Dell 2005 Annual Report Download - page 45

Table of Contents
the assets, and Dell has surrendered control over the rights and obligations of the receivables. Gains and losses from the sale of fixed-term
loans and leases and revolving loans are recognized in the period the sale occurs, based upon the relative fair value of the assets sold and the
remaining retained interests. The retained interests are recorded in financing receivables at fair value. Dell estimates fair value based on the
present value of future expected cash flows using assumptions for estimated credit losses and prepayment rates.
Inventories — Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out basis.
Property, Plant, and Equipment — Property, plant, and equipment are carried at depreciated cost. Depreciation is provided using the straight-
line method over the estimated economic lives of the assets, which range from ten to thirty years for buildings and two to five years for all other
assets. Leasehold improvements are amortized over the shorter of five years or the lease term. Gains or losses related to retirements or
disposition of fixed assets are recognized in the period incurred. Dell performs reviews for the impairment of fixed assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Dell capitalizes eligible internal-use software
development costs incurred subsequent to the completion of the preliminary project stage. Development costs are amortized over the shorter of
the expected useful life of the software or five years.
Foreign Currency Translation — The majority of Dell's international sales are made by international subsidiaries, most of which have the
U.S. dollar as their functional currency. Local currency transactions of international subsidiaries that have the U.S. dollar as the functional
currency are remeasured into U.S. dollars using current rates of exchange for monetary assets and liabilities and historical rates of exchange
for nonmonetary assets and liabilities. Gains and losses from remeasurement of monetary assets and liabilities are included in investment and
other income, net. Dell's subsidiaries that do not have the U.S. dollar as their functional currency translate assets and liabilities at current rates
of exchange in effect at the balance sheet date. Revenue and expenses from these international subsidiaries are translated using the monthly
average exchange rates in effect for the period in which the items occur. The resulting gains and losses from these foreign currency translation
adjustments are included as a component of stockholders' equity.
Hedging Instruments — Dell applies Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, which establishes accounting and reporting standards for derivative instruments and hedging activities.
SFAS No. 133 requires Dell to recognize all derivatives as either assets or liabilities in its consolidated statement of financial position and
measure those instruments at fair value.
Treasury Stock — Effective with the beginning of the second quarter of fiscal 2002, Dell began holding repurchased shares of its common stock
as treasury stock. Prior to that date, Dell retired all such repurchased shares, which were recorded as a reduction to retained earnings. Dell
accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders' equity.
Revenue Recognition — Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts
and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. Dell allocates
revenue from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the
relative sales price of each element when sold separately. The allocation of fair value for a multiple-element software arrangement is based on
vendor specific objective evidence ("VSOE") or in absence of VSOE for delivered elements, the residual method. In the absence of VSOE for
undelivered elements, revenue is deferred and subsequently recognized over the term of the arrangement. For sales of extended warranties
with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is
deferred and recorded when delivery occurs. Product revenue is recognized, net of an
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