8x8 2012 Annual Report Download - page 31

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For all sales, except those completed via the Internet, we use either a binding purchase order or other signed agreement as
evidence of an arrangement. For sales over the Internet, we use a credit card authorization as evidence of an arrangement, and
recognize revenue upon settlement of the transaction, if there are no customer acceptance conditions. We do not settle credit
card transactions until equipment related to the transaction, if any, is shipped to a customer.
Our ability to enter into revenue generating transactions and recognize revenue in the future is subject to a number of business
and economic risks discussed above under Item 1A,"Risk Factors."
Collectability of Accounts Receivable
We must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts
receivable, including historical bad debts, customer concentrations, customer creditworthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. As of March 31,
2012, the accounts receivable balance was $2,279,000, net of an allowance for doubtful accounts of $140,000, including a
reserve for disputed credits, and an estimated returns reserve of $98,000. If the financial condition of our customers
deteriorates, our actual losses may exceed our estimates, and additional allowances would be required.
Valuation of Inventories
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand, market conditions and replacement
costs. If actual future demand or market conditions are less favorable than those projected by us, additional inventory write-
downs may be required.
Income and Other Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process requires us to estimate our actual current tax expense and to assess
temporary differences resulting from book-tax accounting differences for items such as deferred revenue. These differences
result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. In the event that we determine that we would be able to realize deferred
tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in
the period such determination was made.
Significant management judgment is required to determine the valuation allowance recorded against our net deferred tax assets,
which include net operating loss and tax credit carry forwards. The valuation allowance is based on our estimates of taxable
income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. As of March
31, 2011, we provided a full valuation allowance of approximately $65.5 million related to our net deferred tax assets due to
uncertainties related to our ability to utilize most of our deferred tax assets before they expire. During the fourth quarter of
fiscal 2012, we reassessed the need for a valuation allowance against our net deferred tax asset and concluded that it was more
likely than not that we would be able to realize a portion of our deferred tax assets. Accordingly, we released a portion of our
valuation allowance related to our deferred tax asset which resulted in a credit to the income statement of approximately $62.1
million. We determined that a release of a portion of our valuation allowance was appropriate as a result of the following
discrete events: (1) our attainment of three consecutive years of net income, (2) the acquisition of Contactual in the second
quarter of fiscal 2012, (3) the completion of the Section 382 ownership analysis under the Internal Revenue Code for
Contactual in the fourth quarter of fiscal 2012. In making this determination, we considered all available positive and negative
evidence, including our recent earnings trend and expected continued future taxable income. As of March 31, 2012, the net
deferred tax asset on the balance sheet represented the projected tax benefit we expect to realize and we continue to maintain a
valuation allowance against the remainder of our deferred tax assets that we believe we will not be able to utilize.
We have received inquiries, demands or audit requests from several state, municipal and 9-1-1 taxing agencies seeking
payment of taxes that are applied to or collected from the customers of providers of traditional public switched telephone
network services. We recorded no expense for the years ended March 31, 2012, 2011 and 2010 for estimated tax exposure for
such assessments.