Google 2011 Annual Report Download - page 86

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We recognize as revenues the fees charged to advertisers each time a user clicks on one of the ads that
appears next to the search results or content on our websites or our Google Network Members’ websites. For those
advertisers using our AdWords cost-per-impression pricing, we recognize as revenues the fees charged to
advertisers each time their ads are displayed on our websites or our Google Network Members’ websites. We report
our Google AdSense revenues on a gross basis principally because we are the primary obligor to our advertisers.
We recognize revenues when the services or products have been provided or delivered, the fees we charge
are fixed or determinable, we and our advertisers or other customers understand the specific nature and terms of
the agreed upon transactions, and collectability is reasonably assured.
We record deferred revenue upon invoicing or when cash payments are received in advance of our
performance in the underlying agreement on the accompanying Consolidated Balance Sheets.
Cost of Revenues
Cost of revenues consists primarily of traffic acquisition costs. Traffic acquisition costs consist of amounts
ultimately paid to our Google Network members under AdSense arrangements and to certain other partners (our
distribution partners) who distribute our toolbar and other products (collectively referred to as access points) or
otherwise direct search queries to our website (collectively referred to as distribution arrangements). These
amounts are primarily based on the revenue share and fixed fee arrangements with our Google Network Members
and distribution partners.
Certain distribution arrangements require us to pay our partners based on a fee per access point delivered and
not exclusively—or at all—based on revenue share. These fees are non-refundable. Further, these arrangements
are terminable at will, although under the terms of certain contracts we or our distribution partners may be subject
to penalties in the event of early termination. We recognize fees under these arrangements over the estimated
useful lives of the access points (approximately two years) to the extent we can reasonably estimate those lives
and they are longer than one year, or based on any contractual revenue share, if greater. Otherwise, the fees are
charged to expense as incurred. The estimated useful life of the access points is based on the historical average
period of time they generate traffic and revenues. Further, we review the access points for impairment by
distribution partner, type, and geography, and we have not made any impairment to date.
Prepaid revenue share and distribution fees are included in prepaid revenue share, expenses, and other assets
on the accompanying Consolidated Balance Sheets.
Cost of revenues also includes the expenses associated with the operation of our data centers, including
depreciation, labor, energy, and bandwidth costs, credit card and other transaction fees related to processing
customer transactions including Google Checkout transactions, amortization of acquired intangible assets, as well
as content acquisition costs. We have entered into arrangements with certain content providers under which we
distribute or license their video and other content. In a number of these arrangements, we display ads on the pages
of our web sites from which the content is viewed and share most of the fees these ads generate with the content
providers. To the extent we are obligated to make guaranteed minimum revenue share payments to our content
providers, we recognize as content acquisition costs the contractual revenue share amount or on a straight-line
basis, whichever is greater, over the terms of the agreements.
Stock-based Compensation
We have elected to use the BSM option pricing model to determine the fair value of stock options on the dates
of grant.Restricted stock units (RSUs) are measured based on the fair market values of the underlying stock on
the dates of grant. Shares are issued on the vesting dates net of the minimum statutory tax withholding
requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be
fewer than the actual number of RSUs outstanding. Furthermore, we record the liability for withholding amounts to
be paid by us as a reduction to additional paid-in capital when paid. Also, we recognize stock-based compensation
using the straight-line method.
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