Vistaprint 2015 Annual Report Download - page 40

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million of incremental interest expense primarily due to our increased borrowing levels under our credit facility and
the issuance of our senior unsecured notes in March 2015. We also recognized significant gains from currency
movements in fiscal 2015, as compared to losses in fiscal 2014, principally as a result of changes in the fair value of
our derivative instruments for which we have not elected hedge accounting and currency gains on non-functional
currency activity, principally from intercompany transactional and financing relationships. During fiscal 2014 we
recognized a $12.7 million loss on the sale of our investment in Namex Limited that did not occur in fiscal 2015.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles
(“GAAP”). To apply these principles, we must make estimates and judgments that affect our reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In some
instances, we reasonably could have used different accounting estimates and, in other instances, changes in the
accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ
significantly from our estimates. We base our estimates and judgments on historical experience and other
assumptions that we believe to be reasonable at the time under the circumstances, and we evaluate these
estimates and judgments on an ongoing basis. We refer to accounting estimates and judgments of this type as
critical accounting policies and estimates, which we discuss further below. This section should be read in
conjunction with Note 2, "Summary of Significant Accounting Policies," of our audited consolidated financial
statements included elsewhere in this Report.
Revenue Recognition. We generate revenue primarily from the sale and shipping of customized
manufactured products, as well as providing digital services, website design and hosting, email marketing services,
and order referral fees. We recognize revenue arising from sales of products and services, net of discounts and
applicable indirect taxes, when it is realized or realizable and earned. We consider revenue realized or realizable
and earned when there is persuasive evidence of an arrangement, a product has been shipped or service rendered
with no significant post-delivery obligation on our part, the net sales price is fixed or determinable and collection is
reasonably assured. For arrangements with multiple deliverables, we allocate revenue to each deliverable based on
the relative selling price for each deliverable. We determine the relative selling price using a hierarchy of (1)
company specific objective and reliable evidence, then (2) third-party evidence, then (3) best estimate of selling
price. Shipping, handling and processing charges billed to customers are included in revenue at the time of
shipment or rendering of service. Revenues from sales of prepaid orders on our websites are deferred until
shipment of fulfilled orders or until the prepaid service has been rendered.
For promotions through discount voucher websites, we recognize revenue on a gross basis, as we are the
primary obligor, when redeemed items are shipped. As the vouchers do not expire, any unredeemed vouchers are
recorded as deferred revenue. We recognize revenue on the portion of unredeemed vouchers when the likelihood
of redemption becomes remote (referred to as "breakage") and we determine there is no legal obligation to remit the
value of the unredeemed coupons to government agencies. We estimate the breakage rate based upon the pattern
of historical redemptions. Prior to the fourth quarter of fiscal 2015, we did not have sufficient historical redemption
data to reasonably estimate breakage and, therefore, did not recognize any breakage revenue. During the fourth
quarter of fiscal 2015, we concluded that we have now accumulated sufficient historical data from a large pool of
homogeneous transactions to allow us to reasonably and objectively determine a pattern of historical redemptions
in accordance with our accounting policy. Accordingly, we recognized $4.0 million of breakage revenue during the
quarter as a result of this change in estimate. We will apply this approach prospectively for future unredeemed
voucher activity.
A reserve for estimated sales returns and allowances is recorded as a reduction of revenue, based on
historical experience or specific identification of an event necessitating a reserve. This reserve is dependent upon
customer return practices and will vary during the year due to volume or specific reserve requirements. Sales
returns have not historically been significant to our net revenue and have been within our estimates.
Share-Based Compensation. We measure share-based compensation costs at fair value, including
estimated forfeitures, and recognize the expense over the period that the recipient is required to provide service in
exchange for the award, which generally is the vesting period. We use the Black-Scholes option pricing model to
measure the fair value of most of our share options and use a lattice model to measure the fair value of share
options with a market condition, as well as the subsidiary share option liability award granted in conjunction with the
Pixartprinting acquisition. The Black-Scholes model requires significant estimates related to the award’s expected