Stamps.com 2008 Annual Report Download - page 31

judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our financial statements.
Revenue Recognition
We recognize revenue from product sales or services rendered, as well as from licensing the use of our software and
intellectual property, 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.
Our service revenue is based on monthly convenience fees and is recognized in the period that services are provided. Product
sales, net of return allowances, are recorded when the products are shipped and title passes to customers. Sales of items,
including PhotoStamps, 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 for expected product returns, which reduce product revenue, are estimated
using historical experience. We recognize licensing revenue ratably over the contract period. Commissions from the advertising
or sale of products by a third party vendor to our customer base are recognized when the revenue is earned and collection is
deemed probable. We recognize revenue on insurance purchases upon the ship date of the insured package.
Intangibles
We make an assessment of the estimated useful lives of our patents and other amortizable intangibles. These estimates are
made using various assumptions that are subjective in nature and could change as economic and competitive conditions change.
If events were to occur that would cause our assumptions to change, the amounts recorded as amortization would be adjusted.
Contingencies and Litigation
We are involved in various litigation matters as a claimant and as a defendant. We record any amounts recovered in these
matters when collection is certain. We record liabilities for claims against us when the losses are probable and estimable. Any
amounts recorded would be based on reviews by outside counsel, in-house counsel and management. Actual results may differ
from estimates.
Promotional Expense
New PC Postage customers are typically offered promotional items that are redeemed using coupons that are qualified for
redemption after a customer is successfully billed beyond an initial trial period. This includes free postage and a free digital scale
and is expensed in the period in which a customer qualifies using estimated redemption rates based on historical data.
Promotional expense, which is included in cost of service, is incurred as customers qualify and thereby may not correlate directly
with changes in revenue, as the revenue associated with the acquired customer is earned over the customer's lifetime.
Recent Accounting Pronouncements
In December 2007, the FASB issued Financial Statement Position No. 141 (revised 2007), “Business Combinations” (FSP
SFAS 141(R)). The fundamental requirements of using the acquisition method of
30
TABLE OF CONTENTS
accounting (which SFAS 141 called the purchase method) for all business combinations, identifying an acquirer for each
business combination, and identifying and recognizing intangible assets separately from goodwill remain unchanged by the
standard. The new requirements of the standard include: recognizing assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values as of that date; recognizing the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree in a step acquisition at the full amounts of their fair values;
recognizing acquisition-related and restructuring costs separately from the acquisition itself; and recognizing a gain by the
acquirer when total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration
transferred plus any noncontrolling interest in the acquiree. SFAS 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008. SFAS 141(R) is effective for the Company for transactions consummated during annual periods beginning after December
15, 2008. Earlier adoption is prohibited. SFAS 141 (R) also amends FASB Statement No. 109, “Accounting for Income