Adobe 2001 Annual Report Download - page 70

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
Note 1. Significant Accounting Policies (Continued)
We record OEM licensing revenue, primarily royalties, when OEM partners ship products
incorporating Adobe software, provided collection of such revenue is deemed probable. We have no
remaining obligations in relation to such licensing revenue.
We also recognize revenue under a subscription-based model for our Adobe Studio website, which we
launched in the fourth quarter of fiscal 2001. Revenue is recognized on a monthly basis from fees received
that month for providing software subscriptions for our hosted application.
Deferred revenue includes customer advances under OEM licensing agreements and maintenance
revenue for application products. We recognize deferred maintenance revenue ratably over the term of the
contract, generally twenty-four months. In cases where we will provide a specified free upgrade to an
existing product, we defer revenue until the future obligation is fulfilled.
We perform ongoing credit evaluations of our customers’ financial condition and generally do not
require collateral. We maintain allowances for potential credit losses and such losses have been within our
expectations.
Direct Costs
Direct costs include the costs associated with the manufacturing of our products, product packaging,
third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired
technologies, and hosted server costs.
Advertising Costs
We expense all advertising costs as incurred and classify these costs under sales and marketing
expense.
Advertising costs for fiscal years 2001, 2000, and 1999 were $30.5 million, $32.9 million, and
$22.4 million, respectively.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under the asset and liability
method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to
differences between the financial statement carrying amounts and the tax basis of existing assets and
liabilities. We record a valuation allowance to reduce deferred tax assets to an amount whose realization is
more likely than not.
Foreign Currency and Other Hedging Instruments
On December 2, 2000, we adopted Statement of Financial Accounting Standards No. 133
(‘‘SFAS 133’’), ‘‘Accounting for Derivative Instruments and Hedging Activities.’’ SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging activities and requires us to
recognize these as either assets or liabilities on the balance sheet and measure them at fair value. As
described in Note 15, gains and losses resulting from changes in fair value are accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge accounting. The adoption of
this accounting standard did not have a material impact on our financial position or results of operations.
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