Summary of Significant Accounting Policies
|12 Months Ended|
Dec. 31, 2015
|Accounting Policies [Abstract]|
|Summary of Significant Accounting Policies||
Summary of Significant Accounting Policies
Basis of Presentation
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of RealPage, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Segment and Geographic Information
Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a company-wide basis. As a result, we determined that the Company has a single reporting segment and operating unit structure.
Principally, all of our revenue for the years ended December 31, 2015, 2014, and 2013 was earned in the United States. Net property, equipment, and software held were $77.4 million and $66.5 million in the United States, and $4.8 million and $6.1 million in our international subsidiaries at December 31, 2015 and 2014, respectively. Substantially all of the net property, equipment, and software held in our international subsidiaries was located in the Philippines and India at both December 31, 2015 and 2014.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allowance for doubtful accounts; the useful lives of intangible assets and the recoverability or impairment of tangible and intangible asset values; fair value measurements; contingent commissions related to the sale of insurance products; purchase accounting allocations and contingent consideration; revenue and deferred revenue and related reserves; stock-based compensation; and our effective income tax rate and the recoverability of deferred tax assets, which are based upon our expectations of future taxable income and allowable deductions. Actual results could differ from these estimates.
The Company is self-insured for the cost of claims made under its employee medical programs. These costs include an estimate for expected settlements of pending claims and an estimate for claims incurred but not reported. These significant estimates are based on management's assessment of outstanding claims, historical analyses, and current payment trends.
In the second quarter of 2013, we revised the estimated useful lives of our data processing equipment and internally developed software to more accurately reflect our use of these assets. The result of the change for the year ended December 31, 2013, was a $3.5 million increase in operating income, a $1.9 million increase in net income, and an increase in basic and diluted earnings per share of $0.03. During the third quarter of 2013, we revised the length of the expected customer benefit of our license fees billed at the initial order date. The result of the change for the year ended December 31, 2013, was a $2.8 million increase in operating income, a $1.5 million increase in net income, and an increase in basic and diluted earnings per share of $0.02.
Concentrations of Credit Risk
Our cash accounts are maintained at various financial institutions and may, from time to time, exceed federally insured limits. The Company has not experienced any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable result from substantially all of our customers being in the multifamily rental housing market. Our customers, however, are dispersed across different geographic areas. We do not require collateral from customers. We maintain an allowance for doubtful accounts based upon the expected collectability of accounts receivable.
No single customer accounted for 10% or more of our revenue or accounts receivable for the years ended December 31, 2015, 2014, or 2013. Revenues for our largest customer were 4.6%, 4.9%, and 3.4% of total revenues for the years ended December 31, 2015, 2014, and 2013, respectively.
We consider all highly liquid investments with a maturity date, when purchased, of three months or less to be cash equivalents.
Restricted cash consists of cash collected from tenants that will be remitted primarily to our customers.
Accounts receivable primarily represent trade receivables from customers that we present net of an allowance for doubtful accounts. For several of our solutions, we invoice customers prior to the period in which service is provided. For certain transactions, we have met the requirements to recognize revenue in advance of invoicing the customer. In these instances, we record unbilled receivables for the amount that will be due from the customer upon invoicing. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments, or the customer canceling prior to the service being rendered. As a result, a portion of our allowance is for services not yet rendered and, therefore, classified as an offset to deferred revenue. In evaluating the sufficiency of the allowance for doubtful accounts we consider the current financial condition of the customer, the specific details of the customer account, the age of the outstanding balance, the current economic environment, and historical credit trends. Any change in the assumptions used in analyzing a specific account receivable might result in an additional allowance for doubtful accounts being recognized in the period in which the change occurs.
Accounts receivable are written off upon determination of non-collectability following established Company policies based on the aging from the accounts receivable invoice date. In the case of balances relating to services not yet rendered, the balance is written off when the customer cancels the service or when we determine that the invoiced service will no longer be provided, whichever occurs first. During the years ended December 31, 2015, 2014, and 2013, we incurred bad debt expense of $2.0 million, $1.5 million, and $2.1 million, respectively.
Accounts receivable includes commissions due to the Company related to the sale of insurance products to individuals and commissions which are contingent based upon the activity in the underlying policies. Contingent commissions are determined based on a calculation that considers earned agent commissions, a percent of premium retained by our underwriting partner, incurred losses, and profit retained by our underwriting partner during the time period. Contingent commissions receivable are recorded at their estimated net realizable value, based on estimates and considerations which include, but are not limited to, the historical and projected loss rates incurred by the underlying policies.
Property, Equipment, and Software
Property, equipment, and software are recorded at cost less accumulated depreciation and amortization, which are computed using the straight-line method over the following estimated useful lives:
Software includes both purchased and internally developed software. Leasehold improvements are depreciated over the shorter of the lease term or 10 years. Gains and losses from asset disposals are included in the line "General and administrative" in the Consolidated Statements of Operations.
When we acquire businesses, we allocate the total consideration paid to the fair value of the tangible assets, liabilities, and identifiable intangible assets acquired. Any residual purchase consideration is recorded as goodwill. The allocation of the purchase price requires our management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, in particular with respect to identified intangible assets. These estimates are based on the application of valuation models using historical experience and information obtained from the management of the acquired businesses. Such estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur which affect the accuracy or validity of these estimates.
Our business combination agreements may provide for the payment of additional cash consideration to the extent certain targets are achieved in the future. The fair value of this contingent consideration is based on significant estimates and is initially recorded as purchase price. Changes in the fair value of contingent consideration are reflected in the Consolidated Statements of Operations. We expense acquisition-related costs as incurred rather than including them as a component of purchase price.
Impairment of Long-Lived Assets
We perform an impairment review of long-lived assets held and used whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant under-performance relative to projected future operating results, significant changes in the manner of our use of the acquired assets, or significant changes in our overall business and/or product strategies. When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of these indicators, we determine the recoverability by comparing the carrying amount of the asset or asset group to net future undiscounted cash flows that the asset or assets are expected to generate. If the carrying amount exceeds the fair market value of the asset or assets, we would recognize an impairment charge equal to this excess.
Goodwill and Identified Intangible Assets with Indefinite Lives
We test goodwill and identified intangible assets with indefinite lives for impairment separately on an annual basis in the fourth quarter of each year. Additionally, we test these assets in the interim if events and circumstances indicate they may be impaired. The events and circumstances that we consider include, but are not limited to, significant under-performance relative to projected future operating results and significant changes in our overall business and/or product strategies.
If an event or circumstance occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill and identified intangible assets with indefinite lives, the revision could result in a non-cash impairment charge that could have a material impact on our financial results. We evaluate impairment of goodwill by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. The first step involves a comparison of the fair value of a reporting unit with its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the second step involves a comparison of the implied fair value and carrying amount of the goodwill of that reporting unit to determine the impairment charge, if any.
We quantitatively evaluate identified intangible assets with indefinite lives by estimating the fair value of those assets based on estimated future earnings derived from the assets using the income approach model. Assets with indefinite lives that have been determined to be inseparable due to their interchangeable use are grouped into single units of accounting for purposes of testing for impairment. If the carrying amount of an identified intangible asset with an indefinite life exceeds its fair value, we would recognize an impairment loss equal to the excess of carrying value over fair value.
Identified Intangible Assets with Finite Lives
Identified intangible assets with finite lives consist of acquired developed technologies, customer relationships, vendor relationships, and trade names. We record intangible assets at fair value and amortize those with finite lives over the shorter of the contractual life or the estimated useful life. We estimate the useful lives of acquired developed product technologies and customer relationships based on factors that include the planned use of each developed product technology and the expected pattern of future cash flows to be derived from each developed product technology and existing customer relationships.
Estimated useful lives for identified intangible assets with finite lives consist of the following:
We include amortization of acquired developed technologies in cost of revenue, amortization of acquired customer relationships in sales and marketing expenses, and amortization of vendor relationships in general and administrative expenses in our Consolidated Statements of Operations.
Income taxes are provided based on the liability method, which results in income tax assets and liabilities arising from temporary differences. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The liability method requires the effect of tax rate changes on current and accumulated deferred income taxes to be reflected in the period in which the rate change was enacted.
The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. We evaluate the need for, and the adequacy of, valuation allowances based on the expected realization of our deferred tax assets. The factors used to assess the likelihood of realization include historical earnings, our latest forecast of taxable income, and available tax planning strategies that could be implemented to realize the net deferred tax assets.
We may recognize a tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. There were no identified tax benefits that were considered uncertain positions at December 31, 2015 and 2014.
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2015-17, Balance Sheet Classification of Deferred Taxes, which requires companies to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet instead of the current requirement to separate deferred income tax assets and liabilities into current and noncurrent amounts. As permitted in this ASU, we early adopted ASU 2015-17 effective December 31, 2015 on a retrospective basis. Adoption of this ASU resulted in a reclassification of our net current deferred tax assets, totaling $11.0 million, from current assets to noncurrent assets in the Consolidated Balance Sheet as of December 31, 2014. Additionally, due to the removal of the requirement to classify these assets and liabilities as current or noncurrent, we were able to further net deferred tax assets and liabilities arising from the same taxing jurisdiction, resulting in the reclassification of $5.2 million of deferred tax liabilities from current liabilities to noncurrent assets as of December 31, 2014.
We derive our revenue from three primary sources: on demand software solutions, on premise software solutions, and professional services. We commence revenue recognition when all of the following conditions are met:
If the fees are not fixed or determinable, we recognize revenues as payments become due from customers or when amounts owed are collected, provided all other conditions for revenue recognition have been met. Accordingly, this may materially affect the timing of our revenue recognition and results of operations.
When arrangements with customers include multiple software solutions and/or services, we allocate arrangement consideration to each deliverable based on its relative selling price. In such circumstances, we determine the relative selling price for each deliverable based on vendor specific objective evidence of selling price ("VSOE"), if available, or our best estimate of selling price ("ESP"). We have determined that third-party evidence of selling price is not available as our solutions and services are not largely interchangeable with those of other vendors. Our process for determining ESP considers multiple factors, including prices charged by us for similar offerings when sold separately, pricing and discount strategies, and other business objectives.
Taxes collected from customers and remitted to governmental authorities are presented on a net basis.
On Demand Revenue
Our on demand revenue consists of license and subscription fees, transaction fees related to certain of our software-enabled value-added services, and commissions derived from us selling certain risk mitigation services.
License and subscription fees are composed of a charge billed at the initial order date and monthly or annual subscription fees for accessing our on demand software solutions. The license fee billed at the initial order date is recognized as revenue on a straight-line basis over the longer of the contractual term or the period in which the customer is expected to benefit, which we consider to be three years. Recognition starts once the product has been activated. Revenue from monthly and annual subscription fees is recognized on a straight-line basis over the access period.
We recognize revenue from transaction fees derived from certain of our software-enabled value-added services as the related services are performed.
As part of our risk mitigation services to the rental housing industry, we act as an insurance agent and derive commission revenue from the sale of insurance products to individuals. The commissions are based upon a percentage of the premium that the insurance company charges to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. If the policy is cancelled, our commissions are forfeited as a percent of the unearned premium. As a result, we recognize commissions related to these services as earned ratably over the policy term. Our contract with our underwriting partner provides for contingent commissions to be paid to us in accordance with the agreement. Our estimate of contingent commission revenue considers historical loss experience on the policies sold by us.
On Premise Revenue
Sales of our on premise software solutions consists of an annual term license, which includes maintenance and support. Customers can renew their annual term license for additional one-year terms at renewal price levels. We recognize revenue for the annual term license and support services on a straight-line basis over the contract term.
We also derive on premise revenue from multiple element arrangements that include perpetual licenses with maintenance and other services to be provided over a fixed term. Revenue is recognized for delivered items using the residual method when we have VSOE of fair value for the undelivered items and all other criteria for revenue recognition have been met.
When VSOE has not been asserted for the undelivered items, we recognize the arrangement fees ratably over the longer of the customer support period or the period during which professional services are rendered.
Professional and Other Revenue
Professional services and other revenue are recognized as the services are rendered for time and material contracts. Training revenues are recognized after the services are performed.
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from our subscription service described above and is recognized as the revenue recognition criteria are met. For several of our solutions, we invoice our customers in annual, monthly, or quarterly installments in advance of the commencement of the service period. Accordingly, the deferred revenue balance does not represent the total contract value of annual subscription agreements.
Cost of Revenue
Cost of revenue consists primarily of salaries and related personnel expenses of our operations and support personnel, including training and implementation services; expenses related to the operation of our data centers; fees paid to third-party providers; allocations of facilities overhead costs; depreciation, amortization of acquired technologies; and amortization of capitalized software.
The Company recognizes compensation expense related to stock options and restricted stock units (“RSU”) granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures.
The Company estimates the fair value of time-based vesting stock option awards using the Black-Scholes option pricing model on the date of grant and the associated expense is recognized over the requisite service period, which is generally the vesting period, on a straight-line basis. We have granted stock options at exercise prices equal to the fair market value of our common stock, as of the grant date.
The fair value of time-based RSU awards is based on the closing trading price of our common stock on the date of grant. Compensation expense for these awards is recognized on a straight-line basis over the requisite service period.
The fair value of RSU awards with both market and time-based vesting conditions is estimated using a discrete model based on multiple stock price-paths developed through the use of Monte Carlo simulation. Expense associated with market-based awards is recognized over the requisite service period using the graded-vesting attribution method. The requisite service period includes the estimated period to achieve the market condition, based on the median of the distribution of share price-paths on which the market condition is satisfied, and the time-based vesting period subsequent to achieving the market condition.
The Company estimates the fair value of RSU awards with both performance-based and time-based vesting conditions based on the closing price of our common stock on the date of grant. Compensation expense for performance-based RSU awards is recognized when achievement of the performance condition is determined to be probable. Expense is recognized on a straight-line basis over the requisite service period.
Changes to the assumptions underlying the above models may have a significant impact on the underlying value of the stock options or RSU awards, which could have a material impact on our consolidated financial statements.
Capitalized Product Development Costs
We capitalize specific product development costs, including costs to develop software products or the software components of our solutions to be marketed to external users, as well as software programs to be used solely to meet our internal needs. The costs incurred in the preliminary stages of development related to research, project planning, training, maintenance, general and administrative activities, and overhead costs are expensed as incurred. The costs of relatively minor upgrades and enhancements to the software are also expensed as incurred. Once an application has reached the development stage, internal and external costs incurred in the performance of application development stage activities, including costs of materials, services, and payroll and payroll-related costs for employees, are capitalized, if direct and incremental, until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality.
Capitalized costs are recorded as part of property, equipment, and software. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three to five years. Our management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Advertising costs are expensed as incurred and totaled $16.3 million, $15.1 million, and $11.4 million for the years ended December 31, 2015, 2014, and 2013, respectively.
Some of the operating lease agreements entered into by the Company contain provisions for future rent increases, rent free periods, periods in which rent payments are reduced (abated), or lease incentives. The total amount of rental payments due over the lease term is charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to “Accrued lease liability,” which is included in “Accrued expenses and other current liabilities" or "Other long-term liabilities" in the accompanying Consolidated Balance Sheets, depending upon when the liability is expected to be relieved.
Other Current and Long-Term Liabilities
Accrued expenses and other current liabilities consisted of the following at December 31, 2015 and 2014:
Other long-term liabilities consisted of the following at December 31, 2015 and 2014:
Accrued lease liability consisted of balances resulting from the recognition of rent expense under various lease agreements on a straight-line basis. Deferred rent amounts at December 31, 2015, primarily related to incentives under a lease executed in 2015 for our new corporate headquarters in Richardson, Texas. See Note 9 for additional information regarding this lease.
Fair Value of Financial Instruments
Financial assets and liabilities with carrying amounts approximating fair value include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities. The carrying amount of our other long-term liabilities approximates their fair value.
Fair Value Measurements
We measure certain financial assets and liabilities at fair value pursuant to a hierarchy based upon the observability of the inputs to valuation technique. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. See additional discussion of our fair value measurements at Note 12.
Recently Issued Accounting Standards
In November 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior period financial statements for measurement-period adjustments. This ASU requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. This new standard is effective for interim and annual reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company will adopt ASU 2015-16 in the first quarter of 2016 and does not expect that the adoption will have a material effect on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, and early adoption of this ASU is permitted.
In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, which excludes line of credit arrangements from the scope of ASU 2015-03. Under this ASU, debt issuance costs related to line of credit arrangements can be deferred and presented as an asset that is subsequently amortized over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. ASU 2015-15 should be adopted concurrent with the adoption of ASU 2015-03.
The Company will adopt ASU's 2015-03 and 2015-15 in the first quarter of 2016 and does not expect that the adoption of these standards will have a material effect on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. ASU 2015-02 is effective for periods beginning after December 15, 2015. The Company will adopt this standard in the first quarter of 2016 and does not expect that the adoption will have a material effect on its consolidated financial statements.
The FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement in April 2015. This update provides guidance to customers in determining whether a cloud computing arrangement includes a software license. The update is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption of ASU 2015-05 is permitted. The update allows for the use of either a prospective or retrospective adoption approach. The Company will adopt this standard in the first quarter of 2016 and does not expect that the adoption will have a material effect on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 was originally effective for annual and interim reporting periods beginning after December 15, 2016 and early application was prohibited. This ASU permits companies to apply the amendments either retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) - Deferral of Effective Date. ASU 2015-14 permits public business entities to defer the adoption of ASU 2014-09 until interim and annual reporting periods beginning after December 15, 2017. Earlier application is permitted, but not before interim and annual and reporting periods beginning after December 15, 2016. The Company has not yet selected a transition method or date and is currently evaluating the impact of the pending adoption of this ASU on its ongoing financial reporting.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef