HP 2014 Annual Report Download - page 101

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
HP recognizes revenue from operating leases on a straight-line basis as service revenue over the
rental period.
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
HP records amounts invoiced to customers in excess of revenue recognized as deferred revenue
until the revenue recognition criteria are satisfied. HP records revenue that is earned and recognized in
excess of amounts invoiced on services contracts as trade receivables.
Deferred revenue represents amounts invoiced in advance for product support contracts, software
customer support contracts, outsourcing startup services work, consulting and integration projects,
product sales or leasing income.
HP recognizes costs associated with outsourcing contracts as incurred, unless such costs are
considered direct and incremental to the startup phase of the contract, in which case HP defers these
costs during the startup phase and subsequently amortizes such costs over the period that outsourcing
services are provided, once those services commence. HP amortizes deferred contract costs on a
straight-line basis over the remaining 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 using the
undiscounted estimated cash flows of the contract over its remaining term. If such undiscounted cash
flows are insufficient to recover the carrying amount of deferred contract costs and long-lived assets
directly associated with the contract, the deferred contract costs are first impaired. If a cash flow
deficiency remains after reducing the carrying amount 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.
Stock-Based Compensation
HP determines stock-based compensation expense based on the measurement date fair value of
the award. HP recognizes compensation cost only for those awards expected to meet the service and
performance vesting conditions on a straight-line basis over the requisite service period of the award.
HP determines compensation costs 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.
Retirement and Post-Retirement Plans
HP has various defined benefit, other contributory and noncontributory retirement and post-
retirement plans. HP generally amortizes unrecognized actuarial gains and losses on a straight-line basis
over the average remaining estimated service life of participants. In some cases, HP amortizes actuarial
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