iRobot 2015 Annual Report Download - page 115

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Revenue Recognition
We derive our revenue from product sales and, to a lesser extent, government and commercial research and development
contracts. We sell products directly to customers and indirectly through resellers and distributors. We recognize revenue from
sales of robots under the terms of the customer agreement upon transfer of title and risk of loss to the customer, net of estimated
returns, provided that collection is determined to be reasonably assured and no significant obligations remain.
Beginning in the third quarter of 2015, with the introduction of our first connected robot, each sale of a connected robot
represents a multi-element arrangement containing the robot, an app and potential future unspecified software upgrades.
Revenue is allocated to the deliverables based on their relative selling prices which have been determined using best estimate of
selling price (BESP), as we have not been able to establish vendor specific objective evidence (VSOE) or obtain relevant third
party evidence (TPE). Revenue allocated to the app and unspecified software upgrades is then deferred and recognized on a
straight-line basis over the period in which we expect to provide the upgrades over the estimated life of the robot.
Sales to domestic and Canadian resellers of home robots are typically subject to agreements allowing for limited rights of
return, rebates and price protection. We also provide limited rights of returns for direct-to-consumer sales generated through our
on-line stores. Accordingly, we reduce revenue for our estimates of liabilities for these rights of return, rebates and price
protection at the time the related sale is recorded. These estimates for rights of return are directly based on specific terms and
conditions included in the reseller agreements, historical returns experience and various other assumptions that we believe are
reasonable under the circumstances. In the case of new product introductions, the estimates for returns applied to the new
products are based upon the estimates for the most similar predecessor products until such time that we have enough actual
returns experience for the new products, which is typically two holiday returns cycles. At that time, we incorporate that data
into the development of returns estimates for the new products. We update our analysis of returns on a quarterly basis. If
actual returns differ significantly from our estimates, or if modifications to individual reseller agreements are entered into that
impact their rights of returns, such differences could result in an adjustment to previously established reserves and could have a
material impact, either favorably or unfavorably, on our results of operations for the period in which the actual returns become
known or the reseller agreement is modified. Our international distributor agreements do not currently allow for product returns
and, as a result, no reserve for returns is established for this group of customers. 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.
Under cost-plus-fixed-fee (CPFF) type contracts, we recognize revenue based on costs incurred plus a pro rata portion of
the total fixed fee. Costs incurred include labor and material that are directly associated with individual CPFF contracts plus
indirect overhead and general and administrative type costs based upon billing rates we submit to the Defense Contract
Management Agency (DCMA). We submit on an annual basis final indirect billing rates to DCMA based upon actual costs
incurred throughout the year. In the situation where our final actual billing rates are greater than the estimated rates currently in
effect, we record a cumulative revenue adjustment in the period in which the rate differential is collected from the customer.
These final billing rates are subject to audit by the Defense Contract Audit Agency (DCAA), which can occur several years
after the final billing rates are submitted and may result in material adjustments to revenue recognized based on estimated final
billing rates. As of January 2, 2016, fiscal years 2012 through 2015 are open for audit by DCAA. In the situation where our
anticipated actual billing rates will be lower than the provisional rates currently in effect, we record a cumulative revenue
adjustment in the period in which the rate differential is identified. Revenue on firm fixed price (FFP) contracts is recognized
using the percentage-of-completion method. For government product FFP contracts, revenue is recognized as the product is
shipped or in accordance with the contract terms. Costs and estimated gross margins on contracts are recorded as revenue as
work is performed based on the percentage that incurred costs compare 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 and government audits, may result in revisions to costs and income and are recognized 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, a 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.
Form 10-K