Support.com 2011 Annual Report Download - page 26

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In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we make
assumptions, judgments and estimates that can have a significant impact on our revenue and operating results, as well as on the value of certain assets
and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors
that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or
conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions,
judgments and estimates involved in the accounting for revenue recognition, fair value measurements, business combinations, purchase accounting,
accounting for goodwill and other intangible assets, stock-based compensation and accounting for income taxes have the greatest potential impact on
our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates
associated with these policies. For further information on the critical accounting policies, see Note 1 of our Notes to Consolidated Financial
Statements.
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Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations, and
revenue recognition is based on complex rules which require us to make judgments. In applying our revenue recognition policy we must determine
whether revenue is to be recognized on a gross or net basis in accordance with the provisions of ASC 605, , which portions of
our revenue are to be recognized in the current period, and which portions must be deferred and recognized in subsequent periods. We also recognize
services breakage on non-subscription deferred revenue balances, and we use judgment in evaluating the historical redemption patterns used to
estimate the amount of such revenue to be recognized. We do not record revenue on sales transactions when the collection of cash is in doubt at the
time of sale, and we use management judgment in determining collectability. From time to time, we may enter into agreements which involve us
making payments to our channel partners. We use judgment in evaluating the treatment of such payments and in determining which portions of the
consideration paid to customers should be recorded as contra-revenue and which should be recorded as an expense. We generally provide a refund
period on services and software, and we employ judgment in determining whether a customer is eligible for a refund based on that customer’s specific
facts and circumstances. If our estimates and judgments on any of the foregoing are incorrect, our revenue for one or more periods may be incorrectly
recorded. Please see Note 1 in Notes to Consolidated Financial Statements for further discussion of our revenue recognition policies.
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ASC 820,  defines fair value, establishes a framework for measuring fair value under generally
accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs
and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are
considered observable and the last unobservable, that may be used to measure fair value, which are the following:
• Level 1 - Quoted prices in active markets for identical assets or liabilities. Therefore, determining fair value for Level 1 instruments
generally does not require significant management judgment, and the estimation is not difficult.
• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.
Our Level 2 securities are priced using quoted market prices for similar instruments, nonbinding market prices that are corroborated by
observable market data, or discounted cash flow techniques. Marketable securities, measured at fair value using Level 2 inputs, are primarily
comprised of commercial paper, corporate bonds, corporate notes and U.S. government agencies securities. We review trading activity and pricing for
these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other
observable market inputs for similar securities obtained from various third party data providers. These inputs either represent quoted prices for similar
assets in active markets or have been derived from observable market data. There were no transfers between Level 1 and Level 2 measurements
during the year of 2011.
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