|INTUITIVE SURGICAL INC filed this Form 10-K on 02/02/2018|
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margin on the sale of the reconditioned unit to be generated. When there is no market for the traded-in units, no value is assigned. Traded-in units are reported as a component of inventory until reconditioned and resold, or otherwise disposed.
In addition, customers may also have the opportunity to upgrade their systems, for example, by adding a fourth arm to a three-arm system, adding a second surgeon console for use with the da Vinci Si, Xi, and X Surgical Systems, or by upgrading a da Vinci X Patient-Side Cart to an Xi Patient-Side Cart. Such upgrades are performed by completing component level upgrades at the customer’s site or by swapping out the component upgraded. Upgrade revenue is recognized when the component level upgrades have been completed and all other revenue recognition criteria have been met.
The Company's system sale arrangements contain multiple elements including a system(s), system accessories, instruments, accessories, and system service. A da Vinci Surgical Systems are comprised of three components; a Patient-Side Cart, Surgeon’s Console, and a Vision Cart. The Company generally delivers all of the elements, other than service, within days of entering into the system sale arrangement. da Vinci X and Xi Patient-Side Carts, Surgeon’s Consoles, and Vision Carts are also sold on a stand-alone basis, as are system accessories, instruments, accessories, and service. Each of these elements is a separate unit of accounting.
For multiple-element arrangements, revenue is allocated to each unit of accounting based on their relative selling prices. Relative selling prices are based first on vendor specific objective evidence of fair value (“VSOE”), then on third-party evidence of selling price (“TPE”) when VSOE does not exist, and then on management's best estimate of the selling price (“ESP”) when VSOE and TPE do not exist.
The Company’s system sales arrangements generally include a one-year period of free service and four additional years of service that are generally billed for separately on an annual basis at a contractually stated price. The revenue allocated to the free service period is deferred and recognized ratably over the free service period. Amounts billed for the additional years of service are recorded into deferred revenue when they are billed and recognized ratably over the service period. Deferred revenue, for the periods presented, was primarily comprised of contract consideration related to services not yet performed.
Because the Company has neither VSOE nor TPE for its systems, the allocation of revenue is based on ESP for the systems sold. The objective of ESP is to determine the price at which the Company would transact a sale, had the product been sold on a stand-alone basis. The Company determines ESP for its systems by considering multiple factors, including, but not limited to, features and functionality of the system, geographies, type of customer, and market conditions. The Company regularly reviews ESP and maintains internal controls over establishing and updating these estimates.
The Company enters into sales-type lease and operating lease arrangements with certain qualified customers to purchase or rent its systems. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the underlying assets. Revenue related to multiple-element arrangements are allocated to lease and non-lease elements based on their relative selling prices as prescribed by the Company's revenue recognition policy. Lease elements generally include a da Vinci Surgical System or system component, while non-lease elements generally include service, instruments and accessories. In determining whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms: (1) whether title of the system transfers automatically or for a nominal fee at the end of the term of the lease, (2) whether the present value of the minimum lease payments are equal to or greater than 90% of the fair market value of the leased asset at the inception of the lease, (3) whether the lease term exceeds 75% of the economic life of the leased asset, and (4) whether there is an option to purchase the leased asset at a "bargain price" at the end of the lease term.
The Company generally recognizes revenue from sales-type lease arrangements at the time the system is accepted by the customer, assuming all other revenue recognition criteria have been met. Revenue from sales-type leases is presented as product revenue. Revenue from operating lease arrangements is recognized as earned over the lease term, which is generally on a straight-line basis and is presented as product revenue. Operating lease revenue for the years ended December 31, 2017, 2016, and 2015, was $25.9 million, $16.6 million, and $7.0 million, respectively.
Allowance for Sales Returns and Doubtful Accounts
The allowance for sales returns is based on the Company’s estimates of potential future product returns and other allowances related to current period product revenue. The Company analyzes historical returns, current economic trends, and changes in customer demand and acceptance of the Company's products. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.
The Company accounts for share-based employee compensation plans using the fair value recognition and measurement provisions under U.S. GAAP. The Company’s share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period.
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