Chegg 2014 Annual Report Download - page 89

Table of Contents
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similar functionality cannot be obtained. As we have not established VSOE or TPE for our enrollment marketing services, we
have used ESP in our allocation of arrangement consideration. We have determined ESP by considering multiple factors
including, but not limited to, prices charged for similar offerings, sales volume, geographies, market conditions, the competitive
landscape and pricing practices. We believe this best represents the price at which we would transact a sale if the services were
sold on a standalone basis, and we regularly assess the method used to determine ESP. Additionally, we limit the amount of
revenue recognized for delivered elements to the amount that is not contingent on future delivery of services or other future
performance obligations.
Revenue is presented net of sales tax collected from customers to be remitted to governmental authorities and net of
allowances for estimated cancellations and customer returns, which are based on historical data. Customer refunds from
cancellations and returns are recorded as a reduction to revenue. Deferred revenue primarily consists of advance payments from
students related to rentals and subscriptions that have not been recognized and marketing services that have yet to be
performed. Deferred revenue is recognized as revenue ratably over the term or when the services are provided and all other
revenue recognition criteria have been met.
Textbook Library
We consider our textbook library to be a long-term productive asset and, as such, we classify it as a non-current asset
in our consolidated balance sheets. Additionally, cash outflows for the acquisition of the textbook library, net of changes in
related accounts payable and accrued liabilities, as well as cash inflows received from the liquidation of textbooks, are
classified as cash flows from investing activities in our consolidated statements of cash flows, consistent with other long-term
asset activity. The gain or loss from the liquidation of textbooks previously rented is recorded as a component of operating
expenses in our consolidated statements of operations and is classified as cash flow from operating activities.
All textbooks in our textbook library are stated at cost, which includes the purchase price less accumulated
depreciation.
We record allowances for lost or damaged textbooks in cost of revenues in our consolidated statements of operations
based on our assessment of our textbook library on a book-by-book basis. Factors considered in the determination of textbook
allowances include historical experience, management’s knowledge of current business conditions and expectations of future
demand. Write-offs result from lost or damaged books, books no longer considered to be rentable or when books are not
returned to us by our customers after the rental period.
We depreciate our textbooks, less an estimated salvage value, over an estimated useful life of three years using an
accelerated method of depreciation, as we estimate this method most accurately reflects the actual pattern of decline in the
economic value of the assets as described below. The salvage value considers the historical trend and projected liquidation
proceeds for textbooks. The useful life is determined based on the time period in which the textbooks are held and rented before
liquidation. In accordance with our policy, we review the estimated useful lives of our textbook library on an ongoing basis.
We will continue to review the accelerated method of depreciation to ensure consistency with the value of the textbook
to the customer during its useful life. Based on historical experience, we believe that a textbook has more value to our
customers and us early in its useful life and an accelerated depreciation method reflects the actual pattern of decline in
economic value and aligns with the textbook’s condition, which may deteriorate over time. In addition, we consider the
utilization of the textbooks and the rental revenue we can earn, recognizing that a used textbook rents for a lower amount than a
new textbook. Should the actual rental activity or deterioration of books differ from our estimates, our loss (gain) on liquidation
of textbooks or write-offs could differ.
In addition, we will continue to evaluate the appropriateness of the estimated salvage value and estimated useful life
based on historical liquidation transactions with both vendors and customers and reviewing a blend of actual and estimates of
the lifecycle of each book and the number of times rented before it is liquidated, respectively. Our estimates utilize data from
historical experience, including actual proceeds from liquidated textbooks as a percentage of original sourcing costs, channel
mix of liquidations and consideration of the estimated sales price, largely driven by the average market price data of used books
and the projected values of a book in relation to the original source cost over time. Changes in the estimated salvage value,
method of depreciation or useful life can have a significant impact on our depreciation expense, write-offs liquidations and
gross margins.