Avid 2006 Annual Report Download - page 39

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volume, term and customer location. We review services revenues sold separately and corresponding renewal rates
on a periodic basis and update, when appropriate, our fair value for such services used for revenue recognition
purposes to ensure that it reflects our recent pricing experience.
In most cases, the products we sell do not require significant production, modification or customization of software.
Installation of the products is generally routine, requires minimal effort and is not typically performed by us.
However, certain transactions, typically those involving orders from end-users for a significant number of products
for a single customer site, such as news broadcasters, require that we perform an installation effort that we deem to
be complex and non-routine. In these situations, we do not recognize revenue for either the products shipped or
the installation services until the installation is complete. In addition, if such orders include a customer acceptance
provision, no revenue is recognized until the customer’s acceptance of the products and services has been received
or the acceptance period has lapsed.
Telephone support, enhancements and unspecified upgrades typically are provided at no additional charge
during the product’s initial warranty period (generally between 30 days and twelve months), which precedes
commencement of the maintenance contracts. We defer the fair value of this support period and recognize the
related revenue ratably over the initial warranty period. We also from time to time offer certain customers free
upgrades or specified future products or enhancements. For each of these elements that is undelivered at the time
of product shipment and provided that we have vendor specific objective evidence regarding the fair value of the
undelivered element, we defer the fair value of the specified upgrade, product or enhancement and recognize that
revenue only upon later delivery or at the time at which the remaining contractual terms relating to the upgrade
have been satisfied.
In 2006, approximately 72% of our revenue was derived from indirect sales channels, including authorized resellers
and distributors. Within our Professional Video segment, our resellers and distributors are generally not granted
rights to return products to us after purchase, and actual product returns from them have been insignificant to date.
However, distributors of our Avid Media Composer, Avid Xpress Pro and Avid Mojo product lines have a contractual
right to return a percentage of prior quarter purchases. The return provision for these distributors has not had a
material impact on our results of operations. In contrast, some channel partners, particularly our Audio and certain
of our Consumer Video channel partners, are offered limited rights of return, stock rotation, and price protection.
In accordance with Statement of Financial Accounting Standards, or SFAS, No. 48, “Revenue Recognition When
Right of Return Exists,” we record a provision for estimated returns and other allowances, as a reduction of
revenues, in the same period that related revenues are recorded. Management estimates must be made and used
in connection with establishing and maintaining a sales allowance for expected returns and other credits. In making
such estimates, we analyze historical returns and credits and the amounts of products held by major resellers and
consider the impact of new product introductions, changes in customer demand, current economic conditions and
other known factors. We maintain a rolling history of returns on a product-by-product basis and analyze returns
and credits by product category. The amount and timing of our revenue for any period may be impacted if actual
product returns or other reseller credits prove to be materially different from our estimates.
A portion of our revenue from sales of Consumer Video products is derived from transactions with channel partners
who have unlimited return rights and from whom payment is contingent upon the product being sold through to
their customers. Accordingly, revenue for these channel partners is recognized when the products are sold through
to the customer instead of being recognized at the time products are shipped to the channel partners.
From time to time, we offer rebates on purchases of certain products or rebates based on purchasing volume
that are accounted for as reductions to revenue upon shipment of related products or expected achievement
of purchasing volumes. In accordance with Emerging Issues Task Force, or EITF, Issue 01-09, “Accounting for
Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor’s Products),” consideration
given to customers or resellers under the rebate program is recorded as a reduction to revenue because we do not
receive an identifiable benefit that is sufficiently separable from the sale of our products.
At the time of a sales transaction, we make an assessment of the collectibility of the amount due from the customer.
Revenue is recognized only if we are reasonably assured that collection will occur. In making this assessment, we
consider customer credit-worthiness and historical payment experience. If it is determined from the outset of the
arrangement that collection is not reasonably assured based upon our credit review process, revenue is recognized
on a cash-collected basis to the extent that the other criteria of SOP 97-2 and SAB No. 104 are satisfied. At the
outset of the arrangement, we assess whether the fee associated with the order is fixed or determinable and free