8x8 2003 Annual Report Download - page 49

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USE OF ESTIMATES
The preparation of the consolidated financial statements, in conformity with accounting principles generally
accepted in the United States, requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and equity and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company
evaluates its estimates, including, but not limited to, those related to bad debts, investments, goodwill and intangible
assets, income taxes, restructuring and impairment charges, and other contingencies. The Company bases its
estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under
different assumptions or conditions.
REVENUE RECOGNITION
Product revenue -- The Company recognizes revenue from product sales upon shipment to OEMs and end users
provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred, collection of
resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no
remaining significant obligations. Reserves for returns and allowances for OEM and end user sales are recorded at
the time of shipment. The Company defers recognition of revenue on sales to distributors and resellers where the
right of return exists until products are resold to the end user.
License and other revenue -- The Company recognizes revenue from license contracts when a non-cancelable,
non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exist
surrounding product acceptance, fees from the agreement are fixed and determinable, and collection is probable. The
Company uses the residual method to recognize revenue when a license agreement includes one or more elements to
be delivered at a future date if evidence of the fair value of all undelivered elements exists. If evidence of the fair
value of the undelivered elements does not exist, revenue is deferred and recognized when delivery occurs. When
the Company enters into a license agreement requiring that the Company provide significant customization of the
software products, the license and consulting revenue is recognized using contract accounting. Revenue from
maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances
is one year. The Company recognizes royalties upon notification of sale by its licensees. Revenue from consulting,
training, and development services is recognized as the services are performed. For sales generated from long-term
contracts, the Company uses the percentage of completion method of accounting. In doing so, management makes
important judgments in estimating costs and in measuring progress towards completion. These judgments underlie
the Company’s determinations regarding overall contract value, contract profitability and timing of revenue
recognition. Revenue and cost estimates are revised periodically based on changes in circumstances, and any losses
on contracts are recognized immediately.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original maturity of three months or less to be cash
equivalents. Management determines the appropriate classification of debt and equity securities at the time of
purchase and reevaluates the classification at each reporting date. The cost of the Company's investments is
determined based upon specific identification.
Investments classified as available-for-sale are reported at fair value, based upon quoted market prices, with
unrealized gains and losses, net of related tax, if any, included in Accumulated Other Comprehensive Loss in the
Consolidated Balance Sheet. At March 31, 2002 and 2003, there were no investments classified as available-for-
sale.
Investments classified as trading securities are carried at fair value, with unrealized holding gains and losses
included in earnings. Realized gains and losses are determined using the specific identification method based on the
trade date of a transaction. The Company had $208,000 of investments classified as trading securities at March 31,
2003, and no investments classified as trading securities at March 31, 2002.
In March 2002 8x8’s board of directors (the Board) authorized the Company to open securities trading accounts and
make investments of up to $1.0 million, as directed by the Company's Chairman, Joe Parkinson, the Chief Executive