8x8 2006 Annual Report Download - page 33

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We recognize new subscriber revenue from our Packet8 service offerings upon expiration of any applicable
acceptance period has expired. New customers may terminate their service within thirty days of order placement
and receive a full refund of fees previously paid. As we have been providing our Packet8 service for a limited
period of time, we have not developed sufficient history to apply a return rate and reserve against new order
revenue. Accordingly, we defer new subscriber revenue for thirty days to ensure that the thirty day acceptance
period has expired. We will have sufficient history and commence recording a returns reserve in fiscal 2007.
Emerging Issues Task Force (EITF) consensus No. 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables” requires that revenue arrangements with multiple deliverables be divided into separate units of
accounting if the deliverables in the arrangement meet specific criteria. In addition, arrangement consideration must
be allocated among the separate units of accounting based on their relative fair values, with certain limitations. The
provisioning of the Packet8 service with the accompanying desktop terminal adapter or other customer premise
equipment constitutes a revenue arrangement with multiple deliverables. In accordance with the guidance of EITF
No. 00-21, we allocate Packet8 revenues, including activation fees, among the customer premise equipment and
subscriber services. Revenues allocated to the customer premise equipment are recognized as product revenues at
the end of thirty days after order placement, provided the customer does not cancel their Packet8 service. All other
revenues are recognized as license and service revenues when the related services are provided. We defer the cost
of goods sold of products sold for which the end customer or distributor has a right of return. The cost of the
products sold is recognized, contemporaneously with the recognition of revenue, when the subscriber has accepted
the service.
At the time of each revenue transaction we assess whether the revenue amount is fixed and determinable and
whether or not collection is reasonably assured. We assess whether the fee is fixed and determinable based on the
payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment
terms, which are thirty to ninety days from invoice date, we account for the fee as not being fixed and determinable.
In these cases, we recognize revenue as the fees become due. We assess collection based on a number of factors,
including past transaction history with the customer and the credit-worthiness of the customer. We generally do not
request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the
fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of
payment.
During fiscal 2006 and 2005, revenues from software licensing and related arrangements were limited. For
arrangements with multiple obligations (for example, undelivered maintenance and support), we allocate revenue to
each component of the arrangement using the residual value method based on the fair value of the undelivered
elements, which is specific to us. This means that we defer revenue from the arranged fee that is equivalent to the
fair value of the undelivered elements. Fair values for the ongoing maintenance and support obligations for our
technology licenses are based upon separate sales of renewals to other customers or upon renewal rates quoted in the
contracts. We base the fair value of services, such as training or consulting, on separate sales of these services to
other customers. We recognize revenue for maintenance services ratably over the contract term. Our training and
consulting services are billed based on hourly rates and we generally recognize revenue as these services are
performed.
If a software license arrangement includes acceptance criteria, revenue is not recognized until we can objectively
demonstrate that the software or service can meet the acceptance criteria or when the customer has signed formal
acceptance documentation. If a software license arrangement obligates us to deliver unspecified future products,
revenue is recognized on a subscription basis, ratably over the term of the contract.
For all sales, except those completed via the Internet, we use either a binding purchase order or other signed
agreement as evidence of an arrangement. For sales over the Internet, we use a credit card authorization as evidence
of an arrangement, and recognize revenue upon settlement of the transaction, if there are no customer acceptance
conditions. We do not settle credit card transactions until equipment related to the transaction, if any, is shipped to a
customer.
Our ability to enter into revenue generating transactions and recognize revenue in the future is subject to a number
of business and economic risks discussed above in Item 1A,"Risk Factors."
Collectibility of Accounts Receivable
We must make estimates of the collectibility of our accounts receivable. Management specifically analyzes accounts