Rosetta Stone 2013 Annual Report Download - page 39

Table of Contents
We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could
have the greatest potential impact on our consolidated financial statements. In addition, we believe that a discussion of these policies is necessary to understand
and evaluate the consolidated financial statements contained in this annual report on Form 10-K.
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Our primary sources of revenue are online subscriptions, software and bundles of software and online subscriptions. We also generate revenue from
the sale of audio practice products and training and implementation services. Revenue is recognized when all of the following criteria are met: there is
persuasive evidence of an arrangement; the product has been delivered or services have been rendered; the fee is fixed or determinable; and collectability is
reasonably assured. Revenues are recorded net of discounts.
We identify the units of accounting contained within our sales arrangements in accordance with ASC 605-25 Revenue Recognition - Multiple Element
Arrangements (“ASC 605-25”). In doing so, we evaluate a variety of factors including whether the undelivered element(s) have value to our customer on a
stand-alone basis or if the undelivered element(s) could be sold by another vendor on a stand-alone basis.
For multiple element arrangements that contain software products and related services, we allocate the total arrangement consideration to all
deliverables based on vendor-specific objective evidence of fair value, or VSOE, in accordance with ASC subtopic 985-605-25 Software: Revenue
Recognition-Multiple-Element Arrangements ("ASC 985-605-25"). We generate a substantial portion of our consumer revenue from Rosetta Stone Version 4
 which is a multi-element arrangement that includes perpetual software bundled with the subscription and conversational coaching components of our
 online service. We have 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 the subscription service. We allocate revenue between these two
deliverables using the residual method based on the existence of VSOE of the subscription service. In the U.S., we offer consumers who purchase our
packaged software and audio practice products directly from us a 30-day, unconditional, full money-back refund. We also permit some of our retailers and
distributors to return packaged products, subject to certain limitations. We establish revenue reserves for packaged product returns based on historical
experience, estimated channel inventory levels, the timing of new product introductions and other factors.
For non-software multiple element arrangements we allocate revenue to all deliverables based on their relative selling prices.
We distribute our products and services both directly to the end customer and indirectly through resellers. Our resellers earn commissions generally
calculated as a fixed percentage of the gross sale to the end customer. We evaluate each of our reseller relationships in accordance with ASC 605-45 Revenue
Recognition - Principal Agent Considerations (“ASC 605-45”) to determine whether the revenue we recognize from indirect sales should be the gross amount of
the contract with the end customer or reduced for the reseller commission. In making this determination we evaluate a variety of factors including whether we
are the primary obligor to the end customer.
Revenue for online service subscriptions is recognized ratably over the term of the subscription period, assuming all revenue recognition criteria have
been met. Rosetta Stone Version 4  bundles, which include an online service subscription including conversational coaching and packaged software,
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 us or an
authorized reseller. Online service subscriptions that are not activated during this registration window are forfeited and revenue is recognized upon expiry.
Revenue from non-refundable upfront fees that are not related to products already delivered or services already performed is deferred and recognized over the
term of the related arrangement or the estimated customer life. 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, we defer revenue until the customer receives the product because we legally
retain 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 ASC 985-605-50 Revenue Recognition: Customer Payments and Incentives (“ASC 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. Price
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