Adobe 2012 Annual Report Download - page 56

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We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, stock-based
compensation, business combinations, goodwill impairment and income taxes have the greatest potential impact on our consolidated
financial statements. These areas are key components of our results of operations and are based on complex rules requiring us to
make judgments and estimates, so we consider these to be our critical accounting policies.
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 perpetual and time-based software products, associated software maintenance
and support plans, non-software related hosting services, consulting services, training and technical support.
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 undelivered 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.
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.
We have established VSOE for our software maintenance and support services, custom software development services,
consulting services and training.
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, third-
party evidence (“TPE”) or best-estimated selling price (“BESP”), as applicable; and (3) allocate the total price among the various
elements based on the relative selling price method.
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.
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. We are generally unable to establish VSOE or TPE for non-software elements and as such, we use
BESP.
We determine BESP for a product or service by considering multiple factors including, but not limited to major product
groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices.
Significant pricing practices taken into consideration include historic contractually stated prices, volume discounts where applicable
and our price lists.
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