Rosetta Stone 2012 Annual Report Download - page 87

Table of Contents
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

For Rosetta Stone Version 4 , which is a multiple-element arrangement that includes perpetual software bundled with the subscription and
conversational coaching components of our  online service, the Company allocates revenue to all deliverables based on vendor-specific
objective evidence of fair value, or VSOE, in accordance with ASC subtopic 985-605-25 Software: —
 ("ASC 985-605-25"). The Company has identified two deliverables generally contained in Rosetta Stone V4  software
arrangements. The first deliverable is the perpetual software, which is delivered at the time of sale, and the second deliverable is subscription service.
Revenue is allocated between these two deliverables using the residual method based on the existence of VSOE of the subscription service.
Revenue for online service subscriptions including 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 
bundles, which include packaged software and an online service subscription including conversational coaching, allow customers to begin their online
services at any point during a registration window, which is up to six months from the date of purchase from the Company or an authorized reseller.
Online service subscriptions that are not activated during this registration window are forfeited and revenue is recognized upon expiry. Some online
licensing arrangements include a specified number of licenses that can be activated over a period of time, which typically ranges between six 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.
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 and audio
practice products is recognized as the products are shipped and title passes and risks of loss have been transferred. For most of our 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 Rosetta Stone 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,  ("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. 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 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
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