TiVo 2013 Annual Report Download - page 47

Table of Contents
Critical Accounting Estimates
In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact
on our revenue, operating income (loss) and net income (loss), as well as on the value of certain assets and liabilities on our consolidated
balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be
reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At
least quarterly, we evaluate our assumptions, judgments and estimates and make changes accordingly. Historically, our assumptions,
judgments and estimates relative to our critical accounting estimates have not differed materially from actual results.
Revenue Recognition
We generate service revenues from fees for providing the TiVo service to consumers and operators and through the sale of advertising
and audience research measurement services. We also generate technology revenues from licensing technology (Refer to Note 16.
"Settlements" of Notes to Consolidated Financial Statements included in Part II, Item 8. of this report) and by providing engineering
professional services. In addition, we generate hardware revenues from the sale of hardware products that enable the TiVo service. A
substantial part of our revenues are derived from multiple element arrangements.
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or
determinable, collectability is probable, and there are no post-delivery obligations. Service revenue is generally recognized as the services are
performed which generally is ratably over the term of the service period.
Multiple Element Arrangements
Our multiple deliverable revenue arrangements primarily consist of bundled sales of TiVo-enabled DVRs and TiVo service to
consumers; arrangements with multiple system operators and broadcasters (MSOs) which generally include delivery of software
customization and set up services, training, post contract support (PCS), TiVo-enabled DVRs and TiVo service; and bundled sales of
advertising and audience research measurement services.
We allocate revenue to each element in a multiple-element arrangement based upon their relative selling price. We determine the selling
price for each deliverable using VSOE of selling price or TPE of selling price, if it exists. If neither vendor specific object evidence (VSOE) nor
third party evidence (TPE) of selling price exists for a deliverable, we use our best estimated selling price (BESP) for that deliverable. Since
the use of the residual method is eliminated under the new accounting standards, any discounts offered by TiVo are allocated to each of the
deliverables. Revenue allocated to each element, limited to the amount not contingent on future performance, is then recognized when the
basic revenue recognition criteria are met for the respective element.
Consistent with our methodology under previous accounting guidance, if available, we determine VSOE of fair value for each element
based on historical standalone sales to third-parties or from the stated renewal rate for the elements contained in the initial contractual
arrangement. We currently estimate selling prices for our PCS, training, TiVo-enabled DVRs for MSOs, and consumer TiVo service based
on VSOE of selling price.
In some instances, we may not be able to obtain VSOE of selling price for all deliverables in an arrangement with multiple elements.
This may be due to TiVo infrequently selling each element separately or not pricing products within a narrow range. When VSOE cannot be
established, we attempt to estimate the selling price of each element based on TPE. TPE would consist of competitor prices for similar
deliverables when sold separately. Generally, our offerings contain significant differentiation such that the comparable pricing of products with
similar functionality or services cannot be obtained. Furthermore, we sell TiVo-enabled DVRs to consumers whereas our competitors
usually lease them to their customers. Therefore, TiVo is typically not able to obtain TPE of selling price.
When we are unable to establish a selling price using VSOE or TPE, which is generally the case for sales of TiVo-enabled DVRs to
consumers and advertising and audience research measurement services, we use our BESP in determining the allocation of arrangement
consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a
standalone basis. BESP is generally used for offerings that are not typically sold on a standalone basis or for new or highly customized
offerings.
We establish pricing for our products and services by considering multiple factors including, but not limited to, geographies, market
conditions, competitive landscape, internal costs, gross margin objectives, and industry
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