Dell 2007 Annual Report Download - page 58

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During Fiscal 2008, Dell began selling its products through retailers. Sales to Dell's retail customers are generally made under agreements
allowing for limited rights of return, price protection, rebates, and marketing development funds. Dell has generally limited these rights
through contractual caps within Dell's agreements with its retailers. Dell's policy on sales to retailers is to recognize revenue and related
costs of revenue, net of returns and price adjustments, which are estimated using the contractual caps specified in the sales arrangement.
To the extent return rights or price adjustments are not limited by a contractual cap, the revenue and related cost are deferred until the
product has been sold by the retailer, the rights expire, or a reliable estimate of such amounts can be made. Dell records estimated
reductions to revenue or an expense for retail customer programs at the time revenue is recognized. Dell's customer programs primarily
involve rebates, which are designed to serve as sales incentives to resellers of Dell products and marketing development funds, which
represent monies paid to retailers that are generally earmarked for market segment development and expansion and are designed to
support Dell retail partners' activities while also promoting Dell products. Dell accounts for customer programs in accordance with
EITF 01-09.
Dell sells its products and services 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 arrangement involving software is based on
vendor specific objective evidence ("VSOE"), or in the absence of VSOE for delivered elements, the residual method. Under the residual
method, Dell allocates the residual amount of revenue from the arrangement to software licenses at the inception of the license term when
VSOE for all undelivered elements, such as Post Contract Customer Support ("PCS"), exists and all other revenue recognition criteria
have been satisfied. 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
allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain.
Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and
subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended
warranty and service contracts or other products or software PCS, for which Dell is not obligated to perform, and for which Dell does not
meet the criteria for gross revenue recognition under EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, is
recognized on a net basis. All other revenue is recognized on a gross basis.
Dell defers the cost of shipped products awaiting revenue recognition until revenue is recognized. These deferred costs totaled
$519 million and $424 million at February 1, 2008 and February 2, 2007, respectively, and are included in other current assets on Dell's
Consolidated Statement of Financial Position.
Dell records revenue from the sale of equipment under sales-type leases as product revenue at the inception of the lease. Sales-type leases
also produce financing income, which Dell recognizes at consistent rates of return over the lease term. Customer revolving loan financing
income is recognized when billed to the customer.
Dell reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with
specific revenue-producing transactions.
Warranty — Dell records warranty liabilities at the time of sale for the estimated costs that may be incurred under its limited warranty.
The specific warranty terms and conditions vary depending upon the product sold and country in which Dell does business, but generally
includes technical support, parts, and labor over a period ranging from one to three years. Factors that affect Dell's warranty liability
include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost
per claim to satisfy Dell's warranty obligation. The anticipated rate of warranty claims is the primary factor impacting the estimated
warranty obligation. The other factors are less significant due to the fact that the average remaining aggregate warranty period of the
covered installed base is approximately 20 months, repair parts are generally already in stock or available at
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