Chegg 2015 Annual Report Download - page 92

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subject to inventory risk, have latitude in establishing prices and selecting suppliers, none of which is presumptive or
determinative. Our evaluation requires management to make a judgment based on the terms of arrangement in our
determination of whether we act as a principal or an agent. If our evaluation of an arrangement was incorrect, this could impact
our revenue recognition and cost of revenues amount in a given period.
Some of our customer arrangements for enrollment marketing services include multiple deliverables, which include the
delivery of student leads as well as other services to the end customer. We have determined these deliverables qualify as
separate units of accounting, as they have value to the customer on a standalone basis and our arrangements do not contain a
right of return. For these arrangements that contain multiple deliverables, we allocate the arrangement consideration based on
the relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor-specific objective
evidence of fair value (VSOE), when available; (ii) third-party evidence of selling price (TPE), if VSOE does not exist; and
(iii) estimated selling price (ESP), if neither VSOE nor TPE is available.
We determine VSOE based on our historical pricing and discounting practices for the specific solution when sold
separately and when a substantial majority of the selling prices for these services fall within a narrow range. TPE is determined
based on competitor prices for similar deliverables when sold separately. Generally our go-to-market strategy differs from that
of our peers, and our offerings contain a significant level of differentiation such that the comparable pricing of services with
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.
Our determination of ESP requires management to make a judgment in which factors to consider when determining ESP. If
different factors were considered we could conclude a different determination of ESP and this could have a material impact to
the amount of revenues recognized. We believe the factors considered best represent 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.
Textbook Library
Factors considered in the determination of print textbook allowances impacting cost of revenues and our consolidated
statements of operations include historical experience, management’s knowledge of current business conditions and
expectations of future demand. The consideration of these factors requires management to make judgments in the determination
of our allowance for lost or damaged books in any given period.
We depreciate our print 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 print
textbook to the customer during its useful life. Based on historical experience, we believe that a print textbook has more value
to our customers and us early in its useful life and therefore 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 revenues 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 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.
As we continue to accumulate additional data related to our textbook library, we may make refinements to our estimates,
which could materially impact our depreciation expense, write-offs and liquidations.