Rosetta Stone 2015 Annual Report Download - page 66

Table of Contents
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
doing so, the Company evaluates a variety of factors including whether the undelivered element(s) have value to the 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 perpetual software products and related online services, the Company allocates the total arrangement
consideration to its deliverables based on the existence of vendor-specific objective evidence of fair value, or vendor-specific objective evidence
("VSOE"), in accordance with ASC subtopic 985-605-25  ("ASC 985-605-25"). The
Company generates a substantial portion of its Consumer revenue from the CD and digital download formats of the Rosetta Stone language-learning product
which is typically a multiple-element arrangement that includes two deliverables: the perpetual software, delivered at the time of sale, and the online service,
which is considered an undelivered software-related element. The online service includes access to conversational coaching services. Because the Company
only sells the perpetual language-learning software on a stand-alone basis in its homeschool version, the Company does not have a sufficient concentration
of stand-alone sales to establish VSOE for the perpetual product. Where VSOE of the undelivered online services can be established, arrangement
consideration is allocated using the residual method. The Company determines VSOE by reference to the range of comparable stand-alone renewal sales of
the online service. The Company reviews these stand-alone 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. Where VSOE of the undelivered online
services cannot be established, revenue is deferred and recognized commensurate with the delivery of the online services.
For non-software multiple element arrangements the Company allocates revenue to all deliverables based on their relative selling prices. The
Company's non-software multiple element arrangements primarily occur as sales to its Enterprise & Education customers. These arrangements can include
web-based subscription services, audio practice materials and professional services or any combination thereof. The Company does not have a sufficient
concentration of stand-alone sales of the various deliverables noted above to its Enterprise & Education customers, and therefore cannot establish VSOE for
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 subtopic 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. The CD and digital download formats of Rosetta Stone language-learning products 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.
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