IBM 2014 Annual Report Download - page 88

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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is a principal to the transaction. Several factors are considered
to determine whether the company is an agent or principal, most
notably whether the company is the primary obligor to the client, or
has inventory risk. Consideration is also given to whether the com-
pany adds meaningful value to the vendor’s product or service,
was involved in the selection of the vendor’s product or service,
has latitude in establishing the sales price or has credit risk.
The company reports revenue net of any revenue-based
taxes assessed by governmental authorities that are imposed on
and concurrent with specific revenue-producing transactions. In
addition to the aforementioned general policies, the following are
the specific revenue recognition policies for multiple-deliverable
arrangements and for each major category of revenue.
Multiple-Deliverable Arrangements
The company enters into revenue arrangements that may con-
sist 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 arrange-
ments 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 out-
source the running of its datacenter 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 soft-
ware products are delivered in one reporting period. To the extent
that a deliverable in a multiple-deliverable arrangement is subject
to specific accounting 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 on whether and/or how to
separate multiple-deliverable arrangements into separate units of
accounting (separability) and how to allocate the arrangement con-
sideration 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 rec-
ognized 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, mobile,
security, social 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 outsourc-
ing, application management services, consulting and systems
integration, technology infrastructure and system maintenance,
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 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.