IBM 2008 Annual Report Download - page 70

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Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
Management Discussion ............................................................................................. 18
Consolidated Statements ............................................................................................ 60
Notes ............................................................................................................................... 66
A – E ........................................................................................................................66
A. SIGNIFICANT ACCOUNTING POLICIES ..........................................................66
B. ACCOUNTING CHANGES .................................................................................76
C. ACQUISITIONS/DIVESTITURES ........................................................................78
D. FAIR VALUE ......................................................................................................84
E. FINANCIAL INSTRUMENTS (EXCLUDING DERIVATIVES) .................................85
F – J ........................................................................................................................86
K– Q .......................................................................................................................88
R –W ..................................................................................................................... 10 2
In some of the company’s services contracts, the company bills the
client prior to recognizing revenue from performing the services.
Deferred income of $, million and $, million at December
,  and , respectively, is included in the Consolidated
Statement of Financial Position. The year-to-year increase was driven
by growth in the Global Services business and the impacts of cur-
rency. In other services contracts, the company performs the services
prior to billing the client. Unbilled accounts receivable of $,
million and $, million at December ,  and , respec-
tively, are included in notes and accounts receivable-trade in the
Consolidated Statement of Financial Position. Billings usually occur
in the month after the company performs the services or in accor-
dance with specific contractual provisions. Unbilled receivables are
expected to be billed within four months.
Hardware
Revenue from hardware sales and sales-type leases is recognized
when risk of loss has transferred to the client and there are no unful-
filled company obligations that affect the client’s final acceptance of
the arrangement. Any cost of standard warranties and remaining
obligations that are inconsequential or perfunctory are accrued when
the corresponding revenue is recognized. Revenue from rentals and
operating leases is recognized on a straight-line basis over the term
of the rental or lease.
Software
Revenue from perpetual (one-time charge) license software is recog-
nized at the inception of the license term if all revenue recognition
criteria have been met. Revenue from term (recurring license charge)
license software is recognized on a subscription basis over the period
that the client is entitled to use the license. Revenue from mainte-
nance, unspecified upgrades on a when-and-if-available basis and
technical support is recognized on a straight-line basis over the period
such items are delivered. In multiple-element revenue arrangements
that include software that is more than incidental to the products or
services as a whole (software multiple-element arrangements), soft-
ware and software-related elements are accounted for in accordance
with the following criteria. Software-related elements include software
products and services, as well as any non-software deliverable for
which a software deliverable is essential to its functionality.
A software multiple-element arrangement is separated into more
than one unit of accounting if all of the following criteria are met:
• The functionality of the delivered element(s) is not dependent on
the undelivered element(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 com-
pany on a regular basis and not as part of the multiple-element
arrangement; and
• Delivery of the delivered element(s) represents the culmination of
the earnings process for that element(s).
If any one of these criteria are not met, the arrangement is accounted
for as one unit of accounting which would result in revenue being
recognized on a straight-line basis or being deferred until the earlier
of when such criteria are met or when the last undelivered element
is delivered. If these criteria are met for each element and there is
VSOE of fair value for all units of accounting in an arrangement, the
arrangement consideration is allocated to the separate units of
accounting based on each unit’s relative VSOE of fair value. There
may be cases, however, in which there is VSOE of fair value of the
undelivered item(s) but no such evidence for the delivered item(s).
In these cases, the residual method is used to allocate the arrange-
ment consideration. Under the residual method, the amount of
consideration allocated to the delivered item(s) equals the total
arrangement consideration less the aggregate VSOE of fair value of
the undelivered elements.
Financing
Financing income attributable to sales-type leases, direct financing
leases and loans is recognized on the accrual basis using the effective
interest method. Operating lease income is recognized on a straight-
line basis over the term of the lease.
 
Recurring operating costs for services contracts, including costs
related to bid and proposal activities, are recognized as incurred. For
fixed price design and build contracts, the costs of external hardware
and software accounted for under the POC method are deferred and
recognized based on the labor costs incurred to date, as a percentage
of the total estimated labor costs to fulfill the contract. Certain eli-
gible, nonrecurring costs incurred in the initial phases of outsourcing
contracts are deferred and subsequently amortized. These costs consist
of transition and setup costs related to the installation of systems and
processes and are amortized on a straight-line basis over the expected
period of benefit, 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 life of
the asset. If an asset is contract specific, then the depreciation period
is the shorter of the useful life of the asset or the contract term.