HP 2009 Annual Report Download - page 95

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
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.
Advertising
HP expenses advertising costs as incurred or when the advertising is first run. Such costs totaled
approximately $0.7 billion in fiscal 2009, $1.0 billion in fiscal 2008 and $1.1 billion in fiscal 2007.
Taxes on Earnings
HP recognizes deferred tax assets and liabilities for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported amounts using enacted tax
rates in effect for the year the differences are expected to reverse. HP records a valuation allowance to
reduce the deferred tax assets to the amount that is more likely than not to be realized.
Cash and Cash Equivalents
HP classifies investments as cash equivalents if the original maturity of an investment is three
months or less. Cash and cash equivalents consist primarily of highly liquid investments in time deposits
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