HP 2007 Annual Report Download - page 94

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products
or services or subject to customer-specified return or refund privileges.
Products
Hardware
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 programs offered
under sales agreements established by HP with its distributors and resellers. HP records revenue from the sale of equipment
under sales-type 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.
Software
In accordance with the specific guidance of the American Institute of Certified Public Accountants Statement of
Position 97-2, “Software Revenue Recognition” where applicable, the company recognizes revenue from perpetual software
licenses at the inception of the license term assuming all revenue recognition criteria have been met. Term based software
license revenue is recognized on a subscription basis over the term of the license entitlement. HP uses the residual method to
allocate revenue to software licenses at the inception of the license term when VSOE of fair value for all undelivered
elements exists, such as post-contract support, and all other revenue recognition criteria have been satisfied. Revenue
generated from maintenance and unspecified upgrades or updates on a when-and-if-available basis is recognized over the
period such items are delivered.
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. While HP uses the proportional performance basis as its basic accounting
policy, the company uses the completed performance method if reasonable and reliable cost estimates for a project cannot be
made. 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. HP recognizes revenue from operating leases on a straight-line
basis as service revenue over the rental 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
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