Rosetta Stone 2011 Annual Report Download - page 92

Table of Contents
ROSETTA STONE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
time, which typically ranges between 6 and 24 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 12 months. Revenue
for set-up fees related to online licensing arrangements is recognized ratably over the term of the online licensing arrangement, assuming all revenue
recognition criteria have been met. Accounts receivable and deferred revenue are recorded at the time a customer enters into a binding subscription agreement
and the subscription services are made available to the customer. In connection with packaged software product sales and online software subscriptions,
technical support is provided to customers, including customers of resellers, at no additional cost from one year of purchase. As the fee for technical support is
included in the initial licensing fee, the technical support and services are generally provided within one year, the estimated cost of providing such support is
deemed insignificant and no unspecified upgrades/enhancements are offered, technical support revenues are recognized together with the software product
and license revenue. Costs associated with the technical support are accrued at the time of sale.
Revenue for online service subscriptions for dedicated conversational coaching is recognized ratably over the term of the subscription period, assuming
all revenue recognition criteria have been met, which typically range from three months to 15 months. Rosetta Stone Version 4 TOTALe bundles, which
include dedicated conversational coaching online services and packaged software, allow customers to begin their online services at any point during a
registration window, which is 6 months from the date of purchase from the Company or an authorized reseller. Dedicated conversational coaching online
service subscriptions that are not activated during this registration window are forfeited and revenue is recognized upon expiry. Accounts receivable and
deferred revenue are recorded at the time a customer purchases the online services.
In accordance with ASC 985-605-50, cash sales incentives to resellers are accounted for as a reduction of revenue, unless a specific identified benefit is
identified and the fair value is reasonably determinable.
The Company has been engaged to develop language-learning software for certain endangered languages under fixed-fee arrangements. These
arrangements also include contractual periods of post-contract support ("PCS") and online hosting services ranging from one to ten years. Revenue for multi-
element contracts are recognized ratably once the PCS and online hosting periods begin, over the longer of the 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, the Company 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, the Company
allocates 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"),
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