Netgear 2012 Annual Report Download - page 66

Table of Contents NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, events affecting the reporting
units, and changes in our share price. Based on these factors , the Company determined that it is not more likely than not that there were events or
changes in circumstances that indicated that the carrying amount of our indefinite-
lived intangible assets may not be recoverable from their
undiscounted cash flows, and therefore performing the first step of the two-step impairment test for each reporting unit was unnecessary.
No
impairments to long-lived assets were recognized in the years ended December 31, 2012 , 2011 and 2010 .
Product warranties
The Company provides for estimated future warranty obligations at the time revenue is recognized. The Company's standard warranty
obligation to its direct customers generally provides for a right of return of any product for a full refund in the event that such product is not
merchantable or is found to be damaged or defective. At the time revenue is recognized, an estimate of future warranty returns is recorded to reduce
revenue in the amount of the expected credit or refund to be provided to its direct customers. At the time the Company records the reduction to
revenue related to warranty returns, the Company includes within cost of revenue a write-
down to reduce the carrying value of such products to net
realizable value. The Company's standard warranty obligation to its end-users provides for replacement of a defective product for one
or more years.
Factors that affect the warranty obligation include product failure rates, material usage, and service delivery costs incurred in correcting product
failures. The estimated cost associated with fulfilling the Company's warranty obligation to end-
users is recorded in cost of revenue. Because the
Company's products are manufactured by third-party manufacturers, in certain cases the Company has recourse to the third-
party manufacturer for
replacement or credit for the defective products. The Company gives consideration to amounts recoverable from its third-
party manufacturers in
determining its warranty liability. Changes in the Company's warranty liability, which is included as a component of “Other accrued liabilities”
in the
consolidated balance sheets, are as follows (in thousands):
Revenue recognition
Revenue from product sales is generally recognized at the time the product is shipped provided that persuasive evidence of an arrangement
exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the related receivable is
reasonably assured. Currently, for some of the Company's customers, title passes to the customer upon delivery to the port or country of destination,
upon their receipt of the product, or upon the customer's resale of the product. At the end of each fiscal quarter, the Company estimates and defers
revenue related to product where title has not transferred. The revenue continues to be deferred until such time that title passes to the customer. The
Company assesses collectability based on a number of factors, including general economic and market conditions, past transaction history with the
customer, and the creditworthiness of the customer. If the Company determines that collection of the fee is not reasonably assured, then the Company
defers the fee and recognizes revenue upon receipt of payment.
The Company has an insignificant amount of product offerings with multiple elements. The Company's multiple-
element product offerings
include networking hardware with embedded software, various software subscription services, and support, which are considered separate units of
accounting. In general, the networking hardware with embedded software is delivered up front, while the subscription services and support are
delivered over the subscription and support period. The Company allocates revenue to the software deliverables and the non-
software deliverables
(including software deliverables which function together with hardware deliverables to provide the product's essential functionality) based upon their
relative selling price. Revenue allocated to each unit of accounting is then recognized when persuasive evidence of an arrangement exists, title and
risk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the related receivable is reasonably assured.
When applying the relative selling price method, the Company determines the selling price for each deliverable using VSOE of fair value of the
deliverable, or when VSOE of fair value is unavailable, its best estimate of selling price (“ESP”),
as the Company has determined it is unable to
establish TPE of selling price for the deliverables. In determining VSOE, the Company requires that a substantial majority of the selling prices for a
deliverable sold on a stand-alone basis fall within a reasonably narrow pricing
62
Year Ended December 31,
2012
2011
Balance as of beginning of the period
$
44,846
$
40,513
Provision for warranty liability made during the period
61,985
60,285
Settlements made during the period
(60,172
)
(55,952
)
Balance at end of period
$
46,659
$
44,846