Motorola 2012 Annual Report Download - page 48

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accounting when (i) the delivered element(s) have value to the customer on a stand-alone basis, and (ii) delivery of the
undelivered element(s) is probable and substantially in our control. In these arrangements, we allocate revenue to all
deliverables based on their relative selling prices. We use the following hierarchy to determine the selling price to be used for
allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of
selling price (“TPE”) and (iii) best estimate of selling price (“ESP”).
• VSOE—In many instances, products are sold separately in stand-alone arrangements as customers may support the
products themselves or purchase support on a time and materials basis. Additionally, advanced services such as
general consulting, network management or advisory projects are often sold in stand-alone engagements. Technical
support services are also often sold separately through renewals of annual contracts. We determine VSOE based on our
normal pricing and discounting practices for the specific product or service when sold separately. In determining
VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably
narrow pricing range, generally evidenced by the pricing rates of approximately 80% of such historical stand-alone
transactions falling within plus or minus 15% of the median rate. In addition, we consider the geographies in which
the products or services are sold, major product and service groups, customer classification, and other environmental
or marketing variables in determining VSOE.
• TPE—VSOE exists only when we sell the deliverable separately. When VSOE does not exist, we attempt to determine
TPE based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy for
many of our products differs from that of our peers and our offerings contain a significant level of customization and
differentiation such that the comparable pricing of products with similar functionality sold by other companies cannot
be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a
stand-alone basis. Therefore, we are typically not able to determine TPE.
• ESP—The objective of ESP is to determine the price at which we would transact a sale if the product or service were
sold on a stand-alone basis. When both VSOE and TPE do not exist, we determine ESP by first collecting all
reasonably available data points including sales, cost and margin analysis of the product, and other inputs based on our
normal pricing practices. Second, we make any reasonably required adjustments to the data based on market and
Company-specific factors. Third, we stratify the data points, when appropriate, based on customer, magnitude of the
transaction and sales volume.
Once elements of an arrangement are separated into more than one unit of accounting, revenue is recognized for each
separate unit of accounting based on the nature of the revenue as described above.
Our arrangements with multiple deliverables may also contain a stand-alone software deliverable that is subject to
software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software
deliverable and the non-software deliverable(s) based on the relative selling prices of all of the deliverables in the arrangement
using the fair value hierarchy outlined above. In circumstances where we cannot determine VSOE or TPE of the selling price
for any of the deliverables in the arrangement, ESP is used for the purpose of allocating the arrangement consideration.
We account for multiple element arrangements that consist entirely of software or software-related products, including
the sale of software upgrades or software support agreements to previously sold software, in accordance with software
accounting guidance. For such arrangements, revenue is allocated to the deliverables based on the relative fair value of each
element, and fair value is determined using VSOE. Where VSOE does not exist for the undelivered software element, revenue
is deferred until either the undelivered element is delivered or VSOE is established, whichever occurs first. When VSOE of a
delivered element has not been established, but VSOE exists for the undelivered elements, we use the residual method to
recognize revenue when the fair value of all undelivered elements is determinable. Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion of the arrangement consideration is allocated to the delivered
elements and is recognized as revenue.
Changes in cost estimates and the fair values of certain deliverables could negatively impact our operating results. In
addition, unforeseen conditions could arise over the contract term that may have a significant impact on operating results.
Inventory Valuation
We record valuation reserves on our inventory for estimated excess or obsolescence. The amount of the reserve is equal
to the difference between the cost of the inventory and the estimated market value based upon assumptions about future
demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify
reserves needed for excess and obsolescence. We use our best judgment to estimate appropriate reserves based on this analysis.
In addition, we adjust the carrying value of inventory if the current market value of that inventory is below our cost.