Shutterfly 2013 Annual Report Download - page 78

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Intellectual Property Prepaid Royalties
The Company has patent license agreements with various third parties. The Company has accounted
for these agreements as prepaid royalties that are amortized over the remaining life of the patents.
Amortization expense is recorded on a straight-line basis as a component of cost of revenue. The current
portion of the prepaid royalty is recorded as a component of prepaid expenses and the long term portion is
recorded in other assets.
Lease Obligations
The Company categorizes leases at their inception as either operating or capital leases. On certain of
our lease agreements, the Company may receive rent holidays and other incentives. The Company
recognizes lease costs on a straight-line basis without regard to deferred payment terms, such as rent
holidays that defer the commencement date of required payments. Additionally, incentives the Company
receives are treated as a reduction of our costs over the term of the agreement.
The Company establishes assets and liabilities for the estimated construction costs incurred under
build-to-suit lease arrangements to the extent the Company is involved in the construction of structural
improvements or takes construction risk prior to commencement of a lease. Upon occupancy of facilities
under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition
under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, the
facilities are accounted for as financing leases.
Revenue Recognition
The Company recognizes revenue from Consumer and Enterprise product sales, net of applicable
sales tax, upon shipment of fulfilled orders, when persuasive evidence of an arrangement exists, the selling
price is fixed or determinable and collection of resulting receivables is reasonably assured. Customers place
Consumer product orders through the Company’s websites and pay primarily using credit cards. Enterprise
customers are invoiced upon fulfillment. Shipping charged to customers is recognized as revenue at the
time of shipment.
For camera, lenses, and video equipment rentals from our BorrowLenses brand, we recognize rental
revenue and the related shipping and insurance revenue, ratably over the rental period. Revenue from the
sale of rental equipment is recognized upon shipment of the equipment.
For gift card sales and flash deal promotions through group buying websites, the Company recognizes
revenue on a gross basis, as it is the primary obligor, when redeemed items are shipped. Revenues from
sales of prepaid orders on its websites are deferred until shipment of fulfilled orders or until the prepaid
period expires. The Company’s share of revenue generated from its print to retail relationships, is
recognized when orders are picked up by its customers at the respective retailer.
The Company provides its customers with a 100% satisfaction guarantee whereby products can be
returned within a 30-day period for a reprint or refund. The Company maintains an allowance for
estimated future returns based on historical data. The provision for estimated returns is included in
accrued expenses.
The Company periodically provides incentive offers to its customers in exchange for setting up an
account and to encourage purchases. Such offers include free products and percentage discounts on
current purchases. Discounts, when accepted by customers, are treated as a reduction to the purchase price
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