Digital River 2002 Annual Report Download - page 34

28
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.
As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most
critical to aid in fully understanding and evaluating our reported financial results are 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 fees based on a percentage of the products sale price and fees from services rendered associated with the e-commerce services
provided to its clients. These services include Web commerce development and hosting, transaction processing, fraud screening, digital delivery,
integration to physical fulfillment, merchandising services, analytical marketing and customer service. The Company reports its revenue on a net
basis and therefore records only the net service fees and transaction 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, which obligate the Company to pay to the client a
specified percentage of each sale. The Company retains its transaction fee and also charges fees for services rendered. The Company also
derives revenue from integration, development and consulting services. Signed contracts are obtained from clients prior to recognition of these
revenues. Fees for 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 rendering the service, even if non-refundable, are recorded as deferred revenue until
earned. 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,
future margins may be negatively affected.
Allowance for Doubtful 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 credit card chargebacks and product returns related to current period revenue by
analyzing the timing of historical credit card chargebacks and applying anticipated percentages to current period revenues. Similarly,
management must make estimates of the uncollectability of our billed accounts receivable. Management specifically analyzes accounts
receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. Significant management judgments and estimates must be made and used in
connection with the allowance in any accounting period. Material differences may result in the amount and timing of our revenue for any period
if management makes different judgments or utilizes different estimates.
Goodwill, Intangibles And Other Long-Lived Assets. The Company amortizes property, plant and equipment, certain intangibles and certain
other long-lived assets with definite lives over their useful lives. Useful lives are based on management’ s estimates of the period that the assets
will generate revenue. Intangible assets with definitive lives are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company’ s evaluation considers nonfinancial data such as changes in the
operating environment and business strategy, competitive information, market trends and operating performance.
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and
Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment. For acquisitions consummated by the Company subsequent to July
1, 2001, the Company adopted the provisions of SFAS No. 142 effective July 1, 2001. The Company has adopted the full provisions of SFAS
No. 142 effective January 1, 2002. Upon adoption of SFAS No. 142, the Company discontinued the amortization of goodwill.
The Company has assessed in 2002 whether or not there was a goodwill impairment using a two-step approach based on reportable segments
and reassessed any intangible assets, including goodwill, recorded in connection with earlier acquisitions. The Company’ s assessment has
indicated that there is no impairment of goodwill or other intangibles for the year ended December 31, 2002.