Kodak 2011 Annual Report Download - page 68

situated customers. The best estimate of selling price is established by considering internal factors such as margin objectives, pricing practices and
controls, customer segment pricing strategies and the product life cycle. Consideration is also given to geographies, market conditions such as
competitor pricing strategies and industry technology life cycles. The Company regularly reviews VSOE, TPE and BESP and maintains internal
controls over the establishment and updates of these estimates.
Most of the Company’s equipment has both software and non-software components that function together to deliver the equipment’s essential
functionality and therefore they are accounted for together as non-software deliverables. Non-essential software sold in connection with the
Company’s equipment sales is off-the-shelf and accounted for as separate deliverables or elements. In most cases these software products sold as part
of a multiple element arrangement include software maintenance agreements as well as unspecified upgrades or enhancements on a when-and-if-
available basis. In those multiple element arrangements where non-essential software deliverables are included, revenue is allocated to non-software
and to software deliverables each as a group based on relative selling prices of each of the deliverables in the arrangement. The software deliverables
are subject to software accounting whereby revenue is allocated based on relative VSOE or based on the residual method when VSOE exists for all
undelivered software elements such as post-contract support. Revenue allocated to the software deliverables is deferred and amortized over the
contract period if VSOE does not exist for the undelivered elements. Revenue allocated to software licenses is recognized when all other revenue
criteria have been met. Revenue generated from maintenance and unspecified upgrades or updates on a when-and-if-available basis is recognized
over the contract period.
At the time revenue is recognized, the Company also records reductions to revenue for customer incentive programs. Such incentive programs
include cash and volume discounts, price protection, promotional, cooperative and other advertising allowances, and coupons. For those incentives
that require the estimation of sales volumes or redemption rates, such as for volume rebates or coupons, the Company uses historical experience and
internal and customer data to estimate the sales incentive at the time revenue is recognized.
In instances where the Company provides slotting fees or similar arrangements, this incentive is recognized as a reduction in revenue when payment is
made to the customer (or at the time the Company has incurred the obligation, if earlier) unless the Company receives a benefit over a period of time,
in which case the incentive is recorded as an asset and is amortized as a reduction of revenue over the period in which the benefit is
realized. Arrangements in which the Company receives an identifiable benefit include arrangements that have enforceable exclusivity provisions and
include clawback provisions entitling the Company to a pro rata reimbursement if the customer does not fulfill its obligations under the contract.
The Company may offer customer financing to assist customers in their acquisition of Kodak’s products. At the time a financing transaction is
consummated, which qualifies as a sales-type lease, the Company records equipment revenue equal to the total lease receivable net of unearned
income. Unearned income is recognized as finance income using the effective interest method over the term of the lease. Leases not qualifying as
sales-type leases are accounted for as operating leases. The Company recognizes revenue from operating leases as earned.
RESEARCH AND DEVELOPMENT COSTS
Research and development (“R&D”) costs, which include costs incurred in connection with new product development, fundamental and exploratory
research, process improvement, product use technology and product accreditation, are expensed in the period in which they are incurred. The
acquisition-date fair value of research and development assets acquired in a business combination is capitalized.
ADVERTISING
Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the accompanying Consolidated Statement
of Operations. Advertising expenses amounted to $206 million, $301 million, and $271 million for the years ended December 31, 2011, 2010, and
2009, respectively.
SHIPPING AND HANDLING COSTS
Amounts charged to customers and costs incurred by the Company related to shipping and handling are included in net sales and cost of sales,
respectively.
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