Rosetta Stone 2011 Annual Report Download - page 91

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.
Professional services include training, implementation services and dedicated conversational coaching associated with Rosetta Stone TOTALe. Rosetta Stone
TOTALe online, which was released in July 2009, combines dedicated conversational coaching and an online software subscription. Rosetta Stone Version 4
TOTALe, which was released in September 2010, combines packaged software and dedicated conversational coaching. The Company recognizes revenue 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 and risks of loss have been transferred. For most of the Company's product sales,
these criteria are met at the time the product is shipped. For some sales to resellers and certain other sales, the Company defers revenue until the customer
receives the product because the Company legally retains a portion of the risk of loss on these sales during transit. 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 12 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. 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 3 and
12 months. Some online licensing arrangements include a specified number of licenses that can be activated over a period of
F-10