HP 2014 Annual Report Download - page 57

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
losses become known and are recorded as a component of cost of sales. In circumstances when
reasonable and reliable cost estimates for a project cannot be made we recognize revenue using the
completed contract method.
Outsourcing services revenue is generally recognized in the period when the service is provided
and the amount earned is not contingent on the occurrence of any future event. We recognize revenue
using an objective measure of output for per unit-priced contracts. Revenue for fixed-price outsourcing
contracts with periodic billings is recognized on a straight-line basis if the service is provided evenly
over the contract term. Provisions for estimated losses on outsourcing arrangements are recognized in
the period when such losses become probable and estimable and are recorded as a component of cost
of sales.
Warranty
We accrue the estimated cost of product warranties at the time we recognize revenue. We evaluate
our warranty obligations on a product group basis. Our standard product warranty terms generally
include post-sales support and repairs or replacement of a product at no additional charge for a
specified period of time. While we engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our component suppliers, we base our
estimated warranty obligation on contractual warranty terms, repair costs, product call rates, average
cost per call, current period product shipments and ongoing product failure rates, as well as specific
product class failure outside of our baseline experience. Warranty terms generally range from 90 days
to three years for parts and labor, depending upon the product. Over the last three fiscal years, the
annual warranty expense and actual warranty costs have averaged approximately 2.7% and 2.9% of
annual net product revenue, respectively.
Restructuring
We have engaged in restructuring actions which require management to estimate the timing and
amount of severance and other employee separation costs for workforce reduction and enhanced early
retirement programs, fair value of assets made redundant or obsolete, and the fair value of lease
cancellation and other exit costs. We accrue for severance and other employee separation costs under
these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The
rates used in determining severance accruals are based on existing plans, historical experiences and
negotiated settlements. For a full description of our restructuring actions, refer to our discussions of
restructuring in ‘‘Results of Operations’’ below and in Note 3 to the Consolidated Financial Statements
in Item 8, which are incorporated herein by reference.
Retirement and Post-Retirement Benefits
Our pension and other post-retirement benefit costs and obligations depend on various
assumptions. Our major assumptions relate primarily to discount rates, mortality rates, expected
increases in compensation levels and the expected long-term return on plan assets. The discount rate
assumption is based on current investment yields of high-quality fixed-income securities with maturities
similar to the expected benefits payment period. Mortality rates help predict the expected life of plan
participants and are based on a historical demographic study of the plan. As a result of a historical
study of the U.S. plans, in fiscal 2014, HP adopted a new mortality rate table which incorporated newly
released mortality rates published by the Society of Actuaries. This resulted in an increase to the
projected benefit obligation of approximately $870 million for the U.S. defined benefit plans. The
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