Adobe 2010 Annual Report Download - page 87

ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
87
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 vendor-specific objective evidence
(“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 Financial Accounting Standards Board (“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 the best estimated selling price (“BESP”) of
deliverables if a vendor does not have VSOE of selling price or third-party evidence (“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 element separately based on the selling price hierarchy. We
determine the selling price for each deliverable using VSOE of fair value 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. Revenue allocated to
each element is then recognized when the basic revenue recognition criteria are met for each element. Once revenue is
allocated to software or software related elements as a group, it follows historic software accounting guidance.
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.
In certain instances, we are not able to establish VSOE for all deliverables in an arrangement with multiple elements.
This may be due to infrequently selling each element separately, not pricing products or services within a narrow range, or
only having a limited sales history. When VSOE cannot be established, we attempt to establish the selling price of each
element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.
Generally, our offerings contain significant differentiation such that the comparable pricing of products with similar
functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling
prices are on a stand-alone basis. Therefore, we typically are not able to obtain TPE of selling price.
When we are unable to establish selling prices using VSOE or TPE, we use BESP in our allocation of arrangement
consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service
were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for
new or highly customized offerings.