Adobe 2003 Annual Report Download - page 72

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72
The assumptions used to value the option grants and purchase rights are stated as follows:
Options and restricted stock grants vest over several years, and new option and restricted stock grants
are generally made each year. Because of this, the pro forma amounts shown above may not be
representative of the pro forma effect on reported net income in future years.
Revenue Recognition
We recognize desktop application products revenue upon shipment, net of estimated returns, provided
collection is determined to be probable and no significant obligations remain. Desktop application products
revenue from distributors is subject to agreements allowing limited rights of return, rebates and price
protection. Accordingly, we reduce revenue recognized for estimated future returns, price protection and
rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based
upon historical rates of returns, inventory levels in the distribution channel and other related factors.
We provide free technical phone support to customers for our shrink-wrapped application products
under warranty. We record the estimated cost of free technical phone support upon shipment of software.
We also license software in multiple element arrangements in which a customer purchases a
combination of software, post-contract customer support (“PCS”) and professional services. PCS, or
maintenance, includes rights to upgrades, when and if available, telephone support, updates and
enhancements. Professional services relate to consulting services and training. When vendor specific
objective evidence (“VSOE”) of fair value exists for all elements in a multiple element arrangement,
revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair
value is established by the price charged when the same element is sold separately. We determine VSOE of
fair value of PCS based on renewal rates for the same term PCS. Revenue allocated to PCS is recognized
ratably over the contractual term (typically one to two years). In a multiple element arrangement whereby
VSOE of fair value of all undelivered elements exists but VSOE of fair value does not exist for one or more
delivered elements, revenue is recognized using the residual method. Under the residual method, the fair
value of the undelivered elements is deferred and the remaining portion of the arrangement fee is
recognized as revenue, assuming all other criteria for revenue recognition have been met.
The arrangement fees related to fixed-priced consulting contracts are recognized using the percentage
of completion method. Percentage of completion is measured monthly based primarily on input measures,
such as on hours incurred to date compared to total estimated hours to complete, with consideration given
to output measures, such as contract milestones, when applicable. Anticipated losses on fixed-priced
contracts are recognized in the period when they become known.
We record OEM licensing revenue, primarily royalties, when OEM partners ship products
incorporating Adobe software, provided collection of such revenue is deemed probable.
Deferred revenue includes customer advances under OEM licensing agreements and maintenance
revenue. In cases where we provide a specified free upgrade to an existing product, we defer the VSOE of
fair value for the specified upgrade right, until the future obligation is fulfilled or when the right to the
specified free upgrade expires.
We perform ongoing credit evaluations of our customers’ financial condition and generally do not
require collateral. We also maintain allowances for estimated credit losses.
Year Ended
November 28,
2003
November 29,
2002
November 30,
2001
Expected life of options (in years) ..............................................
.
2.5 - 3 3 3
Expected life of purchase rights (in years)..................................
.
1.25 1.24 1.23
Volatility .....................................................................................
.
40 – 66% 69% 80%
Risk free interest rate ― options.................................................
.
1.37 – 2.23% 2.14 – 4.14% 2.92 – 4.77%
Risk free interest rate ― purchase rights ....................................
.
1.12 – 1.74% 1.96 – 3.03% 3.62 – 4.81%
Dividend yield ............................................................................
.
0.125% 0.125% 0.125%