Adobe 2004 Annual Report Download - page 73

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applicable. Our maintenance and support offerings, which entitle customers to receive product upgrades
and enhancements or technical support, depending on the offering, are recognized ratably over the term of
the arrangement.
Multiple element arrangements
We enter into revenue arrangements in which a customer may purchase a combination of software,
upgrades, maintenance and support, and professional services (multiple-element arrangements). When
vendor-specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue 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 that element is sold separately. For maintenance and support, VSOE of fair value is
established by renewal rates. For arrangements where VSOE of fair value exists only for the undelivered
elements, we defer the full fair value of the undelivered elements and recognize the difference between the
total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other
criteria for revenue recognition have been met.
We perform ongoing credit evaluations of our customers’ financial condition and in some cases we
require various forms of security. We also maintain allowances for estimated losses on receivables.
Advertising Expenses
We expense all advertising costs as incurred and classify these costs under sales and marketing
expense. Advertising expenses for fiscal 2004, 2003, and 2002 were $31.9 million, $24.0 million and $26.7
million, respectively.
Foreign Currency and Other Hedging Instruments
Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative
Instruments and Hedging Activities,” 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 16, 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. See Note 16 for further information.
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 for which realization
is more likely than not. We also account for any income tax contingencies in accordance with Statement of
Financial Accounting Standards No. 5 (“SFAS 5”), “Accounting for Contingencies.”
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R which requires the measurement of all employee
share-based payments to employees, including grants of employee stock options, using a fair-value-based
method and the recording of such expense in our consolidated statements of income. The accounting
provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005. We are required
to adopt SFAS 123R in the fourth quarter of fiscal 2005. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial statement recognition. See “Stock-Based
Incentive Compensation” above for the pro forma net income and net income per share amounts, for fiscal
2002 through fiscal 2004, as if we had used a fair-value-based method similar to the methods required
under SFAS 123R to measure compensation expense for employee stock incentive awards. Although we
have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the
current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and
expect the adoption to have a significant adverse impact on our consolidated statements of income and net
income per share.