Cisco 2011 Annual Report Download - page 51

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Revenue Recognition
Revenue is recognized when all of the following criteria have been met:
•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 deliverables, such as sales of
products that include services, the multiple deliverables are evaluated to determine the unit of accounting, and the
entire fee from the arrangement is allocated to each unit of accounting based on the relative selling price.
Revenue is recognized when the revenue recognition criteria for each unit of accounting 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 deliverables and, if so, our valuation of the units of accounting for
multiple deliverables. According to the accounting guidance prescribed in Accounting Standards Codification
(ASC) 605, Revenue Recognition, we use vendor-specific objective evidence of selling price (VSOE) for each of
those units, when available. We determine VSOE based on our normal pricing and discounting practices for the
specific product or service when sold separately. 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, generally evidenced by
approximately 80% of such historical standalone transactions falling within plus or minus 15% of the median
selling price. VSOE exists across most of our product and service offerings. In certain limited circumstances
when VSOE does not exist, we apply the selling price hierarchy to applicable multiple-deliverable arrangements.
Under the selling price hierarchy, third-party evidence of selling price (TPE) will be considered if VSOE does
not exist, and estimated selling price (ESP) will be used if neither VSOE nor TPE is available. Generally, we are
not able to determine TPE because our go-to-market strategy differs from that of others in our markets, and the
extent of customization varies among comparable products or services from our peers. In determining ESP, we
apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the
arrangement. We typically arrive at an ESP for a product or service that is not sold separately by considering
company-specific factors such as geographies, competitive landscape, internal costs, gross margin objectives,
pricing practices used to establish bundled pricing, and existing portfolio pricing and discounting.
Some of our sales arrangements have multiple deliverables containing software and related software support
components. Such sale arrangements are subject to the accounting guidance in ASC 985-605, Software-Revenue
Recognition.
As our business and offerings evolve over time, our pricing practices may be required to be modified
accordingly, which could result in changes in selling prices, including both VSOE and ESP, in subsequent
periods. There were no material impacts during fiscal 2011, nor do we currently expect a material impact in fiscal
2012 on our revenue recognition due to any changes in our VSOE, TPE, or ESP.
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 deferred revenue for products
was $3.7 billion as of both July 30, 2011 and July 31, 2010. Technical support services revenue is deferred and
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