WebEx 2002 Annual Report Download - page 17

Critical Accounting Policies
We believe that there are a number of accounting policies that are critical to understanding our historical
and future performance, as these policies affect the reported amounts of revenue and the more significant areas
involving management’s judgments and estimates. These significant accounting policies relate to revenue
recognition, sales reserves, and the allowance for doubtful accounts. The policies, and our procedures related to
these policies, are described in detail below.
Revenue Recognition. Revenue is derived from web communication services. Web communication
services revenue is generated through a variety of contractual arrangements directly with customers and with
distribution partners, who in turn sell the services to customers. We sell web communication services directly to
customers through service subscriptions and pay-per-use arrangements. Under these arrangements, customers
access the application hosted on WebEx servers using a standard web browser. Subscription arrangements
include monthly subscriber user fees and user set-up fees. The subscription arrangements are considered service
arrangements in accordance with EITF Issue No. 00-3, Application of AICPA Statement of Position 97-2,
Software Revenue Recognition, to Arrangements That Include the Right to Use Software Stored on Another
Entity’s Hardware. Accordingly, revenue is recognized ratably over the service period provided that evidence of
the arrangement exists, the fee is fixed or determinable and collectibility is reasonably assured. Initial set up fees
received in connection with these arrangements are recognized ratably over the initial term of the contract.
During the initial term, we provide training services, web-page design and set-up services. In addition to the
subscription services revenue, we derive revenue from pay-per-use services and telephony charges that are
recognized as the related services are provided.
We also enter into reselling arrangements with distribution partners, which purchase and resell our services
on a revenue sharing, discounted or pay-per-use basis. Revenue under these arrangements is derived from hosted
services provided to end-users and is recognized over the service period provided that evidence of the
arrangement exists, the fee is fixed or determinable and collectibility is reasonably assured. Initial set up fees
received in connection with these arrangements are recognized ratably over the initial term of the contract.
During the initial term, we provide training services, web-page design and set-up services. Service fees are
recognized as the services are provided for pay-per-use service arrangements and ratably over the service period
for services provided on a subscription basis through the reseller. Our reseller arrangements may require
guaranteed minimum revenue commitments that are billed in advance to the reseller. Advance payments received
from distribution partners are deferred until the related services are provided or until otherwise earned by us. We
contract directly with the distribution partner, and revenue is recognized based on net amounts charged to the
distribution partner.
Persuasive evidence for all of our arrangements is represented by a signed contract. The fee is considered
fixed or determinable if it is not subject to refund or adjustment. Collectibility of guaranteed minimum revenue
commitments by resellers is not reasonably assured; thus revenue from guaranteed minimum commitments is
deferred until services are sold by the reseller to an end-user customer or until the end of the commitment period
and forfeited by the reseller.
Sales Reserves. An estimate of the sales reserve for losses on receivables resulting from customer
cancellations or terminations is recorded as a reduction in revenues at the time of the sale. The sales reserve is
estimated based on an analysis of the historical rate of cancellations or terminations. The accuracy of the estimate
is dependent on the rate of future cancellations or terminations being consistent with the historical rate. If the rate
of actual cancellations or terminations is greater than the historic rate, then the sales reserve may not be sufficient
to provide for actual losses.
Allowance for Doubtful Accounts. We record an allowance for doubtful accounts to provide for losses on
accounts receivable due to customer credit risk. Increases to the allowance for doubtful accounts are charged to
general and administrative expense as bad debt expense. Losses on accounts receivable due to financial distress
or failure of the customer are charged to the allowance for doubtful accounts. The allowance is estimated based
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