Digital River 2006 Annual Report Download - page 41

clients, which obligate us to pay to the client a specified percentage of each sale. We derive our revenue
primarily from transaction fees based on a percentage of the products sale price and fees from services
rendered associated with the e-commerce and other services provided to our clients and end customers.
Our revenue is recorded as net as generally our clients are subject to inventory risks and control
customers’ product choices. Clients do not have the right to take possession of the software applications
used in the delivery of services.
We also provide customers with various proprietary software backup services. We recognize revenue for
these backup services upon delivery or based upon historical usage within the contract period of the
digital backup services when this information is available. Digital backup services are recognized
straight-line over the life of the backup service when historical usage information is unavailable. Shipping
revenues are recorded net of any associated costs.
We also, to a lesser extent, provide fee-based client services, which include website design, custom
development and integration, analytical marketing and email marketing services. If we receive payments
for fee-based services in advance of delivery, these amounts are deferred and recognized over the service
period.
Provisions for doubtful accounts and transaction losses and authorized credits are made at the time of
revenue recognition based upon our historical experience. The provision for doubtful accounts and
transaction losses are recorded as charges to operating expense, while the provision for authorized credits
is recognized as a reduction of net revenues.
Allowance for Doubtful Accounts. We must make estimates and assumptions that can affect the
amount of assets and liabilities and the amounts of revenues and expenses we report in any financial
reporting period. We use estimates in determining our allowance for doubtful accounts, which are based
on our historical experience and current trends. We must estimate the collectability of our billed accounts
receivable. We analyze accounts receivable and consider our historical bad debt experience, customer
credit-worthiness, current economic trends and changes in our customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. We must make significant judgments and estimates
in connection with the allowance in any accounting period. There may be material differences in our
operating results for any period if we change our estimates or if the estimates are not accurate. Credit
Card Chargeback Reserve. We use estimates based on historical experience and current trends to
determine accrued chargeback expenses. Significant management judgments are used and estimates made
in connection with the accrued expenses in any accounting period. There may be material differences in
our operating results for any period if we change our estimates or if the estimates are not accurate.
Goodwill, Intangibles and Other Long-Lived Assets. We depreciate property, plant and equipment;
amortize certain intangibles and certain other long-lived assets with definite lives over their useful lives.
Useful lives are based on our estimates of the period of time over which the assets will generate revenue
or benefit our business. We review assets with definite lives for impairment whenever events or changes
in circumstances indicate that the value we are carrying on our financial statements for an asset may not
be recoverable. Our evaluation considers non-financial data such as changes in the operating environment
and business strategy, competitive information, market trends and operating performance. If there are
indications that impairment may be necessary, we use an undiscounted cash flow analysis to determine
the impairment amount, if any. Assets with indefinite lives are reviewed for impairment annually (or more
frequently if there are indications that an impairment may be necessary) utilizing the two-step approach
prescribed in Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other
Intangible Assets.” There have been no impairments of goodwill and other intangible assets for the years
2006, 2005 and 2004.
Income Taxes and Deferred Taxes. Deferred income taxes reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. We record deferred tax assets for favorable tax attributes,
including tax loss carryforwards. We currently have significant U.S. tax loss carryforwards resulting from
the tax deduction for exercise of stock options and acquired operating tax loss carryforwards, and a lesser
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