HP 2010 Annual Report Download - page 88

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
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.
Deferred Revenue and Related Deferred Contract Costs
Deferred revenue represents amounts received in advance for product support contracts, software
customer support contracts, outsourcing start-up services work, consulting and integration projects,
product sales or leasing income. The product support contracts include stand-alone product support
packages, routine maintenance service contracts, upgrades or extensions to standard product warranty,
as well as high availability services for complex, global, networked, multi-vendor environments. HP
defers these service amounts at the time HP bills the customer, and HP then generally recognizes the
amounts ratably over the support contract life or as HP delivers the services. HP also defers and
subsequently amortizes certain costs related to start-up activities that enable the performance of the
customer’s long-term services contract. Deferred contract costs, including start-up and other unbilled
costs, are generally amortized on a straight-line basis over the contract term unless specific customer
contract terms and conditions indicate a more accelerated method is more appropriate.
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 $1.0 billion in fiscal 2010, $0.7 billion in fiscal 2009 and $1.0 billion in fiscal 2008.
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