Stamps.com 2004 Annual Report Download - page 43

F-8
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS (continued)
SFAS No. 142 requires that goodwill and other intangibles be tested for impairment using a two-step
process. The first step is to determine the fair value of the reporting unit, which may be calculated using a
discounted cash flow methodology, and compare this value to its carrying value. If the fair value exceeds the
carrying value, no further work is required and no impairment loss would be recognized. The second step is an
allocation of the fair value of the reporting unit to all of the reporting unit’ s assets and liabilities under a hypothetical
purchase price allocation. Based on the evaluation performed by the Company, there is no impairment to be
recorded at December 31, 2004.
Revenue Recognition
The Company recognizes revenue from product sales or services rendered when the following four revenue
recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have
been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured.
Service revenue is based on monthly convenience fees. Service revenue is recognized in the period that
services are provided. Product sales, including shipping and handling, net of return allowances, are recorded when
the products are shipped and title passes to customers. Retail items, including PhotoStamps, sold to customers are
made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the
carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are
estimated using historical experience. Commissions from the advertising or sale of products by a third party vendor
to the Company’ s customer base are recognized as revenue is earned and collection is deemed probable.
Customers who purchase postage for use through the Company’ s NetStamps™, shipping label or
traditional postage features, pay face value, and the funds are transferred directly from the customers to the US
Postal Service. As this postage is purchased directly from the US Postal Service, no revenue is recognized.
PhotoStamps revenue recognized during the Company’ s market test included the cost of postage and was
made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the
carrier.
On a limited basis, the Company allows third parties to offer products and promotions to the Stamps.com
customer base. These arrangements generally provide payment in the form of a flat fee or revenue sharing
arrangements where the Company receives payment upon customers accessing third party products and services.
Total revenue from such advertising arrangements is currently immaterial.
The Company provides its customers the opportunity to purchase parcel insurance directly through the
Stamps.com software. The insurance information is communicated directly to Parcel Insurance Plan for processing
and the insurance is underwritten by Fireman’ s Fund. The Company recognizes revenue from the insurance
offerings based on the shipment date of the item insured.
In 2004, the Company entered into a licensing agreement for the use of its software and intellectual
property. Licensing revenues are recognized when the following four revenue recognition criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility is reasonably assured.
Cost of Revenue
Cost of revenue principally consists of the cost of customer service, certain promotional expenses, system
operating costs, credit card processing fees, the cost of consumables, the cost of postage for PhotoStamps, printing
and fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through
our online store and the related costs of shipping and handling.