Rosetta Stone 2014 Annual Report Download - page 35

Table of Contents
sales on a quarterly basis. VSOE is established if at least 80% of the stand-alone sales are within a range of plus or minus 15% of a midpoint of the range of
prices, consistent with generally accepted industry practice.
For non-software multiple element arrangements we allocate revenue to all deliverables based on their relative selling prices. Our non-software multiple
element arrangements primarily occur as sales to our Global Enterprise & Education customers. These arrangements can include a web-based subscription,
audio practice tools and professional services or any combination thereof. We do not have a sufficient concentration of stand-alone sales of the various
deliverables noted above to our Global Enterprise & Education customers, and therefore cannot establish VSOE for each deliverable. Third party evidence of
fair value does not exist for the web-based software subscription services, audio practice products and professional services due to the lack of interchangeable
language-learning products and services within the market. Accordingly, we determine the relative selling price of the web-based subscription, audio practice
tools and professional services deliverables included in our non-software multiple element arrangements using our best estimate of selling price. We
determine our best estimate of selling price based on our internally published price list which includes suggested sales prices for each deliverable based on
the type of client and volume purchased. This price list is derived from past experience and from the expectation of obtaining a reasonable margin based on
our cost of each deliverable.
In the U.S. and Canada, 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 unsold packaged products, subject to certain limitations. We estimate
and establish revenue reserves for returns at the time of sale based on historical return rates, estimated channel inventory levels, the timing of new product
introductions and other factors.
We distribute 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 to determine whether the revenue
recognized 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 is recorded net of taxes.
Revenue for online services and web-based subscriptions is recognized ratably over the term of the service or subscription period, assuming all revenue
recognition criteria have been met. Our CD and digital download formats of Rosetta Stone language-learning product are bundled with a short-term online
service where customers are allowed to begin their short-term 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. Short-term online services 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 because the period over which a customer is expected to benefit from the service that is included
within our subscription arrangements does not extend beyond the contractual period. 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 many 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 the sales of packaged software is recognized as the
products are shipped and title passes and risks of loss have been transferred. For many 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. In other cases where 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. Cash sales incentives to
resellers are accounted for as a reduction of revenue, unless a specific identifiable benefit is identified and the fair value is reasonably determinable. 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 at the time of sale.
We offer our U.S. and Canada consumers 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, a successful collection
history has been established and these fees are fixed and determinable, revenue is recognized at the time of sale, assuming the remaining revenue recognition
criteria have been met.
In connection with packaged software product sales and web-based software subscriptions, technical support is provided to customers, including
customers of resellers, via telephone support at no additional cost for up to six months from the time of purchase. As the fee for technical support is included
in the initial licensing fees, the technical support and services are generally provided within one year, the estimated cost of providing such support is deemed
insignificant and no unspecified upgrades/enhancements are offered, technical support revenues are recognized together with the software product and web-
based software subscription revenue. Costs associated with the technical support service are accrued at the time of sale.
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