Netgear 2011 Annual Report Download - page 71

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Table of Contents
estimate of selling price (“ESP”), as the Company has determined it is unable to establish TPE of selling price for the deliverables. In
determining VSOE, the Company requires that a substantial majority of the selling prices for a deliverable sold on a stand-alone basis fall within
a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical stand-alone transactions falling within + 15%
of the median price. 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 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 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, 2011 and 2010. The new accounting standards for revenue
recognition if applied in the same manner to the year ended December 31, 2009 would not have had a material impact on total net revenues for
that fiscal year.
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, 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 the authoritative guidance for
revenue recognition.
Sales incentives
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
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 $13.9 million, $11.4 million and $11.0 million in the years ended December 31, 2011, 2010
and 2009 respectively.
Research and development
Costs incurred in the research and development of new products are charged to expense as incurred.
Technology license arrangements
The Company expenses the licensing of software technologies intended to be integrated into certain future products if those products have
not yet reached technological feasibility and the licensed software does not have alternative future use.
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