Computer Associates 2016 Annual Report Download - page 78

The Company begins to recognize revenue from software licensing and maintenance when all of the following criteria are met:
(1) the Company has evidence of an arrangement with a customer; (2) the Company delivers the specified products; (3) license
agreement terms are fixed or determinable and free of contingencies or uncertainties that may alter the agreement such that it
may not be complete and final; and (4) collection is probable. Revenue is recorded net of applicable sales taxes.
The Company’s software licenses generally do not include acceptance provisions. An acceptance provision allows a customer to
test the software for a defined period of time before committing to license the software. If a license agreement includes an
acceptance provision, the Company does not recognize revenue until the earlier of the receipt of a written customer acceptance
or when the acceptance right lapses. The Company’s standard licensing agreements include a product warranty provision for all
products. The likelihood that the Company will be required to make refunds to customers under such provisions is considered
remote.
Subscription and Maintenance Revenue: Software licenses that include the right to receive unspecified future software products
are considered subscription arrangements under GAAP and are recognized ratably over the term of the license agreement.
Subscription and maintenance revenue is the amount of revenue recognized ratably during the reporting period from either:
(i) software usage fees and product sales that include subscription agreements and also generally include maintenance;
(ii) maintenance agreements associated with providing customer technical support and access to software fixes and upgrades
which are separately identifiable from software usage fees or product sales; or (iii) software license agreements bundled with
elements (i.e., maintenance or professional services) for which vendor specific objective evidence (VSOE) has not been
established. Revenue for these arrangements is recognized ratably over the term of the subscription or maintenance term.
Professional Services: Revenue from professional services arrangements is generally recognized as the services are performed.
Revenue and costs from committed professional services that are sold as part of a subscription license agreement are deferred
and recognized on a ratable basis over the term of the related software license. VSOE of professional services is established
based on hourly rates when sold on a stand-alone basis. 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.
Software Fees and Other: Software fees and other revenue consists primarily of revenue from the sale of perpetual software
licenses that do not include the right to unspecified software products (i.e., a subscription agreement) in a bundled arrangement
where VSOE exists for all undelivered elements, and revenue from hosted software as a service (SaaS) offerings. For bundled
arrangements that include either maintenance or both maintenance and professional services, the Company uses the residual
method to determine the amount of license revenue to be recognized. Under the residual method, consideration is allocated to
undelivered elements based upon VSOE of those elements, with the residual of the arrangement fee allocated to and
recognized as license revenue. The Company determines VSOE of maintenance for its enterprise solutions products from
contractually stated renewal rates.
In the event that agreements with the Company’s customers are executed in close proximity of the other software license
agreements with the same customer, the Company evaluates whether the separate arrangements are linked, and, if so, the
agreements are considered a single multi-element arrangement for which revenue is recognized ratably as subscription and
maintenance revenue or, in the case of a professional services arrangement that is linked to a subscription-based software
license, as professional services revenue, in the Consolidated Statements of Operations.
(h) Sales Commissions: Sales commissions are recognized in the period the commissions are earned by employees, which is
typically upon signing of the contract. Under the Company’s sales commissions policy, the amount of sales commissions expense
attributable to the license agreements signed in the period is recognized fully, but the revenue from the license agreements may
be recognized ratably over the subscription and maintenance term.
(i) Accounting for Share-Based Compensation: Share-based awards exchanged for employee services are accounted for under the
fair value method. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the
award. The expense for awards expected to vest is recognized over the employee’s requisite service period (generally the vesting
period of the award). Awards expected to vest are estimated based on a combination of historical experience and future
expectations.
The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the
total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost
recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.
The Company uses the Black-Scholes option-pricing model to compute the estimated fair value of share-based awards in the
form of options. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected term of
the option and risk-free interest rates.
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