Rosetta Stone 2014 Annual Report Download - page 67

Table of Contents
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each deliverable. Third party evidence of fair value does not exist for the web-based subscription, audio practice and professional services due to the lack of
interchangeable language-learning products and services within the market. Accordingly, the Company determines the relative selling price of the web-based
subscription, audio practice tools and professional services deliverables included in its non-software multiple element arrangements using the best estimated
selling price. The Company determines the best estimated selling price based on its 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 what each deliverable costs the Company.
In the U.S. and Canada, the Company offers consumers who purchase packaged software and audio practice products directly from the Company a 30-
day, unconditional, full money-back refund. The Company also permits some of our retailers and distributors to return unsold packaged products, subject to
certain limitations. In accordance with ASC subtopic 985-605,  ("ASC 985-605"), the Company estimates and establishes
revenue reserves for packaged product returns at the time of sale based on historical return rates, estimated channel inventory levels, the timing of new
product introductions and other factors.
The Company distributes its products and services both directly to the end customer and indirectly through resellers. Resellers earn commissions
generally calculated as a fixed percentage of the gross sale to the end customer. The Company evaluates each of its reseller relationships in accordance with
ASC 605-45  (“ASC 605-45”) 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 the Company evaluates a
variety of factors including whether it is 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. The 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 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 many 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
the Company legally retains 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. In accordance with ASC subtopic 605-50  (“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 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.
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, 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 fee, 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 are accrued at the time of sale.
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