GUID » Topics » Critical Accounting Policies and Estimates

This excerpt taken from the GUID 10-Q filed May 8, 2009.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There have no significant changes in those critical accounting policies and estimates during the three months ended March 31, 2009.

These excerpts taken from the GUID 10-K filed Mar 3, 2009.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are discussed in Note 1 to our financial statements, included herein at Item 8. The application of GAAP requires us to make estimates, judgments and

 

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assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities, and related disclosure of contingent assets and liabilities. We base our estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable based upon information available to us at the time these estimates are made. Historically, our critical accounting estimates have not differed materially from actual results; however, changes in these accounting estimates are reasonably likely to occur from period to period. Although we evaluate these estimates, judgments and assumptions on a regular basis and make changes accordingly, actual results could differ significantly from those anticipated based on our estimates and assumptions. To the extent there are significant differences between these estimates and actual results, our future results of operations and financial condition could be materially affected.

We believe that the estimates, judgments and assumptions involved in the accounting policies described below require the most subjective judgment and have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has reviewed the development and selection of these critical accounting policies and estimates, and their related disclosure in this report, with the Audit Committee of our Board of Directors.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are discussed in Note 1 to our financial statements, included herein at Item 8.
The application of GAAP requires us to make estimates, judgments and

 


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assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities, and related disclosure of contingent assets and liabilities.
We base our estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable based upon information available to us at the time these estimates are made. Historically, our critical
accounting estimates have not differed materially from actual results; however, changes in these accounting estimates are reasonably likely to occur from period to period. Although we evaluate these estimates, judgments and assumptions on a regular
basis and make changes accordingly, actual results could differ significantly from those anticipated based on our estimates and assumptions. To the extent there are significant differences between these estimates and actual results, our future
results of operations and financial condition could be materially affected.

We believe that the estimates, judgments and assumptions
involved in the accounting policies described below require the most subjective judgment and have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has reviewed
the development and selection of these critical accounting policies and estimates, and their related disclosure in this report, with the Audit Committee of our Board of Directors.

STYLE="margin-top:18px;margin-bottom:0px; text-indent:4%">Revenue Recognition

We derive
revenue from licenses of our software and sales of related services, which include post-contract customer support, or maintenance, consulting and training. We recognize revenue in accordance with GAAP as prescribed for the software industry, which
are substantially governed by AICPA Statement of Position No. 97-2 (“SOP 97-2”), “Software Revenue Recognition,” as amended and interpreted. While these pronouncements govern the basis for revenue recognition, in
applying our revenue recognition policy we must determine which portions of our revenue should be recognized currently and which portions, if any, should be deferred. In order to determine current and deferred revenue, we make judgments and
estimates with regard to future deliverable products and services and the appropriate pricing for those products and services. In general, we recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed or determinable and collectability is probable, as follows:

 







  

Persuasive evidence of an arrangement. If we either enter into contracts or receive written purchase orders issued by a customer that legally bind us and the
customer, we consider that as evidence of an arrangement.

 







  

Delivery. We deem delivery of products to have occurred when the title and risk of ownership have passed to the buyer. Services revenue is recognized as services
are performed.

 







  

Fixed or determinable fee. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within normal
established practices. If the fee is not fixed or determinable, we recognize the revenue as amounts become due and payable, provided all other revenue recognition criteria have been met.

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

Collection is deemed probable. We conduct a credit review for all significant transactions at the time of the arrangement to determine the credit-worthiness of the
customer. Collection is deemed probable if we have a reasonable basis to expect that the customer will pay amounts under the arrangement as payments become due.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant
impact on the timing and amount of revenue reported. For example, for multiple element arrangements we must make assumptions and judgments in order to allocate the total purchase price (irrespective of invoiced allocations) among the various
elements we deliver, to determine whether undelivered services are essential to the functionality of the delivered products and services, to determine whether vendor-specific evidence (“VSOE”) of fair value exists for each undelivered
element and to determine whether and when each element has been delivered. The VSOE of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices for those products and services when

 


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sold separately and, for software license updates and product support services, is additionally measured by the renewal rate offered to the customer. If we
were to change our pricing practices or any of our other assumptions or judgments in the future, our future revenue recognition could differ significantly from our historical results.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Amounts for fees collected or invoiced and due relating to arrangements when revenue cannot be recognized are reflected on our balance sheet as deferred
revenue and recognized when the product is delivered or over the period in which the service is performed, in accordance with our revenue recognition policy for such element. If we cannot objectively determine the fair value of any undelivered
element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the
fair value of a delivered element has not been established, we use the residual method to record revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

Product
Revenue.
The timing of product revenue recognition is dependent on the nature of the product sold. Product arrangements comprising multiple deliverables, including software and hardware, are generally categorized into one of the following:

 







 

 

EnCase® Enterprise, EnCaseSIZE="1">® eDiscovery, and related products. License revenue associated with these arrangements, exclusive of amounts allocated to maintenance and other undelivered elements for which we have vendor-specific objective evidence
(“VSOE”) of fair value, is recognized upon delivery, provided that all other criteria for revenue recognition have been met.

 







 

 

EnCase® Forensic. License revenue from corporate customers,
exclusive of amounts allocated to maintenance, for which we have VSOE of fair value, is recognized upon delivery, provided that all other criteria for revenue recognition have been met. Because maintenance is included at no additional cost in
governmental Forensic arrangements, VSOE of fair value for the maintenance element for governmental customers is indeterminable, so we allocate governmental Forensic product, services and maintenance revenue ratably over the longer of the
contractual maintenance period (12 months) or the implied maintenance period (typically, 12-25 months) based on estimated fair values of the various components.

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

Premium License Support Program Solutions. The Premium License Support Program is a subscription arrangement entitling customers to receive unspecified future
products and post-contract customer support for a period of several years. Revenue resulting from Premium License Support Program arrangements is recognized ratably over the contractual period beginning with the delivery of the first product.

 







 

 

EnCase® NeutrinoSIZE="1">®. Our mobile device investigative solution is sold to Forensic customers with a related subscription covering future adapters for newly issued cell phones. Revenue is recognized over the related subscription period.
For Enterprise customers, EnCase® Neutrino® revenue is recognized upon delivery, provided that all other criteria for revenue
recognition have been met. Standard maintenance is charged to entitle customers to future cell phone adapters on an if-and-when available basis.

 







  

Hardware. Revenue associated with the sale of hardware is recognized upon shipment to the customer, provided that all other criteria for revenue recognition have
been met.

Services and Maintenance Revenue. Services and maintenance revenue consists of professional services,
training, and maintenance. Revenue from such services is recognized as the services are provided. We refer to revenue related to technical product support and software updates on a when-and-if available basis as maintenance revenue, which is
recognized ratably over the applicable contractual period. We determine the amount of maintenance revenue to be deferred through reference to substantive maintenance renewal provisions contained in each arrangement. We consider substantive
maintenance provisions to be provisions where the cost

 


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of the maintenance renewal, stated in the contract with our customer as a percentage of the product fee, is comparable to the normal pricing for
maintenance-only renewals. Substantially all of our customers purchase maintenance support when they acquire new software licenses and substantially all renew their maintenance support contracts annually or otherwise.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Training revenues are either recognized on a per-class basis upon a participant’s attendance or, for those customers who have subscribed to our
Annual Training Passport program, revenue is recognized ratably over the annual period.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are discussed in Note 1 to our financial statements, included herein at Item 8.
The application of GAAP requires us to make estimates, judgments and

 


38







Table of Contents



assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities, and related disclosure of contingent assets and liabilities.
We base our estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable based upon information available to us at the time these estimates are made. Historically, our critical
accounting estimates have not differed materially from actual results; however, changes in these accounting estimates are reasonably likely to occur from period to period. Although we evaluate these estimates, judgments and assumptions on a regular
basis and make changes accordingly, actual results could differ significantly from those anticipated based on our estimates and assumptions. To the extent there are significant differences between these estimates and actual results, our future
results of operations and financial condition could be materially affected.

We believe that the estimates, judgments and assumptions
involved in the accounting policies described below require the most subjective judgment and have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has reviewed
the development and selection of these critical accounting policies and estimates, and their related disclosure in this report, with the Audit Committee of our Board of Directors.

STYLE="margin-top:18px;margin-bottom:0px; text-indent:4%">Revenue Recognition

We derive
revenue from licenses of our software and sales of related services, which include post-contract customer support, or maintenance, consulting and training. We recognize revenue in accordance with GAAP as prescribed for the software industry, which
are substantially governed by AICPA Statement of Position No. 97-2 (“SOP 97-2”), “Software Revenue Recognition,” as amended and interpreted. While these pronouncements govern the basis for revenue recognition, in
applying our revenue recognition policy we must determine which portions of our revenue should be recognized currently and which portions, if any, should be deferred. In order to determine current and deferred revenue, we make judgments and
estimates with regard to future deliverable products and services and the appropriate pricing for those products and services. In general, we recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed or determinable and collectability is probable, as follows:

 







  

Persuasive evidence of an arrangement. If we either enter into contracts or receive written purchase orders issued by a customer that legally bind us and the
customer, we consider that as evidence of an arrangement.

 







  

Delivery. We deem delivery of products to have occurred when the title and risk of ownership have passed to the buyer. Services revenue is recognized as services
are performed.

 







  

Fixed or determinable fee. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within normal
established practices. If the fee is not fixed or determinable, we recognize the revenue as amounts become due and payable, provided all other revenue recognition criteria have been met.

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

Collection is deemed probable. We conduct a credit review for all significant transactions at the time of the arrangement to determine the credit-worthiness of the
customer. Collection is deemed probable if we have a reasonable basis to expect that the customer will pay amounts under the arrangement as payments become due.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant
impact on the timing and amount of revenue reported. For example, for multiple element arrangements we must make assumptions and judgments in order to allocate the total purchase price (irrespective of invoiced allocations) among the various
elements we deliver, to determine whether undelivered services are essential to the functionality of the delivered products and services, to determine whether vendor-specific evidence (“VSOE”) of fair value exists for each undelivered
element and to determine whether and when each element has been delivered. The VSOE of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices for those products and services when

 


39







Table of Contents



sold separately and, for software license updates and product support services, is additionally measured by the renewal rate offered to the customer. If we
were to change our pricing practices or any of our other assumptions or judgments in the future, our future revenue recognition could differ significantly from our historical results.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Amounts for fees collected or invoiced and due relating to arrangements when revenue cannot be recognized are reflected on our balance sheet as deferred
revenue and recognized when the product is delivered or over the period in which the service is performed, in accordance with our revenue recognition policy for such element. If we cannot objectively determine the fair value of any undelivered
element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the
fair value of a delivered element has not been established, we use the residual method to record revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

Product
Revenue.
The timing of product revenue recognition is dependent on the nature of the product sold. Product arrangements comprising multiple deliverables, including software and hardware, are generally categorized into one of the following:

 







 

 

EnCase® Enterprise, EnCaseSIZE="1">® eDiscovery, and related products. License revenue associated with these arrangements, exclusive of amounts allocated to maintenance and other undelivered elements for which we have vendor-specific objective evidence
(“VSOE”) of fair value, is recognized upon delivery, provided that all other criteria for revenue recognition have been met.

 







 

 

EnCase® Forensic. License revenue from corporate customers,
exclusive of amounts allocated to maintenance, for which we have VSOE of fair value, is recognized upon delivery, provided that all other criteria for revenue recognition have been met. Because maintenance is included at no additional cost in
governmental Forensic arrangements, VSOE of fair value for the maintenance element for governmental customers is indeterminable, so we allocate governmental Forensic product, services and maintenance revenue ratably over the longer of the
contractual maintenance period (12 months) or the implied maintenance period (typically, 12-25 months) based on estimated fair values of the various components.

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

Premium License Support Program Solutions. The Premium License Support Program is a subscription arrangement entitling customers to receive unspecified future
products and post-contract customer support for a period of several years. Revenue resulting from Premium License Support Program arrangements is recognized ratably over the contractual period beginning with the delivery of the first product.

 







 

 

EnCase® NeutrinoSIZE="1">®. Our mobile device investigative solution is sold to Forensic customers with a related subscription covering future adapters for newly issued cell phones. Revenue is recognized over the related subscription period.
For Enterprise customers, EnCase® Neutrino® revenue is recognized upon delivery, provided that all other criteria for revenue
recognition have been met. Standard maintenance is charged to entitle customers to future cell phone adapters on an if-and-when available basis.

 







  

Hardware. Revenue associated with the sale of hardware is recognized upon shipment to the customer, provided that all other criteria for revenue recognition have
been met.

Services and Maintenance Revenue. Services and maintenance revenue consists of professional services,
training, and maintenance. Revenue from such services is recognized as the services are provided. We refer to revenue related to technical product support and software updates on a when-and-if available basis as maintenance revenue, which is
recognized ratably over the applicable contractual period. We determine the amount of maintenance revenue to be deferred through reference to substantive maintenance renewal provisions contained in each arrangement. We consider substantive
maintenance provisions to be provisions where the cost

 


40







Table of Contents



of the maintenance renewal, stated in the contract with our customer as a percentage of the product fee, is comparable to the normal pricing for
maintenance-only renewals. Substantially all of our customers purchase maintenance support when they acquire new software licenses and substantially all renew their maintenance support contracts annually or otherwise.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Training revenues are either recognized on a per-class basis upon a participant’s attendance or, for those customers who have subscribed to our
Annual Training Passport program, revenue is recognized ratably over the annual period.

This excerpt taken from the GUID 10-Q filed Nov 10, 2008.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There have no significant changes in those critical accounting policies and estimates during the nine months ended September 30, 2008.

This excerpt taken from the GUID 10-Q filed Aug 11, 2008.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There have no significant changes in those critical accounting policies and estimates during the six months ended June 30, 2008.

This excerpt taken from the GUID 10-Q filed May 12, 2008.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are discussed in Note 1 to our financial statements. The application of GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities, and related disclosure of contingent assets and liabilities. We base our estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable based upon information available to us at the time these estimates are made. Historically, our critical accounting estimates have not differed materially from actual results; however, changes in these accounting estimates are reasonably likely to occur from period to period. Although we evaluate these estimates, judgments and assumptions on a regular basis and make changes accordingly, actual results could differ significantly from those anticipated based on our estimates and assumptions. To the extent there are significant differences between these estimates and actual results, our future results of operations and financial condition could be materially affected.

We believe that the estimates, judgments and assumptions involved in the accounting policies described below require the most subjective judgment and have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has reviewed the development and selection of these critical accounting policies and estimates, and their related disclosure in this report, with the Audit Committee of our Board of Directors.

These excerpts taken from the GUID 10-K filed Mar 17, 2008.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are discussed in Note 1 to our financial statements, included herein at Item 8. The application of GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities, and related

 

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disclosure of contingent assets and liabilities. We base our estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable based upon information available to us at the time these estimates are made. Historically, our critical accounting estimates have not differed materially from actual results; however, changes in these accounting estimates are reasonably likely to occur from period to period. Although we evaluate these estimates, judgments and assumptions on a regular basis and make changes accordingly, actual results could differ significantly from those anticipated based on our estimates and assumptions. To the extent there are significant differences between these estimates and actual results, our future results of operations and financial condition could be materially affected.

We believe that the estimates, judgments and assumptions involved in the accounting policies described below require the most subjective judgment and have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has reviewed the development and selection of these critical accounting policies and estimates, and their related disclosure in this report, with the Audit Committee of our Board of Directors.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our significant accounting policies are discussed in Note 1 to our financial statements, included herein at Item 8.
The application of GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities, and related

 


37







Table of Contents



disclosure of contingent assets and liabilities. We base our estimates, judgments and assumptions on historical experience and on various other factors that
are believed to be reasonable based upon information available to us at the time these estimates are made. Historically, our critical accounting estimates have not differed materially from actual results; however, changes in these accounting
estimates are reasonably likely to occur from period to period. Although we evaluate these estimates, judgments and assumptions on a regular basis and make changes accordingly, actual results could differ significantly from those anticipated based
on our estimates and assumptions. To the extent there are significant differences between these estimates and actual results, our future results of operations and financial condition could be materially affected.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">We believe that the estimates, judgments and assumptions involved in the accounting policies described below require the most subjective judgment and
have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has reviewed the development and selection of these critical accounting policies and estimates, and their
related disclosure in this report, with the Audit Committee of our Board of Directors.

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