Stamps.com 2010 Annual Report Download - page 67

TABLE OF CONTENTS
STAMPS.COM INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies – (continued)
have meaningful historical data upon which to base estimates for gift cards that will never be redeemed (“breakage”), we have
not recorded any breakage income related to our gift card program.
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 postage for PhotoStamps, image review, printing and fulfillment costs for PhotoStamps,
parcel insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of
shipping and handling.
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. We account for our promotional expense in
accordance with Accounting Standard Codification (“ASC”) 605-50-25, “Recognition — Vendor’s Accounting for
Consideration Given to a Customer”, by recognizing a liability for promotional expense based on estimated amounts that will be
claimed by customers unless the liability for promotional expense cannot be reasonable and reliably estimated. 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.
Research and Development Costs
Research and development costs are expensed as incurred. These costs primarily consist of compensation for personnel
involved in the development of our services, depreciation of equipment and software and expenditures for consulting services
and third party software.
Sales and Marketing
Sales and marketing expense primarily consist of discretionary spending to acquire new customers and compensation and
related expenses for personnel engaged in marketing and business development activities.
Advertising Costs
We expense the costs of producing advertisements as incurred, and expense the costs of communicating and placing the
advertising in the period in which the advertising space or airtime is used. For the years ended December 31, 2010, 2009 and
2008, advertising and tradeshow costs were $5.5 million, $4.7 million and $4.3 million, respectively.
Internet Advertising
We recognize Internet advertising expense based on the specifics of the individual agreements. Under partner and affiliate
agreements, third parties refer prospects to our web site and we pay the third parties when the customer completes the customer
registration process, completes the first purchase or in some cases, upon the first successful billing of a customer. We record
these expenses on a monthly basis as prospects are successfully converted to customers.
General and Administrative
General and administrative expense principally consists of compensation and related costs for executive and administrative
personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate
purposes and amortization of intangible assets.
Income Taxes
We account for income taxes in accordance with FASB ASC Topic No. 740, Income Taxes (“ASC 740”), which requires
that deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the
book and tax basis of recorded assets and liabilities. ASC 740 also requires
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