TiVo 2013 Annual Report Download - page 50

Table of Contents
launch. When we are reasonably assured that these upfront development costs are recoverable, we defer such cost and recognize them after
the launch of the solution. The assessment of recoverability is highly dependent on our estimates of engineering costs related to the project.
We also recognize revenues for certain software engineering services that are essential to the functionality of the software or involve
significant customization or modification using the percentage-of-completion method. We recognize revenue by measuring progress toward
completion based on the ratio of costs incurred, principally labor, to total estimated costs of the project, an input method. For these projects 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, tracking progress of costs incurred to
date, and projecting the remaining effort to complete the project. Costs included in project costs are labor, materials, and overhead related to
the specific activities that are required for the project. Costs related to general infrastructure or uncommitted platform development are not
included in the project cost estimates. These estimates are assessed continually during the term of the contract and revisions are reflected
when the conditions become known. Using different cost estimates, or different methods of measuring progress to completion, engineering
services revenues and expenses may produce materially different results or development costs may not be deemed recoverable. A favorable
change in estimates in a period could result in additional profit, and an unfavorable change in estimates could result in a reduction of profit or
the recording of a loss that would be borne solely by us including a write-off of development costs that were incurred in prior periods and
previously deferred because they were previously deemed recoverable. See also the discussions Part I. Item lA. Risk Factors under the
heading “Risks Related to Our Business - If we fail to properly estimate, manage, and perform the development and engineering services for
our television service provider customers, we could incur additional unexpected expenses and losses which could reduce or even eliminate
any profit from these deployment arrangements, in which case our business would be harmed.” For the fiscal year ended January 31, 2014,
the majority of our technology revenues (after excluding revenues from our licensing agreements with DISH, AT&T, Verizon, and
Motorola/Cisco) were related to Com Hem and Virgin (United Kingdom).
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We value inventory at the lower of cost or market with cost determined on the first-in, first-out method. We base write-downs of
inventories upon current facts and circumstances and determine net realizable value on an aggregate pool basis (DVR type). We perform a
detailed assessment of excess and obsolete inventory and purchase commitments at each balance sheet date, which includes a review of,
among other factors, demand requirements and market conditions. Based on this analysis, we record adjustments, when appropriate, to
reflect inventory of finished products and materials on hand at lower of cost or market and to reserve for products or materials which are not
forecasted to be used. We also record accruals for charges that represent management’s estimate of our exposure to the contract
manufacturer for excess non-cancelable purchase commitments. Although we make every effort to ensure the accuracy of our forecasts of
product demand and pricing assumptions, any significant unanticipated changes in demand, pricing, or technological developments would
significantly impact the value of our inventory and our reported operating results. If we find that our estimates are too optimistic and
determine that our inventory needs to be written down, we will be required to recognize such costs in our cost of revenue at the time of such
determination. Conversely, if we find our estimates are too pessimistic and/or circumstances beyond our control change and we
subsequently sell product that has previously been written down, our gross margin in the period of sale will be favorably impacted.
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We have goodwill in the amount of $12.3 million as of January 31, 2014, which represents the excess of the purchase price of our
acquisitions over the fair value of the identified net tangible and intangible assets. The goodwill recognized in these acquisitions was derived
from expected benefits from future technology, cost synergies and a knowledgeable and an experienced workforce who joined TiVo after these
acquisitions. Goodwill is not amortized, but is tested instead for impairment. The majority of goodwill is not expected to be tax deductible for
income tax purposes.
Goodwill is tested for impairment on an annual basis (on December 31) using a two-step model. The first step, identifying a potential
impairment, compares the fair value of the reporting unit with its carrying amount. Management has determined that the Company has one
reporting unit. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no
further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair
value of the goodwill with the carrying amount of that goodwill. Any excess of the goodwill carrying value over the respective implied fair
value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. In each period presented the fair
value of the reporting unit exceeded its carrying value, thus
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