Redbox 2006 Annual Report Download - page 53

COINSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
Impairment of long-lived assets: Long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash
flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated
future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset
group exceeds the fair value of the asset group.
Revenue recognition:
We recognize revenue as follows:
• Coin-counting revenue is recognized at the time the consumers’ coins are counted by our coin-counting
machines;
• Entertainment services revenue is recognized at the time cash is deposited in our machines. Cash
deposited in the machines that has not yet been collected is referred to as coin-in-machine and is
estimated at period end and reported on the balance sheet as cash in machine or in transit and cash being
processed. This estimate is based on the average daily revenue per machine, multiplied by the number of
days since the coin in the machine has been collected;
• E-payment services revenue is recognized at the point of sale based on our commissions earned, net of
retailer fees. Money transfer revenue is recognized at the time the customer completes the transaction.
Fees paid to retailers: Fees paid to retailers relate to the amount we pay our retailers for the benefit of
placing our machines in their stores and their agreement to provide certain services on our behalf to our
customers. The fee is calculated as a percentage of each coin-counting transaction or as a percentage of our
entertainment revenue and is recorded in our consolidated income statement under the caption “direct operating
expenses.” The fee arrangements are based on our evaluation of certain factors with the retailers such as total
revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic
and/or urban or rural locations, new product commitments, co-op marketing incentive, or other criteria. We
recognize this expense at the time we recognize the associated revenue from each of our customer transactions.
This expense is recorded on a straight-line basis as a percentage of revenue based on estimated annual volumes.
In certain instances, we prepay amounts to our retailers, which are expensed over the contract term. The expense
is included in depreciation and other in the accompanying consolidated statements of operations and cash flows.
Fair value of financial instruments: The carrying amounts for cash and cash equivalents, our trade
receivables and our trade payables approximate fair value, which is the amount for which the instrument could be
exchanged in a current transaction between willing parties. The fair value of our term and revolving loans
approximates their carrying amounts. Our interest rate derivative is carried at fair value, which is more fully
described in Note 6.
Foreign currency translation: The functional currencies of our International subsidiaries are the British
Pound Sterling for Coinstar Limited in the United Kingdom and the Euro for CMT. We translate assets and
liabilities related to these operations to U.S. dollars at the exchange rate in effect at the date of the consolidated
balance sheet; we convert revenues and expenses into U.S. dollars using the average monthly exchange rates.
Translation gains and losses are reported as a separate component of accumulated other comprehensive income.
Stock-based compensation: Effective January 1, 2006, we adopted the fair value recognition provisions of
FASB Statement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”) using the modified–prospective
transition method. Under this transition method, compensation expense recognized includes the estimated fair
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