options are fully vested and exercisable.
The following table summarizes our stock option activity for the fiscal year ended March 31, 2020:
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Options
(in thousands)
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Weighted-
Average
Exercise Prices
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Weighted-
Average
Remaining
Contractual
Term (in years)
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Aggregate
Intrinsic Value
(in millions)
|
Outstanding as of March 31, 2019
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|
1,375
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|
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$
|
30.63
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Granted
|
|
5
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|
|
97.16
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Exercised
|
|
(306)
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30.96
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|
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Forfeited, cancelled or expired
|
|
—
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|
|
—
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|
|
|
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Outstanding as of March 31, 2020
|
|
1,074
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|
|
$
|
30.85
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|
|
3.89
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|
$
|
69
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|
Vested and expected to vest
|
|
1,074
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|
|
$
|
30.85
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|
|
3.89
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|
$
|
69
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|
Exercisable as of March 31, 2020
|
|
1,074
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|
|
$
|
30.85
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|
|
3.89
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|
$
|
69
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|
The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of March 31, 2020, which would have been received by the option holders had all the option holders exercised their options as of that date. The
total intrinsic values of stock options exercised during fiscal years 2020, 2019, and 2018 were $22 million, $24 million and $43 million, respectively. We issue new common stock from our authorized shares upon the exercise of stock options.
The following table summarizes outstanding and exercisable stock options as of March 31, 2020:
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Options Outstanding and Exercisable
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Range of
Exercise Prices
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Number
of Shares
(in thousands)
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Weighted-
Average
Exercise
Prices
|
|
Potential
Dilution
|
|
|
|
|
|
|
$11.53 - $22.42
|
|
7
|
|
|
1.81
|
|
$
|
16.80
|
|
|
—
|
%
|
|
|
|
|
|
|
26.25 - 26.25
|
|
550
|
|
|
3.59
|
|
26.25
|
|
|
0.2
|
%
|
|
|
|
|
|
|
33.60 - 37.12
|
|
517
|
|
|
4.23
|
|
35.92
|
|
|
0.2
|
%
|
|
|
|
|
|
|
$11.53 - $37.12
|
|
1,074
|
|
|
3.89
|
|
$
|
30.85
|
|
|
0.4
|
%
|
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|
|
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|
|
Potential dilution is computed by dividing the options in the related range of exercise prices by 288 million shares of common stock, which were issued and outstanding as of March 31, 2020.
Restricted Stock Units
We grant restricted stock units under our 2019 Equity Plan to employees worldwide. Restricted stock units are unfunded, unsecured rights to receive common stock upon the satisfaction of certain vesting criteria. Upon vesting, a number of shares of common stock equivalent to the number of restricted stock units is typically issued net of required tax withholding requirements, if any. Restricted stock units are subject to forfeiture and transfer restrictions. Vesting for restricted stock units is based on the holders’ continued employment with us through each applicable vest date. If the vesting conditions are not met, unvested restricted stock units will be forfeited. Our restricted stock units generally vest over 35 months to four years.
Each restricted stock unit granted reduces the number of shares available for grant by 1.43 shares under our 2019 Equity Plan. The following table summarizes our restricted stock units activity, excluding performance-based and market-based restricted stock unit activity which is discussed below, for the fiscal year ended March 31, 2020:
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Restricted
Stock Units
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Values
|
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|
Outstanding as of March 31, 2019
|
|
4,960
|
|
|
$
|
111.03
|
|
|
|
Granted
|
|
4,297
|
|
|
93.52
|
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Vested
|
|
(2,445)
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|
|
108.42
|
|
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|
Forfeited or cancelled
|
|
(595)
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|
|
106.22
|
|
|
|
Outstanding as of March 31, 2020
|
|
6,217
|
|
|
$
|
100.42
|
|
|
|
The grant date fair value of restricted stock units is based on the quoted market price of our common stock on the date of grant. The weighted-average grant date fair values of restricted stock units granted during fiscal years 2020, 2019, and 2018 were $93.52, $128.76 and $110.05 respectively. The fair values of restricted stock units that vested during fiscal years 2020, 2019, and 2018 were $240 million, $300 million and $289 million, respectively.
Performance-Based Restricted Stock Units
Our performance-based restricted stock units cliff vest after a four-year performance period contingent upon the achievement of pre-determined performance-based milestones based on our non-GAAP net revenue and free cash flow as well as service conditions. If these performance-based milestones are not met but service conditions are met, the performance-based restricted stock units will not vest, in which case any compensation expense we have recognized to date will be reversed. Each quarter, we update our assessment of the probability that the non-GAAP net revenue and free cash flow performance milestones will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The performance-based restricted stock units contain threshold, target and maximum milestones for each of non-GAAP net revenue and free cash flow. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of performance-based restricted stock units attributable to each performance-based milestone based on the company’s performance as compared to these threshold, target and maximum performance-based milestones. Each performance-based milestone is weighted evenly where 50 percent of the total performance-based restricted stock units that vest
will be determined based on non-GAAP net revenue and the other 50 percent will be determined based on free cash flow. The number of shares that vest based on each performance-based milestone is independent from the other.
The following table summarizes our performance-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the fiscal year ended March 31, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-
Based Restricted
Stock Units
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
|
|
Outstanding as of March 31, 2019
|
579
|
|
|
$
|
110.51
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
Forfeited or cancelled
|
—
|
|
|
—
|
|
|
|
Outstanding as of March 31, 2020
|
579
|
|
|
$
|
110.51
|
|
|
|
Market-Based Restricted Stock Units
Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the market-based restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be issued at vesting will range from zero to 200 percent of the target number of market-based restricted stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, over either a one-year, two-year cumulative, three-year cumulative period or a two-year and four-year cumulative period.
The following table summarizes our market-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the year ended March 31, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market-Based
Restricted Stock
Units
(in thousands)
|
|
Weighted-
Average Grant
Date Fair Value
|
|
|
Outstanding as of March 31, 2019
|
|
958
|
|
|
$
|
155.64
|
|
|
|
Granted
|
|
1,313
|
|
|
109.04
|
|
|
|
Vested
|
|
(93)
|
|
|
109.05
|
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
(280)
|
|
|
137.08
|
|
|
|
Outstanding as of March 31, 2020
|
|
1,898
|
|
|
$
|
128.41
|
|
|
|
The weighted-average grant date fair values of market-based restricted stock units granted during fiscal years 2020, 2019, and 2018 were $109.04, $185.24, and $140.93, respectively. The fair values of market-based restricted stock units that vested during fiscal years 2020, 2019, and 2018 were $9 million, $54 million, and $48 million, respectively.
ESPP
Pursuant to our ESPP, eligible employees may authorize payroll deductions of between 2 percent and 10 percent of their compensation to purchase shares of common stock at 85 percent of the lower of the market price of our common stock on the date of commencement of the applicable offering period or on the last day of each six-month purchase period.
The following table summarizes our ESPP activity for fiscal years ended March 31, 2020, 2019 and 2018:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
(in millions)
|
|
Exercise Prices for Purchase Rights
|
|
Weighted-Average Fair Values of Purchase Rights
|
Fiscal Year 2018
|
|
0.6
|
|
|
$67.56 - $99.82
|
|
|
$
|
21.57
|
|
Fiscal Year 2019
|
|
0.5
|
|
|
$89.46 - $107.51
|
|
|
$
|
31.88
|
|
Fiscal Year 2020
|
|
0.7
|
|
|
$74.70 - $74.89
|
|
|
$
|
29.05
|
|
The fair values were estimated on the date of grant using the Black-Scholes valuation model. We issue new common stock out of the ESPP’s pool of authorized shares. As of March 31, 2020, 5.6 million shares were available for grant under our ESPP.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense resulting from stock options, restricted stock units, market-based restricted stock units, performance-based restricted stock units, and the ESPP purchase rights included in our Consolidated Statements of Operations (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cost of revenue
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
3
|
|
Research and development
|
|
229
|
|
|
184
|
|
|
146
|
|
Marketing and sales
|
|
37
|
|
|
33
|
|
|
32
|
|
General and administrative
|
|
77
|
|
|
63
|
|
|
61
|
|
Stock-based compensation expense
|
|
$
|
347
|
|
|
$
|
284
|
|
|
$
|
242
|
|
During the fiscal years ended March 31, 2020, 2019 and 2018, we recognized $43 million, $40 million and $29 million, respectively, of deferred income tax benefit related to our stock-based compensation expense.
As of March 31, 2020, our total unrecognized compensation cost related to restricted stock units, market-based restricted stock units, and performance-based restricted stock units was $534 million and is expected to be recognized over a weighted-average service period of 1.8 years. Of the $534 million of unrecognized compensation cost, $452 million relates to restricted stock units, $75 million relates to market-based restricted stock units, and $7 million relates to performance-based restricted stock units at a 68 percent average payout. As of March 31, 2020, there were no unrecognized compensation cost related to stock options as they were fully vested.
Deferred Compensation Plan
We have a Deferred Compensation Plan (“DCP”) for the benefit of a select group of management or highly compensated employees and directors, which is unfunded and intended to be a plan that is not qualified within the meaning of section 401(a) of the Internal Revenue Code. The DCP permits the deferral of the annual base salary and/or director cash compensation up to a maximum amount. The deferrals are held in a separate trust, which has been established by us to administer the DCP. The trust is a grantor trust and the specific terms of the trust agreement provide that the assets of the trust are available to satisfy the claims of general creditors in the event of our insolvency. The assets held by the trust are classified as trading securities and are held at fair value on our Consolidated Balance Sheets. The assets and liabilities of the DCP are presented in other assets and other liabilities on our Consolidated Balance Sheets, respectively, with changes in the fair value of the assets and in the deferred compensation liability recognized as compensation expense. The estimated fair value of the assets was $13 million and $11 million as of March 31, 2020 and 2019, respectively. As of March 31, 2020 and 2019, $14 million and $12 million were recorded, respectively, to recognize undistributed deferred compensation due to employees.
401(k) Plan, Registered Retirement Savings Plan and ITP Plan
We have a 401(k) plan covering substantially all of our U.S. employees, a Registered Retirement Savings Plan covering substantially all of our Canadian employees, and an ITP pension plan covering substantially all our Swedish employees. These plans may permit us to make discretionary contributions to employees’ accounts based on our financial performance. We contributed an aggregate of $29 million, $43 million and $31 million to these plans in fiscal years 2020, 2019, and 2018, respectively.
Stock Repurchase Program
In May 2015, our Board of Directors authorized a two-year program to repurchase up to $1 billion of our common stock. We repurchased approximately 0.3 million for approximately $31 million under this program during the fiscal year ended March 31, 2018. In May 2017, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a two-year program to repurchase up to $1.2 billion of our common stock. We repurchased approximately 0.6 million and 5.0 million shares for approximately $76 million and $570 million under this program, respectively, during the fiscal years ended March 31, 2019 and 2018. In May 2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $2.4 billion of our common stock. We repurchased approximately 12.3 million and 10.4 million shares for approximately $1,207 million and $1,116 million under this program, respectively, during the fiscal years ended March 31, 2020 and 2019. The May 2018 program was scheduled to expire on May 31, 2020, however we completed repurchases under the May 2018 program in April 2020.
The following table summarizes total shares repurchased during fiscal years 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2015 Program
|
|
|
|
|
|
|
|
May 2017 Program
|
|
|
|
May 2018 Program
|
|
|
|
Total
|
|
|
(In millions)
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
|
|
|
|
0.3
|
|
|
$
|
31
|
|
|
|
|
|
|
5.0
|
|
|
$
|
570
|
|
|
—
|
|
|
$
|
—
|
|
|
5.3
|
|
|
$
|
601
|
|
Fiscal Year 2019
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
0.6
|
|
|
$
|
76
|
|
|
10.4
|
|
|
$
|
1,116
|
|
|
11.0
|
|
|
$
|
1,192
|
|
Fiscal Year 2020
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
12.3
|
|
|
$
|
1,207
|
|
|
12.3
|
|
|
$
|
1,207
|
|
(16) INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, for the fiscal years ended March 31, 2020, 2019 and 2018 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Interest expense
|
(44)
|
|
|
(45)
|
|
|
(44)
|
|
Interest income
|
100
|
|
|
88
|
|
|
50
|
|
Net gain (loss) on foreign currency transactions
|
11
|
|
|
(9)
|
|
|
18
|
|
Net gain (loss) on foreign currency forward contracts
|
(4)
|
|
|
50
|
|
|
(16)
|
|
Other income (expense), net
|
—
|
|
|
(1)
|
|
|
7
|
|
Interest and other income (expense), net
|
$
|
63
|
|
|
$
|
83
|
|
|
$
|
15
|
|
(17) EARNINGS PER SHARE
The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock, restricted stock units and ESPP purchase rights using the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
(In millions, except per share amounts)
|
2020
|
|
2019
|
|
2018
|
|
Net income
|
$
|
3,039
|
|
|
$
|
1,019
|
|
|
$
|
1,043
|
|
|
Shares used to compute earnings per share:
|
|
|
|
|
|
|
Weighted-average common stock outstanding — basic
|
293
|
|
|
303
|
|
|
308
|
|
|
Dilutive potential common shares related to stock award plans and from assumed exercise of stock options
|
2
|
|
|
3
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding — diluted
|
295
|
|
|
306
|
|
|
312
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
$
|
10.37
|
|
|
$
|
3.36
|
|
|
$
|
3.39
|
|
|
Diluted
|
$
|
10.30
|
|
|
$
|
3.33
|
|
|
$
|
3.34
|
|
|
For the fiscal years ended March 31, 2020 and 2019, two million restricted stock units and market-based restricted stock units were excluded from the treasury stock method computation of diluted shares as their inclusion would have had an antidilutive effect. For the fiscal year ended March 31, 2018, an immaterial amount of restricted stock units and market-based restricted stock units were excluded from the treasury stock method computation of diluted shares as their inclusion would have had an antidilutive effect.
Our performance-based restricted stock units, which are considered contingently issuable shares, are also excluded from the treasury stock method computation because the related performance-based milestones were not achieved as of the end of the fiscal years ended March 31, 2020, 2019 and 2018.
(18) SEGMENT AND REVENUE INFORMATION
Our reporting segment is based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Our CODM currently reviews total company operating results to assess overall performance and allocate resources. As of March 31, 2020, we have only one reportable segment, which represents our only operating segment.
Information about our total net revenue by timing of recognition for the fiscal years ended March 31, 2020 and 2019 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2020
|
|
2019
|
Net revenue by timing of recognition
|
|
|
|
Revenue recognized at a point in time
|
$
|
2,043
|
|
|
$
|
1,902
|
|
Revenue recognized over time
|
3,494
|
|
|
3,048
|
|
Net revenue
|
$
|
5,537
|
|
|
$
|
4,950
|
|
Generally, performance obligations that are recognized upfront upon transfer of control are classified as revenue recognized at a point in time, while performance obligations that are recognized over the Estimated Offering Period or subscription period as the services are provided are classified as revenue recognized over time.
Revenue recognized at a point in time includes revenue allocated to the software license performance obligation. This also includes revenue from the licensing of software to third-parties.
Revenue recognized over time includes service revenue allocated to the future update rights and the online hosting performance obligations. This also includes service revenue allocated to the future update rights from the licensing of software to third-parties, software that offers an online-only service such as our Ultimate Team game mode, and subscription services.
Information about our total net revenue by composition for the fiscal years ended March 31, 2020, 2019 and 2018 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net revenue by composition
|
|
|
|
|
|
Full game downloads
|
$
|
809
|
|
|
$
|
680
|
|
|
$
|
707
|
|
Live services
|
2,813
|
|
|
2,216
|
|
|
2,083
|
|
Mobile
|
692
|
|
|
814
|
|
|
660
|
|
Total Digital
|
4,314
|
|
|
3,710
|
|
|
3,450
|
|
|
|
|
|
|
|
Packaged goods and other
|
1,223
|
|
|
1,240
|
|
|
1,700
|
|
Net revenue
|
$
|
5,537
|
|
|
$
|
4,950
|
|
|
$
|
5,150
|
|
Digital net revenue includes full game downloads, live services, and mobile revenue. Full game downloads includes revenue from digital sales of full games on console and PC. Live services includes revenue from sales of extra content for console, PC, browser games, game software licensed to our third-party publishing partners who distribute our games digitally, subscriptions, and advertising. Mobile includes revenue from the sale of full games and extra content on mobile phones and tablets.
Packaged goods net revenue includes revenue from software that is sold physically. This includes (1) net revenue from game software sold physically through traditional channels such as brick and mortar retailers, and (2) our software licensing revenue from third parties (for example, makers of console platforms, personal computers or computer accessories) who include certain of our products for sale with their products (for example, OEM bundles). Other revenue includes our non-software licensing revenue.
Information about our total net revenue by platform for the fiscal years ended March 31, 2020, 2019 and 2018 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Platform net revenue
|
|
|
|
|
|
Console
|
$
|
3,774
|
|
|
$
|
3,333
|
|
|
$
|
3,635
|
|
PC / Browser
|
1,017
|
|
|
780
|
|
|
827
|
|
Mobile
|
727
|
|
|
824
|
|
|
672
|
|
Other
|
19
|
|
|
13
|
|
|
16
|
|
Net revenue
|
$
|
5,537
|
|
|
$
|
4,950
|
|
|
$
|
5,150
|
|
Information about our operations in North America and internationally for the fiscal years ended March 31, 2020, 2019 and 2018 is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net revenue from unaffiliated customers
|
|
|
|
|
|
North America
|
$
|
2,270
|
|
|
$
|
1,906
|
|
|
$
|
2,090
|
|
International
|
3,267
|
|
|
3,044
|
|
|
3,060
|
|
Net revenue
|
$
|
5,537
|
|
|
$
|
4,950
|
|
|
$
|
5,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2020
|
|
2019
|
Long-lived assets
|
|
|
|
North America
|
$
|
375
|
|
|
$
|
371
|
|
International
|
74
|
|
|
77
|
|
Total
|
$
|
449
|
|
|
$
|
448
|
|
We attribute net revenue from external customers to individual countries based on the location of the legal entity that sells the products and/or services. Note that revenue attributed to the legal entity that makes the sale is often not the country where the consumer resides. For example, revenue generated by our Swiss legal entity includes digital revenue from consumers who reside outside of Switzerland, including consumers who reside outside of Europe. Revenue generated by our Swiss legal entity during fiscal years 2020, 2019, and 2018 represents $2,586 million, $2,303 million and $2,272 million or 47 percent, 47 percent and 44 percent of our total net revenue, respectively. Revenue generated in the United States represents over 99 percent of our total North America net revenue. There were no other countries with net revenue greater than 10 percent.
In fiscal year 2020, our direct sales to Sony and Microsoft represented approximately 32 percent and 17 percent of total net revenue, respectively. In fiscal year 2019, our direct sales to Sony and Microsoft represented approximately 29 percent and 16 percent of total net revenue, respectively. In fiscal year 2018, our direct sales to Sony and Microsoft represented approximately 27 percent and 16 percent of total net revenue, respectively.
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
Year
Ended
|
(In millions, except per share data)
|
June 30
|
|
September 30
|
|
December 31
|
|
March 31
|
|
|
Fiscal 2020 Consolidated
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
1,209
|
|
|
$
|
1,348
|
|
|
$
|
1,593
|
|
|
$
|
1,387
|
|
|
$
|
5,537
|
|
Gross profit
|
1,022
|
|
|
943
|
|
|
1,085
|
|
|
1,118
|
|
|
4,168
|
|
Operating income
|
415
|
|
|
268
|
|
|
361
|
|
|
401
|
|
|
1,445
|
|
Net income
|
1,421
|
|
(a)
|
854
|
|
(a)
|
346
|
|
|
418
|
|
|
3,039
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Earnings per share — Basic
|
$
|
4.78
|
|
|
$
|
2.89
|
|
|
$
|
1.18
|
|
|
$
|
1.44
|
|
|
$
|
10.37
|
|
Earnings per share — Diluted
|
$
|
4.75
|
|
|
$
|
2.89
|
|
|
$
|
1.18
|
|
|
$
|
1.43
|
|
|
$
|
10.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 Consolidated
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
1,137
|
|
|
$
|
1,286
|
|
|
$
|
1,289
|
|
|
$
|
1,238
|
|
|
$
|
4,950
|
|
Gross profit
|
922
|
|
|
868
|
|
|
876
|
|
|
962
|
|
|
3,628
|
|
Operating income
|
300
|
|
|
258
|
|
|
242
|
|
|
196
|
|
|
996
|
|
Net income
|
293
|
|
|
255
|
|
|
262
|
|
|
209
|
|
|
1,019
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Earnings per share — Basic
|
$
|
0.96
|
|
|
$
|
0.84
|
|
|
$
|
0.87
|
|
|
$
|
0.70
|
|
|
$
|
3.36
|
|
Earnings per share — Diluted
|
$
|
0.95
|
|
|
$
|
0.83
|
|
|
$
|
0.86
|
|
|
$
|
0.69
|
|
|
$
|
3.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) During the fiscal year ended March 31, 2020, we recognized total one-time tax benefits of $1.760 billion related to the $1.840 billion Swiss Deferred Tax Asset, partially offset by the $80 million one-time Altera opinion charge. Of this amount, we recognized tax benefits of $1.17 billion and $630 million, during the quarters ended June 30, 2019 and September 30, 2019, respectively. See Note 2 — Summary of Significant Accounting Policies - Income Taxes for more information on the Swiss intra-entity sale.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Electronic Arts Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Electronic Arts Inc. and subsidiaries (the Company) as of March 28, 2020 and March 30, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 28, 2020, and the related notes and Schedule II (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 28, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 28, 2020 and March 30, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended March 28, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 28, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of March 31, 2019, due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases. As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition as of April 1, 2018, due to the adoption of FASB ASC Topic 606, Revenue From Contracts with Customers.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the Estimated Offering Period
As discussed in Note 2 to the consolidated financial statements, revenue for transactions that include future update rights and/or online hosting performance obligations are subject to deferral and recognized over the Estimated Offering Period. Determining the Estimated Offering Period is inherently subjective because it is not an explicitly defined period. The Company’s methodology and model to determine the Estimated Offering Period considers the following inputs and assumptions:
•the average period of time customers are online,
•for physical games sold at retail, the period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer,
•known and expected online gameplay trends, and
•disclosed service periods for competitors’ games.
We identified the assessment of the Estimated Offering Period as a critical audit matter. Due to the complexity and subjectivity of the methods and assumptions used within the Company’s model, challenging auditor judgment was required to evaluate the results of the procedures performed over the Estimated Offering Period.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to determine the Estimated Offering Period, including controls over the relevance and reliability of data used to estimate the inputs and assumptions, and the Company’s review of the Estimated Offering Period concluded for use in recognizing revenue. We evaluated the method and model the Company used to develop the Estimated Offering Period against the accounting requirements and considered potential management bias in developing or applying their methodology. We computed the average period of time customers are online as well as the period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer by using the Company’s internal data. We compared the results of this computation against the periods used by the Company in their Estimated Offering Period model. We evaluated other third-party data, such as publicly available competitor data and compared it against the third-party data used by the Company in their model. We evaluated known and expected online gameplay trends and performed a sensitivity analysis of the Company’s Estimated Offering Period to assess the impact of potential changes in the Estimated Offering Period on revenue. We evaluated the overall results of the procedures performed over the Estimated Offering Period.
Evaluation of the realizability of the Swiss deferred tax assets
As discussed in Notes 2 and 10 to the consolidated financial statements, during the year ended March 28, 2020, the Company recognized $1.840 billion of deferred tax benefits related to an intra-entity sale of some of its intellectual property rights to its Swiss subsidiary, which is net of the impact of a $131 million valuation allowance and a $393 million reduction due to the Altera opinion. The Company periodically performs an analysis to determine whether it is more likely than not that all or a portion of its Swiss deferred tax assets will be realized. The Company’s realizability analysis considers whether sufficient taxable income will be generated by the Swiss subsidiary over the 20-year period over which the Swiss deferred tax assets will generally reverse. The Company determined that there is a greater than
50% likelihood that its Swiss deferred tax assets will not be fully realized. As a result, the Company reduced the Swiss deferred tax assets by a valuation allowance of approximately $131 million as of March 28, 2020.
We identified the evaluation of the realizability of the Company’s Swiss deferred tax assets as a critical audit matter. This evaluation required especially challenging auditor judgment to assess the Company’s estimated future Swiss taxable income over the 20-year period over which the Swiss deferred tax assets will generally reverse. Specifically, the Company’s assumptions of expected future growth rates of Swiss taxable income were based primarily on third-party market and industry growth data. Changes in assumptions regarding estimated future Swiss taxable income could have a significant impact on the realization of the Company’s Swiss deferred tax assets and the amount of the valuation allowance.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s income tax process over the valuation allowance, including controls over the process to develop estimates of future Swiss taxable income. We performed a sensitivity analysis of the valuation allowance to assess the impact of reasonably possible changes in expected future growth rates. We compared the Company’s estimated future Swiss taxable income to historical growth rates and other projected financial information prepared by the Company. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company’s benchmarking study of third-party market and industry growth data by assessing the relevance and reliability of the benchmarking data.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Santa Clara, California
May 20, 2020