Avid 2015 Annual Report Download - page 40

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which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues 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 Allowance for Sales Returns and Exchanges
General
We commence revenue recognition when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collection is reasonably assured. Generally, the products we sell do not require significant production,
modification or customization. Installation of our products is generally routine, consists of implementation and configuration and
does not have to be performed by us.
At the time of a sales transaction, we make an assessment of the collectability of the amount due from the customer. Revenues are
recognized only if it is reasonably assured that collection will occur. When 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, revenues are recognized on a cash basis, provided that all other revenue recognition criteria are satisfied. At
the outset of the arrangement, we also assess whether the fee associated with the order is fixed or determinable and free of
contingencies or significant uncertainties. When assessing whether the fee is fixed or determinable, we consider the payment
terms of the transaction, our collection experience in similar transactions without making concessions, and our involvement, if
any, in third-party financing transactions, among other factors. If the fee is not fixed or determinable, revenues are recognized
only as payments become due from the customer, provided that all other revenue recognition criteria are met. If a significant
portion of the fee is due after our normal payment terms, we evaluate whether we have sufficient history of successfully collecting
past transactions with similar terms without offering concessions. If that collection history is sufficient, revenue recognition
commences, upon delivery of the products, assuming all other revenue recognition criteria are satisfied. If we were to make
different judgments or assumptions about any of these matters, it could cause a material increase or decrease in the amount of
revenues reported in a particular period.
We often receive multiple purchase orders or contracts from a single customer or a group of related customers that are evaluated
to determine if they are, in effect, part of a single arrangement. In situations when we have concluded that two or more orders
with the same customer are so closely related that they are, in effect, parts of a single arrangement, we account for those orders as
a single arrangement for revenue recognition purposes. In other circumstances, when we have concluded that two or more orders
with the same customer are independent buying decisions, such as an earlier purchase of a product and a subsequent purchase of a
software upgrade or maintenance contract, we account for those orders as separate arrangements for revenue recognition
purposes.
For many of our products, there has been an ongoing practice of Avid making available at no charge to customers minor feature
and compatibility enhancements as well as bug fixes on a when-and-if-available basis (collectively “Software Updates”), for a
period of time after initial sales to end users. The implicit obligation to make such Software Updates available to customers over a
period of time represents implied post-contract customer support, which is deemed to be a deliverable in each arrangement and is
accounted for as a separate element (“Implied Maintenance Release PCS”).
Over the course of the last two years, in connection with a strategic initiative to increase support and other recurring revenue
streams, we have taken a number of steps to eliminate the longstanding practice of providing Implied Maintenance Release PCS
for the Media Composer, Pro Tools and Sibelius product lines. On Media Composer 8.0 in particular, which was released in May
2014, management has (i) clearly communicated a policy of no longer providing any Software Updates or other support to
customers that are not covered under a paid support plan and (ii) implemented robust digital rights management tools to enforce
the policy. With the new policy and technology for Media Composer 8.0 in place, combined with management’s intent to
continue to adhere to the policy, management concluded in the third quarter of 2015 that Implied Maintenance Release PCS for
Media Composer 8.0 transactions no longer exists. As a result of the conclusion that Implied Maintenance Release PCS on Media
Composer 8.0 has ended, revenue and net income for the twelve months ended December 31, 2015 increased by approximately
$13.0 million, reflecting the recognition of orders received after the launch of Media Composer 8.0 that would have qualified for
earlier recognition using the residual method of accounting. In addition, as the elimination of Implied Maintenance Release PCS
also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized over the