Adobe 2010 Annual Report Download - page 58

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Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially
from actual results.
Revenue Recognition
Our revenue is derived from the licensing of software products, associated software maintenance and support plans,
custom software development and consulting services and training. To a lesser extent our revenue includes non-software
related hosting services, custom hosting development and consulting services, and technical support and training for hosting
services.
We recognize revenue when all four revenue recognition criteria have been met: 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.
Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can
have a significant impact on the timing and amount of revenue we report.
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software,
upgrades, maintenance and support, hosting services, and consulting.
For our software and software related multiple element arrangements, we must: (1) determine whether and when each
element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the
delivered products and services; (3) determine the fair value of each element using VSOE, and (4) allocate the total price
among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the
residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until
the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the
arrangement have been delivered. However, if the only undelivered element is maintenance and support, the entire
arrangement fee is recognized ratably over the performance period. Changes in assumptions or judgments or changes to the
elements in a software arrangement could cause a material increase or decrease in the amount of revenue that we report in a
particular period.
In October 2009, the FASB amended the accounting standards for certain multiple deliverable revenue arrangements to:
• provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be
separated, and how the consideration should be allocated;
• require an entity to allocate revenue in an arrangement using BESP of deliverables if a vendor does not have VSOE
of selling price or TPE of selling price; and
• eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price
method.
We elected to early adopt this accounting guidance at the beginning of our fiscal quarter of 2010 on a prospective basis
for applicable transactions originating or materially modified after November 27, 2009. Our revenue from sales containing
non-software related hosting services, custom hosting development and consulting services, and related technical support and
training are those impacted.
For multiple element arrangements containing our non-software services, we must (1) determine whether and when each
element has been delivered; (2) determine fair value of each element using the selling price hierarchy of VSOE of fair value,
TPE or BESP, as applicable, and (3) allocate the total price among the various elements based on the relative selling price
method.
This guidance does not generally change the units of accounting for our revenue transactions. For multiple-element
arrangements that contain software and non-software elements such as our hosted offerings, we allocate revenue to software
or software related elements as a group and any non-software elements separately based on the selling price hierarchy. We
determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither
VSOE nor TPE of selling price exist for a deliverable, we use its BESP for that deliverable. Once revenue is allocated to
software or software related elements as a group, it follows historic software accounting guidance. Revenue is then
recognized when the basic revenue recognition criteria are met for each element.
Consistent with our methodology under previous accounting guidance, we determine VSOE for each element based on
historical stand-alone sales to third-parties or from the stated renewal rate for the elements contained in the initial
arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall
within a reasonably narrow pricing range.