Lexmark 2010 Annual Report Download - page 77

Revenue Recognition:
General
Lexmark recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred,
the sales price is fixed or determinable and collectibility is reasonably assured. Revenue as reported in the
Company’s Consolidated Statements of Earnings is reported net of any taxes (e.g., sales, use, value
added) assessed by a governmental entity that is directly imposed on a revenue-producing transaction
between a seller and a customer.
The following are the policies applicable to Lexmark’s major categories of revenue transactions:
Printing Products
Revenue from product sales, including sales to distributors and resellers, is recognized when title and risk
of loss transfer to the customer, generally when the product is shipped to the customer. Lexmark
customers include distributors, resellers and end-users of Lexmark products. When other significant
obligations remain after products are delivered, such as contractual requirements pertaining to customer
acceptance, revenue is recognized only after such obligations are fulfilled. At the time revenue is
recognized, the Company provides for the estimated cost of post-sales support, principally product
warranty, and reduces revenue for estimated product returns.
Lexmark records estimated reductions to revenue at the time of sale for customer programs and incentive
offerings including special pricing agreements, promotions and other volume-based incentives. Estimated
reductions in revenue are based upon historical trends and other known factors at the time of sale.
Lexmark also records estimated reductions to revenue for price protection, which it provides to
substantially all of its distributors and reseller customers.
Printing Services
Revenue from support or maintenance contracts, including extended warranty programs, is recognized
ratably over the contractual period. Amounts invoiced to customers in excess of revenue recognized on
support or maintenance contracts are recorded as deferred revenue until the appropriate revenue
recognition criteria are met. Revenue for time and material contracts is recognized as the services are
performed.
ECM Software and Solutions
Lexmark has two general forms of software agreements with customers, perpetual licenses and
subscription services. Provided that all other recognition criteria has been met, license revenue is
recognized when the customer either takes possession of the software via a download, or has been
provided with access codes that allow immediate possession of the software. Conversely, subscription
services revenue is recognized ratably over the duration of the contract as the customer does not take
ownership of the software. Revenue from software support services is recognized as the services are
performed, or is deferred and recognized ratably over the life of the contract as appropriate.
Multiple Element Revenue Arrangements
Lexmark enters into transactions that include multiple elements, such as a combination of products and
services. Revenue for these arrangements is allocated to each element based on its relative fair value and
is recognized when the revenue recognition criteria for each element have been met. For printing products
and services, relative fair value may be determined by the price of an element if it were sold on a stand-
alone basis or third party evidence (e.g., competitors’ prices of comparable products or services). For
software products and services, relative fair value may be determined using stand-alone sales or renewal
rates. In many cases, the Company uses the residual method to allocate arrangement consideration as
permitted under the existing accounting guidance.
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