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Table of Contents
ROSETTA STONE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenue is primarily derived from the sale of packaged software and audio practice products, online software subscriptions and professional services.
Our professional services include training, implementation services and dedicated conversational coaching associated with Rosetta Stone TOTALe, which
was released in July 2009. Rosetta Stone TOTALe is currently sold only as an online software subscription. Revenue is recognized for software products and
related services in accordance with Accounting Standards Codification subtopic 985-605, Software: Revenue Recognition ("ASC 985-605").
Revenue is recognized when all of the following criteria are met: there is persuasive evidence of an arrangement; the product has been delivered or
services have been rendered; the fee is fixed and determinable; and collectability is probable. Revenues from packaged software and audio practice products
and online software subscriptions are recorded net of discounts.
Revenue is recognized from the sale of packaged software and audio practice products when the product has been delivered, assuming the remaining
revenue recognition criteria have been met. Software products include sales to end user customers and resellers. In most cases, revenue from sales to resellers
is not contingent upon resale of the software to the end user and is recorded in the same manner as all other product sales. Revenue from sales of packaged
software products are recognized as the products are shipped and title passes. A limited amount of packaged software products are sold to resellers on a
consignment basis. Revenue is recognized for these consignment transactions once the end-user sale has occurred, assuming the remaining revenue
recognition criteria have been met. In accordance with Accounting Standards Codification subtopic 985-605-50, Software: Revenue Recognition: Customer
Payments and Incentives ("ASC 985-605-50"), price protection for changes in the manufacturer suggested retail value granted to resellers for the inventory
that they have on hand at the date the price protection is offered is recorded as a reduction to revenue. The Company offers customers the ability to make
payments for packaged software purchases in installments over a period of time, which typically ranges between three and five months. Given that these
installment payment plans are for periods less than twelve months and a successful collection history has been established, revenue is recognized at the time
of sale, assuming the remaining revenue recognition criteria have been met. For the years ended December 31, 2009, 2008 and 2007, installment sales
represented 8%, 4% and 3% of revenue, respectively. Packaged software is provided to customers who purchase directly from us with a six-month right of
return. The Company also allows its retailers to return unsold products, subject to some limitations. In accordance with Accounting Standards Codification
subtopic 985-605-15, Software: Revenue Recognition: Products ("ASC 985-605-15"), product revenue is reduced for estimated returns, which are based on
historical return rates.
Revenue for software license agreements sold via online software subscriptions as hosting agreements are recognized in accordance with Accounting
Standards Codification subtopic 985-605-05, Software: Revenue Recognition: Background ("ASC 985-605-05"). Revenue for online software subscriptions is
recognized ratably over the term of the subscription period, assuming all revenue recognition criteria have been met, which typically ranges between three and
twelve months. Some online licensing arrangements include a specified number of licenses that can be activated over a period of time, which typically ranges
between twelve and twenty-four months. Revenue for these arrangements is recognized on a per license basis ratably over the term of the individual license
subscription period, assuming all revenue recognition criteria have been met, which typically ranges between three and twelve months. Revenue for set-up
fees related to online licensing arrangements is
F-8