HP 2012 Annual Report Download - page 94

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
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 in
which such contractual losses become 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 2012, $1.2 billion in fiscal 2011 and $1.0 billion in fiscal 2010.
Stock-Based Compensation
Stock-based compensation expense for all share-based payment awards granted is determined
based on the grant-date fair value. HP recognizes these compensation costs net of an estimated
forfeiture rate, and recognizes compensation cost only for those shares expected to meet the service
and performance vesting conditions, on a straight-line basis over the requisite service period of the
award. These compensation costs are determined at the aggregate grant level for service-based awards
and at the individual vesting tranche level for awards with performance and/or market conditions. HP
estimates the forfeiture rate based on its historical experience.
Foreign Currency Translation
HP uses the U.S. dollar predominately as its functional currency. Assets and liabilities
denominated in non-U.S. dollars are remeasured into U.S. dollars at current exchange rates for
86