Netgear 2009 Annual Report Download - page 38

Table of Contents
Revenue Recognition
Revenue from product sales is generally 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 our 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, we estimate and defer revenue related
to product where title has not transferred. The revenue continues to be deferred until such time that title passes to the customer. We assess
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 we determine that collection of the corresponding receivable is not reasonably assured, then we defer the
revenue until receipt of payment.
Allowances for Product Warranties, Returns due to Stock Rotation, Sales Incentives and Doubtful Accounts
Our standard warranty obligation to our direct customers generally provides for a right of return of any product for a full refund in the
event that such product is not merchantable or is found to be damaged or defective. At the time revenue is recognized, an estimate of future
warranty returns is recorded to reduce revenue in the amount of the expected credit or refund to be provided to our direct customers. At the time
we record the reduction to revenue related to warranty returns, we include within cost of revenue a write-down to reduce the carrying value of
such products to net realizable value. Our standard warranty obligation to end-users provides for replacement of a defective product for one or
more years. Factors that affect the warranty obligation include product failure rates, material usage, and service delivery costs incurred in
correcting product failures. The estimated cost associated with fulfilling the warranty obligation to end-users is recorded in cost of revenue.
Because our products are manufactured by third party manufacturers, in certain cases we have recourse to the third party manufacturer for
replacement or credit for the defective products. We give consideration to amounts recoverable from our third party manufacturers in
determining our warranty liability. Our estimated allowances for product warranties can vary from actual results and we may have to record
additional revenue reductions or charges to cost of revenue which could materially impact our financial position and results of operations.
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, we reduce revenue for an estimate of potential future stock rotation returns related to the current period product
revenue. We analyze historical returns, channel inventory levels, current economic trends and changes in customer demand for our products
when evaluating the adequacy of the allowance for sales returns, namely stock rotation returns. Our estimated allowances for returns due to stock
rotation can vary from actual results and we may have to record additional revenue reductions which could materially impact our financial
position and results of operations.
We accrue for sales incentives as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair
value of the identifiable benefit received; otherwise, it is recorded as a reduction of revenues. Our estimated provisions for sales incentives can
vary from actual results and we may have to record additional expenses or additional revenue reductions dependent on the classification of the
sales incentive.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. We regularly perform credit evaluations of our customers’ financial condition and consider factors such as historical experience,
credit quality, age of the accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a
customer’s ability to pay. The allowance for doubtful accounts is reviewed monthly and adjusted if necessary based on our assessments of our
customers’ ability to pay. If the financial condition of our customers should deteriorate or if actual defaults are higher than our historical
experience, additional allowances may be required, which could have an adverse impact on operating expenses.
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