Rosetta Stone 2011 Annual Report Download - page 52

Table of Contents
PCS or online hosting period. When the current estimates of total contract revenue and contract cost indicate a loss for a fixed fee arrangement, a provision for
the entire loss on the contract is recorded.
Revenue Recognition for Arrangements with Multiple Deliverables
As of January 1, 2010, we began to recognize revenue prospectively for new arrangements with multiple deliverables in accordance with ASU
No. 2009-13, Revenue Recognition (Topic 605)—Multiple Deliverable Revenue Arrangements ("ASU No. 2009-13"). For multi-element arrangements that
include online services and auxiliary items, such as headsets and audio practice products which provide stand-alone value to the customer, we allocate
revenue to all deliverables based on their relative selling prices in accordance with ASU No. 2009-13. The new accounting principles establish a hierarchy to
determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value ("VSOE"),
(ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("ESP"). VSOE generally exists only when we sell the deliverable
separately and is the price that we actually charge for that deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they
were sold regularly on a stand-alone basis.
We account for multiple element arrangements that consist only of software or software related products, in accordance with industry specific accounting
guidance for software and software related transactions. For such transactions, revenue on arrangements that include multiple elements is allocated to each
element based on the relative fair value of each element, and fair value is generally determined by VSOE or the residual method when VSOE exists only for
the undelivered element. If we cannot objectively determine the fair value of any undelivered element included in such multiple element arrangements, we
defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining
undelivered elements.
We have identified two deliverables generally contained in Rosetta Stone Version 4 TOTALe software arrangements. The first deliverable is the
packaged software, which is delivered at the time of sale, and the second deliverable is the dedicated conversational coaching online services. We allocate
revenue between these two deliverables using the residual method based on the existence of VSOE for the undelivered service element. Amounts allocated to
the software are recognized at the time of sale, provided the other conditions for revenue recognition have been met. Amounts allocated to the online services
are deferred and recognized on a straight-line basis over the term of the online services or upon expiry of the online services. The language-learning software
cost of sales are generally recognized at the time of sale. Costs for online services and sales and marketing are expensed as incurred.
Stock-Based Compensation
We account for stock-based compensation in accordance Accounting Standards Codification topic 718, Compensation—Stock Compensation
("ASC 718"), which we adopted effective January 1, 2006. Under ASC 718, all stock-based awards, including employee stock option grants, are recorded at
fair value as of the grant date and recognized as expense in the statement of operations on a straight-line basis over the requisite service period, which is the
vesting period.
As of December 31, 2011 and 2010, there were approximately $7.9 million and $8.3 million of unrecognized stock-based compensation expense related
to non-vested stock option awards that is expected to be recognized over a weighted average period of 2.67 and 2.76 years, respectively.
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