Computer Associates 2009 Annual Report Download - page 78

Under the Company’s subscription model, implemented in October 2000, software license agreements typically combine
the right to use specified software products, the right to maintenance, and the right to receive unspecified future
software products for no additional fee during the term of the agreement. Under these subscription licenses, once all
four of the above-noted revenue recognition criteria are met, the Company is required under GAAP to recognize revenue
ratably over the term of the license agreement.
For license agreements signed prior to October 2000, once all four of the above-noted revenue recognition criteria were
met, software license fees were recognized as revenue generally when the software was delivered to the customer, or
“up-front” (as the contracts did not include a right to unspecified future software products), and the maintenance fees
were deferred and subsequently recognized as revenue over the term of the license. Currently, a relatively small amount
of the Company’s revenue from software licenses is recognized on an up-front basis, subject to meeting the same
revenue recognition criteria in accordance with SOP 97-2 as described above. Software fees from such licenses are
recognized up-front and are reported in the “Software fees and other” line item in the Consolidated Statements of
Operations. Maintenance fees from such licenses are recognized ratably over the term of the license and are recorded
on the “Subscription and maintenance revenue” line item in the Consolidated Statements of Operations. License
agreements with software fees that are recognized up-front do not include the right to receive unspecified future
software products. However, in the event such license agreements are executed within close proximity to or in
contemplation of other license agreements that are signed under the Company’s subscription model with the same
customer, the licenses together may be considered a single multi-element agreement, and all such revenue is required to
be recognized ratably and is recorded as “Subscription and maintenance revenue” in the Consolidated Statements of
Operations.
Since the Company implemented its subscription model in October 2000, the Company’s practice with respect to
products of newly acquired businesses with established vendor specific objective evidence (VSOE) of fair value has been
to record revenue initially on the acquired company’s systems, generally under an up-front model; and, starting within
the first fiscal year after the acquisition, to enter new licenses for such products under the Company’s subscription
model, following which revenue is recognized ratably and recorded as “Subscription and maintenance revenue.” In some
instances, the Company sells newly developed and recently acquired products on an up-front model. The software
license fees from these contracts are presented as “Software fees and other.” Selling such licenses under an up-front
model may result in higher total revenue in a current reporting period than if such licenses were based on the
Company’s subscription model and the associated revenue recognized ratably.
Revenue from professional service arrangements is generally recognized as the services are performed. Revenue from
committed professional services that are sold as part of a subscription license agreement is deferred and recognized on
a ratable basis over the term of the related software license. If it is not probable that a project will be completed or the
payment will be received, revenue recognition is deferred until the uncertainty is removed.
Revenue from sales to distributors, resellers, and value-added resellers commences when all four of the SOP 97-2
revenue recognition criteria noted above are met and when these entities sell the software product to their customers.
This is commonly referred to as the sell-through method. Revenue from the sale of products to distributors, resellers and
value-added resellers that include licensing terms that provide the right for the end-users to receive certain unspecified
future software products is recognized on a ratable basis.
In the second quarter of fiscal year 2008, the Company decided that certain channel or “commercial” products sold
through tier two distributors will no longer be licensed with terms entitling the customer to receive unspecified future
software products. As such, license revenue from these sales where the Company has established VSOE for
maintenance is recognized on a perpetual or up-front basis using the residual method and is reflected as “Software fees
and other,” with maintenance revenue being deferred and recognized ratably.
The Company has an established business practice of offering installment payment options to customers and has a
history of successfully collecting substantially all amounts due under such agreements. The Company assesses
collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness
of the customer. If, in the Company’s judgment, collection of a fee is not probable, revenue will not be recognized until
the uncertainty is removed, which is generally through the receipt of cash payment.
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