Rosetta Stone 2011 Annual Report Download - page 93

Table of Contents
ROSETTA STONE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("ESP"). VSOE generally exists only when the Company sells the
deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect its best estimates of what the selling prices of
elements would be if they were sold regularly on a stand-alone basis.
The Company accounts 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 the Company cannot objectively determine the fair value of any undelivered element included in such multiple element
arrangements, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be
determined for any remaining undelivered elements.
The Company has 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. The Company
allocates 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less and demand deposits with financial
institutions.
Restricted Cash
Restricted cash is restricted for the reimbursement of funds to employees under the Company's flexible benefit plan and security for a credit card
processing vendor.
Short-Term Investments
Short-term investments generally consist of highly liquid, fixed-income investments with an original maturity at the time of purchase of greater than
three months. Such investments consist of obligations of the U.S. government and government agencies.
Investments are classified as available-for-sale and stated at fair value. The net unrealized gains or losses on available-for-sale securities are reported as a
component of comprehensive income. The specific identification method is used to compute the realized gains and losses on investments. Investments are
periodically reviewed for impairment. If the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-
temporary, an impairment loss is recognized for the difference.
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