8x8 2007 Annual Report Download - page 51

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, returns reserve for expected cancellations, valuation of inventories, income and sales tax, and
litigation 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 and product revenue
The Company’s VoIP service and product revenue is derived from the sale of desktop terminal adapters and VoIP service.
Emerging Issues Task Force (EITF) consensus No. 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables” 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 provisioning 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 or videophone are recognized as
product revenues during the period of the sale less the allowance for estimated returns during the 30 day trial period. All other
revenues are recognized as license and service revenues when the related services are provided.
Historically, the Company recognized new subscriber revenue from its Packet8 service offerings upon the expiration of the
applicable acceptance period. Under the terms of the Company’s typical subscription agreement, new customers can terminate
their service within 30 days of order placement and receive a full refund of fees previously paid. During the first few years of
the Company’s Packet8 service, it lacked sufficient history to apply a return rate and reserve against new order revenue.
Accordingly, the Company deferred new subscriber revenue 30 days to ensure that the 30-day acceptance period has expired.
In the first quarter of 2007, the Company evaluated two years of historical data related to the termination of service during the
30-day acceptance period. By June 2006, the Company determined that it had sufficient history of subscriber conduct to make
reasonable estimates of cancellations within the 30-day trial period. Therefore, in the first quarter of fiscal 2007, the Company
began recognizing new subscriber revenue in the month in which the new order was shipped, net of an allowance for expected
cancellations. As a result of this change in revenue recognition, the Company recognized an additional $68,000 of new order
service revenue, $280,000 of new order product revenue and $466,000 of new order cost of product during the first quarter of
fiscal 2007.
Deferred cost of goods sold represents the cost of products sold for which the end customer or distributor has a right of return.
The cost of the products sold is recognized contemporaneously with the recognition of revenue, when the subscriber has
accepted the service.
Product revenue
The Company recognizes revenue from product sales for which there are no related services to be rendered 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. Gross outbound shipping and handling charges are recorded as revenue, and the related
costs are included in cost of goods sold. Reserves for returns and allowances for OEM and end user sales are recorded at the
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