TiVo 2005 Annual Report Download - page 47

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Table of Contents
Critical Accounting Estimates
Critical accounting estimates are those that reflect significant judgments and uncertainties, and may potentially result in materially different results
under different assumptions and conditions. We base our discussion and analysis on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles as described in Item 8. Note 1. "Nature of Operations" in the notes to our consolidated
financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets,
liabilities, revenue, and expenses and related disclosure of contingent assets and liabilities. On an ongoing 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 general sale for the life of the DVR for
a one-time, upfront payment. We have announced our intention to eliminate the product lifetime service option. 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, 2006, 100,000 product
lifetime subscriptions had exceeded the four-year period we use to recognize product lifetime subscription revenues and had made contact with the TiVo
service within the prior six month period. This represents approximately 13.3% of our cumulative lifetime subscriptions as compared to 11.4% for the fiscal
year ended January 31, 2005. If we determine at a later date that the useful life of a TiVo-enabled DVR is shorter or longer than four-years, we would
recognize revenues from this source over a shorter or longer period. Our product is still relatively new, and as we gather more user information, we may revise
this estimated life.
Engineering Services Project Cost Estimates. For engineering 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 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 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 services contracts that were expected to
be losses at the time of acceptance. 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 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.
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