Shutterfly 2012 Annual Report Download - page 45

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP
and does not require management’s judgment in its application, while in other cases, management’s
judgment is required in selecting among available alternative accounting standards that allow different
accounting treatment for similar transactions. We believe that the accounting policies discussed below are
the most critical to understanding our historical and future performance, as these policies relate to the
more significant areas involving management’s judgments and estimates.
Revenue Recognition. We recognize revenue from Consumer and Enterprise product sales, net of
applicable sales tax, upon shipment of fulfilled orders, when persuasive evidence of an arrangement exists,
the selling price is fixed or determinable and collection of resulting receivables is reasonably assured.
Customers place Consumer product orders through our websites and pay primarily using credit cards.
Enterprise customers are invoiced upon fulfillment. Shipping charged to customers is recognized as
revenue at the time of shipment.
For gift card sales and flash deal promotions through group buying websites, we recognize revenue on
a gross basis, as we are the primary obligor, when redeemed items are shipped. Revenues from sales of
prepaid orders on our websites are deferred until shipment of fulfilled orders or until the prepaid period
expires. Our share of revenue generated from our print to retail relationships, is recognized when orders
are picked up by our customers at the respective retailer.
We provide our customers with a 100% satisfaction guarantee whereby products can be returned
within a 30-day period for a reprint or refund. We maintain an allowance for estimated future returns
based on historical data. The provision for estimated returns is included in accrued expenses. During the
year ended December 31, 2012, returns totaled approximately 1% of net revenues and have been within
management’s expectations.
We periodically provide incentive offers to our customers in exchange for setting up an account and to
encourage purchases. Such offers include free products and percentage discounts on current purchases.
Discounts, when accepted by customers, are treated as a reduction to the purchase price of the related
transaction and are presented in net revenues. Production costs related to free products are included in
cost of revenues upon redemption.
Our advertising revenues are derived from the sale of online advertisements on our websites.
Advertising revenues are recognized as ‘‘impressions’’ (i.e., the number of times that an advertisement
appears in pages viewed by users of the Company’s websites) are delivered; as ‘‘clicks’’ (which are
generated each time users of our websites click through the advertisements to an advertiser’s designated
website) are provided to advertisers; or ratably over the term of the agreement with the expectation that
the advertisement will be delivered ratably over the contract period.
Inventories. Our inventories consist primarily of paper, photo book covers and packaging supplies
and are stated at the lower of cost on a first-in, first-out basis or net realizable value. The value of
inventories is reduced by an estimate for excess and obsolete inventories. The estimate for excess and
obsolete inventories is based upon management’s review of utilization of inventories in light of projected
sales, current market conditions and market trends.
Fair Value. We record our financial assets and liabilities at fair value. The accounting standard for fair
value provides a framework for measuring fair value, clarifies the definition of fair value and expands
disclosures regarding fair value measurements. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market
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