Avid 2011 Annual Report Download - page 61

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revenue to each element based on the aforementioned selling price hierarchy. Revenue is allocated to the non-
software deliverables as a group and to the software deliverables as a group using the relative selling prices of each of the
deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one
software deliverable, the arrangement consideration allocated to the software deliverables as a group is then recognized using the
guidance for recognizing software revenue, as amended.
The Company's process for determining its ESP for deliverables without VSOE or TPE involves management's judgment. The
Company generally determines ESP based on the following.
• The Company utilizes a pricing model for its products to capture the right value given the product and market context.
The model considers such factors as: (i) competitive reference prices for products that are similar but not functionally
equivalent, (ii) differential value based on specific feature sets, (iii) geographic regions where the products are sold, (iv)
customer price sensitivity, (v) price-cost-volume tradeoffs, and (vi) volume based pricing. Management approval
ensures that all of the Company's selling prices are consistent and within an acceptable range for use with the relative
selling price method.
• While the pricing model currently in use captures all critical variables, unforeseen changes due to external market forces
may result in the revision of some of the Company's inputs. These modifications may result in consideration allocation
in future periods that differs from the one presently in use. Absent a significant change in the pricing inputs, future
changes in the pricing model are not expected to materially impact the Company's allocation of arrangement
consideration.
From time to time, the Company offers certain customers free upgrades or specified future products or enhancements. For
software products, if elements are undelivered at the time of product shipment and provided that the Company has VSOE of fair
value for the undelivered elements, the Company defers the fair value of the specified upgrade, product or enhancement and
recognizes those revenues only upon later delivery or at the time at which the remaining contractual terms relating to the elements
have been satisfied. If the Company cannot establish VSOE for each undelivered element, all revenue is deferred until all
elements are delivered, the Company establishes VSOE or the remaining contractual terms relating to the undelivered elements
have been satisfied. For non-software products, if elements are undelivered at the time of product shipment, the Company defers
the relative selling price of the specified upgrade, product or enhancement and recognizes those revenues only upon later delivery
or at the time at which the remaining contractual terms relating to the elements have been satisfied.
Approximately 60% of the Company's revenues for 2011 were derived from indirect sales channels, including authorized resellers
and distributors. Certain channel partners are offered limited rights of return, stock rotation and price protection. For these
partners, the Company generally records a provision for estimated returns and other allowances as a reduction of revenues in the
same period that related revenues are recorded in accordance with ASC Subtopic 605-15, Revenue Recognition - Products.
Management estimates must be made and used in connection with establishing and maintaining a sales allowance for expected
returns and other credits. In making these estimates, the Company analyzes historical returns and credits and the amounts of
products held by major resellers and considers the impact of new product introductions, changes in customer demand, current
economic conditions and other known factors. While the Company believes it can make reliable estimates regarding these
matters, these estimates are inherently subjective. The amount and timing of the Company's revenues for any period may be
affected if actual product returns or other reseller credits prove to be materially different from the Company's estimates.
A portion of the Company's revenues from sales of consumer video-editing and audio 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, revenues for these channel partners are recognized when the products are sold through to the
customer instead of being recognized at the time products are shipped to the channel partners.
At the time of a sales transaction, the Company makes an assessment of the collectability of the amount due from the customer.
Revenues are recognized only if it is probable that collection will occur in a timely manner. In making this assessment, the
Company considers customer credit-worthiness and historical payment experience. If it is determined from the outset of the
arrangement that collection is not probable based on the Company's credit review process, revenues are recognized on a cash-
collected basis to the extent that the other criteria of ASC Topic 605, ASC Subtopic 985-605 and Securities and Exchange
Commission Staff Accounting Bulletin No. 104 are satisfied. At the outset of the arrangement, the Company assesses whether the
fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. In assessing whether
the fee is fixed or determinable, the Company considers the payment terms of the transaction, its collection experience in similar
transactions without making concessions, and the Company's involvement, if any, in third-party financing transactions, among