Netgear 2006 Annual Report Download - page 53

Table of Contents
NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
failures. The estimated cost associated with fulfilling the Company’s warranty obligation to end-users is recorded in
cost of revenue. Because the Company’s products are manufactured by contract manufacturers, in certain cases the
Company has recourse to the contract manufacturer for replacement or credit for the defective products. The
Company gives consideration to amounts recoverable from its contract manufacturers in determining its warranty
liability. Changes in the Company’s warranty liability, which is included as a component of “Other accrued
liabilities” in the consolidated balance sheets, are as follows (in thousands):
Revenue recognition
Revenue from product sales is recognized at the time the product is shipped provided that persuasive evidence of
an arrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable
and collection of the related receivable is reasonably assured. Currently, for some of the Company’s customers, title
passes to the customer upon delivery to the port or country of destination, upon their receipt of the product, or upon
the customer’s resale of the product. At the end of each fiscal quarter, the Company estimates and defers revenue
related to product where title has not transferred. The revenue continues to be deferred until such time that title
passes to the customer.
In addition to warranty-
related returns, certain distributors and retailers generally have the right to return product
for stock rotation purposes. Every quarter, stock rotation rights are generally limited to 10% of invoiced sales to the
distributor or retailer in the prior quarter. Upon shipment of the product, the Company reduces revenue for an
estimate of potential future product warranty and stock rotation returns related to the current period product revenue.
Management analyzes historical returns, channel inventory levels, current economic trends and changes in customer
demand for the Company’s products when evaluating the adequacy of the allowance for sales returns, namely
warranty and stock rotation returns. Revenue on shipments is also reduced for estimated price protection and sales
incentives deemed to be contra-revenue under Emerging Issues Task Force (“EITF”) Issue No. 01-9.
Sales incentives
Sales incentives provided to customers are accounted for in accordance with EITF Issue No. 01-9, “Accounting
for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products”. Under these guidelines,
the Company accrues for sales incentives as a marketing expense if it receives an identifiable benefit in exchange and
can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is recorded as a reduction to
revenues. As a consequence, the Company records a substantial portion of its channel marketing costs as a reduction
of revenue.
The Company records estimated reductions to revenues for sales incentives at the later of when the related
revenue is recognized or when the program is offered to the customer or end consumer.
Shipping and handling fees and costs
In September 2000, the EITF issued EITF Issue No. 00-10, “Accounting for Shipping and Handling Fees and
Costs.” EITF Issue No. 00-10 requires shipping and handling fees billed to customers to be classified as revenue and
shipping and handling costs to be either classified as cost of revenue or disclosed in the notes to the consolidated
financial statements. The Company includes shipping and handling fees billed to customers in net revenue.
49
Year Ended
December 31,
2005 2006
Balance as of beginning of year
$
10,766
$
11,845
Provision for warranty liability made during the year
25,087
45,459
Settlements made during the year
(24,008
)
(36,005
)
Balance at end of year
$
11,845
$
21,299