Citrix 2005 Annual Report Download - page 18

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Revenue฀Recognition.฀ The฀accounting฀related฀to฀revenue฀recognition฀in฀the฀software฀industry฀is฀complex฀and฀affected฀by฀interpretations฀
of฀the฀rules฀and฀an฀understanding฀of฀industry฀practices,฀both฀of฀which฀are฀subject฀to฀change.฀As฀a฀result,฀revenue฀recognition฀accounting฀
rules฀require฀us฀to฀make฀significant฀judgments.฀In฀addition,฀our฀judgment฀is฀required฀in฀assessing฀the฀probability฀of฀collection,฀which฀
is฀generally฀based฀on฀evaluation฀of฀customer-specific฀information,฀historical฀collection฀experience฀and฀economic฀market฀conditions.฀
If฀market฀conditions฀decline,฀or฀if฀the฀financial฀condition฀of฀our฀distributors฀or฀customers฀deteriorate,฀we฀may฀be฀unable฀to฀determine฀
that฀collectibility฀is฀probable,฀and฀we฀could฀be฀required฀to฀defer฀the฀recognition฀of฀revenue฀until฀we฀receive฀customer฀payments.
We฀ sell฀ our฀ Access฀ Suite฀ products฀ bundled฀ with฀ an฀ initial฀ subscription฀ for฀ license฀ updates฀ that฀ provide฀ the฀ end-user฀ with฀ free฀
enhancements฀ and฀upgrades฀to฀the฀ licensed฀product฀on฀ a฀when฀and฀ if฀available฀ basis.฀ Customers฀ may฀also฀elect฀ to฀purchase฀
technical฀support,฀product฀training฀or฀consulting฀services.฀We฀allocate฀revenue฀to฀license฀updates฀and฀any฀other฀undelivered฀elements฀
of฀the฀arrangement฀based฀on฀vendor฀specific฀objective฀evidence,฀or฀VSOE,฀of฀fair฀value฀of฀each฀element฀and฀such฀amounts฀are฀
deferred฀until฀the฀applicable฀delivery฀criteria฀and฀other฀revenue฀recognition฀criteria฀have฀been฀met.฀The฀balance฀of฀the฀revenue,฀net฀of฀
any฀discounts฀inherent฀in฀the฀arrangement,฀is฀allocated฀to฀the฀delivered฀product฀using฀the฀residual฀method฀and฀recognized฀at฀the฀outset฀
of฀the฀arrangement฀as฀the฀ licenses฀are฀delivered.฀If฀ we฀cannot฀ objectively฀ determine฀the฀ fair฀value฀of฀ each฀undelivered฀element฀
based฀on฀VSOE,฀we฀defer฀revenue฀recognition฀until฀all฀elements฀are฀delivered,฀all฀services฀have฀been฀performed,฀or฀until฀fair฀value฀can฀
be฀objectively฀determined.฀We฀must฀apply฀judgment฀in฀determining฀all฀elements฀of฀the฀arrangement฀and฀in฀determining฀the฀VSOE฀
of฀fair฀value฀for฀each฀element,฀considering฀the฀price฀charged฀for฀each฀product฀or฀applicable฀renewal฀rates฀for฀license฀updates.
In฀the฀normal฀course฀of฀business,฀we฀do฀not฀permit฀product฀returns,฀but฀we฀do฀provide฀most฀of฀our฀distributors฀and฀value-added฀
resellers฀with฀stock฀ balancing฀and฀price฀ protection฀ rights.฀ In฀ accordance฀with฀the฀provisions฀ of฀ our฀warranties,฀we฀ also฀provide฀
end-users฀of฀our฀products฀the฀right฀to฀replacement฀products,฀as฀applicable.฀Stock฀balancing฀rights฀permit฀distributors฀to฀return฀
products฀to฀us฀up฀to฀the฀forty-fifth฀day฀of฀the฀fiscal฀quarter,฀subject฀to฀ordering฀an฀equal฀dollar฀amount฀of฀our฀other฀products฀prior฀
to฀the฀last฀day฀of฀the฀same฀fiscal฀quarter.฀Price฀protection฀rights฀require฀that฀we฀grant฀retroactive฀price฀adjustments฀for฀inventories฀
of฀our฀products฀held฀by฀distributors฀or฀resellers฀if฀we฀lower฀our฀prices฀ for฀such฀products.฀We฀establish฀provisions฀for฀estimated฀
returns฀for฀stock฀balancing฀and฀price฀protection฀rights,฀as฀well฀as฀other฀sales฀allowances,฀concurrently฀with฀the฀recognition฀of฀revenue.฀
The฀provisions฀are฀established฀based฀upon฀consideration฀of฀a฀variety฀of฀factors,฀including,฀among฀other฀things,฀recent฀and฀historical฀
return฀rates฀for฀both฀specific฀products฀and฀distributors,฀estimated฀distributor฀inventory฀levels฀by฀product,฀the฀impact฀of฀any฀new฀
product฀releases฀and฀projected฀economic฀conditions.฀Actual฀product฀returns฀for฀stock฀balancing฀and฀price฀protection฀provisions฀
incurred฀are,฀however,฀dependent฀upon฀future฀events,฀including฀the฀amount฀of฀stock฀balancing฀activity฀by฀our฀distributors฀and฀the฀
level฀of฀distributor฀inventories฀at฀the฀time฀of฀any฀price฀adjustments.฀We฀continually฀monitor฀the฀factors฀that฀influence฀the฀pricing฀of฀
our฀products฀and฀distributor฀inventory฀levels฀and฀make฀adjustments฀to฀these฀provisions฀when฀we฀believe฀actual฀returns฀and฀other฀
allowances฀could฀differ฀from฀established฀reserves.฀Our฀ability฀to฀recognize฀revenue฀upon฀shipment฀to฀our฀distributors฀is฀predicated฀
on฀our฀ability฀to฀reliably฀estimate฀future฀stock฀balancing฀returns.฀If฀actual฀experience฀or฀changes฀in฀market฀condition฀impairs฀our฀
ability฀to฀estimate฀returns,฀we฀would฀be฀required฀to฀defer฀the฀recognition฀of฀revenue฀until฀the฀delivery฀of฀the฀product฀to฀the฀end-user.฀
Allowances฀for฀estimated฀product฀returns฀amounted฀to฀approximately฀$2.3฀million฀at฀December฀31,฀2005฀and฀December฀31,฀2004.฀
We฀ have฀ not฀ reduced฀ and฀ have฀ no฀ current฀ plans฀ to฀ reduce฀ our฀ prices฀ for฀ inventory฀ currently฀ held฀ by฀ distributors฀ or฀ resellers.฀
Accordingly,฀there฀were฀no฀reserves฀required฀for฀price฀protection฀at฀December฀31,฀2005฀and฀December฀31,฀2004.฀We฀also฀record฀
reductions฀to฀revenue฀for฀customer฀programs฀and฀incentive฀offerings฀including฀volume-based฀incentives,฀at฀the฀ time฀the฀sale฀ is฀
recorded.฀If฀market฀conditions฀were฀to฀decline,฀we฀could฀take฀actions฀to฀increase฀our฀customer฀incentive฀offerings,฀which฀could฀
result฀in฀an฀incremental฀reduction฀to฀our฀revenue฀at฀the฀time฀the฀incentive฀is฀offered.
Core฀and฀Product฀Technology฀Assets.฀ We฀review฀acquired฀core฀and฀product฀technology฀assets฀for฀impairment฀on฀a฀periodic฀basis฀
by฀comparing฀the฀estimated฀net฀realizable฀value฀to฀the฀unamortized฀cost฀of฀the฀technology.฀We฀have฀acquired฀our฀core฀and฀product฀
technology฀assets฀from฀our฀business฀combinations฀and฀other฀third฀party฀agreements.฀The฀recoverability฀of฀these฀technologies฀is฀
primarily฀dependent฀upon฀our฀ability฀to฀commercialize฀products฀utilizing฀these฀technologies.฀The฀estimated฀net฀realizable฀value฀of฀the฀
purchased฀technology฀is฀based฀on฀the฀estimated฀undiscounted฀future฀cash฀flows฀derived฀from฀such฀technology.฀Our฀assumptions฀
about฀future฀revenues฀and฀expenses฀require฀significant฀judgment฀associated฀with฀the฀forecast฀of฀the฀performance฀of฀our฀products.฀
Actual฀revenues฀and฀costs฀could฀vary฀significantly฀from฀these฀forecasted฀amounts.฀As฀of฀December฀31,฀2005,฀the฀estimated฀undiscounted฀
future฀cash฀flows฀expected฀from฀core฀and฀product฀technology฀assets฀from฀these฀acquisitions฀is฀sufficient฀to฀recover฀their฀carrying฀
value.฀If฀these฀products฀are฀not฀ultimately฀accepted฀by฀our฀customers฀and฀distributors,฀and฀there฀is฀no฀alternative฀future฀use฀for฀the฀
technology,฀we฀could฀determine฀that฀some฀or฀all฀of฀their฀remaining฀$81.7฀million฀carrying฀value฀is฀impaired.฀In฀the฀event฀of฀impairment,฀
we฀would฀record฀an฀impairment฀charge฀to฀earnings฀that฀could฀have฀a฀material฀adverse฀effect฀on฀our฀results฀of฀operations.
Citrix฀Systems,฀Inc.
Management’s฀Discussion฀and฀Analysis฀of฀Financial฀Condition฀and฀Results฀of฀Operations฀
(Continued)฀