HP 2008 Annual Report Download - page 93

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Services
HP recognizes revenue from fixed-price support or maintenance contracts, including extended
warranty contracts and software post-contract customer support agreements, 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. HP recognizes revenue on
certain design and build (design, development and/or construction of software and/or systems) projects
using the percentage-of-completion method. HP uses the cost to cost method of measurement towards
completion as determined by the percentage of cost incurred to date to the total estimated costs of the
project. HP uses the completed contract method if reasonable and reliable cost estimates for a project
cannot be made.
For outsourcing services revenue is generally recognized when the service is provided and the
amount earned is not contingent upon any future event. If the service is provided evenly during the
contract term but service billings are uneven, revenue is recognized on a straight-line basis over the
contract term. HP recognizes revenue from operating leases on a straight-line basis as service revenue
over the rental period.
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 defers and subsequently amortizes
these set-up costs over the contractual services period. Deferred contract costs are amortized on a
straight-line basis over the remaining original term unless billing patterns indicate a more accelerated
method is appropriate. Based on actual and projected contract financial performance indicators, the
recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic
basis using the undiscounted estimated cash flows of the whole contract over its remaining contract
term. If such undiscounted cash flows are insufficient to recover the long-lived assets and deferred
contract costs, the deferred contract costs are written down based on a discounted cash flow model. If a
cash flow deficiency remains after reducing the balance of the deferred contract costs to zero, any
remaining long-lived assets related to that contract are evaluated for impairment.
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.
Financing Income
Sales-type and direct-financing leases produce financing income, which HP recognizes at consistent
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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