SEC Company Response from ALIGN TECHNOLOGY (ALGN) — Jun 28, 2013
ALIGN TECHNOLOGY INC
Date: June 28, 2013 · CIK: 0001097149 · Accession: 0001097149-13-000021
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 000-32259
Referenced dates: June 3, 2013
Letter
SEC Comment Response REDACTED
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
FOIA Confidential Treatment Request
Under 17 C.F.R. § 200.83
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
June 28, 2013
Attention: Mr. Cascio
Ms. Lochhead
Mr. Soares
Mr. Kruczek
Re: Align Technology, Inc.
Form 10-K for the fiscal year ended December 31, 2012
Filed March 1, 2013
Form 10-Q for the quarterly period ended March 31, 2013
Filed May 3, 2013
File No. 000-32259
Ladies and Gentlemen:
On behalf of Align Technology, Inc. (“Align”), I respectfully submit this letter in response to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) received by letter dated June 3, 2013 relating to Align's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “Form 10-K”) and Quarterly Report on Form 10-Q for the period ended March 31, 2013 (the “Form 10-Q”).
In this letter, Align has recited the comments from the Staff in italicized, bold type and followed each comment with Align's response. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Form 10-K or Form 10-Q, as applicable.
Because of the sensitive nature of the information contained in certain parts of this letter, this submission is accompanied by a request for confidential treatment for such information. Align is requesting pursuant to 17 C.F.R. §200.83 confidential treatment for certain parts of this letter, as indicated by [***], with respect to the Freedom of Information Act (the “FOIA”) and have filed a separate letter with the Office of Freedom of Information and Privacy Act Operations in connection with that request. In the event that the Staff receives a request for access to the confidential portions herein, whether pursuant to the FOIA or otherwise, Align respectfully request to be notified immediately, so that it may further substantiate this request for confidential treatment. Please address any notification of a request for access to such information to me.
Form 10-K for the fiscal year ended December 31, 2012
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, page 31
FOIA CONFIDENTIAL TREATMENT REQUEST
CONFIDENTIAL TREATMENT REQUESTED BY ALIGN TECHNOLOGY, INC.
ALGN 001
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
1.
We see that Invisalign Express/Lite and Invisalign Teen increased at a greater percentage than the Invisalign Full products from 2011 to 2012. To the extent material, in future filings please include a discussion of how the price mix among the different Clear Aligner products impacted revenue from period to period.
Response:
Align acknowledges the Staff’s comment and will include in future filings a discussion of the price mix among different Clear Aligner products and the impact on revenues from period to period to the extent that they are material.
Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies, page 60
Revenue Recognition, pages 45 and 63
2.
We see from page 50 that in the fourth quarter of 2012 you identified an error that the actual case refinement usage rate was lower than estimated and recorded a net revenue release of $4.9 million of which $4.5 million relates to the first three quarters of fiscal year 2012. Please respond to the following comments:
a.
Please tell us how you concluded that the actual case refinement usage rate was lower than your estimate and how you determined to what period the “error” related.
Response:
Background
Align offers various products as part of multiple-element arrangements. Typically, these arrangements will comprise of the delivery of aligners and delivery of up to three case refinements. Aligners are typically delivered at the outset of the arrangement and case refinements are typically delivered during the final stages of the treatment period. Case refinement allows for additional aligners as a finishing tool to adjust the patient's teeth to the desired final position, and has been included in the list prices of Invisalign Full since 2005, and Invisalign Teen and Invisalign Assist since these products were introduced in 2008. Based on historical experience since 2005, Align has determined that customers will typically not utilize the maximum number of case refinements offered.
Align has sufficient historical experience to calculate an estimate of the number of case refinements that will be used by customers. The case refinement usage rate is the average number of case refinements that will be delivered in each treatment plan.
Based on an analysis of historical case refinement utilization, Align uses an average of the most recent eight-consecutive quarters of treatment data in which at least 90% of treatments have reached their case completion dates to estimate the case refinement usage rate. Once a case completion date has passed, the ability to order up to three free case refinements expires. Eight quarters represents the average case treatment length, and, as case refinements are ordered toward the end of the treatment plan, achieving case completion is important for Align to reasonably estimate the case refinement usage rate.
FOIA CONFIDENTIAL TREATMENT REQUEST
CONFIDENTIAL TREATMENT REQUESTED BY ALIGN TECHNOLOGY, INC.
ALGN 002
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
Determination of Error in the Application of the Usage Rate Calculation
Align applies the current case refinement usage rate to open treatment cases to calculate the number of estimated case refinements to be delivered in the future. During Q4 2012, Align identified an error in the application of its usage rate to estimate the number of undelivered case refinements. Prior to Q4 2012, Align treated all historic treatments for which it applied an estimated usage rate as a single population; however, many of the completed historic treatments have been included erroneously. Accordingly, the application of the most current quarter case refinement usage rate to the population (which incorrectly included treatments which had reached their completion date), resulted in an overstatement of the estimated number of case refinements to be delivered in the future. This resulted in an overstatement of deferred revenue for historic treatment plans.
During Q4 2012, Align calculated the out of period adjustment by excluding the periods in which treatments have been completed from its deferred revenue analysis. As a result, Align concluded that its deferred revenue balance was overstated by $0.7 million at the end of 2011 and by $4.5 million at the end of Q3 2012, resulting in a cumulative out of period adjustment of $5.2 million at the end of Q3 2012.
Determination of the Period to which the Error Related To
In order to determine which periods the $4.9 million net revenue adjustment related to, Align analyzed the impact to each quarter of fiscal year 2012. As of each reporting date, Align bifurcated the treatment data by fiscal years based on the original date of the case shipment. If the treatments for a particular fiscal year were complete, Align concluded the deferred revenue balance related to that year should have been released. For those years where treatments were not complete, Align utilized historical information to project the case refinement usage for that period for the purpose of calculating the deferred revenue balance. Of the $5.2 million out of period revenue adjustment, $0.7 million was related to periods prior to 2012 and $4.5 million related to the first three quarters of 2012. Align prepared a SAB 99 materiality assessment and concluded that the impact of the errors and out of period adjustment were not material to the consolidated financial statements for the respective quarters of 2012.
b.
Please tell us why you considered the change in usage rate an “error” rather than a change in estimate that should be recognized prospectively under FASB ASC 250-10-45-17.
Response:
Align considered whether this adjustment was a change in estimate or a correction of an error and concluded that it is a correction of an error as Align had sufficient data and should have excluded the periods in which treatments have been completed from its deferred revenue analysis.
c.
Please tell us why you did not include the financial statement requirements of FASB ASC 250-10-50, including the effect of the correction on each financial statement line item and any per-share amounts affected for each of the quarterly periods of 2012.
Response:
Align respectfully advises the Staff that the financial statement requirements of FASB ASC 250-10-50, including the effect of the correction on each financial statement line item and any per-share amounts affected for each of the quarterly periods in 2012, were not included as Align concluded that the correction of the error was not material to any period or to any quarter within 2012 under the guidance of SAB Topic 1M. Accordingly, Align recorded an out of period revenue adjustment in Q4 2012 to correct this error. In future filings Align will clarify the effects of the out of period adjustment in each of the affected periods.
FOIA CONFIDENTIAL TREATMENT REQUEST
CONFIDENTIAL TREATMENT REQUESTED BY ALIGN TECHNOLOGY, INC.
ALGN 003
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
3.
Regarding your revenue recognition policy for multiple-element arrangements, please explain to us in greater detail how you allocate arrangement consideration to each deliverable as required by FASB ASC 605-25-30-2. Provide an example of how you determine the allocation to each deliverable. In your example show us how you apply the relative selling price method to a typical Invisalign treatment plan and clarify the amount and timing of revenue recognized for each deliverable.
Response:
For fiscal years 2012, 2011 and 2010, the Invisalign Full revenue represents approximately 61%, 63%, and 68% of total net revenues, respectively, and, therefore, is considered a typical Invisalign treatment. The price for Invisalign Full includes aligners and up to three case refinements. The following discussion is based on a typical Invisalign treatment plan as represented by the Invisalign Full product.
Align allocates the arrangement consideration to the separate units of accounting based on each unit's selling price using the relative selling price method at the inception of the arrangement when the order is received.
Each deliverable is shipped during different times of treatment, and revenue is recognized upon shipment of each deliverable. Aligners are shipped at the inception of the treatment plan and case refinements are typically ordered and shipped towards the end of the treatment plan.
In order to provide an example of the amount and timing of revenue recognition allocation of the arrangement consideration using the relative selling price method in a typical Invisalign Full treatment, the following assumptions are used:
[***]
4.
Please respond to the following comments about your allocation of arrangement consideration to all deliverables, including case refinements and replacement aligners, as required by FASB ASC 605-25-30-2:
a.
Explain to us why you adjust vendor-specific objective evidence (VSOE) for estimated usage rates for case refinements and replacement aligners to determine the relative selling price allocated to those units of accounting.
Response:
Align acknowledges the Staff's comments and would like to clarify that Align does not adjust VSOE of selling price for case refinements and replacement aligners when determining the relative selling price allocation. Align utilizes VSOE of selling price of the case refinement and replacement aligner deliverables. Note that replacement aligners are only included in Invisalign Teen.
Align determines the number of case refinements and replacement aligners estimated to be delivered for each arrangement by applying an estimated usage rate, based on historical experience to the number of maximum potential case refinement and replacement aligner deliverables. The estimated number of case refinements and replacement aligners to be delivered is less than one for each treatment. Accordingly, the calculated selling price per arrangement element reflects the estimated number of case refinement and replacement aligners to be delivered (refer to the table in response to Comment 3).
FOIA CONFIDENTIAL TREATMENT REQUEST
CONFIDENTIAL TREATMENT REQUESTED BY ALIGN TECHNOLOGY, INC.
ALGN 004
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
b.
Please tell us how adjusting VSOE by estimated usable rates complies with FASB ASC 605-25-30-2 which states that arrangement consideration should be allocated at inception of the arrangement to all deliverables on the basis of their relative selling price using VSOE or third party evidence of selling price.
Response:
Align's multiple-element arrangements have a fixed amount of consideration and a variable number of deliverables (i.e. case refinements and/or replacement aligners). While Align is not aware of any specific guidance in Generally Accepted Accounting Principles ("GAAP") that addresses this situation (fixed amount of consideration and variable number of deliverables), Align considers the following example and reference to ASC 985-605-25-45 are relevant to its situation.
The following example involves a fixed amount of consideration and a variable number of deliverables (i.e., case refinements and/or replacement aligners) which can be reasonably and reliably estimated. Align understands that the revenue recognition model in this example has been previously accepted by the Commission.
Facts: Publishing Company (“Publisher”) publishes and distributes a wide range of periodicals and phone directories in both paper ("physical publication") and internet formats ("online publication").
Publisher generates all its fees from selling advertising in such publications to its customers. Publisher is required to deliver these free publications to specified locations. The advertisement is included in both the physical and online publications for a period equal to the circulation period of the physical publication.
The physical and online publication advertising are always sold as a bundled package for one fee.
Publisher has properly separated and allocated the fee between the two deliverables (physical publication and online publication) in accordance with ASC 605-25. How should Publisher recognize revenue on each element?
Interpretive Response: The revenue allocated to the online advertising element should be recognized ratably over the contractual period it is required to be displayed on the website. Up-front revenue recognition is precluded as Publisher has a more than an inconsequential or perfunctory obligation for continued display of the online advertising over the contractual period.
Align understands that, in this example, the Commission accepted a model in which the revenue allocated to the physical publication may be recognized using either of two methods below, assuming certain conditions are met:
- Delivery method - recognize revenue based upon the percentage of publications/books delivered
(i.e., a proportionate performance model), and
- Deferral method - recognize revenue ratably over the contractual circulation period.
The delivery method takes a view that the
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filename1.htm
SEC Comment Response REDACTED
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
FOIA Confidential Treatment Request
Under 17 C.F.R. § 200.83
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
June 28, 2013
Attention: Mr. Cascio
Ms. Lochhead
Mr. Soares
Mr. Kruczek
Re: Align Technology, Inc.
Form 10-K for the fiscal year ended December 31, 2012
Filed March 1, 2013
Form 10-Q for the quarterly period ended March 31, 2013
Filed May 3, 2013
File No. 000-32259
Ladies and Gentlemen:
On behalf of Align Technology, Inc. (“Align”), I respectfully submit this letter in response to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) received by letter dated June 3, 2013 relating to Align's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “Form 10-K”) and Quarterly Report on Form 10-Q for the period ended March 31, 2013 (the “Form 10-Q”).
In this letter, Align has recited the comments from the Staff in italicized, bold type and followed each comment with Align's response. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Form 10-K or Form 10-Q, as applicable.
Because of the sensitive nature of the information contained in certain parts of this letter, this submission is accompanied by a request for confidential treatment for such information. Align is requesting pursuant to 17 C.F.R. §200.83 confidential treatment for certain parts of this letter, as indicated by [***], with respect to the Freedom of Information Act (the “FOIA”) and have filed a separate letter with the Office of Freedom of Information and Privacy Act Operations in connection with that request. In the event that the Staff receives a request for access to the confidential portions herein, whether pursuant to the FOIA or otherwise, Align respectfully request to be notified immediately, so that it may further substantiate this request for confidential treatment. Please address any notification of a request for access to such information to me.
Form 10-K for the fiscal year ended December 31, 2012
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, page 31
FOIA CONFIDENTIAL TREATMENT REQUEST
CONFIDENTIAL TREATMENT REQUESTED BY ALIGN TECHNOLOGY, INC.
ALGN 001
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
1.
We see that Invisalign Express/Lite and Invisalign Teen increased at a greater percentage than the Invisalign Full products from 2011 to 2012. To the extent material, in future filings please include a discussion of how the price mix among the different Clear Aligner products impacted revenue from period to period.
Response:
Align acknowledges the Staff’s comment and will include in future filings a discussion of the price mix among different Clear Aligner products and the impact on revenues from period to period to the extent that they are material.
Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies, page 60
Revenue Recognition, pages 45 and 63
2.
We see from page 50 that in the fourth quarter of 2012 you identified an error that the actual case refinement usage rate was lower than estimated and recorded a net revenue release of $4.9 million of which $4.5 million relates to the first three quarters of fiscal year 2012. Please respond to the following comments:
a.
Please tell us how you concluded that the actual case refinement usage rate was lower than your estimate and how you determined to what period the “error” related.
Response:
Background
Align offers various products as part of multiple-element arrangements. Typically, these arrangements will comprise of the delivery of aligners and delivery of up to three case refinements. Aligners are typically delivered at the outset of the arrangement and case refinements are typically delivered during the final stages of the treatment period. Case refinement allows for additional aligners as a finishing tool to adjust the patient's teeth to the desired final position, and has been included in the list prices of Invisalign Full since 2005, and Invisalign Teen and Invisalign Assist since these products were introduced in 2008. Based on historical experience since 2005, Align has determined that customers will typically not utilize the maximum number of case refinements offered.
Align has sufficient historical experience to calculate an estimate of the number of case refinements that will be used by customers. The case refinement usage rate is the average number of case refinements that will be delivered in each treatment plan.
Based on an analysis of historical case refinement utilization, Align uses an average of the most recent eight-consecutive quarters of treatment data in which at least 90% of treatments have reached their case completion dates to estimate the case refinement usage rate. Once a case completion date has passed, the ability to order up to three free case refinements expires. Eight quarters represents the average case treatment length, and, as case refinements are ordered toward the end of the treatment plan, achieving case completion is important for Align to reasonably estimate the case refinement usage rate.
FOIA CONFIDENTIAL TREATMENT REQUEST
CONFIDENTIAL TREATMENT REQUESTED BY ALIGN TECHNOLOGY, INC.
ALGN 002
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
Determination of Error in the Application of the Usage Rate Calculation
Align applies the current case refinement usage rate to open treatment cases to calculate the number of estimated case refinements to be delivered in the future. During Q4 2012, Align identified an error in the application of its usage rate to estimate the number of undelivered case refinements. Prior to Q4 2012, Align treated all historic treatments for which it applied an estimated usage rate as a single population; however, many of the completed historic treatments have been included erroneously. Accordingly, the application of the most current quarter case refinement usage rate to the population (which incorrectly included treatments which had reached their completion date), resulted in an overstatement of the estimated number of case refinements to be delivered in the future. This resulted in an overstatement of deferred revenue for historic treatment plans.
During Q4 2012, Align calculated the out of period adjustment by excluding the periods in which treatments have been completed from its deferred revenue analysis. As a result, Align concluded that its deferred revenue balance was overstated by $0.7 million at the end of 2011 and by $4.5 million at the end of Q3 2012, resulting in a cumulative out of period adjustment of $5.2 million at the end of Q3 2012.
Determination of the Period to which the Error Related To
In order to determine which periods the $4.9 million net revenue adjustment related to, Align analyzed the impact to each quarter of fiscal year 2012. As of each reporting date, Align bifurcated the treatment data by fiscal years based on the original date of the case shipment. If the treatments for a particular fiscal year were complete, Align concluded the deferred revenue balance related to that year should have been released. For those years where treatments were not complete, Align utilized historical information to project the case refinement usage for that period for the purpose of calculating the deferred revenue balance. Of the $5.2 million out of period revenue adjustment, $0.7 million was related to periods prior to 2012 and $4.5 million related to the first three quarters of 2012. Align prepared a SAB 99 materiality assessment and concluded that the impact of the errors and out of period adjustment were not material to the consolidated financial statements for the respective quarters of 2012.
b.
Please tell us why you considered the change in usage rate an “error” rather than a change in estimate that should be recognized prospectively under FASB ASC 250-10-45-17.
Response:
Align considered whether this adjustment was a change in estimate or a correction of an error and concluded that it is a correction of an error as Align had sufficient data and should have excluded the periods in which treatments have been completed from its deferred revenue analysis.
c.
Please tell us why you did not include the financial statement requirements of FASB ASC 250-10-50, including the effect of the correction on each financial statement line item and any per-share amounts affected for each of the quarterly periods of 2012.
Response:
Align respectfully advises the Staff that the financial statement requirements of FASB ASC 250-10-50, including the effect of the correction on each financial statement line item and any per-share amounts affected for each of the quarterly periods in 2012, were not included as Align concluded that the correction of the error was not material to any period or to any quarter within 2012 under the guidance of SAB Topic 1M. Accordingly, Align recorded an out of period revenue adjustment in Q4 2012 to correct this error. In future filings Align will clarify the effects of the out of period adjustment in each of the affected periods.
FOIA CONFIDENTIAL TREATMENT REQUEST
CONFIDENTIAL TREATMENT REQUESTED BY ALIGN TECHNOLOGY, INC.
ALGN 003
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
3.
Regarding your revenue recognition policy for multiple-element arrangements, please explain to us in greater detail how you allocate arrangement consideration to each deliverable as required by FASB ASC 605-25-30-2. Provide an example of how you determine the allocation to each deliverable. In your example show us how you apply the relative selling price method to a typical Invisalign treatment plan and clarify the amount and timing of revenue recognized for each deliverable.
Response:
For fiscal years 2012, 2011 and 2010, the Invisalign Full revenue represents approximately 61%, 63%, and 68% of total net revenues, respectively, and, therefore, is considered a typical Invisalign treatment. The price for Invisalign Full includes aligners and up to three case refinements. The following discussion is based on a typical Invisalign treatment plan as represented by the Invisalign Full product.
Align allocates the arrangement consideration to the separate units of accounting based on each unit's selling price using the relative selling price method at the inception of the arrangement when the order is received.
Each deliverable is shipped during different times of treatment, and revenue is recognized upon shipment of each deliverable. Aligners are shipped at the inception of the treatment plan and case refinements are typically ordered and shipped towards the end of the treatment plan.
In order to provide an example of the amount and timing of revenue recognition allocation of the arrangement consideration using the relative selling price method in a typical Invisalign Full treatment, the following assumptions are used:
[***]
4.
Please respond to the following comments about your allocation of arrangement consideration to all deliverables, including case refinements and replacement aligners, as required by FASB ASC 605-25-30-2:
a.
Explain to us why you adjust vendor-specific objective evidence (VSOE) for estimated usage rates for case refinements and replacement aligners to determine the relative selling price allocated to those units of accounting.
Response:
Align acknowledges the Staff's comments and would like to clarify that Align does not adjust VSOE of selling price for case refinements and replacement aligners when determining the relative selling price allocation. Align utilizes VSOE of selling price of the case refinement and replacement aligner deliverables. Note that replacement aligners are only included in Invisalign Teen.
Align determines the number of case refinements and replacement aligners estimated to be delivered for each arrangement by applying an estimated usage rate, based on historical experience to the number of maximum potential case refinement and replacement aligner deliverables. The estimated number of case refinements and replacement aligners to be delivered is less than one for each treatment. Accordingly, the calculated selling price per arrangement element reflects the estimated number of case refinement and replacement aligners to be delivered (refer to the table in response to Comment 3).
FOIA CONFIDENTIAL TREATMENT REQUEST
CONFIDENTIAL TREATMENT REQUESTED BY ALIGN TECHNOLOGY, INC.
ALGN 004
Align Technology, Inc. 2560 Orchard Parkway San Jose, CA 95131
Tel: (408) 470-1000 Fax: (408) 470-1010
WWW.INVISALIGN.COM
b.
Please tell us how adjusting VSOE by estimated usable rates complies with FASB ASC 605-25-30-2 which states that arrangement consideration should be allocated at inception of the arrangement to all deliverables on the basis of their relative selling price using VSOE or third party evidence of selling price.
Response:
Align's multiple-element arrangements have a fixed amount of consideration and a variable number of deliverables (i.e. case refinements and/or replacement aligners). While Align is not aware of any specific guidance in Generally Accepted Accounting Principles ("GAAP") that addresses this situation (fixed amount of consideration and variable number of deliverables), Align considers the following example and reference to ASC 985-605-25-45 are relevant to its situation.
The following example involves a fixed amount of consideration and a variable number of deliverables (i.e., case refinements and/or replacement aligners) which can be reasonably and reliably estimated. Align understands that the revenue recognition model in this example has been previously accepted by the Commission.
Facts: Publishing Company (“Publisher”) publishes and distributes a wide range of periodicals and phone directories in both paper ("physical publication") and internet formats ("online publication").
Publisher generates all its fees from selling advertising in such publications to its customers. Publisher is required to deliver these free publications to specified locations. The advertisement is included in both the physical and online publications for a period equal to the circulation period of the physical publication.
The physical and online publication advertising are always sold as a bundled package for one fee.
Publisher has properly separated and allocated the fee between the two deliverables (physical publication and online publication) in accordance with ASC 605-25. How should Publisher recognize revenue on each element?
Interpretive Response: The revenue allocated to the online advertising element should be recognized ratably over the contractual period it is required to be displayed on the website. Up-front revenue recognition is precluded as Publisher has a more than an inconsequential or perfunctory obligation for continued display of the online advertising over the contractual period.
Align understands that, in this example, the Commission accepted a model in which the revenue allocated to the physical publication may be recognized using either of two methods below, assuming certain conditions are met:
- Delivery method - recognize revenue based upon the percentage of publications/books delivered
(i.e., a proportionate performance model), and
- Deferral method - recognize revenue ratably over the contractual circulation period.
The delivery method takes a view that the