Rosetta Stone 2012 Annual Report Download - page 92

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Table of Contents



ROW Consumer, based on the relative fair value of each reporting unit as of October 31, 2012. In doing so, the Company evaluated the results of the
allocation of goodwill for events or indicators that would require further impairment testing, noting none. The Company will continue to review for
impairment indicators in future periods.
For income tax purposes, the goodwill balance is amortized over a period of 15 years.

In accordance with ASC topic 360,  ("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, 2012 and 2011.

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 product revenue consists of the direct and indirect materials and labor costs to produce and distribute the Company's products. Such costs
include packaging materials, computer headsets, freight, inventory receiving, personnel costs associated with product assembly, third-party royalty fees
and inventory storage, obsolescence and shrinkage. The Company believes cost of subscription and service revenue primarily represents costs
associated with supporting the online language learning service, which includes online language conversation coaching, hosting costs and depreciation.
Also included are the cost of credit card processing and customer technical support in both cost of product revenue and cost of subscription and service
revenue.

Research and development expenses include employee compensation costs, professional services fees and overhead costs associated with product
development. Software products are developed for sale to external customers. The Company considers technological feasibility to be established when
all planning, designing, coding, and testing has been completed according to design specifications. The Company has determined that technological
feasibility for its software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is
established have not been material, and accordingly, the Company has expensed all research and development costs when incurred.

Product development also includes certain software products for internal use. Development costs for internal use software are expensed as incurred
until the project reaches the application development
F-15