IBM 2012 Annual Report Download - page 78

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 combina-
tion of services, software, hardware and/or financing. For example,
a client may purchase a server that includes operating system soft-
ware. In addition, the arrangement may include post-contract
support for the software and a contract for post-warranty mainte-
nance service for the hardware. These types of arrangements can
also include financing provided by the company. These arrange-
ments 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 datacenter operations to the company on a long-term,
multiple-year basis and periodically purchase servers and/or soft-
ware 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 account-
ing 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 guid-
ance or software which is subject to specific software revenue
recognition guidance 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-deliver-
able 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 recog-
nized 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 com-
prised of services, hardware and/or software.
Services
The company’s primary services offerings include information tech-
nology (IT) datacenter and business process outsourcing, application
management services, consulting and systems integration, technol-
ogy infrastructure and system maintenance, Web hosting and the
design and development of complex IT systems to a client’s speci-
fications (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 recog-
nized 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 comple-
tion, 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
the company.
The company performs ongoing profitability analyses of its ser-
vices contracts accounted for under the POC method in order to
determine whether the latest estimates of revenues, costs and prof-
its require updating. If at any time these estimates indicate that the
contract will be unprofitable, the entire estimated loss for the remain-
der of the contract is recorded immediately. For non-POC method
services 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 $7,281 million and $7,363 million at December 31, 2012 and 2011,
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
$1,998 million and $2,166 million at December 31, 2012 and 2011,
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.