IBM 2005 Annual Report Download - page 57
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
56_ NotestoConsolidatedFinancialStatements
SOFTWARE
Revenue from perpetual (one-time charge) license software is
recognized at the inception of the license term if all revenue
recognitioncriteriahavebeenmet.Revenuefromterm(monthly
licensecharge)licensesoftwareisrecognizedonasubscription
basisovertheperiodthattheclientisentitledtousethelicense.
Revenuefrommaintenance,unspecifiedupgrades onawhen-
and-if-availablebasis andtechnicalsupportisrecognizedover
theperiodsuchitemsaredelivered.Inmultiple-elementrevenue
arrangementsthatincludesoftwarethatismorethanincidental
to the products or services as a whole (software multiple-ele-
ment arrangements), software and software-related elements
are accounted for in accordance with the following policies.
Software-relatedelementsincludesoftwareproductsandserv-
ices,aswellasanynon-softwaredeliverableforwhichasoftware
deliverableisessentialtoitsfunctionality.
Asoftwaremultiple-elementarrangementisseparatedinto
morethanoneunitofaccountingif all ofthefollowingcriteria
aremet:
• Thefunctionalityofthedeliveredelement(s)isnotdepend-
entontheundeliveredelement(s).
• There is vendor-specific objective evidence (VSOE) of fair
value of the undelivered element(s). VSOE of fair value is
based on the price charged when the deliverable is sold
separately by the company on a regular basis and not as
partofthemultiple-elementarrangement.
• Deliveryofthedeliveredelement(s)representstheculmina-
tionoftheearningsprocessforthatelement(s).
Ifthesecriteriaarenotmet, thearrangementisaccountedforas
oneunitofaccountingwhich would resultinrevenuebeingrec-
ognizedonastraight-linebasisor beingdeferreduntiltheear-
lierofwhensuchcriteria aremetorwhenthelastundelivered
elementis delivered.If these criteriaaremetforeachelement
and thereisVSOEoffairvalueforallunitsofaccountinginan
arrangement,thearrangementconsiderationisallocatedtothe
separateunitsofaccountingbasedoneachunit’srelativeVSOE
of fair value. There may be cases, however, in which there is
VSOE of fair value of the undelivered item(s) but no such evi-
dence for the delivered item(s). In these cases, the residual
methodisusedtoallocatethearrangementconsideration.Under
theresidualmethod,theamountofconsiderationallocatedtothe
delivereditem(s)equalsthetotalarrangementconsiderationless
theaggregateVSOEoffairvalueoftheundeliveredelements.
FINANCING
Financeincomeattributabletosales-typeleases,directfinancing
leasesand loansisrecognizedontheaccrualbasisusingthe
effectiveinterestmethod.Operatingleaseincomeisrecognized
onastraight-linebasisoverthetermofthelease.
ServicesCost
Recurringoperating costs foroutsourcingcontracts, including
costs related to bid and proposal activities, are expensed
asincurred.Nonrecurringcostsincurredintheinitialphasesof
outsourcing contracts are deferred and subsequently amor-
tized.Thesecostsconsistoftransitionandset-upcostsrelated
totheinstallationofsystemsandprocessesandareamortized
onastraight-linebasisovertheexpectedperiodofbenefit,not
to exceed the term of the contract. Additionally, fixed assets
associated with outsourcing contracts are capitalized and
depreciated on a straight-line basis over the expected useful
lifeoftheasset.Ifanassetiscontractspecific,thenthedepre-
ciationperiodistheshorteroftheusefullifeoftheassetorthe
contract term. Amounts paid to clients in excess of the fair
valueofacquiredassetsusedinoutsourcingarrangementsare
deferredandamortizedonastraight-linebasisasareduction
ofrevenueovertheexpectedperiodofbenefitnottoexceedthe
termofthecontract.Thecompanyperformsperiodicreviewsto
assesstherecoverabilityofdeferredcontracttransitionandset-
upcosts.Thisreviewisdonebycomparingtheestimatedmini-
mum remaining undiscounted cash flows of a contract to the
unamortized contract costs. If such minimum undiscounted
cashflowsarenotsufficienttorecovertheunamortizedcosts,a
lossisrecognized.
Deferred services transition and set-up costs were $1,004
millionand$628million at December 31,2005 and December
31,2004,respectively.Theprimarydriveroftheincreaseyearto
year was the continued growth of the company’s Business
ConsultingServices business.Amortizationexpenseofdeferred
servicestransitionandset-upcostsisestimatedatDecember
31, 2005tobe$327 millionin 2006,$240 millionin2007,$180
millionin2008,$100 millionin2009,and$157millionthereafter.
Deferredamountspaidtoclientsinexcessofthefairvalue
of acquired assets used in outsourcing arrangements were
$227 million and $353 million at December 31, 2005 and
December 31, 2004, respectively. The primary driver of the
decreaseyear toyear was the reduction in these terms being
offeredduring 2005. Amortizationofdeferredamounts paid to
clientsinexcessofthefairvalueofacquiredassets isrecorded
asanoffsetofrevenueand isestimatedatDecember31,2005
to be $100 million in 2006, $64 million in 2007, $37 million in
2008,$22 millionin2009,and$4 million thereafter.
Insituationsinwhichanoutsourcingcontractisterminated,
thetermsofthecontractmayrequiretheclienttoreimbursethe
company for the recovery of unbilled accounts receivable,
unamortized deferred costs incurred to purchase specific
assetsutilizedinthedeliveryofservices,andtopayanyaddi-
tionalcostsincurredbythecompanytotransitiontheservices.
SoftwareCosts
Coststhatarerelatedtotheconceptualformulationanddesign
of licensed programs are expensed as incurred to research,
developmentand engineering expense. Also for licensedpro-
grams,thecompanycapitalizescoststhatareincurredtopro-
duce the finished product after technological feasibility has
beenestablished.Capitalizedamountsareamortizedusingthe
straight-linemethod,whichisappliedoverperiodsrangingup
to three years. The company performs periodic reviews to
ensure that unamortized program costs remain recoverable