Rosetta Stone 2011 Annual Report Download - page 97

Table of Contents
ROSETTA STONE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company will continue to review indicators and it is possible an impairment charge may need to be recorded if trends do not reverse. For income tax
purposes, the goodwill balance is amortized over a period of 15 years. Beginning in 2011, the Company began reporting its results in two reportable segments,
which resulted in two reporting units for goodwill impairment purposes—Consumer and Institutional. The Company's annual testing resulted in no
impairments of goodwill since the dates of acquisition.
Valuation of Long-Lived Assets
In accordance with Accounting Standards Codification topic 360, Accounting for the Impairment or Disposal of Long-lived Assets ("ASC 360"), the
Company evaluates the recoverability of its long-lived assets. ASC 360 requires recognition of impairment of long-lived assets in the event that the net book
value of such assets exceeds the future undiscounted net cash flows attributable to such assets. Impairment, if any, is recognized in the period of identification
to the extent the carrying amount of an asset exceeds the fair value of such asset. Based on its analysis, the Company believes that no impairment of its long-
lived assets was indicated as of December 31, 2011 and 2010.
Financial Instruments with Characteristics of Both Liabilities and Equity
The Company issues financial instruments that have characteristics of both liabilities and equity. The Company accounts for these arrangements in
accordance with Accounting Standards Codification topic 480, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity ("ASC 480"), as well as related interpretations of this standard.
Derivative Instruments
The Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded
derivative features. The Company accounts for these arrangements in accordance with Accounting Standards Codification topic 815, Accounting for
Derivative Instruments and Hedging Activities ("ASC 815") as well as related interpretation of this standard. In accordance with this standard, derivative
instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings.
Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value
recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available
market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.
Guarantees
Indemnifications are provided of varying scope and size to certain institutional customers against claims of intellectual property infringement made by
third parties arising from the use of its products. The Company has not incurred any costs or accrued any liabilities as a result of such obligations.
Cost of Revenue
Cost of product revenue consists of the direct and indirect materials and labor costs to produce and distribute our products. Such costs include packaging
materials, computer headsets, freight,
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