Motorola 2013 Annual Report Download - page 60

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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 the Company’s long-term contracts, Estimated Costs at Completion is complex
and subject to many variables. The Company has 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 maintenance agreements, which do not contain specified future software
upgrades, is recognized ratably over the contract term as services are performed.
Software and Licenses
Revenue from pre-paid perpetual licenses is recognized at the inception of the arrangement, presuming all other relevant
revenue recognition criteria are met. Revenue from non-perpetual licenses or term licenses is recognized ratably over the period
that the licensee uses the license.
Multiple-Element Arrangements
Arrangements with customers may include multiple deliverables, including any combination of products, services and
software. These multiple element arrangements could also include an element accounted for as a long-term contract coupled
with other products, services and software. For multiple-element arrangements that include products containing software that
functions together with the equipment to deliver its essential functionality, undelivered software elements that relate to the
product's essential software, and undelivered non-software services deliverables are separated into more than one unit of
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 the control of the Company.
In these arrangements, the Company allocates revenue to all deliverables based on their relative selling prices. The
Company uses 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”).
The Company determines VSOE based on its normal pricing and discounting practices for the specific product or service
when that same product or service is sold separately. In determining VSOE, the Company requires 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.
When VSOE does not exist, the Company attempts to determine TPE based on competitor prices for similar deliverables
when sold separately. Generally, the Company's go-to-market strategy for many of its products differs from that of its
competitors and its 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, the Company is unable to reliably
determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company is typically not
able to determine TPE.
When both VSOE and TPE are unavailable, the Company uses ESP. The Company determines ESP by: (i) collecting all
reasonably available data points including sales, cost and margin analysis of the product, and other inputs based on its normal
pricing and discounting practices, (ii) making any reasonably required adjustments to the data based on market and Company-