8x8 2016 Annual Report Download - page 60

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 assets and liabilities at the date of the
consolidated 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, and equity that are not readily
apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
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, channel partners, and resellers, where the right of return exists, as deferred revenue. The Company defers recognition of revenue on product
sales to distributors, retailers, channel partners, 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
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