Avid 2006 Annual Report Download - page 38

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associated with currency rate changes on these contracts in results of operations, offsetting transaction and
remeasurement gains and losses on the related assets and liabilities. The success of this hedging program depends
on forecasts of transaction activity in the various currencies. To the extent that these forecasts are overstated or
understated during the periods of currency volatility, we could experience unanticipated currency gains or losses.
A significant portion of our operating expenses are fixed in the short term and we plan our expense run rate based
on our expectations of future revenues. In addition, a significant percentage of our sales transactions are completed
during the final weeks or days of each quarter and, therefore, we generally do not know whether revenues have met
our expectations until after the end of the quarter. If we have a shortfall in revenues in any given quarter, there is an
immediate effect on our overall earnings.
See Item 1A “Risk Factors” for additional risk factors that may cause our future results to differ materially from our
current expectations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. We regularly reevaluate our estimates and judgments, including those
related to revenue recognition and allowances for product returns and exchanges; stock-based compensation;
allowances for bad debts and reserves for recourse under financing transactions; the valuation of inventories,
business combinations, and goodwill and other intangible assets; and income tax assets. We base our estimates
and judgments on historical experience and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities and the amounts of revenue and expenses that are not readily apparent from other sources. Actual results
may differ from these estimates.
We believe the following critical accounting policies most significantly affect the portrayal of our financial condition
and involve our most difficult and subjective estimates and judgments.
Revenue Recognition and Allowances for Product Returns and Exchanges
We generally recognize revenue from sales of software and software-related products upon receipt of a signed
purchase order or contract and product shipment to distributors or end users, provided that collection is reasonably
assured, the fee is fixed or determinable and all other revenue recognition criteria of Statement of Position, or SOP,
97-2, “Software Revenue Recognition,” as amended, are met. In addition, for certain transactions where our services
are non-routine or essential to the delivered products, we record revenue upon satisfying the criteria of SOP 97-2
and obtaining customer acceptance. Within our Professional Video segment, much of our Audio segment and our
Consumer Video segment we follow the guidance of SOP 97-2 for revenue recognition because our products and
services are software or software related. However, for certain offerings in our Audio segment, software is incidental
to the delivered products and services. For these products, we record revenue based on satisfying the criteria in
Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 104, “Revenue Recognition.”
In connection with many of our product sale transactions, customers may purchase a maintenance and support
agreement. We recognize revenue from maintenance contracts on a ratable basis over their term. We recognize
revenue from training, installation or other services as the services are performed.
We use the residual method to recognize revenues when an order includes one or more elements to be delivered
at a future date and evidence of the fair value of all undelivered elements exists. Under the residual method, the
fair value of the undelivered element, typically professional services or maintenance, is deferred and the remaining
portion of the total arrangement fee is recognized as revenue related to the delivered element. If evidence of the
fair value of one or more undelivered elements does not exist, we defer all revenues and only recognize them when
delivery of those elements occurs or when fair value can be established. Fair value is typically based on the price
charged when the same element is sold separately to customers. However, in certain transactions, fair value of
maintenance is based on the renewal price that is offered as a contractual right to the customer, provided that such
renewal price is substantive. Our current pricing practices are influenced primarily by product type, purchase