TiVo 2004 Annual Report Download - page 26

Table of Contents
Index to Financial Statements
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on other
assumptions that we believe to be reasonable under the circumstances. The results of this analysis form the basis for our judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions
or conditions. For a detailed discussion on the application of these and other accounting estimates, see Item 8. Note 2. "Summary of Significant Accounting
Policies" in the notes to our consolidated financial statements.
Recognition Period for Lifetime Subscriptions Revenues. TiVo offers a product lifetime subscription option for the life of the DVR for a one-time,
upfront payment. We recognize subscription revenues from lifetime subscriptions ratably over a four-year period, based on our estimate of the useful life of
these DVRs. As of January 31, 2005, we had 65,000 product lifetime subscriptions, or 2.2% of our total installed subscription base, that had exceeded the
four-year period we use to recognize product lifetime subscription revenues. If the useful life of the recorder were shorter or longer than four-years, we would
recognize revenues earlier or later. Our product is still relatively new, and as we gather more user information, we might revise this estimated life.
Engineering Professional Services Project Cost Estimates. For engineering professional services that are essential to the functionality of the software
or involve significant customization or modification, we recognize revenues using the percentage-of-completion method, as described in Statement of Position
(SOP) 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." We recognize revenue by measuring progress
toward completion based on the ratio of costs incurred to total estimated costs of the project, an input method. In general, these contracts are long-term and
complex. We believe we are able to make reasonably dependable estimates based on historical experience and various other assumptions that we believe to be
reasonable under the circumstances. These estimates include forecasting of costs and schedules, estimating contract revenue related to contract performance,
projecting cost to complete, tracking progress of costs incurred to date, and projecting the remaining effort to complete the project. Costs included in
engineering professional services are labor, materials, and overhead related to the specific activities that are required for the project. Costs related to general
infrastructure or platform development are not included in the engineering professional services project cost estimates. These estimates are assessed
continually during the term of the contract and revisions are reflected when the conditions become known. In some cases, we have accepted engineering
professional services contracts that were expected to be losses at the time of acceptance in order to gain experience in developing a new technology that could
be used in future products and services. Provisions for all losses on contracts are recorded when estimates determine that a loss will be incurred on a contract.
Using different cost estimates, or different methods of measuring progress to completion, engineering professional services revenues and expenses may
produce materially different results. A favorable change in estimates in a period could result in additional revenue and profit, and an unfavorable change in
estimates could result in a reduction of revenue and profit or the recording of a loss that would be borne solely by TiVo.
Consumer Rebate Redemption Rates. In accordance with Emerging Issues Task Force (EITF) 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendors Products)," we record an estimated potential liability for our consumer rebate program that is
based on the percentage of customers that were reimbursed for the rebate for similar past programs and adjust estimates to consider actual redemptions. The
most recent programs have ranged from 57% to 71% averaging 62%. As of January 31, 2005, we recorded an accrual of $16.4 million for rebates. Based on
our results for fiscal year 2005, a one-percentage point deviation in our redemption rebate estimate would have resulted in an increase or decrease in expense
of $529,000. Upon completion of consumer rebate programs, any unredeemed consumer rebate expense will be reversed. The consumer rebates are
recognized as "rebates, revenue share, and other payments to channel" in our consolidated financial statements.
Valuation of Inventory. We maintain a finished goods inventory of TiVo-enabled DVRs throughout the year. We value inventory at the lower of cost
or net realizable value with cost determined on the first-in, first-out method. We base write-downs to inventories on changes in selling price of a completed
unit. Estimates are based upon current facts and circumstances and are determined in aggregate and evaluated on total pool basis. We continually monitor
inventory valuation and purchase commitments for potential losses in net realizable value.
Estimates Used in Complex Agreements. We have a number of complex transactions and commitments. Many of these transactions involve multiple
elements and types of consideration, including cash, debt, equity, and services. For example, our relationship with DIRECTV has historically included
subscription revenue share expense, engineering professional services revenue, common stock and warrants issued for services, and various platform
subsidies. Many of our arrangements require us to make estimations for the valuation of non-cash expenses, such as warrants issued for services, which must
be assigned a value using financial models that require us to estimate certain parameters. We have utilized our best estimate of the value of the various
elements in accounting for these transactions. Had alternative assumptions been used, the values obtained may have been materially different.
Recent Accounting Pronouncements
In June 2004, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force Issue No. 03-1 (EITF 03-1), The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 includes new guidance
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