8x8 2010 Annual Report Download - page 50

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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 IP business telephones and VoIP service.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-25 (formerly 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 8x8 service with the
accompanying 8x8 IP telephone constitutes a revenue arrangement with multiple deliverables. In accordance with the
guidance of ASC 605-25, the Company allocates 8x8 revenues, including activation fees, among the 8x8 IP telephones and
subscriber services. Revenues allocated to these devices 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. The Company records revenue net of any sales-related taxes that are billed to
its customers. The Company believes this approach results in financial statements that are more easily understood by investors.
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. The Company has determined that it has sufficient history of
subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, the Company
recognizes new subscriber revenue in the month in which the new order was shipped, net of an allowance for expected
cancellations.
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
partners 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 partner and end user sales are recorded at the
time of shipment. In accordance with the ASC 985-605, the Company records shipments to distributors, retailers, and resellers,
where the right of return exists, as deferred revenue. The Company defers recognition of revenue on sales to distributors,
retailers, and resellers until products are resold to the end user.
License and other revenue
During fiscal 2010, 2009 and 2008, revenues from software and technology licensing and related arrangements were limited.
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 surrounding product acceptance exist, fees from the
agreement are fixed or 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.