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Table of Contents NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 vendor-
specific objective
evidence ("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 third-
party evidence 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 range, generally
evidenced by approximately 80% of such historical stand-alone transactions falling within +/-
15% of the median price. The Company determines ESP
for a deliverable by considering multiple factors including, but not limited to, market conditions, competitive landscape, internal costs, gross margin
objectives and pricing practices. The objective of ESP is to determine the price at which the Company would transact a sale if the deliverable were sold
on a stand-
alone basis. The determination of ESP is made through consultation with and formal approval by the Company's management, taking into
consideration the go-to-market strategy.
Certain distributors and retailers generally have the right to return product for stock rotation purposes. Upon shipment of the product, the Company
reduces revenue for an estimate of potential future product warranty and stock rotation returns related to the current period product revenue.
Management analyzes historical returns, channel inventory levels, current economic trends and changes in customer demand for the Company's products
when evaluating the adequacy of the allowance for sales returns, namely warranty and stock rotation returns. Revenue on shipments is also reduced for
estimated price protection and sales incentives deemed to be contra-revenue under the authoritative guidance for revenue recognition.
Sales incentives
The Company accrues for sales incentives as a marketing expense if it receives an identifiable benefit in exchange and can reasonably estimate the
fair value of the identifiable benefit received; otherwise, it is recorded as a reduction to revenues. As a consequence, the Company records a substantial
portion of its channel marketing costs as a reduction of revenue.
The Company records estimated reductions to revenues for sales incentives at the later of when the related revenue is recognized or when the
program is offered to the customer or end consumer.
Shipping and handling fees and costs
The Company includes shipping and handling fees billed to customers in net revenue. Shipping and handling costs associated with inbound freight
are included in cost of revenue. In cases where the Company gives a freight allowance to the customer for their own inbound freight costs, such costs are
appropriately recorded as a reduction in net revenue. Shipping and handling costs associated with outbound freight are included in sales and marketing
expenses and totaled $11.6 million , $12.1 million and $13.9 million in the years ended December 31, 2013 , 2012 and 2011 respectively.
Research and development
Costs incurred in the research and development of new products are charged to expense as incurred.
Advertising costs
Advertising costs are expensed as incurred. Total advertising and promotional expenses were $18.0 million , $19.0 million , and $21.7 million
in
the years ended December 31, 2013 , 2012 and 2011 respectively.
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