HP 2009 Annual Report Download - page 93

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
deliverables and to the software deliverables as a group using the relative selling prices of each of the
deliverables in the arrangement based on the aforementioned selling price hierarchy. If the
arrangement contains more than one software deliverable, the arrangement consideration allocated to
the software deliverables as a group is then allocated to each software deliverable using the guidance
for recognizing software revenue, as amended.
HP limits the amount of revenue recognition for delivered elements to the amount that is not
contingent on the future delivery of products or services, future performance obligations or subject to
customer-specified return or refund privileges.
HP evaluates each deliverable in an arrangement to determine whether they represent separate
units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone
value and there are no customer-negotiated refund or return rights for the delivered elements. If the
arrangement includes a customer-negotiated refund or return right relative to the delivered item and
the delivery and performance of the undelivered item is considered probable and substantially in HP’s
control, the delivered element constitutes a separate unit of accounting. In instances when the
aforementioned criteria are not met, the deliverable is combined with the undelivered elements and the
allocation of the arrangement consideration and revenue recognition is determined for the combined
unit as a single unit. Allocation of the consideration is determined at arrangement inception on the
basis of each unit’s relative selling price.
HP establishes VSOE of selling price using the price charged for a deliverable when sold
separately and, in rare instances, using the price established by management having the relevant
authority. TPE of selling price is established by evaluating largely similar and interchangeable
competitor products or services in standalone sales to similarly situated customers. The best estimate of
selling price is established considering internal factors such as margin objectives, pricing practices and
controls, customer segment pricing strategies and the product lifecycle. Consideration is also given to
market conditions such as competitor pricing strategies and industry technology lifecycles.
For fiscal 2008 and fiscal 2007, pursuant to the previous guidance of revenue arrangements with
multiple deliverables, for a sales arrangement with multiple elements, HP allocated revenue to each
element based on its relative fair value, or for software, based on VSOE of fair value. In the absence
of fair value for a delivered element, HP first allocated revenue to the fair value of the undelivered
elements and the residual revenue to the delivered elements. Where the fair value for an undelivered
element could not be determined, HP deferred revenue for the delivered elements until the
undelivered elements were delivered or the fair value was determinable for the remaining undelivered
elements. If the revenue for a delivered item was not recognized because it was not separable from the
undelivered item, then HP also deferred the cost of the delivered item. HP limited the amount of
revenue recognition for delivered elements to the amount that was not contingent on the future
delivery of products or services, future performance obligations or subject to customer-specified return
or refund privileges. For the purposes of income statement classification of products and services
revenue, when HP could not determine fair value for all of the elements in an arrangement and the
transaction was accounted for as a single unit of accounting, HP allocated revenue to products and
services based on a rational and consistent methodology. This methodology utilized external and
internal pricing inputs to derive HP’s best estimate of fair value for the elements in the arrangement.
In instances when revenue is derived from sales of third-party vendor services, revenue is recorded
at gross when HP is a principal to the transaction and net of costs when HP is acting as an agent
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