Accounting Policy
Revenue recognition
We generate substantially all of our revenues from the sale of our integrated navigation devices, the TomTom GO family of products; our non-integrated navigation solutions, the TomTom Navigator and TomTom MOBILE; software-only sales of the TomTom Navigator and TomTom MOBILE; and map updates and upgrades to these products. We also earn a small portion of our total revenues from licensing our Navigator software and the sale of product accessories, such as cradles and car kits.
We recognise revenue from the sale of our navigation products and one-off sales of our TomTom Navigator software licences when the risks and rewards of ownership are transferred to our customers (which include distributors, retailers, original equipment manufacturers and consumers). We generally consider the risks and rewards of ownership to be transferred when the goods are shipped and when our customers have no contractual rights of return. For those distributors and retailers with whom we have agreed to provide a right of return, we defer revenue recognition and the related cost of sales until the product is sold by the distributor or retailer. In circumstances when we believe returns are probable because of market conditions or for other reasons, we record an estimate for these returns as a direct deduction to our revenues based upon historical rates of return. If a greater than estimated proportion of distributors or retailers return our products, we would be required to record additional deductions to our revenue.
We record our revenues net of sales taxes, rebate programs and taking into account product returns.
We have entered into agreements with certain of our distributors and retailers, and we have adopted an inventory valuation compensation policy, whereby we compensate our distributors and retailers on a periodic basis for price differences for their stock on hand resulting from price reductions. We also have agreements with some of our distributors and retailers providing them with performance-based rebates.
Each month we record estimated deductions to our revenue for rebate programs, including performance-based rebates, inventory valuation compensation, promotions and other volume-based incentives. We base our estimates on the assumption that maximum rebates are achieved. As agreed with each customer, at the end of a given period (generally one to three months), we determine the actual sales incentives earned by that customer and accordingly adjust our revenue deduction from our previous estimate. Market conditions and product transitions may require us to increase customer incentive programs and incur incremental inventory rotation and other obligations that could result in additional reductions to revenue at the time such programs are offered.
Currency effect
TomTom’s primary activities are denominated in euros. Accordingly, TomTom has chosen the euro as its functional currency.
Transactions in foreign currencies are recorded in functional currency using the rate of exchange prevailing at the date of the transaction. Monetary assets and liabilities denominated in currencies other than the euro are translated using the rate of exchange prevailing at the balance sheet date, and the results on translation are included in the income statement.
For consolidation purposes, the Company classifies its subsidiaries as “foreign entities”. The assets and liabilities are translated at the year-end spot rate, whereas the income statement is translated at the average monthly exchange rate. Translation differences arising thereon are taken to shareholders’ equity (cumulative translation adjustment).
In order to mitigate the risks of foreign currency exposures, the Group enters into forward contracts and options.
Stock compensation expense
TomTom issues share options, which qualify as equity-settled share-based payments, to eligible employees including members of management. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest. Fair value is measured by use of the Buck and Scholes model. The expected life of the share options used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and makes a corresponding adjustment to equity (stock compensation reserve) over the remaining vesting period. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.
