HP 2015 Annual Report Download - page 110

Table of Contents
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HP derives the results of the business segments directly from its internal management reporting system. The accounting policies HP uses to derive
segment results are substantially the same as those the consolidated company uses. Management measures the performance of each segment based on several
metrics, including earnings from operations. Management uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the
segments.
Segment revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments on an
arm's-length basis. Intersegment revenues primarily consist of sales of hardware and software that are sourced internally and, in the majority of the cases, are
financed as operating leases by HPFS. HP's consolidated net revenue is derived and reported after the elimination of intersegment revenues from such
arrangements.
HP periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between
subsidiaries. Revenues from these intercompany arrangements are deferred and recognized as earned over the term of the arrangement by the HP legal entities
involved in such transactions; however, these advanced payments are eliminated from revenues as reported by HP and its business segments. As disclosed in
Note 6, during fiscal 2015, HP executed an intercompany advanced royalty payment arrangement resulting in advanced payments of $8.8 billion, while
during fiscal 2014 HP executed a multi-year intercompany licensing arrangement and intercompany advanced royalty payment arrangement which resulted
in combined advanced payments of $11.5 billion. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a
deferral of intercompany revenues over the term of the arrangements, approximately 5 years and 15 years, respectively. The impact of these intercompany
arrangements is eliminated from both HP consolidated and segment revenues.
Financing interest in the Consolidated Statements of Earnings reflects interest expense on debt attributable to HPFS. Debt attributable to HPFS consists
of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated
with HPFS and its subsidiaries.
HP does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated costs include certain
corporate governance costs, stock-based compensation expense, amortization of intangible assets, restructuring charges, acquisition and other related
charges, separation costs, defined benefit plan settlement charges and impairment of data center assets.
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Effective at the beginning of the first quarter of fiscal 2015, HP implemented an organizational change to align its segment financial reporting more
closely with its current business structure. This organizational change resulted in the transfer of third-party multi-vendor support arrangements from the
Technology Services ("TS") business unit within the EG segment to the ITO business unit within the ES segment. HP has reflected this change to its segment
information retrospectively to the earliest period presented, which has resulted in the removal of intersegment revenue from the TS business unit within the
EG segment and the related corporate intersegment revenue eliminations, and the transfer of operating profit from the TS business unit within the EG segment
to the ITO business unit within the ES segment.
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Source: HP INC, 10-K, December 16, 2015 Powered by Morningstar® Document Research℠
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