iRobot 2014 Annual Report Download - page 100

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fiscal quarters will end on the Saturday that falls closest to the last day of the third month of each quarter.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We
evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.
We believe that of our significant accounting policies, which are described in the notes to our consolidated financial
statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe
that the following accounting policies are the most critical to aid in fully understanding and evaluating our consolidated
financial condition and results of operations.
Revenue Recognition
We derive our revenue from product sales and, to a lesser extent, government and commercial research and development
contracts. We sell products directly to customers and indirectly through resellers and distributors. We recognize revenue from
sales of robots under the terms of the customer agreement upon transfer of title and risk of loss to the customer, net of estimated
returns, provided that collection is determined to be reasonably assured and no significant obligations remain. Sales to domestic
and Canadian resellers of home robots are typically subject to agreements allowing for limited rights of return, rebates and
price protection. We also provide limited rights of returns for direct-to-consumer sales generated through our on-line stores.
Accordingly, we reduce revenue for our estimates of liabilities for these rights of return, rebates and price protection at the time
the related sale is recorded. These estimates for rights of return are directly based on specific terms and conditions included in
the reseller agreements, historical returns experience and various other assumptions that we believe are reasonable under the
circumstances. In the case of new product introductions, the estimates for returns applied to the new products are based upon
the estimates for the most similar predecessor products until such time that we have enough actual returns experience for the
new products, which is typically two holiday returns cycles. At that time, we incorporate that data into the development of
returns estimates for the new products. We update our analysis of returns on a quarterly basis. If actual returns differ
significantly from our estimates, or if modifications to individual reseller agreements are entered into that impact their rights of
returns, such differences could result in an adjustment to previously established reserves and could have a material impact,
either favorably or unfavorably, on our results of operations for the period in which the actual returns become known or the
reseller agreement is modified. Our international distributor agreements do not currently allow for product returns and, as a
result, no reserve for returns is established for this group of customers. The estimates and reserve for rebates and price
protection are based on specific programs, expected usage and historical experience. Actual results could differ from these
estimates.
Under cost-plus-fixed-fee (CPFF) type contracts, we recognize revenue based on costs incurred plus a pro rata portion of
the total fixed fee. Costs incurred include labor and material that are directly associated with individual CPFF contracts plus
indirect overhead and general and administrative type costs based upon billing rates submitted by the Company to the Defense
Contract Management Agency (DCMA). We submit on an annual basis final indirect billing rates to DCMA based upon actual
costs incurred throughout the year. In the situation where our final actual billing rates are greater than the estimated rates
currently in effect, we record a cumulative revenue adjustment in the period in which the rate differential is collected from the
customer. These final billing rates are subject to audit by the Defense Contract Audit Agency (DCAA), which can occur
several years after the final billing rates are submitted and may result in material adjustments to revenue recognized based on
estimated final billing rates. As of December 27, 2014, fiscal years 2012 through 2014 are open for audit by DCAA. In the
situation where our anticipated actual billing rates will be lower than the provisional rates currently in effect, we record a
cumulative revenue adjustment in the period in which the rate differential is identified. Revenue on firm fixed price (FFP)
contracts is recognized using the percentage-of-completion method. For government product FFP contracts, revenue is
recognized as the product is shipped or in accordance with the contract terms. Costs and estimated gross margins on contracts
are recorded as revenue as work is performed based on the percentage that incurred costs compare to estimated total costs
utilizing the most recent estimates of costs and funding. Changes in job performance, job conditions, and estimated
profitability, including those arising from final contract settlements and government audits, may result in revisions to costs and
income and are recognized in the period in which the revisions are determined. Since many contracts extend over a long period
of time, revisions in cost and funding estimates during the progress of work have the effect of adjusting earnings applicable to
past performance in the current period. When the current contract estimate indicates a loss, a provision is made for the total
anticipated loss in the current period. Revenue earned in excess of billings, if any, is recorded as unbilled revenue. Billings in
excess of revenue earned, if any, are recorded as deferred revenue.