XM Radio 2008 Annual Report Download - page 63

Subscriber Acquisition Costs
Subscriber acquisition costs include hardware subsidies paid to radio manufacturers, distributors and auto-
makers, including subsidies paid to automakers who include a satellite radio and a prepaid subscription to our
service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in
manufacturing radios; device royalties for certain radios; commissions paid to retailers and automakers as
incentives to purchase, install and activate radios; product warranty obligations; provisions for inventory allowance;
and compensation costs associated with stock-based awards granted in connection with certain distribution
agreements. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers
of radios and revenue share payments to automakers and retailers of radios.
Subsidies paid to radio manufacturers and automakers are expensed upon installation, shipment, receipt of
product or activation. Commissions paid to retailers and automakers are expensed upon either the sale or activation
of radios. Chip sets that are shipped to radio manufacturers and held on consignment are recorded as inventory and
expensed as Subscriber acquisition costs when placed into production by radio manufacturers. Costs for chip sets
not held on consignment are expensed as Subscriber acquisition costs when the chip sets are installed, shipped,
received, or activated by a subscriber.
We record product warranty obligations in accordance with FIN No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpre-
tation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN No. 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by
issuing the guarantee. We warrant that certain products sold through our retail and direct to consumer distribution
channels will perform in all material respects in accordance with specifications in effect at the time of the purchase
of the products by the customer. As of April 2008, SIRIUS changed its product warranty period on some of its
products from twelve-months to 90 days from the purchase date for repair or replacement of components and/or
products that contain defects of material or workmanship. Products manufactured prior to April 2008 contained a
warranty period of 12 months from the purchase date. Customers may exchange products directly to the retailer
within 30 days of purchase. We recorded a liability for costs that we expect to incur under our warranty obligations
when the product is shipped from the manufacturer. Factors affecting the warranty liability include the number of
units sold and historical and anticipated rates of claims and costs per claim. We periodically assess the adequacy of
our warranty liability based on changes in these factors.
Research & Development Costs
Research and development costs are expensed as incurred and primarily include the cost of new product
development, chip set design, software development and engineering. During the years ended December 31, 2008,
2007 and 2006, we recorded research and development costs of $41,362, $38,082 and $46,460, respectively. These
costs are reported as a component of Engineering, design and development expense in our consolidated statements
of operations.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, as interpreted
by FIN No. 48, Accounting for Uncertainty in Income Taxes. Deferred income taxes are recognized for the tax
consequences related to temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation
allowance is recognized when, based on the weight of all available evidence, if it is considered more likely than not
that all, or some portion, of the deferred tax assets will not be realized. Income tax expense is the sum of current
income tax plus the change in deferred tax assets and liabilities.
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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)