Adobe 2009 Annual Report Download - page 82

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
82
Multiple Element Arrangements
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software,
upgrades, hosting services, maintenance and support, and consulting (multiple-element arrangements). When vendor specific
objective evidence (“VSOE”) of fair value does not exist for all delivered 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 OEMs 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 forecasts and actual
historical reporting by our OEM customers. To substantiate our ability to estimate revenue, we review license royalty
revenue reports ultimately received from our significant OEM customers in comparison to the amounts estimated in the prior
period.
Our product-related deferred revenue includes maintenance upgrade revenue and customer advances under OEM license
agreements. Our maintenance upgrade revenue for our desktop application products is included in our product revenue line
item as the maintenance primarily entitles customers to receive product upgrades. In cases where we provide a specified free
upgrade to an existing product, we defer the fair value for the specified upgrade right until the future obligation is fulfilled or
when the right to the specified free upgrade expires.
Services and Support Revenue
Our services and support revenue is composed of consulting, training and maintenance and support, primarily related to
the licensing of our Enterprise and Mobile and Device Solutions products. Our support revenue also includes technical
support and developer support to partners and developer organizations related to our desktop products.
We recognize revenue for hosting services that are based on a committed number of transactions, including
implementation and set-up fees, ratably beginning on the date the customer commences use of our services and continuing
through the end of the customer term. Over-usage fees, and fees billed based on the actual number of transactions from which
we capture data, are billed in accordance with contract terms as these fees are incurred. We record amounts that have been
invoiced in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria
have been met.
Our consulting revenue is primarily recognized using the proportionate performance method and is measured monthly
based on input measures, such as hours incurred to date compared to total estimated hours to complete, with consideration
given to output measures, such as contract milestones when 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 performance period of the arrangement.