Netgear 2010 Annual Report Download - page 66

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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 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 October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2009-13,
“Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). The guidance eliminates the residual method of revenue recognition and allows
the use of management’s best estimate of selling price for individual elements of an arrangement when vendor-specific objective evidence
(“VSOE”) or third-party evidence (“TPE”) is unavailable. Concurrently to issuing ASU 2009-13, the FASB also issued ASU No. 2009-14,
“Certain Revenue Arrangements That Include Software Elements”. ASU 2009-14 excludes software that is contained on a tangible product from
the scope of software revenue guidance if the software is essential to the tangible product’s functionality. The Company elected to early adopt
these standards at the beginning of its first quarter of fiscal year 2010 on a prospective basis for applicable transactions originating or materially
modified after January 1, 2010.
The Company has an insignificant amount of product offerings with multiple elements. The Company’s multiple-
element product offerings
include networking hardware with embedded software, various software subscription services, and support, which are considered separate units
of accounting. In general, the networking hardware with embedded software is delivered up front, while the subscription services and support are
delivered over the subscription and support period. The Company allocates revenue to the software deliverables and the non-software
deliverables (including software deliverables which function together with hardware deliverables to provide the product’
s essential functionality)
based upon their relative selling price. Revenue allocated to each unit of accounting is then recognized when 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.
When applying the relative selling price method, the Company determines the selling price for each deliverable using its best estimate of
selling price (“ESP”), as the Company has determined it is unable to establish VSOE of selling price or TPE of selling price for the deliverables.
The objective of ESP is to determine the price at which the Company would transact a sale if the deliverable were sold on a stand-alone basis.
The Company determines ESP for a deliverable by considering multiple factors including, but not limited to, market conditions, competitive
landscape, internal costs, gross margin objectives and pricing practices. The determination of ESP is made through consultation with and formal
approval by the Company’s management, taking into consideration the go-to-market strategy.
The adoption of the new revenue recognition accounting standards did not have a material impact on the Company’
s consolidated financial
position, results of operations, or cash flows for the year ended December 31, 2010. The new accounting standards for revenue recognition if
applied in the same manner to the year ended December 31, 2009 and 2008 would not have had a material impact on total net revenues for those
fiscal years.
Certain distributors and retailers generally have the right to return product for stock rotation purposes. 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,
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