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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2021

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021 (the “Annual Report”).

The condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report. The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the operating results to be expected for the full year or any future periods.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses. Significant items subject to such estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, variable consideration, determining the stand-alone selling prices of performance obligations, gross versus net revenue recognition, evaluation of customer versus vendor relationships, and other obligations such as sales return reserves and sales incentive programs; the impairment of goodwill and intangible assets; valuation of assets acquired and liabilities assumed in connection with business combinations; useful lives of tangible and intangible assets; allowances for doubtful accounts; the valuation of deferred income tax assets; and stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates and assumptions.

Principles of Consolidation

The condensed consolidated financial statements, which include the accounts of Roku, Inc. and its wholly-owned subsidiaries, have been prepared in conformity with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of September 30, 2021, two financial institutions managed 33% and 28%, respectively, of the Company’s cash and cash equivalents balance. As of December 31, 2020, two financial institutions managed 46% and 26%, respectively, of the Company’s cash and cash equivalents balance.

Accounts Receivable, net

Accounts receivable are typically unsecured and are derived from revenue earned from customers. They are stated at invoice value less estimated allowances for sales returns, sales incentives, doubtful accounts and other miscellaneous allowances. The Company performs ongoing credit evaluations of its customers to determine allowances for potential credit losses and doubtful accounts. The Company considers historical experience, ongoing promotional activities, historical claim rate and other factors to determine the allowances for sales returns and sales incentives.

Allowance for Sales Returns: Allowance for sales returns consists of the following activities (in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Beginning balance	$	(4,515	)	$	(5,412	)	$	(5,912	)	$	(6,550	)
Charged to revenue		(3,082	)		(2,313	)		(10,133	)		(8,998	)
Utilization of sales return reserve		3,554			3,402			12,002			11,225
Ending balance	$	(4,043	)	$	(4,323	)	$	(4,043	)	$	(4,323	)

Allowance for Sales Incentives: Allowance for sales incentives consists of the following activities (in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Beginning balance	$	(16,640	)	$	(8,962	)	$	(30,838	)	$	(19,476	)
Charged to revenue		(17,379	)		(10,470	)		(44,953	)		(28,127	)
Utilization of sales incentive reserve		14,184			11,366			55,956			39,537
Ending balance	$	(19,835	)	$	(8,066	)	$	(19,835	)	$	(8,066	)

Allowance for Doubtful Accounts: Allowance for doubtful accounts consists of the following activities (in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Beginning balance	$	(3,082	)	$	(4,403	)	$	(4,181	)	$	(1,140	)
Impact of adoption of ASU 2016-13		—			—			—			(1,066	)
Adjusted beginning balance		(3,082	)		(4,403	)		(4,181	)		(2,206	)
Provision for (recoveries of) doubtful accounts		381			(131	)		1,480			(3,097	)
Adjustments for recovery and write-off		1,119			10			1,119			779
Ending balance	$	(1,582	)	$	(4,524	)	$	(1,582	)	$	(4,524	)

The Company did not have any customer that accounted for more than 10% of its accounts receivable, net balance as of September 30, 2021. Customer H accounted for 11% of the accounts receivable, net balance as of December 31, 2020.

Recently Adopted Accounting Standards

On January 1, 2021, the Company adopted the guidance issued in Accounting Standards Updates (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis of goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) that is expected to be discontinued, subject to meeting certain criteria. The guidance is effective as of March 12, 2020 through December 31, 2022. The Company made a policy election in the second quarter of 2020 to elect a different reference rate for the Credit Agreement (as defined below) when LIBOR is discontinued.

Fair Value

The Company’s financial assets measured at fair value are as follows (in thousands):

	As of September 30, 2021				As of December 31, 2020
	Fair Value		Level 1		Fair Value		Level 1
Assets:
Cash and cash equivalents:
Cash	$	1,736,948	$	1,736,948	$	1,021,022	$	1,021,022
Money market funds		442,797		442,797		71,793		71,793
Restricted cash, current		—		—		434		434
Restricted cash, non-current		1,512		1,512		—		—
Total assets measured and recorded at fair value	$	2,181,257	$	2,181,257	$	1,093,249	$	1,093,249

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs in measuring fair value and utilizes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Financial assets and liabilities measured using Level 1 inputs include cash equivalents including restricted cash, accounts receivable, prepaid expenses, accounts payable and accrued liabilities.

The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. The Company measured money market funds of $442.8 million and $71.8 million as cash equivalents as of September 30, 2021 and December 31, 2020, respectively, using Level 1 inputs.

Level 2—Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

The Company did not have Level 2 instruments on September 30, 2021 and December 31, 2020.

Level 3—Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The Company did not have Level 3 instruments on September 30, 2021 and December 31, 2020.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Non-financial assets such as goodwill, intangible assets, property, plant, and equipment, operating lease right-of-use (“ROU”) assets and content assets are evaluated for impairment and adjusted to fair value using Level 3 inputs, only when impairment is recognized. Impairment charges for the three and nine months ended September 30, 2021 and for the year ended December 31, 2020 were not material.