HP 2005 Annual Report Download - page 80

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
resumes revenue recognition and recognizes any associated deferred revenue when appropriate
customer actions are taken to remove accounts from delinquent status.
Products
Under HP’s standard terms and conditions of sale, HP transfers title and risk of loss to the
customer at the time product is delivered to the customer and revenue is recognized accordingly, unless
customer acceptance is uncertain or significant obligations remain. HP reduces revenue for estimated
customer returns, price protection, rebates and other offerings that occur under sales programs
established by HP directly or with HP’s distributors and resellers. HP recognizes revenue allocated to
software licenses at the inception of the license. HP records revenue from the sale of equipment under
sales-type leases and direct-financing leases as product revenue at the inception of the lease. HP
accrues the estimated cost of post-sale obligations, including basic product warranties, based on
historical experience at the time HP recognizes revenue.
Services
HP recognizes revenue from fixed-price support or maintenance contracts, including extended
warranty contracts and software post-customer support contracts, ratably over the contract period and
recognizes the costs associated with these contracts as incurred. For time and material contracts, HP
recognizes revenue and costs as services are rendered. HP recognizes revenue from fixed-price
consulting arrangements over the contract period on a proportional performance basis, as determined
by the relationship of actual labor costs incurred to date to the estimated total contract labor costs,
with estimates regularly revised during the life of the contract. For outsourcing contracts, HP
recognizes revenue ratably over the contractual service period for fixed price contracts and on the
output or consumption basis for all other outsourcing contracts. HP recognizes costs associated with
outsourcing contracts as incurred, unless such costs relate to the transition phase of the outsourcing
contract, in which case HP generally amortizes those costs over the contractual service period. In
addition, under the provisions of Emerging Issues Task Force No. 00-21, ‘‘Revenue Arrangements with
Multiple Deliverables,’’ if the revenue for a delivered item is not recognized because it is not separable
from the outsourcing arrangement, then HP also defers the cost of the delivered item. HP recognizes
both the revenue and associated cost for the delivered item ratably over the remaining contractual
service period. HP recognizes losses on consulting and outsourcing arrangements in the period that the
contractual loss becomes probable and estimable. HP records amounts invoiced to customers in excess
of revenue recognized as deferred revenue until the revenue recognition criteria are met. HP records
revenue that is earned and recognized in excess of amounts invoiced on fixed-price contracts as trade
receivables. HP recognizes revenue from operating leases on a straight-line basis as service revenue
over the rental period.
Financing Income
Sales-type and direct-financing leases produce financing income, which HP recognizes at level rates
of return over the lease term.
Shipping and Handling
HP includes costs related to shipping and handling in cost of sales for all periods presented.
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