Avid 2015 Annual Report Download - page 71

65
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 $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 expected period of Implied Maintenance Release PCS rather than the
contractual maintenance period, the change in the estimated amortization period of transactions being recognized on a ratable basis
resulted in an additional $9.5 million of revenue during the twelve months ended December 31, 2015. Management also concluded in
the fourth quarter of 2015 that Implied Maintenance Release PCS on Sibelius 8.0 had ended, which did not have a significant impact
on revenue recognition for the twelve months ended December 31, 2015. Management will continue to evaluate the judgment of
whether Implied Maintenance Release PCS exists on each product line and version. If and when management concludes Implied
Maintenance Release PCS no longer exists for other product lines or versions in future quarters, software revenue related to orders
affected will be accelerated and prospective revenue recognition on new product orders will be recognized upfront, assuming all other
revenue recognition criteria are met and vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements.
The Company enters into certain contractual arrangements that have multiple elements, one or more of which may be delivered
subsequent to the delivery of other elements. These multiple-deliverable arrangements may include products, support, training,
professional services and Implied Maintenance Release PCS. For these multiple-element arrangements, the Company allocates
revenue to each deliverable of the arrangement based on the relative selling prices of the deliverables. In such circumstances, the
Company first determines the selling price of each deliverable based on (i) VSOE of fair value if that exists; (ii) third-party evidence
of selling price (“TPE”), when VSOE does not exist; or (iii) best estimate of the selling price (“BESP”), when neither VSOE nor TPE
exists. Revenue is then 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 selling price hierarchy. The Company’s process for
determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining
BESP, the Company considers a number of data points, including:
• the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone
basis;
• contractually stated prices for deliverables that are intended to be sold on a standalone basis;
• the pricing of standalone sales that may not qualify as VSOE of fair value due to limited volumes or variation in prices; and
• other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the
customer size and type.
In determining a BESP for Implied Maintenance Release PCS, which the Company does not sell separately, the Company considers (i)
the service period for the Implied Maintenance Release PCS, (ii) the differential in value of the Implied Maintenance Release PCS
deliverable compared to a full support contract, (iii) the likely list price that would have resulted from the Company’s established
pricing practices had the deliverable been offered separately, and (iv) the prices a customer would likely be willing to pay.
The Company estimates the service period of Implied Maintenance Release PCS based on the length of time the product version
purchased by the customer is planned to be supported with Software Updates. If facts and circumstances indicate that the original
service period of Implied Maintenance Release PCS for a product has changed significantly after original revenue recognition has
commenced, the Company will modify the remaining estimated service period accordingly and recognize the then-remaining deferred
revenue balance over the revised service period.
The Company has established VSOE of fair value for all professional services and training and for some of the Company’s support
offerings. The Company’s policy for establishing VSOE of fair value consists of evaluating standalone sales, where available, to
determine if a substantial portion of the transactions fall within a reasonable range. If a sufficient volume of standalone sales exist and
the standalone pricing for a substantial portion of the transactions falls within a reasonable range, management concludes that VSOE
of fair value exists.
In accordance with ASU No. 2009-14, the Company excludes from the scope of software revenue recognition requirements the
Company’s sales of tangible products that contain both software and non-software components that function together to deliver the
essential functionality of the tangible products. The Company adopted ASU No. 2009-13 and ASU No. 2009-14 prospectively on
January 1, 2011 for new and materially modified arrangements originating after December 31, 2010.
Prior to the Company’s adoption of ASU No. 2009-14, the Company primarily recognized revenues using the revenue recognition
criteria of Accounting Standards Codification, or ASC, Subtopic 985-605, Software-Revenue Recognition. As a result of the