Stamps.com 2011 Annual Report Download - page 40

Critical Accounting Policies
General
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared
in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-
going basis, we evaluate our estimates, including those related to patents, contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial
statements.
Revenue Recognition
We recognize revenue from product sales or services rendered, licensing the use of our software and intellectual property as well as commissions
from advertising or sale of products by third party vendors to our customer base when the following four revenue recognition criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable,
and collectability is reasonably assured.
Our service revenue is primarily based on monthly convenience fees and is recognized in the period that services are provided. Product sales, net
of return allowances, are recorded when the products are shipped and title passes to customers. Sales of items, including PhotoStamps, to
customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. Return
allowances for expected product returns, which reduce product revenue, are estimated using historical experience. We recognize licensing
revenue ratably over the contract period. Commissions from the advertising or sale of products by a third party vendor to our customer base are
recognized when the revenue is earned and collection is deemed probable. We recognize revenue on insurance purchases upon the ship date of
the insured package.
Intangibles
We make an assessment of the estimated useful lives of our patents and other amortizable intangibles. These estimates are made using various
assumptions that are subjective in nature and could change as economic and competitive conditions change. If events were to occur that would
cause our assumptions to change, the amounts recorded as amortization would be adjusted.
Contingencies and Litigation
We are involved in various litigation matters as a claimant and a defendant. We record any amounts recovered in these matters when received.
We record liabilities for claims against us when the loss is probable and estimable. Amounts recorded are based on reviews by outside counsel,
in-house counsel and management. Actual results could differ from estimates.
Promotional Expense
New PC Postage customers are typically offered promotional items that are redeemed using coupons that are qualified for redemption after a
customer is successfully billed beyond an initial trial period. We account for our promotional expense in accordance with Accounting Standard
Codification (“ASC”) 605-50-25, “Recognition – Vendor’s Accounting for Consideration Given to a Customer”,
by recognizing a liability for
promotional expense based on estimated amounts that will be claimed by customers unless the liability for promotional expense cannot be
reasonable and reliably estimated. This includes free postage and a free digital scale and is expensed in the period in which a customer qualifies
using estimated redemption rates based on historical data. Promotional expense, which is included in cost of service, is incurred as customers
qualify and thereby may not correlate directly with changes in revenue, as the revenue associated with the acquired customer is earned over the
customer’s lifetime.
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