Incredimail 2008 Annual Report Download - page 29

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from this program. See “Israeli Taxation–Law for the Encouragement of Capital Investments, 1959” and Item 8. Financial Information A.
Consolidated Statements and Other Financial Information – Policy on Dividend Distribution, for more information about these programs and the
Company’s dividend policy.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operation are based on our financial statements, which have been
prepared in conformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these
estimates on an on-going basis. We base our estimates on our historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions. Under U.S. GAAP, when more than one accounting method or policy or its application is generally accepted, our management selects
the accounting method or policy that it believes to be most appropriate in the specific circumstances. Our management considers some of these
accounting policies to be critical.
A critical accounting policy is an accounting policy that management believes is both most important to the portrayal of our financial
condition and results and requires management’s most difficult subjective or complex judgment, often as a result of the need to make accounting
estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are discussed in Note 2 to our
financial statements, we believe the following accounting policies to be critical:
Revenue recognition
Revenues from email software license sales are recognized when all criteria outlined in Statement of Position (“SOP”) 97-2, “Software
Revenue Recognition” (as amended), are met. Revenues from software license are recognized when persuasive evidence of an agreement exists,
delivery of the product has occurred, the fee is fixed or determinable and collectability is probable.
For substantially all of our software arrangements, we evaluate each of these criteria as follows:
Evidence of an arrangement : We consider a clicking on “acceptance” of the agreement terms to be evidence of an arrangement.
Delivery
: Delivery is considered to occur when the license key is sent via email to the customer or alternatively the customer is given access
to download the licensed key.
Fixed or determinable fee : Fees are determinable at the time of sale. Customers are charged immediately through credit cards. In addition,
the fees are subject to a refund policy period, currently up to 30 days, and we consider collection to be probable as our historical experience shows
that refunds are less than 5% of our revenues.
Collection is probable : We are subject to a minimal amount of collection risk related to our customers as these are either from very
profitable global market leader or obtained through credit card sales.
Revenues from licensing The Gold Gallery
content database are recognized over the term of the licensing period. We offer one year, two year
and lifetime licenses for The Gold Gallery content database for a one-time, upfront payment. The different term licenses constituted less than 8%
of our revenues in 2008. Our estimation of the lifetime usage of The Gold Gallery
is based on historical data collected. We continually track usage
patterns, and as we gather more user information, we may update this estimated useful life. If the lifetime usage of The Gold Gallery is
demonstrated to be shorter or longer than the current estimate, we would recognize revenues earlier or later. Based on our current revenue streams,
such an adjustment would not have a significant effect on our revenues.
30
Revenues from our JunkFilter Plus solution are recognized over one year, which is the term of the license period.
Our deferred revenue consists of the unamortized balance of The Gold Gallery and the JunkFilter Plus license fees, which totaled $4.3
million as of December 31, 2008, of which $2.6 million was classified as short-term deferred revenues and the balance as long-term deferred
revenue on our balance sheet.
Revenues from advertising, whether from keyword search, advertising on our website or in our email client, are recognized when we are
entitled to receive the fee. Advertisers are charged and pay monthly, based on the number of clicks generated by users clicking on these ads.
In accordance with EITF No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product,”
the Company accounts for cash consideration given to customers, for which it does not receive a separately identifiable benefit or cannot