Adobe 2007 Annual Report Download - page 71

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71
an impairment indicator exists under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. We
continually monitor events and changes in circumstances that could indicate carrying amounts of our intangible assets may
not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of intangible assets by
determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows.
If the future undiscounted cash flows are less than the carrying amount of the intangible assets, we recognize an impairment
loss based on the excess of the carrying amount over the fair value of the assets. We did not recognize intangible asset
impairment charges in fiscal 2007, 2006 or 2005.
Our intangible assets are amortized over their estimated useful lives of 1 to 15 years. Generally, amortization is based on
the pattern in which the economic benefits of the intangible asset will be consumed.
Software Development Costs
Capitalization of software development costs for software to be sold, leased, or otherwise marketed begins upon the
establishment of technological feasibility, which is generally the completion of a working prototype that has been certified as
having no critical bugs and is a release candidate. Amortization begins once the software is ready for its intended use,
generally based on the pattern in which the economic benefits will be consumed. To date, software development costs
incurred between completion of a working prototype and general availability of the related product have not been material.
Revenue Recognition
Our revenue is derived from the licensing of software products, consulting and maintenance and support. Primarily, we
recognize revenue pursuant to the requirements of AICPA Statement of Position 97-2, “Software Revenue Recognition”, and
any applicable amendments or modifications, when persuasive evidence of an arrangement exists, we have delivered the
product or performed the service, the fee is fixed or determinable and collection is probable.
Multiple element arrangements
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software,
upgrades, maintenance and support, and consulting (multiple-element arrangements). When VSOE of fair value does not
exist for all elements, we allocate and defer revenue for the undelivered items based on VSOE of fair value of the undelivered
elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as
license revenue.
VSOE of fair value for each element is based on the price for which the element is sold separately. We determine the
VSOE of fair value of each element based on historical evidence of our stand-alone sales of these elements to third parties or
from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value
does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value
exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only
undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over
the performance period.
Product revenue
We recognize our product revenue upon shipment, provided all other revenue recognition criteria have been met. Our
desktop application products’ revenue from distributors is subject to agreements allowing limited rights of return, rebates and
price protection. Our direct sales and OEM sales are also subject to limited rights of return. 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 record the estimated costs of providing free technical phone support to customers for our software products.
We recognize OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating our
software, provided collection of such revenue is deemed probable. For certain OEM customers, we must estimate royalty
revenue due to the timing of securing customer information. This estimate is based on a combination of our generated