Time Magazine 2014 Annual Report Download - page 80

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
executed, revenues are based on estimated rates, giving consideration to factors including the previous contractual rates,
inflation, current payments by the affiliate and the status of the negotiations on a new contract. When the new distribution
contract terms are finalized, an adjustment to Subscription revenues is recorded, if necessary, to reflect the new terms. Such
adjustments historically have not been significant.
Advertising Revenue
Advertising revenues are recognized, net of agency commissions, in the period that the advertisements are aired. If there is
a targeted audience guarantee, revenues are recognized for the actual audience delivery and revenues are deferred for any
shortfall until the guaranteed audience delivery is met, typically by providing additional advertisements. Advertising
revenues from websites are recognized as impressions are delivered or the services are performed.
Sales Returns and Pricing Rebates
Management’s estimate of product sales that will be returned and pricing rebates to grant is an area of judgment affecting
Revenues and Net income. In estimating product sales that will be returned, management analyzes vendor sales of the
Company’s product, historical return trends, current economic conditions, and changes in customer demand. Based on this
information, management reserves a percentage of any product sales that provide the customer with the right of return. The
provision for such sales returns is reflected as a reduction in the revenues from the related sale. In estimating the reserve for
pricing rebates, management considers the terms of the Company’s agreements with its customers that contain targets which,
if met, would entitle the customer to a rebate. In those instances, management evaluates the customer’s actual and forecasted
purchases to determine the appropriate reserve. At December 31, 2014 and 2013, total reserves for sales returns (which also
reflects reserves for certain pricing allowances provided to customers) primarily related to home entertainment products (e.g.,
DVDs, Blu-ray Discs and videogames) were $1.000 billion and $1.192 billion, respectively. An incremental change of 1% in
the Company’s estimated sales returns rate (i.e., provisions for returns divided by gross sales of related product) would have
resulted in an approximate $44 million impact on the Company’s total Revenues for the year ended December 31, 2014. This
revenue impact would have been partially offset by a corresponding impact on related expenses depending on the margin
associated with a specific film or videogame and other factors.
Gross versus Net Revenue Recognition
In the normal course of business, the Company acts as or uses an intermediary in executing transactions with third parties.
In connection with these arrangements, the Company must determine whether to report revenue based on the gross amount
billed to the ultimate customer or on the net amount received from the customer after commissions and other payments to
third parties. To the extent revenues are recorded on a gross basis, any commissions or other payments to third parties are
recorded as expense so that the net amount (gross revenues less expense) is reflected in Operating Income. Accordingly, the
impact on Operating Income is the same whether the Company records revenue on a gross or net basis.
The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the
Company is acting as the principal or an agent in the transaction. If the Company is acting as a principal in a transaction, the
Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports
revenue on a net basis. The determination of whether the Company is acting as a principal or an agent in a transaction
involves judgment and is based on an evaluation of the terms of an arrangement. The Company serves as the principal in
transactions in which it has substantial risks and rewards of ownership.
The following are examples of arrangements where the Company is an intermediary or uses an intermediary:
•Warner Bros. provides distribution services to third-party companies. Warner Bros. may provide distribution
services for an independent third-party company for the worldwide distribution of theatrical films, home video,
television programs and/or videogames. The independent third-party company may retain final approval over the
distribution, marketing, advertising and publicity for each film or videogame in all media, including the timing and
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