8x8 2004 Annual Report Download - page 47

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PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 8x8 and its subsidiaries. All material intercompany
accounts and transactions have been eliminated.
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, 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
VoIP Service Revenue
The Company defers revenue recognition of new subscriber revenue from Packet8 until it deems that the customer
has accepted the service. New customers may terminate their service within thirty days of activation and receive a
full refund of fees previously paid. As the Company has been providing its Packet8 service for a limited period of
time, it has not developed sufficient history to apply a return rate and reserve against new order revenue.
Accordingly, the Company may defer new subscriber revenue for up to sixty days to ensure that the thirty day
activation period has expired.
In November 2002, the Emerging Issues Task Force (EITF) reached consensus on EITF No. 00-21, “Accounting for
Revenue Arrangements with Multiple Deliverables.” This consensus requires that revenue arrangements with
multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet
specific criteria. In addition, arrangement consideration must be allocated among the separate units of accounting
based on their relative fair values, with certain limitations. The provision of the Packet8 service with the
accompanying desktop terminal adapter constitutes a revenue arrangement with multiple deliverables. In
accordance with the guidance of EITF No. 00-21 the Company allocates Packet8 revenues, including activation fees,
among the desktop terminal adapter, and subscriber services. Revenues allocated to the desktop terminal adapter are
recognized as product revenues at the end of thirty days after activation, providing the customer does not cancel
their Packet8 service. All other revenues are recognized as license and service revenues when the related services
are provided.
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