HP 2013 Annual Report Download - page 95

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Products revenue
Hardware
Under HP’s standard terms and conditions of sale, HP transfers title and risk of loss to the
customer at the time product is delivered to the customer and recognizes revenue accordingly, unless
customer acceptance is uncertain or significant obligations remain. HP reduces revenue for estimated
customer returns, price protection, rebates and other programs offered under sales agreements
established by HP with its distributors and resellers. HP records revenue from the sale of equipment
under sales-type leases as product revenue at the inception of the lease. HP accrues the estimated cost
of post-sale obligations, including basic product warranties, based on historical experience, at the time
HP recognizes revenue.
Software
HP recognizes revenue from perpetual software licenses at the inception of the license term,
assuming all revenue recognition criteria have been met. Term-based software license revenue is
generally recognized ratably over the term of the license. HP uses the residual method to allocate
revenue to software licenses at the inception of the license term when VSOE of fair value for all
undelivered elements exists, such as post-contract support, and all other revenue recognition criteria
have been satisfied. HP recognizes revenue generated from maintenance and unspecified upgrades or
updates on a when-and-if-available basis ratably over the period during which such items are delivered.
HP recognizes revenue for software hosting or software-as-a-service (‘‘SaaS’’) arrangements as the
service is delivered, generally on a straight-line basis, over the contractual period of performance. In
software hosting arrangements where licenses are sold, HP recognizes the associated software revenue
according to whether perpetual licenses or term licenses are sold, subject to the above guidance. In
such software hosting arrangements HP considers the rights provided to the customer (e.g., ownership
of a license, contract termination provisions and the feasibility of the customer to operate the software)
in determining how to account for the software license fees. In SaaS arrangements where software
licenses are not sold, HP recognizes the entire arrangement ratably over the term of the subscription
arrangement.
Services revenue
HP recognizes revenue from fixed-price support or maintenance contracts, including extended
warranty contracts and software post-contract customer support agreements, ratably over the contract
period and recognizes the costs associated with these contracts as incurred. For time and material
contracts, HP recognizes revenue as services are rendered and costs as they are incurred. HP
recognizes revenue from fixed-price consulting arrangements over the contract period on a proportional
performance basis, as determined by the relationship of actual labor costs incurred to date compared to
the estimated total contract labor costs. HP recognizes revenue on certain design and build projects (to
design, develop and construct software and systems) using the percentage-of-completion method. HP
uses the cost-to-cost method of measurement towards completion as determined by the percentage of
cost incurred to date compared to the total estimated costs of the project. Estimates of project costs for
fixed-price contracts are regularly revised during the life of a contract. HP records revisions to cost
estimates, and overall contract losses where applicable, in the period in which the facts that give rise to
87