Avid 2014 Annual Report Download - page 69

63
From time to time, the Company offers certain customers free upgrades or specified future products or enhancements. When a
software deliverable arrangement contains an Implied Maintenance Release PCS deliverable, revenue recognition of the entire
arrangement will only commence when any free upgrades or specified future products or enhancements have been delivered, assuming
all other products in the arrangement have been delivered and all services, if any, have commenced.
Other Revenue Recognition Policies
In a limited number of arrangements, the professional services and training to be delivered are considered essential to the functionality
of the Company’s software products. If services sold in an arrangement are deemed to be essential to the functionality of the software
products, the arrangement is accounted for using contract accounting. As the Company has concluded that it cannot reliably estimate
its contract costs, the Company uses the completed contract method of contract accounting. The completed contract method of
accounting defers all revenue and costs until the date that the products have been delivered and professional services, exclusive of
post-contract customer support, have been completed. Deferred costs related to fully deferred contracts are recorded as a component
of inventories in the consolidated balance sheet, and generally all other costs of sales are recognized when revenue recognition
commences.
The Company records as revenues all amounts billed to customers for shipping and handling costs and records its actual shipping costs
as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues,
with related costs recorded as cost of revenues. The Company presents revenues net of any taxes collected from customers and
remitted to government authorities.
In the consolidated statements of operations, the Company classifies revenues as product revenues or services revenues. For multiple-
element arrangements that include both product and service elements, including Implied Maintenance Release PCS, the Company
evaluates available indicators of fair value and applies its judgment to reasonably classify the arrangement fee between product
revenues and services revenues. The amount of multiple-element arrangement fees classified as product and service revenues based on
management estimates of fair value when VSOE of fair value for all elements of an arrangement does not exist could differ from
amounts classified as product and service revenues if VSOE of fair value for all elements existed.
Allowance for Sales Returns and Exchanges
The Company maintains allowances for estimated potential sales returns and exchanges from its customers. The Company records a
provision for estimated returns and other allowances as a reduction of revenues in the same period that related revenues are recorded
based on historical experience and specific customer analysis. Use of management estimates is required in connection with
establishing and maintaining a sales allowance for expected returns and other credits. If actual returns differ from the estimates,
additional allowances could be required.
The following table sets forth the activity in the allowance for sales returns and exchanges for the years ended December 31, 2014,
2013 and 2012 (in thousands):
Year Ended December 31,
2014 2013 2012
Allowance for sales returns and exchanges – beginning of year $ 12,519 $ 19,460 $ 22,767
Additions and adjustments to the allowance 9,260 9,243 11,402
Deductions against the allowance (12,269)(16,184) (14,709)
Allowance for sales returns and exchanges – end of year $ 9,510 $ 12,519 $ 19,460
The allowance for sales returns and exchanges, which is recorded as a reduction to gross accounts receivable, reflects an estimate of
amounts invoiced that will not be collected, as well as other allowances and credits that have been or are expected to offset the trade
receivables. Since many of the Company’s transactions require some or all of amounts invoiced to be recorded in deferred revenue
under GAAP due to revenue recognition considerations, the Company has recorded reductions to deferred revenue of $3.7 million,
$6.1 million and $8.7 million as of December 31, 2014, 2013 and 2012, respectively, to eliminate the estimated deferred revenue
attributable to transactions already provided for by the sales, returns and exchanges allowance.