Netgear 2008 Annual Report Download - page 61

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Table of Contents
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. The Company assesses collectability based on a number of factors, including general economic and market conditions,
past transaction history with the customer, and the creditworthiness of the customer. If the Company determines that collection of the fee is not
reasonably assured, then the Company defers the fee and recognizes revenue upon receipt of payment.
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 Consolidated Financial Statements. The Company includes shipping and handling fees billed to
customers in net revenue. Shipping and handling costs associated with inbound freight are included in cost of revenue. In cases where the
Company gives a freight allowance to the customer for their own inbound freight costs, such costs are appropriately recorded as a reduction in
net revenue. Shipping and handling costs associated with outbound freight are included in sales and marketing expenses and totaled
$12.5 million, $11.6 million and $8.3 million in the years ended December 31, 2008, 2007 and 2006 respectively.
Research and development
Costs incurred in the research and development of new products are charged to expense as incurred.
Advertising costs
Advertising costs are expensed as incurred. Total advertising and promotional expenses were $17.0 million, $17.4 million and $15.3
million in the years ended December 31, 2008, 2007 and 2006, respectively.
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