HP 2013 Annual Report Download - page 96

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
such changes become known. HP uses the completed contract method if reasonable and reliable cost
estimates for a project cannot be made.
HP generally recognizes outsourcing services revenue 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, HP generally recognizes revenue on a straight-line basis over the
contract term. Losses on outsourcing arrangements are recognized in the period in which such
contractual losses become probable and estimable.
HP recognizes revenue from operating leases on a straight-line basis as service revenue over the
rental period.
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 services 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 deferred costs
Deferred revenue represents amounts received in advance for product support contracts, software
customer support contracts, outsourcing startup 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 support service amounts at the time HP bills the customer, and HP then generally
recognizes the amounts ratably over the support contract term or as HP delivers the services.
HP recognizes costs associated with outsourcing contracts as incurred, unless such costs relate to
the startup phase of the outsourcing contract and are considered direct and incremental to the contract,
in which case HP defers and subsequently amortizes such costs over the contractual services period. HP
amortizes deferred contract costs on a straight-line basis over the remaining original term of the
contract unless facts and circumstances of the contract indicate a shorter period is more appropriate.
Based on actual and projected contract financial performance indicators, HP analyzes the recoverability
of deferred contract costs associated with a particular contract on a periodic basis using the
undiscounted estimated cash flows of the contract over its remaining 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, HP evaluates any remaining long-lived
assets related to that contract for impairment.
Shipping and Handling
HP includes costs related to shipping and handling in cost of sales.
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