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Fair value measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements Disclosure [Abstract]

8. Fair value measurements

Fair Value Measurements on a Recurring Basis

Financial Accounting Standards Board (“FASB”) literature regarding fair value measurements for financial and non-financial assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs 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 in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The table below segregates all assets that are measured at fair value on a recurring basis (which means they are so measured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (amounts in millions):

				Fair Value Measurements at
				September 30, 2011 Using
				Quoted
				Prices in
				Active
				Markets for		Significant
				Identical		Other		Significant
		As of		Financial		Observable		Unobservable
		September 30,		Instruments		Inputs		Inputs		Balance Sheet
		2011		(Level 1)		(Level 2)		(Level 3)		Classification
Financial assets:
Money market funds		$	2,329	$	2,329	$	---	$	---	Cash and cash equivalents
U.S. treasuries with original maturies of
	three months or less		11		11		---		---	Cash and cash equivalents
U.S. treasuries and government
	agency securities		391		391		---		---	Short-term investments
ARS held through Morgan Stanley
	Smith Barney LLC		25		---		---		25	Long-term investments
Total financial assets at fair value		$	2,756	$	2,731	$	---	$	25

				Fair Value Measurements at
				December 31, 2010 Using
				Quoted
				Prices in
				Active
				Markets for		Significant
				Identical		Other		Significant
		As of		Financial		Observable		Unobservable
		December 31,		Instruments		Inputs		Inputs		Balance Sheet
		2010		(Level 1)		(Level 2)		(Level 3)		Classification
Financial assets:
Money market funds		$	2,216	$	2,216	$	---	$	---	Cash and cash equivalents
U.S. treasuries and foreign government
	bonds with original maturities of
	three months or less		332		332		---		---	Cash and cash equivalents
U.S. treasuries and government agency
	securities		672		672		---		---	Short-term investments
ARS held through Morgan Stanley
	Smith Barney LLC		23		---		---		23	Long-term investments
Foreign exchange contract derivatives			1		---		1		---	Other assets—current
Total financial assets at fair value		$	3,244	$	3,220	$	1	$	23

The following tables provide a reconciliation of the beginning and ending balances of our financial assets and financial liabilities classified as Level 3 by major categories (amounts in millions) at September 30, 2011 and 2010, respectively:

			Level 3
					Total
					financial
					assets at
			ARS		fair
			(a)		value
Balance at January 1, 2011			$	23	$	23
	Total unrealized gains included in
		other comprehensive income		2		2
Balance at September 30, 2011			$	25	$	25

			Level 3
							Total
							financial
					ARS rights		assets at
			ARS		from UBS		fair		Other financial
			(a)		(b)		value		liabilities
Balance at January 1, 2010			$	77	$	7	$	84	$	(23)
	Total gains (losses) (realized/unrealized)
		included in investment and other income, net		7		(7)		---		13
	Purchases of acquired sales, issuances and
		settlements		(61)		---		(61)		---
Balance at September 30, 2010			$	23	$	---	$	23	$	(10)

The amount of total gains(losses) for the
	period included in earnings attributable to
	the change in unrealized gains or losses
	relating to assets still held at September 30, 2010		$	---	$	---	$	---	$	13

(a) Fair value measurements of the auction rate securities (“ARS”) have been estimated using an income-approach model (specifically, discounted cash-flow analysis). When estimating the fair value, we consider both observable market data and non-observable factors, including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments and the likelihood of redemption. Significant assumptions used in the analysis include estimates for interest rates, spreads, cash flow timing and amounts, and holding periods of the securities. Assets measured at fair value using significant unobservable inputs (Level 3) represent 1% of our financial assets measured at fair value on a recurring basis at September 30, 2011.

In June 2010, we sold the remainder of our ARS held with UBS at par and recognized a gain of $7 million, which is included within investment and other income, net in our condensed consolidated statement of operations for the nine months ended September 30, 2010.

(b) ARS rights from UBS represented an offer from UBS providing us with the right to require UBS to purchase our ARS held through UBS at par value. To value the ARS rights, we considered the intrinsic value, time value of money, and our assessment of the credit worthiness of UBS. We exercised our ARS rights with UBS on June 30, 2010 and recorded a loss of $7 million, which is included within investment and other income, net in our condensed consolidated statement of operations for the nine months ended September 30, 2010.

Foreign Currency Forward Contracts Not Designated as Hedges

We transact business in various currencies other than the U.S. dollar and have significant international sales and expenses denominated in currencies other than the U.S. dollar, subjecting us to currency exchange rate risks. To mitigate our risk from foreign currency fluctuations we periodically enter into currency derivative contracts, primarily swaps and forward contracts with maturities of twelve months or less, with Vivendi as our principal counterparty. We do not hold or purchase any foreign currency contracts for trading or speculative purposes and we do not designate these forward contracts or swaps as hedging instruments. Accordingly, we report the fair value of these contracts in our condensed consolidated balance sheet with changes in fair value recorded in our condensed consolidated statement of operations. The fair value of foreign currency contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.

Fair Value Measurements on a Non-Recurring Basis

We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. For the nine-month period ended September 30, 2011, there were no impairment charges related to assets that are measured on a non-recurring basis.

The table below presents intangible assets that are not subject to recurring fair value measurement at December 31, 2010 (amounts in millions):

				Fair Value Measurements at
				December 31, 2010 Using
				Quoted
				Prices in
				Active
				Markets for		Significant
				Identical		Other		Significant
		As of		Financial		Observable		Unobservable
		December 31,		Instruments		Inputs		Inputs
		2010		(Level 1)		(Level 2)		(Level 3)		Total Losses
Non-financial assets:
Intangible assets, net		$	---	$	---	$	---	$	---	$	326
Total non-financial assets at fair
	value	$	---	$	---	$	---	$	---	$	326

We considered the continued economic downturn within our industry in 2010 and the change in the buying habits of casual consumers while planning for 2011 during the fourth quarter of 2010. This resulted in a significant revision of our outlook for retail sales of software and a strategy change to, among other things, focus on fewer title releases in the casual genre and discontinue the development of music-based titles. As we considered this change in strategy to be an indicator of a potential impairment of our intangible assets, we updated our future projected revenue streams for certain franchises in the casual games and music genres. We performed recoverability tests and, where applicable, measured the impairment of the related intangible assets in accordance with ASC Subtopic 360-10.

Determining whether an impairment has occurred requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the estimated remaining useful life over which these cash flows will occur, the amount of these cash flows and the asset's residual value, if any. For intangible assets that do not pass the recoverability test, the measurement of an impairment loss requires a determination of fair value, which is based on the best information available. Based on the characteristics of the assets being valued and the availability of information, the Company used the income approach, which presumes that the value of an asset can be estimated by the net economic benefit to be received over the estimated remaining useful life of the asset, discounted to present value. We derived the required cash flow estimates from our historical experience and our internal business plans and applied an appropriate discount rate. Based on this analysis, we recorded impairment charges of $67 million, $9 million and $250 million to license agreements, game engines and internally-developed franchises intangible assets, respectively, for the year ended December 31, 2010 within our Activision Publishing Inc. segment.

- Definition

This element represents the disclosure related to the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods.

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