iRobot 2015 Annual Report Download - page 137

iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
54
As of January 2, 2016, the Company’s investments had maturity dates ranging from January 2016 to August 2018. The
Company invests primarily in investment grade securities and limits the amount of investment in any single issuer.
Revenue Recognition
The Company derives its revenue from product sales and, to a lesser extent, government and commercial research and
development contracts. The Company sells products directly to customers and indirectly through resellers and distributors. The
Company recognizes 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 the Company's 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 the Company has 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 the Company expects 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. The Company also provides limited rights of returns for direct-to-consumer sales generated
through its on-line stores. Accordingly, the Company reduces revenue for its 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 the Company believes 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
the Company has enough actual returns experience for the new products, which is typically two holiday return cycles. At that
time, the Company incorporates that data into the development of returns estimates for the new products. The Company
updates its analysis of returns on a quarterly basis. If actual returns differ significantly from the Company's 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 the
Company's results of operations for the period in which the actual returns become known or the reseller agreement is modified.
The Company’s 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, the Company recognizes 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 submitted by the Company
to the Defense Contract Management Agency (DCMA). Annually, the Company submits final indirect billing rates to DCMA
based upon actual costs incurred throughout the year. In the situation where the Company’s final actual billing rates are greater
than the estimated rates currently in effect, the Company records 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 the Company’s anticipated actual billing rates will be lower than the
provisional rates currently in effect, the Company records 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
Form 10-K