IBM 2011 Annual Report Download - page 79

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies 77
Multiple-Deliverable Arrangements
The company enters into revenue arrangements that may consist
of multiple deliverables of its products and services based on the
needs of its clients. These arrangements may include any combination
of services, software, hardware and/or financing. For example, a
client may purchase a server that includes operating system software.
In addition, the arrangement may include post-contract support for
the software and a contract for post-warranty maintenance service
for the hardware. These types of arrangements can also include
financing provided by the company. These arrangements consist of
multiple deliverables, with the hardware and software delivered in
one reporting period and the software support and hardware
maintenance services delivered across multiple reporting periods.
In another example, a client may outsource the running of its data-
center operations to the company on a long-term, multiple-year
basis and periodically purchase servers and/or software products
from the company to upgrade or expand its facility. The outsourcing
services are provided on a continuous basis across multiple
reporting periods and the hardware and software products are
delivered in one reporting period. To the extent that a deliverable in
a multiple-deliverable arrangement is subject to specific guidance
that deliverable is accounted for in accordance with such specific
guidance. Examples of such arrangements may include leased
hardware which is subject to specific leasing guidance or software
which is subject to specific software revenue recognition guidance
(see “Software” on page 78) on whether and/or how to separate
multiple-deliverable arrangements into separate units of accounting
(separability) and how to allocate the arrangement consideration
among those separate units of accounting (allocation). For all other
deliverables in multiple-deliverable arrangements, the guidance
below is applied for separability and allocation. A multiple-deliverable
arrangement is separated into more than one unit of accounting if
the following criteria are met:
• The delivered item(s) has value to the client on a stand-alone
basis; and
• If the arrangement includes a general right of return relative
to the delivered item(s), delivery or performance of the
undelivered item(s) is considered probable and substantially
in the control of the company.
If these criteria are not met, the arrangement is accounted for as
one unit of accounting which would result in revenue being recognized
ratably over the contract term 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 a relative selling
price 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 selling price. The following revenue policies
are then applied to each unit of accounting, as applicable.
Revenue from the company’s business analytics, smarter planet
and cloud offerings follow the specific revenue recognition policies
for multiple deliverable arrangements and for each major category
of revenue depending on the type of offering which can be comprised
of services, hardware and/or software.
Services
The company’s primary services offerings include information
technology (IT) datacenter and business process outsourcing,
application management services, consulting and systems integration,
technology infrastructure and system maintenance, Web hosting
and the design and development of complex IT systems to a client’s
specifications (design and build). These services are provided on
a time-and-material basis, as a fixed-price contract or as a fixed-
price per measure of output contract and the contract terms range
from less than one year to over 10 years.
Revenue from IT datacenter and business process outsourcing
contracts is recognized in the period the services are provided using
either an objective measure of output or on a straight-line basis
over the term of the contract. Under the output method, the amount
of revenue recognized is based on the services delivered in the period.
Revenue from application management services, technology
infrastructure and system maintenance and Web hosting contracts
is recognized on a straight-line basis over the terms of the contracts.
Revenue from time-and-material contracts is recognized as labor
hours are delivered and direct expenses are incurred. Revenue
related to extended warranty and product maintenance contracts
is recognized on a straight-line basis over the delivery period.
Revenue from fixed-price design and build contracts is recognized
under the percentage-of-completion (POC) method. Under the POC
method, revenue is recognized based on the labor costs incurred
to date as a percentage of the total estimated labor costs to fulfill
the contract. If circumstances arise that change the original estimates
of revenues, costs, or extent of progress toward completion, revisions
to the estimates are made. These revisions may result in increases
or decreases in estimated revenues or costs, and such revisions
are reflected in income in the period in which the circumstances
that gave rise to the revision become known by management.
The company performs ongoing profitability analyses of its
services contracts accounted for under the POC method in order
to determine whether the latest estimates of revenue, costs and
profits require updating. If at any time these estimates indicate that
the contract will be unprofitable, the entire estimated loss for the
remainder of the contract is recorded immediately. For non-POC
method service contracts, any losses are recorded as incurred.
In some services contracts, the company bills the client prior to
recognizing revenue from performing the services. Deferred income
of $7,363 million and $7,195 million at December 31, 2011 and 2010,
respectively, is included in the Consolidated Statement of Financial
Position. In other services contracts, the company performs the
services prior to billing the client. Unbilled accounts receivable of
$2,166 million and $2,244 million at December 31, 2011 and 2010,
respectively, is 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 accordance with specific contractual provisions.
Unbilled receivables are expected to be billed within four months.