Motorola 2013 Annual Report Download - page 43

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accordance with software accounting guidance for the following types of sales transactions: (i) standalone sales of software
products or software upgrades, (ii) standalone sales of software maintenance agreements, and (iii) sales of software bundled
with equipment where the software is not essential to the functionality of that equipment.
Products
For equipment sales, in addition to the criteria mentioned above, revenue recognition occurs when title and risk of loss
has transferred to the customer, objective evidence exists that customer acceptance provisions have been met, no significant
obligations remain and allowances for discounts, price protection, returns and customer incentives can be reliably estimated.
Recorded revenues are reduced by these allowances. We base our estimates of these allowances on historical experience taking
into consideration the type of products sold, the type of customer, and the specific type of transaction in each arrangement.
Where customer incentives cannot be reliably estimated, we defer revenue until the incentive has been finalized with the
customer. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of
sales.
We sell software and equipment obtained from other companies. We establish our own pricing and retain related
inventory risk, are the primary obligor in sales transactions with customers, and assume the credit risk for amounts billed to
customers. Accordingly, we generally recognize revenue for the sale of products obtained from other companies based on the
gross amount billed.
Within the Enterprise segment, products are often sold through distributors to value-added resellers. In addition to
cooperative marketing and other incentive programs, we have arrangements with some distributors which allow for price
protection and limited rights of return, generally through stock rotation programs. Under the price protection programs, we
give distributors credits for the difference between the original price paid and our then current price. Under the stock rotation
programs, distributors are able to exchange certain products based on the number of qualified purchases made during the
period. When we are unable to reliably estimate the final sales price due to the price protection and stock rotation programs
revenue is not recognized until the products are resold by distributors to value-added resellers using information provided by
these distributors.
Long-Term Contracts
For long-term contracts that involve customization of equipment and/or software, we generally recognize revenue using
the percentage of completion method based on the percentage of costs incurred to date compared to the total estimated costs to
complete the contract (“Estimated Costs at Completion”). The components of estimated costs to complete a contract and
management’s process for reviewing Estimated Costs at Completion and progress toward completion is discussed further
below. Contracts may be combined or segmented in accordance with the applicable criteria under contract accounting
principles. In certain instances, when revenues or costs associated with long-term contracts cannot be reliably estimated or the
contract contains other inherent uncertainties, revenues and costs are deferred until the project is complete and customer
acceptance is obtained.
Total Estimated Costs at Completion include direct labor, material and subcontracting costs. Due to the nature of the
work required to be performed under many of our long-term contracts, Estimated Costs at Completion is complex and subject
to many variables. We have a standard and disciplined quarterly Estimated Costs at Completion process in which management
reviews the progress and performance of open contracts. As part of this process, management reviews information including,
but not limited to, any outstanding key contract matters, progress towards completion, the project schedule, identified risks and
opportunities, and the related changes in estimates of revenues and costs. The risks and opportunities include management's
judgment about the ability and cost to achieve the project schedule, technical requirements, and other contract requirements.
Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to
be performed, the availability of materials, and performance by subcontractors, among other variables. Based on this analysis,
any quarterly adjustments to net sales, cost of sales, and the related impact to operating income are recorded as necessary in the
period they become known. These adjustments may result from positive project performance, and may result in an increase in
operating income during the performance of individual contracts. Likewise, these adjustments may result in a decrease in
operating income if Estimated Costs at Completion increase. Changes in estimates of net sales or cost of sales could affect the
profitability of one or more of our contracts. The impact on Operating earnings as a result of changes in Estimated Costs at
Completion was not significant for the years 2013, 2012, and 2011. When estimates of total costs to be incurred on a contract
exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period the loss is
determined.
Hardware and Software Services Support
Revenue under equipment and software support and maintenance agreements, which do not contain specified future
software upgrades, is recognized ratably over the contract term as services are performed.
Software and Licenses