EMC 2006 Annual Report Download - page 38

Table of Contents
Revenue Recognition
Revenue recognition is governed by various accounting principles, including SAB No. 104, "Revenue Recognition"; Emerging Issues Task Force No.
00-21, "Revenue Arrangements with Multiple Deliverables"; Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition"; FAS No. 48,
"Revenue Recognition When Right of Return Exists"; FAS No. 13, "Accounting for Leases"; and SOP No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts," among others. The application of the appropriate accounting principle to our revenue is
dependent upon the specific transaction and whether the sale or lease includes systems, software and services or a combination of these items. As our business
evolves, the mix of products and services sold will impact the timing of when revenue and related costs are recognized. Additionally, revenue recognition
involves judgments, including assessments of expected returns and the likelihood of nonpayment. We analyze various factors, including a review of specific
transactions, the credit-worthiness of our customers, our historical experience and market and economic conditions. Changes in judgments on these factors
could materially impact the timing and amount of revenue and costs recognized. Should market or economic conditions deteriorate, our actual return
experience could exceed our estimate.
Warranty Costs
We accrue for systems warranty costs at the time of shipment. We estimate systems warranty costs based upon historical experience and specific
identification of system requirements. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product
failure rates, material usage and service delivery costs. To the extent that our actual systems warranty costs differed from our estimates by 5 percent,
consolidated pre-tax income would have increased/decreased by approximately $10.0 in 2006.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, investments, inventories, goodwill and
other intangible assets. We use a variety of factors to assess valuation, depending upon the asset. Accounts and notes receivable are evaluated based upon the
credit-worthiness of our customers, our historical experience, the age of the receivable and current market and economic conditions. Should current market
and economic conditions deteriorate, our actual bad debt experience could exceed our estimate. The determination of whether unrealized losses on
investments are other than temporary is based upon the type of investments held, market conditions, length of the impairment, magnitude of the impairment
and ability to hold the investment to maturity. Should current market and economic conditions deteriorate, our ability to recover the cost of our investments
may be impaired. The recoverability of inventories is based upon the types and levels of inventory held, forecasted demand, pricing, competition and changes
in technology. Should current market and economic conditions deteriorate, our actual recovery could be less than our estimate. Other intangible assets are
evaluated based upon the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in
judgments on any of these factors could materially impact the value of the asset. Our goodwill valuation is based upon a discounted cash flow analysis
performed at the reporting unit level. The analysis factors in estimated revenue and expense growth rates. The estimates are based upon our historical
experience and projections of future activity, factoring in customer demand, changes in technology and a cost structure necessary to achieve the related
revenues. Changes in judgments on any of these factors could materially impact the value of the asset.
Restructuring Charges
We recognized restructuring charges in 2006, 2005, 2004 and prior years. The restructuring charges include, among other items, estimated losses on the
sale of real estate, employee termination benefit costs, subletting of facilities and termination of various contracts. The amount of the actual obligations may
be different than our estimates due to various factors, including market conditions and negotiations with third parties. Should the actual amounts differ from
our estimates, the amount of the restructuring charges could be materially impacted.
Accounting for Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in
which we operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with
assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our balance sheet. We assess the likelihood that our deferred tax assets will be recovered from future taxable income
and to the extent we believe that recovery is more likely than not, do not establish a valuation allowance. In the event that actual results differ from these
estimates, our provision for income taxes could be materially impacted.
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