HP 2013 Annual Report Download - page 94

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
by evaluating largely similar and interchangeable competitor products or services in standalone sales to
similarly situated customers. HP establishes ESP, based on management judgment, considering internal
factors such as margin objectives, pricing practices and controls, customer segment pricing strategies
and the product life cycle. Consideration is also given to market conditions, such as competitor pricing
strategies and industry technology life cycles. In arrangements with multiple elements, HP determines
allocation of the transaction price at inception of the arrangement based on the relative selling price of
each unit of accounting.
In multiple element arrangements where more-than-incidental software deliverables are included,
HP allocates the transaction price to the individual units of accounting for the non-software
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 selling price hierarchy. If the arrangement contains more
than one software deliverable, the transaction price allocated to the group of software deliverables is
then allocated to each component software deliverable.
HP limits the amount of revenue recognized 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 it represents a separate
unit 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 or other contingencies present 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 within 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 method of revenue
recognition is determined for the combined unit as a single unit of accounting.
HP records estimated reductions to revenue for customer and distributor programs and incentive
offerings, including price protection, promotions, other volume-based incentives and expected returns.
Future market conditions and product transitions may require HP to take actions to increase customer
incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is
offered. Additionally, certain incentive programs require HP to estimate, based on historical experience
and the specific terms and conditions of the incentive, the number of customers who will actually
redeem the incentive.
In instances when revenue is derived from sales of third-party vendor services, HP records revenue
on a gross basis when HP is a principal to the transaction and net of costs when HP is acting as an
agent between the customer and the vendor. HP considers several factors to determine whether it is a
principal or an agent, most notably whether HP is the primary obligor to the customer, has established
its own pricing, and has inventory and credit risks.
HP reports revenue net of any required taxes collected from customers and remitted to
government authorities, with the collected taxes recorded as current liabilities until remitted to the
relevant government authority.
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