Vonage 2008 Annual Report Download - page 49

t
hrough 2010,
$
495 for office space leased for our Mississauga,
Ontario office through 2010 and
$
174 for office space leased fo
r
our London, UK office throu
g
h 2010.
P
urchase obligations. At December 31
,
2008
,f
utur
e
commitments for purchase obligations in the above table repre
-
s
ent non-cance
l
a
bl
e contractua
l
o
blig
at
i
ons.
Th
ese
i
nc
l
u
de
$
60,000 in fees throu
g
h 2009 to a vendor that enables a custom
-
er’s call to connect to the
p
ublic switched tele
p
hone network;
$
8,160 in fees for local number portability throu
g
h 2011; $18,700
f
or inbound sales support throu
g
h 2010;
$
14,800 for a credit car
d
company to process our credit card transactions through 2012
;
$
19,507 for the purchase of customer equipment throu
g
h 2010
and $4,433 for providin
g
broadband internet access services to
our customers through 2011.
O
ther obli
g
ations.
A
t
D
ecem
b
er 31, 2008, we were o
blig
ate
d
t
o pay AT&T $28,600 throu
g
h 2012 for the settlement a
g
reement,
which required Vonage to pay AT&T
$
650 each month.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our si
g
nificant accountin
g
policies are summarized in Note
1
t
o our
f
inancial statements. The
f
ollowing describes our critical
account
i
n
g
po
li
c
i
es an
d
est
i
mates:
U
se of Estimate
s
O
ur consolidated financial statements are
p
re
p
ared in con
-
f
ormity with accountin
g
principles
g
enerally accepted in th
e
United
S
tates, which require management to make estimates and
assum
p
tions that affect the amounts re
p
orted and disclosed i
n
t
he consolidated
f
inancial statements and the accompanyin
g
n
otes. Actual results could differ materially from these estimates
.
O
nanon
g
oin
g
basis, we evaluate our estimates, includin
g
t
he
f
ollowin
g
:
>
t
hose related to the average period o
f
service to a customer
(
the “customer relationshi
pp
eriod”
)
used to amortiz
e
deferred revenue and deferred customer ac
q
uisition cost
s
associated with customer activation;
>
t
he use
f
ul lives o
f
property and equipment and intangibl
e
assets
;
an
d
>
assumptions used for the purpose of determining share
-
b
ased compensation usin
g
the Black-
S
choles option mode
l
(
“Model”), and on various oth
e
r assumptions that we believe
d
t
o be reasonable. The key inputs for this Model are stoc
k
p
rice at valuation date, strike price for the option, the dividend
y
ield, risk-
f
ree interest rate, li
f
eo
f
option in
y
ears and volatilit
y
.
W
e
b
ase our est
i
mates on
hi
stor
i
ca
l
ex
p
er
i
ence, ava
il
a
bl
e
m
arket information, appropriate valuation methodolo
g
ies and o
n
v
arious other assumptions that we believe to be reasonable, the
r
esults of which form the basis for making judgments about th
e
carryin
g
values of assets and liabilities.
Revenue Reco
g
nition
O
peratin
g
revenues consist of telephony services revenue
s
and customer equipment (which enables our telephon
y
services
)
an
d
s
hi
pp
i
ng revenues.
Th
epo
i
nt
i
nt
i
me at w
hi
c
h
revenues are
r
eco
g
nized is determined in accordance with
S
taff Accountin
g
Bulletin No. 104, Revenue Recognition, and Emerging Issues Tas
k
Force
C
onsensus No. 01-9
,
A
ccounting for
C
onsideration
G
iven
by
a Vendor to a
C
ustomer
(
Includin
g
a Reseller of the Vendor’
s
P
roducts
)
.
S
ubstantially all of our operating revenues are telephony serv
-
i
ces revenues, which are derived primarily from monthly sub
-
scription fees that customers are char
g
ed under our service plans.
We also derive telephon
y
services revenues
f
rom per minute
f
ee
s
for international calls and for any calling minutes in excess of a
c
ustomer’s monthly plan limits. Monthly subscription fees are
a
utomatically char
g
ed to customers’ credit cards, debit cards or
E
C
P in advance and are recognized over the following month
w
hen services are provided. Revenues
g
enerated from interna-
tional calls and
f
rom customers exceedin
g
allocated call minutes
under limited minute plans are recognized as services are pro-
v
id
e
d
,t
h
at
i
s, as m
i
nutes are use
d
,an
d
are
bill
e
d
to a customer
’s
c
redit cards, debit cards or ECP in arrears. As a result of ou
r
multiple billing cycles each month, we estimate the amount o
f
r
e
v
e
n
ues ea
rn
ed
fr
o
m int
e
rn
a
ti
o
n
a
l
ca
ll
sa
n
d
fr
o
m
cus
t
o
m
e
r
s
e
xceedin
g
allocated call minutes under limited minute plans but
not billed
f
rom the end o
f
each billing cycle to the end o
f
eac
h
report
i
n
g
per
i
o
d
.
Th
ese est
i
mates are
b
ase
d
pr
i
mar
il
y upon
hi
stor-
ica
l min
u
t
es a
n
d
h
a
v
e bee
n
co
n
s
i
s
t
e
nt with
ou
r
ac
t
ua
lr
esu
lt
s
.
We also generate revenues by charging a fee for activating
service.
C
ustomer activation fees, alon
g
with the related customer
a
cquisition amounts
f
or customer equipment in the direct channe
l
a
nd for rebates and retailer commissions in the retail channel u
p
to but not exceedin
g
the activation fee, are deferred and amor
-
tized over the estimated average customer relationship period.
T
he amortization of deferred customer e
q
ui
p
ment is recorded to
d
irect cost of
g
oods sold. The amortization of deferred rebates i
s
recorded as a reduction to telephon
y
services revenues. The
a
mortization of deferred retailer commissions is recorded as
mar
k
et
i
n
g
expense.
F
or 2006 an
d
2007, t
h
e est
i
mate
d
customer
relationship period was 60 months. For 2008, due to the increas
e
i
nc
h
urn, t
h
e customer re
l
at
i
ons
hip p
er
i
o
d
was re
d
uce
d
to 4
8
months. In 2009, the customer relationshi
pp
eriod will be further
reduced to 44 months based upon
f
urther anal
y
sis o
f
historical
trends
.
W
ea
l
so prov
id
ere
b
ates to customers w
h
o purc
h
ase t
h
e
ir
c
ustomer equipment
f
rom retailers and satis
fy
minimum servic
e
p
eriod re
q
uirements. These rebates in excess of activation fee
s
a
re recorded as a reduction o
f
revenues over the service period
based upon the estimated number o
f
customers that will ulti-
mate
l
y earn an
d
c
l
a
i
mt
h
ere
b
ates
.
Customer equipment and shipping revenues include sales t
o
o
ur retailers, who subsequently resell this customer equipment t
o
c
ustomers. Revenues were reduced for pa
y
ments to retailers an
d
rebates to customers, who purchased their customer equipmen
t
through these retailers, to the extent of customer equipment an
d
s
hi
pp
i
n
g
revenues
.
I
nventor
y
Inventor
y
consists o
f
the cost o
f
customer equipment and i
s
s
tated at the lower o
f
cost or market, with cost determined using
the average cost method. We provide an inventory allowance for
c
ustomer equ
i
pment t
h
at
h
as
b
een returne
dby
customers
b
ut
ma
y
not be able to be re-issued to new customers or returned to
the manufacturer for credit.
I
n
co
m
e
T
a
x
es
We recognize de
f
erred tax assets and liabilities
f
or th
e
e
xpected tax consequences of temporary differences between th
e
tax bases o
f
assets and liabilities and their reported amounts
using tax rates in e
ff
ect
f
or the year the di
ff
erences are expecte
d
t
o
r
e
v
e
r
se
.
We ha
v
e
r
eco
r
ded a
v
alua
t
io
n
allo
w
a
n
ce o
nt
he
a
ssumption that we will not
g
enerate taxable income.
41