Cisco 2012 Annual Report Download - page 97

the intended use of the derivative and the resulting designation. For a derivative instrument designated as a fair
value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or
gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow
hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of AOCI and
subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the
gain or loss is reported in earnings immediately. For a derivative instrument designated as a net investment hedge
of the Company’s foreign operations, the gain or loss is recorded in the cumulative translation adjustment within
AOCI together with the offsetting loss or gain of the hedged exposure of the underlying foreign operations. Any
ineffective portion of the net investment hedges is reported in earnings during the period of change. For
derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in
earnings in the period of change. The Company records derivative instruments in the statements of cash flows to
operating, investing, or financing activities consistent with the cash flows of the hedged item.
(l) Foreign Currency Translation Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates
in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate
component of AOCI. Income and expense accounts are translated at average exchange rates during the year.
Remeasurement adjustments are recorded in other income, net. The effect of foreign currency exchange rates on
cash and cash equivalents was not material for any of the fiscal years presented.
(m) Concentrations of Risk Cash and cash equivalents are maintained with several financial institutions. Deposits
held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may
be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear
minimal credit risk. The Company seeks to mitigate its credit risks by spreading such risks across multiple
counterparties and monitoring the risk profiles of these counterparties.
The Company performs ongoing credit evaluations of its customers and, with the exception of certain financing
transactions, does not require collateral from its customers. The Company receives certain of its components
from sole suppliers. Additionally, the Company relies on a limited number of contract manufacturers and
suppliers to provide manufacturing services for its products. The inability of a contract manufacturer or supplier
to fulfill supply requirements of the Company could materially impact future operating results.
(n) Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. 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. For hosting arrangements, the Company recognizes subscription revenue
ratably over the subscription period, while usage revenue is recognized based on utilization. Technical support
services revenue is deferred and recognized ratably over the period during which the services are to be
performed, which is typically from one to three years. Advanced services transactional revenue is recognized
upon delivery or completion of performance.
The Company uses distributors that stock inventory and typically sell to systems integrators, service providers,
and other resellers. In addition, certain products are sold through retail partners. The Company refers to this as its
two-tier system of sales to the end customer. Revenue from distributors and retail partners is recognized based on
a sell-through method using information provided by them. Distributors and retail partners participate in various
cooperative marketing and other programs, and the Company maintains estimated accruals and allowances for
these programs. The Company accrues for warranty costs, sales returns, and other allowances based on its
historical experience. Shipping and handling fees billed to customers are included in net sales, with the
associated costs included in cost of sales.
Many of the Company’s products have both software and nonsoftware components that function together to
deliver the products’ essential functionality. The Company’s product offerings fall into the following categories:
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