iRobot 2008 Annual Report Download - page 88

Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these consolidated financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and
expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our actual
results may differ from these estimates.
We believe that of our significant accounting policies, which are described in the notes to our consolidated
financial statements, the following accounting policies involve a greater degree of judgment and complexity.
Accordingly, we believe that the following accounting policies are the most critical to aid in fully understanding and
evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We recognize revenue from sales of consumer products under the terms of the customer agreement upon
transfer of title to the customer, provided the price is fixed or determinable, collection is determined to be probable
and no significant obligations remain. Sales to resellers are subject to agreements allowing for limited rights of
return for defective products only, rebates and price protection. We have typically not taken product returns except
for defective products. Accordingly, we reduce revenue for our estimates of liabilities for these rights at the time the
related sale is recorded. We establish a provision for sales returns for products sold by resellers directly or through
our distributors based on historical return experience. We have aggregated and analyzed historical returns from
resellers and end users which form the basis of our estimate of future sales returns by resellers or end users. In
accordance with Statement of Financial Accounting Standards No. 48 “Revenue Recognition When Right of Return
Exists,” the provision for these estimated returns is recorded as a reduction of revenue at the time that the related
revenue is recorded. If actual returns from retailers differ significantly from our estimates, such differences could
have a material impact on our results of operations for the period in which the actual returns become known. Our
returns reserve is calculated as a percentage of gross consumer product revenue. A one percentage point increase or
decrease in our actual experience of returns would have a material impact on our quarterly and annual results of
operations. The estimates for returns are adjusted periodically based upon historical rates of returns. The estimates
and reserve for rebates and price protection are based on specific programs, expected usage and historical
experience. Actual results could differ from these estimates. Through 2003, we recognized revenue on sales to
certain distributors and retail customers upon their sale to the end user. Starting in the first quarter of 2004, as a
result of our accumulation of sufficient experience to reasonably estimate allowances for product returns, we
adopted the standard industry practice of recognizing revenue on all sales upon delivery of product to distributors
and retail stores and established a related allowance for future returns based upon historical experience. If future
trends or our ability to estimate were to change significantly from those experienced in the past, incremental
reductions or increases to revenue may result based on this new experience.
Under cost-plus research and development contracts, we recognize revenue based on costs incurred plus a pro-
rata portion of the total fixed fee. We recognize revenue on fixed-price contracts using the percentage-of-
completion method. Costs and estimated gross margins on contracts are recorded as work is performed based
on the percentage that incurred costs bear to estimated total costs utilizing the most recent estimates of costs and
funding. Changes in job performance, job conditions and estimated profitability, including those arising from final
contract settlements, may result in revisions to costs and income, and are recorded or recognized, as the case may
be, in the period in which the revisions are determined. Since many contracts extend over a long period of time,
revisions in cost and funding estimates during the progress of work have the effect of adjusting earnings applicable
to past performance in the current period. When the current contract estimate indicates a loss, provision is made for
the total anticipated loss in the current period. Revenue earned in excess of billings, if any, is recorded as unbilled
revenue. Billings in excess of revenue earned, if any, are recorded as deferred revenue.
Accounting for Stock-Based Awards
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards, or
SFAS, No. 123(R), Share-Based Payment, which establishes accounting for equity instruments exchanged for
employee services. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the
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