Avid 2009 Annual Report Download - page 55

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AVID TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND OPERATIONS
Avid Technology, Inc. (―Avid‖ or the ―Company‖) develops, markets, sells and supports a wide range of software and
hardware for digital media content production, management and distribution. Digital media are video, audio or graphic
elements in which the image, sound or picture is recorded and stored as digital values, as opposed to analog, or tape-based,
signals. The Company’s products are used worldwide in production and post-production facilities; film studios; network,
affiliate, independent and cable television stations; recording studios; live-sound performance venues; advertising agencies;
government and educational institutions; corporate communication departments; and by Internet professionals and
consumers. Projects produced using Avid’s products include major motion pictures, prime-time television programs, music,
video and other recordings.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’s significant accounting policies follows:
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
Intercompany balances and transactions have been eliminated.
The Company’s preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.
The most significant estimates reflected in these financial statements include revenue recognition, stock-based
compensation, accounts receivable and sales allowances, inventory valuation, goodwill and intangible asset valuation,
divestitures, fair value measurements and income tax valuation allowances.
Beginning in 2009, the Company transitioned to a new business structure that combined the former Professional Video and
Consumer Video business units into a single Video reporting segment and consolidated its sales and marketing teams into a
single customer-facing organization. The Company excludes certain corporate infrastructure costs and expenses, including
marketing and selling, finance, human resources, legal and some information technology expenses, when evaluating
reportable segment performance and measuring the profitability of each operating segment. Such expenses are managed
outside the segments and are not controllable at the segment level, and the Company believes that excluding these costs
provides a better measure of each segment’s performance. The Company also excludes certain other costs and expenses
when evaluating segment performance and profitability, including the amortization and impairment of acquired intangible
assets, stock-based compensation expenses, restructuring expenses, gains or losses on sales of assets, and legal settlements.
For 2009, the Company evaluated performance and measured profitability for two reportable segments, Video and Audio.
The Company has revised its segment reporting for prior periods to conform to the 2009 presentation. The change to the
current presentation did not affect the Company’s consolidated operating results. See Note O for a summary of the
Company’s revenues and contribution margin by reportable segment for the years ended December 31, 2009, 2008 and
2007. In the later part of 2009, the Company completed the reorganization of its business around functional groups rather
than product categories. Based on a preliminary assessment of its segment reporting for 2010, the Company expects to
report based on one reportable segment starting January 1, 2010.
During the preparation of its financial statements for the three- and nine-month periods ended September 30, 2009, the
Company’s management uncovered certain business practices that it believed could potentially affect the timing of revenue
recognition for certain product sales. As a result, the Company’s Audit Committee initiated an investigation into the
business and accounting practices with regard to the shipment of products and recognition of product revenue from certain
distribution centers outside the United States. Based on the preliminary results of the investigation, the Company
determined that it had, in certain instances, erroneously recognized revenue prior to transfer of title and risk of loss to
customers. The Company recorded the estimated errors related to this matter in the financial statements for the three- and
nine-month periods ended September 30, 2009 prior to issuance of those financial statements. The Company completed its
investigation during the fourth quarter of 2009 and determined that no changes to previously filed financial statements were
deemed necessary.