Digital River 2001 Annual Report Download - page 30

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accounting policies which we believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Revenue Recognition.
The Company recognizes revenue from services rendered once all the following criteria for revenue
recognition have been met: 1) Pervasive evidence of an agreement exists, 2) the services have been
rendered, 3) the fee is fixed and determinable and not subject to refund or adjustment and 4) collection
of the amounts due is reasonably assured.The Company derives its revenue primarily from transaction
and service fees associated with the e-commerce services provided to its clients.These services include
Web commerce hosting, transaction processing, digital and physical fulfillment services, fraud screening,
customer service and merchandising and analytical marketing services.The Company reports its revenue
on a net basis and therefore records only the net transaction fees and service fees as its revenue.The
Company acts as the merchant of record on the majority of the transactions processed and has contractual
relationships with its clients, primarily software publishers and online retailers, which obligate the
Company to pay to the client a specified percentage of each sale.The Company retains its transaction
fee and also charges for various service fees.The Company also derives revenue from providing clients
the right to use its software applications along with integration, development and consulting services.
Signed contracts are obtained from clients prior to recognition of these revenues. Fees for the use of
software applications and any integration and development work required to provide on-going hosting
services for the client are recognized ratably over the term of the contract once collection is reasonably
assured. Clients do not have the right to take possession of the software applications used in the delivery of
services. Payments received in advance of revenue recognition, even if non-refundable, are recognized
as deferred revenue. Revenues from consulting services are recognized using the percentage-of-completion
method for fixed-fee arrangements or as the services are provided for time-and-materials arrangements.
If the Company does not accurately estimate the resources required or the scope of work to be performed,
or does not manage its projects properly within the planned periods of time or satisfy its obligations under
the contracts, then future margins may be negatively affected.
Allowance for D oubtful Accounts.
The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Estimates are used in determining our
allowance for doubtful accounts and are based on our historical experience and current trends.
Management makes an estimate of anticipated future chargebacks and product returns related to current
period revenue by analyzing the timing of historical chargebacks and applying anticipated percentages
28
Management’s Discussion and Analysis of Financial Condition and R esults of O perations
Digital River 2001 Annual Report