Motorola 2005 Annual Report Download - page 74

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Ì Valuation of investments and long-lived assets
Ì Restructuring activities
Ì Retirement-related benefits
Revenue Recognition
The Company's arrangements with customers may differ in nature and complexity and may contain multiple
deliverables including products, equipment, services and software that may be essential to the functionality of the
other deliverables, which requires the Company to make judgments and estimates in recognizing revenues.
Product and equipment sales may contain discounts, price protection, return provisions and other customer
incentives. The Company's recorded revenues are reduced by allowances for these items at the time the sales are
recorded. The allowances are based on management's best estimate of the amount of allowances that the customer
will ultimately earn and is based on historical experience taking into account the type of products sold, the type of
customer and the type of transaction specific to each arrangement.
The Company's long-term contracts involve the design, engineering, manufacturing and installation of wireless
networks and two-way radio voice and data systems. These systems are designed to meet specific customer
requirements and specifications and generally require extended periods to complete. If the Company can reliably
estimate revenues and contract costs and the technology is considered proven, revenue is recognized under the
percentage of completion method as work progresses towards completion. Estimates of contract revenues, contract
costs and progress towards completion are based on estimates that consider historical experience and other factors
believed to be relevant under the circumstances. Management regularly reviews these estimates and considers the
impact of recurring business risks and uncertainties inherent in the contracts, such as system performance and
implementation delays due to factors within or outside the control of management.
Generally, multiple element arrangements are separated into specific accounting units when delivered elements
have value to the customer on a stand-alone basis, objective and reliable evidence of fair value exists for the
undelivered element(s), and delivery of the undelivered element(s) is probable and substantially within the control
of the Company. Total arrangement consideration is allocated to the separate accounting units based on their
relative fair values (if the fair value of each accounting unit is known) or using the residual method (if the fair
value of the undelivered element(s) is known). Revenue is recognized for a separate accounting unit when the
revenue recognition criteria are met for that unit. In certain situations, judgment is required in determining both the
number of accounting units and fair value of the elements, although generally the fair value of an element can be
objectively determined if the Company sells the element on a stand alone basis.
Changes in these estimates could negatively impact the Company's operating results. In addition, unforeseen
conditions could arise over the contract term that may have a significant impact on the operating results. It is
reasonably likely that different operating results would be reported if the Company used other acceptable revenue
recognition methodologies, such as the completed-contract method, or applied different assumptions.
Allowance for Losses on Finance Receivables
The Company has historically provided financing to certain customers in connection with purchases of the
Company's infrastructure equipment where the contractual terms of the note agreements are greater than one year.
Financing provided has included all or a portion of the equipment purchase price, as well as working capital for
certain purchasers.
Gross financing receivables were $272 million at December 31, 2005 and $2.1 billion at December 31, 2004,
with an allowance for losses on these receivables of $12 million and $2.0 billion, respectively. Of the receivables at
December 31, 2005, $10 million (zero net of allowances for losses of $10 million) were considered impaired based
on management's determination that the Company will be unable to collect all amounts in accordance with the
contractual terms of the relevant agreement. By comparison, impaired receivables at December 31, 2004 were
$2.0 billion ($7 million, net of allowance for losses of $2.0 billion).
Management periodically reviews customer account activity in order to assess the adequacy of the allowances
provided for potential losses. Factors considered include economic conditions, collateral values and each customer's
payment history and credit worthiness. Adjustments, if any, are made to reserve balances following the completion