Change in Significant Accounting Policies
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6 Months Ended |
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Jul. 31, 2011
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Change in Significant Accounting Policies |
2. Change in Significant Accounting Policies
SeaChange’s
transactions frequently involve the sale of hardware, software,
systems and services in multiple element arrangements. Revenues
from sales of hardware, software and systems that do not require
significant modification or customization of the underlying
software are recognized when title and risk of loss has passed to
the customer, there is evidence of an arrangement, fees are fixed
or determinable and collection of the related receivable is
considered probable. Customers are billed for installation,
training, project management and at least one year of product
maintenance and technical support at the time of the product sale.
Revenue from these activities are deferred at the time of the
product sale and recognized ratably over the period these services
are performed. Revenue from ongoing product maintenance and
technical support agreements are recognized ratably over the period
of the related agreements. Revenue from software development
contracts that include significant modification or customization,
including software product enhancements, is recognized based on the
percentage of completion contract accounting method using labor
efforts expended in relation to estimates of total labor efforts to
complete the contract. Accounting for contract amendments and
customer change orders are included in contract accounting when
executed. Revenue from shipping and handling costs and other
out-of-pocket expenses reimbursed by customers are included in
revenues and cost of revenues. SeaChange’s share of
intercompany profits associated with sales and services provided to
affiliated companies are eliminated in consolidation in proportion
to our equity ownership.
The
Company has historically applied the software revenue recognition
rules as prescribed by Accounting Standards Codification
(ASC) Subtopic 985-605. In October 2009, the Financial
Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) Number 2009-14, “Certain Revenue
Arrangements That Include Software Elements,” which amended
ASC Subtopic 985-605. This ASU removes tangible products containing
software components and non-software components that function
together to deliver the product’s essential functionality
from the scope of the software revenue recognition rules. In the
case of the Company’s hardware products with embedded
software, the Company has determined that the hardware and software
components function together to deliver the product’s
essential functionality, and therefore, the revenue from the sale
of these products no longer falls within the scope of the software
revenue recognition rules. Revenue from the sale of software-only
products remains within the scope of the software revenue
recognition rules. Maintenance and support, training, consulting,
and installation services no longer fall within the scope of the
software revenue recognition rules, except when they are sold with
and relate to a software-only product. Revenue recognition for
products that no longer fall under the scope of the software
revenue recognition rules is similar to that for other tangible
products and ASU Number 2009-13, “Multiple-Deliverable
Revenue Arrangements,” which amended ASC Topic 605 and was
also issued in October 2009, is applicable for
multiple-deliverable revenue arrangements. ASU 2009-13 allows
companies to allocate revenue in a multiple-deliverable arrangement
in a manner that better reflects the transaction’s economics.
ASU 2009-13 and 2009-14 are effective for revenue arrangements
entered into or materially modified in the Company’s fiscal
year 2012.
Under the software revenue recognition rules, the fee is allocated
to the various elements based on Vendor Specific Objective Evidence
(“VSOE”) of fair value. Under this method, the
total arrangement value is allocated first to undelivered elements,
based on their fair values, with the remainder being allocated to
the delivered elements. Where fair value of undelivered service
elements has not been established, the total arrangement value is
recognized over the period during which the services are performed.
The amounts allocated to undelivered elements, which may include
project management, training, installation, maintenance and
technical support and certain hardware and software components, are
based upon the price charged when these elements are sold
separately and unaccompanied by the other elements. The amount
allocated to installation, training and project management revenue
is based upon standard hourly billing rates and the estimated time
required to complete the service. These services are not essential
to the functionality of systems as these services do not alter the
equipment’s capabilities, are available from other vendors
and the systems are standard products. For multiple element
arrangements that include software development with significant
modification or customization and systems sales where
vendor-specific objective evidence of the fair value does not exist
for the undelivered elements of the arrangement (other than
maintenance and technical support), percentage of completion
accounting is applied for revenue recognition purposes to the
entire arrangement with the exception of maintenance and technical
support. All
multiple-deliverable revenue arrangements negotiated prior to
February 1, 2011 and the sale of all software-only products and
associated services have been accounted for under this guidance
during the six months ended July 31, 2011.
Under
the revenue recognition rules for tangible products as amended by
ASU 2009-13, the fee from a multiple-deliverable arrangement is
allocated to each of the deliverables based upon their relative
selling prices as determined by a selling-price hierarchy. A
deliverable in an arrangement qualifies as a separate unit of
accounting if the delivered item has value to the customer on a
stand-alone basis. A delivered item that does not qualify as a
separate unit of accounting is combined with the other undelivered
items in the arrangement and revenue is recognized for those
combined deliverables as a single unit of accounting. The selling
price used for each deliverable is based upon VSOE if available,
third-party evidence (TPE) if VSOE is not available, and best
estimate of selling price (BESP) if neither VSOE nor TPE are
available. TPE is the price of the Company’s or any
competitor’s largely interchangeable products or services in
stand-alone sales to similarly situated customers. BESP is the
price at which the Company would sell the deliverable if it were
sold regularly on a stand-alone basis, considering market
conditions and entity-specific factors. All multiple-deliverable
revenue arrangements negotiated after February 1, 2011,
excluding the sale of all software-only products and associated
services, have been accounted for under this guidance during the
six months ended July 31, 2011.
The
selling prices used in the relative selling price allocation method
for certain of the Company’s services are based upon VSOE.
The selling prices used in the relative selling price allocation
method for third-party products from other vendors are based upon
TPE. The selling prices used in the relative selling price
allocation method for the Company’s hardware products,
software, subscriptions, and customized services for which VSOE
does not exist are based upon BESP. The Company does not believe
TPE exists for these products and services because they are
differentiated from competing products and services in terms of
functionality and performance and there are no competing products
or services that are largely interchangeable. Management
establishes BESP with consideration for market conditions, such as
the impact of competition and geographic considerations, and
entity-specific factors, such as the cost of the product, discounts
provided and profit objectives. Management believes that BESP is
reflective of reasonable pricing of that deliverable as if priced
on a stand-alone basis.
Since
all of the Company’s revenue prior to the adoption of ASU
2009-14 fell within the scope of the software revenue recognition
rules and the Company has only established VSOE for services,
revenue in a multiple-deliverable arrangement involving products
was frequently deferred until the last item was delivered. The
adoption of ASU 2009-13 and 2009-14 has resulted in earlier revenue
recognition in multiple-deliverable arrangements involving the
Company’s hardware products with embedded software because
revenue can be recognized for each of these deliverables based upon
their relative selling prices as defined above. In the three and
six months ended July 31, 2011, revenue was $1.1 million and
$1.7 million higher than it would have been if ASU 2009-13 and
2009-14 had not been adopted. The revenue impact by segment was an
increase of $800,000 and $1.3 million in the Software segment for
the three and six months ended July 31, 2011. The revenue impact in
the Servers and Storage segment was an increase of $300,000 and
$400,000 for the three and six months ended July 31,
2011.
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