Google 2013 Annual Report Download - page 57


PART II
ITEM8.NotestoConsolidatedFinancialStatements
andtablets.Mostofourcustomerspayusonacost-per-clickbasis,whichmeansthatanadvertiserpaysusonlywhenauser
clicksononeofitsads.Wealsooeradvertisingonacost-per-impressionbasisthatenablesadvertiserstopayusbasedonthe
numberoftimestheiradsdisplayonourwebsitesandourGoogleNetworkMembers’websitesasspeciedbytheadvertisers.
GoogleAdSensereferstotheonlineprogramsthroughwhichwedistributeouradvertisers’AdWordsadsfordisplayonour
GoogleNetworkMembers’websites.
Werecognizeasrevenuesthefeeschargedtoadvertiserseachtimeauserclicksononeoftheadsthatappearsnexttothe
searchresultsorcontentonourwebsitesorourGoogleNetworkMembers’websites.Forthoseadvertisersusingourcost-per-
impressionpricing,werecognizeasrevenuesthefeeschargedtoadvertiserseachtimetheiradsaredisplayedonourwebsites
orourGoogleNetworkMembers’websites.WereportourGoogleAdSenserevenuesonagrossbasisprincipallybecauseweare
theprimaryobligortoouradvertisers.
Forhardwareproductsales,whereweselldirectlytoendcustomersorthroughdistributionchannels,revenuerecognitiongenerally
occurswhenproductshavebeenshipped,riskoflosshastransferredtothecustomer,objectiveevidenceexiststhatcustomer
acceptanceprovisionshavebeenmet,nosignicantobligationsremainandallowancesfordiscounts,priceprotection,returns
andcustomerincentivescanbereasonablyandreliablyestimated.Recordedrevenuesarereducedbytheseallowances.Where
theseallowancescannotbereasonablyandreliablyestimated,werecognizerevenueatthetimetheproductsellsthroughthe
distributionchanneltotheendcustomer.
Forthesaleofcertainthird-partyproductsandservices,weevaluatewhetheritisappropriatetorecognizerevenuebasedonthe
grossamountbilledtothecustomersorthenetamountearnedasrevenueshare.Generally,whenweareprimarilyobligatedin
atransaction,aresubjecttoinventoryriskorhavelatitudeinestablishingprices,orhaveseveralbutnotalloftheseindicators,
revenueisrecordedonagrossbasis.Wegenerallyrecordthenetamountsasrevenueshareearnedifwearenotprimarily
obligatedanddonothaveinventoryriskorlatitudeinestablishingprices.Suchamountsearnedaretypicallydeterminedusing
axedpercentage,axedfee,oracombinationofthetwo.
Forarrangementsthatincludemultipledeliverables,primarilyforproductsthatcontainsoftwareessentialtothehardware
products’functionalityandservices,weallocaterevenuetoeachunitofaccountingbasedontheirrelativesellingprices.Insuch
circumstances,weuseahierarchytodeterminethesellingpricestobeusedforallocatingrevenue:(i)vendor-specicobjective
evidenceoffairvalue(VSOE),(ii)third-partyevidenceofsellingprice,and(iii)bestestimateofthesellingprice(ESP).VSOEgenerally
existsonlywhenwesellthedeliverableseparatelyandisthepriceactuallychargedbyusforthatdeliverable.ESPsreectour
bestestimatesofwhatthesellingpricesofelementswouldbeiftheyweresoldregularlyonastand-alonebasis.
Werecorddeferredrevenuesuponinvoicingorwhencashpaymentsarereceivedinadvanceofourperformanceintheunderlying
agreementontheaccompanyingConsolidatedBalanceSheets.
Cost of Revenues
Costofrevenuesconsistsprimarilyoftracacquisitioncosts.Tracacquisitioncostsconsistofamountsultimatelypaidtoour
GoogleNetworkMembersunderAdSensearrangementsandtocertainotherpartners(ourdistributionpartners)whodistribute
ourtoolbarandotherproducts(collectivelyreferredtoasaccesspoints)orotherwisedirectsearchqueriestoourwebsite
(collectivelyreferredtoasdistributionarrangements).Theseamountsareprimarilybasedontherevenueshareandxed
feearrangementswithourGoogleNetworkMembersanddistributionpartners.
Certaindistributionarrangementsrequireustopayourpartnersbasedonafeeperaccesspointdeliveredandnotexclusively—
oratall—basedonrevenueshare.Thesefeesarenon-refundable.Further,thesearrangementsareterminableatwill,although
underthetermsofcertaincontractsweorourdistributionpartnersmaybesubjecttopenaltiesintheeventofearlytermination.
Werecognizefeesunderthesearrangementsovertheestimatedusefullivesoftheaccesspoints(approximatelytwoyears)to
theextentwecanreasonablyestimatethoselivesandtheyarelongerthanoneyear,orbasedonanycontractualrevenueshare,
ifgreater.Otherwise,thefeesarechargedtoexpenseasincurred.Theestimatedusefullifeoftheaccesspointsisbasedonthe
historicalaverageperiodoftimetheygeneratetracandrevenues.
Costofrevenuesalsoincludestheexpensesassociatedwiththeoperationofourdatacenters,includingdepreciation,labor,
energy,andbandwidthcosts,hardwareinventorycosts,creditcardandothertransactionfeesrelatedtoprocessingcustomer
transactions,amortizationofacquisition-relatedintangibleassets,aswellascontentacquisitioncosts.Wehaveenteredinto
arrangementswithcertaincontentprovidersunderwhichwedistributeorlicensetheirvideoandothercontent.Inanumberof
thesearrangements,wedisplayadsonthepagesofourwebsitesfromwhichthecontentisviewedandsharemostofthefees
theseadsgeneratewiththecontentproviders.Wealsolicensecontentonthepagesofourwebsitesfromwhichthecontentis
soldandsharemostofthefeesthesesalesgeneratewithcontentproviders.Totheextentweareobligatedtomakeguaranteed
minimumrevenuesharepaymentstoourcontentproviders,werecognizeascontentacquisitioncoststhecontractualrevenue
shareamountortheamountdeterminedonastraight-linebasis,whicheverisgreater,overthetermsoftheagreements.
Inaddition,costofrevenuesincludesmanufacturingandinventory-relatedcostsprimarilyfromourMotorolaMobilesegment.
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