Cisco 2009 Annual Report Download - page 13

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United
States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and
methods used in the preparation of the Consolidated Financial Statements. The accounting policies described below are significantly
affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the
preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on these
policies. We ensured that our accounting-based judgments and estimates appropriately considered the macroeconomic environment.
Revenue Recognition
Our products are generally integrated with software that is essential to the functionality of the equipment. Additionally, we provide
unspecified software upgrades and enhancements related to the equipment through our maintenance contracts for most of our products.
Accordingly, we account for revenue in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” and all related
interpretations. For sales of products where software is incidental to the equipment, or in hosting arrangements, we apply the provisions of
Staff Accounting Bulletin No. 104, “Revenue Recognition,” and all related interpretations. Revenue is recognized when all of the following
criteria have been met:
•When persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are
generally used to determine the existence of an arrangement.
•Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.
•The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the
transaction and whether the sales price is subject to refund or adjustment.
•Collectibility is reasonably assured. We assess collectibility based primarily on the creditworthiness of the customer as determined by
credit checks and analysis, as well as the customer’s payment history.
In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all
acceptance criteria have been met. When a sale involves multiple elements, such as sales of products that include services, the entire fee
from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition
criteria for each element are met. The amount of product and service revenue recognized in a given period is affected by our judgment as
to whether an arrangement includes multiple elements and, if so, whether vendor-specific objective evidence of fair value exists. Changes
to the elements in an arrangement and our ability to establish vendor-specific objective evidence for those elements could affect the timing
of the revenue recognition.
Revenue deferrals relate to the timing of revenue recognition for specific transactions based on financing arrangements, service,
support, and other factors. Financing arrangements may include sales-type, direct-financing, and operating leases, loans, and guarantees
of third-party financing. Our total deferred revenue for products was $2.9 billion and $2.7 billion as of July 25, 2009 and July 26, 2008,
respectively. Technical support services revenue is deferred and recognized ratably over the period during which the services are to be
performed, which typically is from one to three years. Advanced services revenue is recognized upon delivery or completion of
performance. Our total deferred revenue for services was $6.5 billion and $6.1 billion as of July 25, 2009 and July 26, 2008, respectively.
We make sales to distributors and retail partners and recognize revenue based on a sell-through method using information provided
by them. Our distributors and retail partners participate in various cooperative marketing and other programs, and we maintain estimated
accruals and allowances for these programs. If actual credits received by our distributors and retail partners under these programs were to
deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.
2009 Annual Report 11