New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

Recently Adopted Accounting Standards

In May 2014, the FASB issued the Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts with Customers (the “New Revenue Standard” or “ASC 606”), which replaced ASC Topic 605, Revenue Recognition (the “Old Revenue Standard” or “ASC 605”), including industry-specific requirements, and provided companies with a single principles-based revenue recognition model for recognizing revenue from contracts with customers. The core principle of the New Revenue Standard is that a company should recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

We adopted the New Revenue Standard on April 1, 2018, the beginning of fiscal year 2019, using the modified retrospective method. We elected to apply the New Revenue Standard only to contracts that were not completed as of the adoption date. 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.

The net cumulative effect adjustment upon adoption resulted in an increase to retained earnings of $590 million, net of tax, and included the impact from the following adjustments to our Condensed Consolidated Balance Sheet at April 1, 2018:



BALANCE SHEETS (In millions)	Balance at March 31, 2018			Adjustments due to New Revenue Standard Adoption			Balance at April 1, 2018
Assets
Receivables, net	$	385		$	158		$	543
Deferred income taxes, net	84			(64		)	20

Liabilities
Accrued and other current liabilities
Sales return and price protection reserves	$	—		$	158		$	158
Deferred net revenue (other)	108			(3		)	105
Deferred net revenue (online-enabled games)	1,622			(673		)	949

Stockholders’ Equity
Retained earnings	$	4,062		$	590		$	4,652
Accumulated other comprehensive income (loss)	(127		)	22			(105		)

The most significant impacts of the New Revenue Standard were:

•

The accounting for our transactions as multiple elements or “bundled” arrangements. Under prior software revenue recognition accounting standards, because we did not have vendor-specific objective evidence of fair value (“VSOE”) for unspecified future updates or online hosting, we were not able to account for performance obligations separately, and therefore, the entire sales price of most transactions that had multiple performance obligations was recognized ratably over the period we expected to provide the future updates and/or online hosting performance obligations (the “Estimated Offering Period”). Under the New Revenue Standard, this VSOE requirement was eliminated and was replaced with a requirement for us to determine our best estimate of the stand-alone selling price of each performance obligation and allocate the transaction price to each distinct performance obligation on a relative stand-alone selling price basis. Therefore, we are now able to account for performance obligations separately.

For example, for an individual sale of a game with both online and offline functionality, we typically have three distinct performance obligations; (1) the software license; (2) a right to receive future updates; and (3) online hosting. The software license performance obligation represents the game that is delivered digitally or via physical disc at the time of sale and typically provides access to offline core game content. The future update rights performance obligation includes 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. The online hosting performance obligation consists of providing the customer with a hosted connection for online playability.

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 under the New Revenue Standard, generally 75 percent of the sales price is allocated to the software license performance obligation and recognized at a point in time upon delivery (which is usually at or near the same time as the booking of the transaction), and the remaining 25 percent is allocated to the future update rights and the online hosting performance obligations and recognized ratably over the Estimated Offering Period. For sales prior to April 1, 2018, our deferred revenue balances decreased by $740 million upon adoption of the New Revenue Standard because the software license performance obligation had been delivered in the prior fiscal year.

•

Mobile platform fees. The adoption of the New Revenue Standard also changed how we present mobile platform fees after March 31, 2018. Previously, mobile platform fees retained by third-party application storefronts such as the Apple App Store and Google Play, were reported on a net basis (i.e. as a reduction of net revenue) because we previously determined that generally, the third party was considered the primary obligor. Upon adoption of the New Revenue Standard, we concluded that we are the principal in the transactions, resulting in mobile platform fees now being reported within cost of revenue rather than as a reduction of net revenue. We recognized $64 million of mobile platform fees at April 1, 2018 as an increase to our deferred revenue balances. Mobile platform fees for the three and six months ended September 30, 2018 were $44 million and $93 million, respectively, and accordingly increased both service and other net revenue and cost of revenue by this amount relative to the same period a year ago. While this change also decreased our gross margin percentage, it does not have a material impact on our annual total gross profit or overall profitability.

•

Increased portion of our sales from games with services are presented as service revenue. The amount of the transaction price allocated to future update rights and the online hosting performance obligations are presented as service revenue under the New Revenue Standard (previously, revenue associated with future update rights were generally presented as product revenue). Therefore, for the three and six months ended September 30, 2018, approximately $102 million and $288 million, respectively, of revenue for future update rights are now presented as service revenue under the New Revenue Standard as compared to product revenue under the Old Revenue Standard.


•	Sales returns and price protection reserves. Upon adoption, our sales returns and price protection reserves are now presented within accrued and other liabilities (previously, these allowances were presented as contra-assets within receivables on our Condensed Consolidated Balance Sheets). We reclassified $158 million of sales returns and price protection reserves on April 1, 2018.

The adoption of the New Revenue Standard impacted our Condensed Consolidated Balance Sheet as of September 30, 2018 and our Condensed Consolidated Statement of Operations for the three and six months ended September 30, 2018 as follows:



	As of September 30, 2018
BALANCE SHEETS (In millions)	Under New Revenue Standard			Under Old Revenue Standard			$ Change
Assets
Receivables, net	$	966		$	858		$	108
Other current assets	292			288			4
Deferred income taxes, net	112			151			(39		)
Other assets	101			89			12

Liabilities
Accrued and other current liabilities
Sales return and price protection reserves	$	108		$	—		$	108
Deferred net revenue (other)	113			157			(44		)
Deferred net revenue (online-enabled games)	574			1,120			(546		)
Other liabilities	217			218			(1		)

Stockholders’ Equity
Retained earnings	$	5,199		$	4,625		$	574
Accumulated other comprehensive loss	(19		)	(13		)	(6		)



	Three Months Ended September 30, 2018
(In millions, except per share data)	Under New Revenue Standard		Under Old Revenue Standard			$ Change			% Change
Net revenue:
Product	$	623	$	437		$	186		43	%
Service and other	663		517			146			28	%
Total net revenue	1,286		954			332			35	%
Cost of revenue:
Product	222		280			(58		)	(21	)%
Service and other	196		94			102			109	%
Total cost of revenue	418		374			44			12	%
Gross profit	868		580			288			50	%
Operating expenses:
Total operating expenses	610		610			—			—	%
Operating income (loss)	258		(30		)	288			(960	)%
Interest and other income (expense), net	18		18			—			—	%
Income (loss) before provision for income taxes	276		(12		)	288			(2,400	)%
Provision for income taxes	21		7			14			200	%
Net income (loss)	$	255	$	(19	)	$	274		(1,442	)%
Earnings (loss) per share:
Basic	$	0.84	$	(0.06	)	$	0.90		(1,500	)%
Diluted	$	0.83	$	(0.06	)	$	0.89		(1,483	)%



	Six Months Ended September 30, 2018
(In millions, except per share data)	Under New Revenue Standard		Under Old Revenue Standard		$ Change			% Change
Net revenue:
Product	$	825	$	1,153	$	(328	)	(28	)%
Service and other	1,598		1,217		381			31	%
Total net revenue	2,423		2,370		53			2	%
Cost of revenue:
Product	290		358		(68		)	(19	)%
Service and other	343		182		161			88	%
Total cost of revenue	633		540		93			17	%
Gross profit	1,790		1,830		(40		)	(2	)%
Operating expenses:
Total operating expenses	1,232		1,232		—			—	%
Operating income	558		598		(40		)	(7	)%
Interest and other income (expense), net	37		37		—			—	%
Income before provision for income taxes	595		635		(40		)	(6	)%
Provision for income taxes	47		71		(24		)	(34	)%
Net income	$	548	$	564	$	(16	)	(3	)%
Earnings per share:
Basic	$	1.80	$	1.85	$	(0.05	)	(3	)%
Diluted	$	1.77	$	1.83	$	(0.06	)	(3	)%

The adoption of the New Revenue Standard accelerated the revenue recognition of prior period game sales into retained earnings, which will result in a one-time increase in cash taxes paid on our Condensed Consolidated Statement of Cash Flows for the fiscal year ending March 31, 2019.

Refer to the following sections of our Condensed Consolidated Financial Statements for the additional disclosures required by the New Revenue Standard:


•	See Note 2 — Summary of Significant Accounting Policies, for our updated revenue accounting policy, including significant judgments, under ASC 606. For a discussion of our revenue recognition policy as it relates to revenue transactions accounted for prior to April 1, 2018, which were accounted for under ASC 605, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.


•	See Note 10 — Balance Sheet Details, for a discussion on our contract liabilities (“deferred net revenue”) and our remaining performance obligations. We had an immaterial amount of contract assets as of April 1, 2018 and September 30, 2018.


•	See Note 16 — Segment Information, for our disaggregations of revenue.

Condensed Balance Sheet Statements, Captions [Line Items]

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

The adoption of the New Revenue Standard impacted our Condensed Consolidated Balance Sheet as of September 30, 2018 and our Condensed Consolidated Statement of Operations for the three and six months ended September 30, 2018 as follows:



	As of September 30, 2018
BALANCE SHEETS (In millions)	Under New Revenue Standard			Under Old Revenue Standard			$ Change
Assets
Receivables, net	$	966		$	858		$	108
Other current assets	292			288			4
Deferred income taxes, net	112			151			(39		)
Other assets	101			89			12

Liabilities
Accrued and other current liabilities
Sales return and price protection reserves	$	108		$	—		$	108
Deferred net revenue (other)	113			157			(44		)
Deferred net revenue (online-enabled games)	574			1,120			(546		)
Other liabilities	217			218			(1		)

Stockholders’ Equity
Retained earnings	$	5,199		$	4,625		$	574
Accumulated other comprehensive loss	(19		)	(13		)	(6		)

Condensed Balance Sheet Statements, Captions [Line Items]