Cisco 2012 Annual Report Download - page 51

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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.
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 historical standalone transactions have 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 rates. 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 our proprietary technology
varies among comparable products or services from those of 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, profitability 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 sales arrangements are subject to the accounting guidance in ASC 985-605, Software-Revenue
Recognition.
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