8x8 2015 Annual Report Download - page 60

REVENUE RECOGNITION
Service and Product Revenue
The Company recognizes service revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been
rendered, price is fixed or determinable and collectability is reasonably assured. The Company defers recognition of service revenues in
instances when cash receipts are received before services are delivered and recognizes deferred revenues ratably as services are provided.
The Company recognizes revenue from product sales for which there are no related services to be rendered upon shipment to customers provided
that persuasive evidence of an arrangement exists, the price is fixed or determinable, 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
customer sales are recorded at the time of shipment. In accordance with the Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") 605, Revenue Recognition , 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 product sales to distributors, retailers, and resellers
until the products have been sold to the end customer.
The Company records revenue net of any sales and service related taxes and mandatory government charges that are billed to its customers. The
Company believes this approach results in consolidated financial statements that are more easily understood by users.
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 that is fixed or
determinable and that are not contingent on future performance or future deliverables in the month in which the new order was shipped, net of an
allowance for expected cancellations.
Multiple Element Arrangements
ASC 605-25, Revenue Recognition - Multiple Element Arrangements , requires that revenue arrangements with multiple deliverables be divided
into separate units of accounting if the deliverables in the arrangement meet specific criteria. The provisioning of the 8x8 cloud service with the
accompanying 8x8 IP telephone constitutes a revenue arrangement with multiple deliverables. For arrangements with multiple deliverables, the
Company allocates the arrangement consideration to all units of accounting based on their relative selling prices. In such circumstances, the
accounting principles establish a hierarchy to determine the relative selling price to be used for allocating arrangement consideration to units of
accounting as follows: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii)
best estimate of the selling price ("BESP").
VSOE generally exists only when the Company sells the deliverable separately, on more than a limited basis, at prices within a relatively narrow
range. When VSOE cannot be established, the Company attempts to establish the selling price of deliverables based on relevant TPE. TPE is
determined based on manufacturer's prices for similar deliverables when sold separately, when possible. When the Company is unable to
establish selling price using VSOE or TPE, it uses a BESP for the allocation of arrangement consideration. The objective of BESP is to
determine the price at which the Company would transact a sale if the product or service was sold on a stand-
alone basis. BESP is generally used
for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. The Company determines BESP for a
product or service by considering multiple factors including, but not limited to:
4 the price list established by its management which is typically based on general pricing practices and targeted gross margin of products
and services sold; and
4 analysis of pricing history of new arrangements, including multiple element and stand-alone transactions.
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