This excerpt taken from the DRIV 10-K filed Mar 16, 2005.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical in fully understanding and evaluating our reported financial results are the following:
Revenue Recognition. We recognize revenue from services rendered once all the following criteria for revenue recognition have been met: (1) pervasive evidence of an agreement exists; (2) the services have been rendered; (3) the fee is fixed and determinable and not subject to refund or adjustment; and (4) collection of the amounts due is reasonably assured. We derive our revenue primarily from transaction fees based on a percentage of the products sale price and fees from services rendered associated with the e-commerce services provided to our clients and end customers. These services include e-commerce development and hosting, transaction processing, fraud screening, digital delivery, integration to physical fulfillment, merchandising services, analytical marketing, customer service and proprietary software backup services. We report our revenue on a net basis and therefore record only the net service fees and transaction fees as our revenue. We act as the merchant of record on most of the transactions processed and have contractual relationships with our clients, which obligate us to pay to the client a specified percentage of each sale. We retain our transaction fee and also charge fees for services rendered. Signed contracts are obtained from clients prior to recognition of these revenues. Clients do not have the right to take possession of the software applications used in the delivery of services. Payments received in advance of rendering the service, even if non-refundable, are recorded as deferred revenue until earned.
Allowance for Doubtful Accounts. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used in determining our allowance for doubtful accounts and are based on our historical experience and current trends. Management must make estimates of the uncollectability of our billed accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Significant management judgments and estimates must be made and used in connection with the allowance in any accounting period. Material differences may result in the amount and timing of our operating results for any period if management makes different judgments or utilizes different estimates.
Credit Card Chargeback Reserve. Estimates are also used in determining our accrued chargeback expenses and are based on our historical experience and current trends. Management makes an estimate of anticipated future credit card chargebacks related to current period revenue by analyzing the timing of historical credit card chargebacks as well as reviewing the current charge back trends and applying a conservative anticipated rate to current period revenues. Significant management judgments and estimates must be made and used in connection with the accrued expenses in any accounting period. Material differences may result in the amount and timing of our operating results for any period if management makes different judgments or utilizes different estimates.
Goodwill, Intangibles And Other Long-Lived Assets. We amortize property, plant and equipment, certain intangibles and certain other long-lived assets with definite lives over their useful lives. Useful lives are based on managements estimates of the period that the assets will generate revenue. Assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our evaluation considers nonfinancial data such as changes in the operating environment and business strategy, competitive information, market trends and operating performance. If indicators of impairment are present, we utilize an undiscounted cash flow analysis to determine the impairment amount, if any. Assets with indefinite lives are reviewed annually (or more frequently if impairment indicators are present) for impairment utilizing the two-step approach prescribed in Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Our assessment has indicated that there have been no impairments of goodwill for the years 2004, 2003 and 2002.
Income Taxes and Deferred Taxes. We currently have significant U.S. tax loss carryforwards resulting primarily from the tax deduction for disqualifying disposition of stock options, and a lesser amount of acquired foreign operating tax loss carryforwards. The deferred tax benefit of the loss carryforwards has been fully reserved by a valuation allowance pursuant to GAAP. The benefit of the loss carryforwards from disqualifying disposition of stock options will be recognized as additional paid in capital when these deductions are utilized in future periods. The valuation reserve of the deferred tax asset will be removed if and when we have met the requirements under GAAP of more likely than not that we will realize the benefit of the deferred tax asset. Deferred tax assets are the tax value of temporary timing differences for financial reporting and tax basis of assets and liabilities.