Motorola 2014 Annual Report Download - page 41

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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 2014, 2013, and 2012. 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
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 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”).
We determine VSOE based on our normal pricing and discounting practices for the specific product or service when that
same product or service is 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.
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 competitors 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 typically are not able to determine TPE.
When both VSOE and TPE are unavailable, we use ESP. We determine ESP by: (i) collecting all reasonably available data
points including sales, cost and margin analysis of the product, and other inputs based on our normal pricing and discounting
practices, (ii) making any reasonably required adjustments to the data based on market and Company-specific factors, and (iii)
stratifying the data points, when appropriate, based on customer, magnitude of the transaction and sales volume.
We also 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, and ESP.
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 one or more software deliverables that are subject to
software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software
deliverable(s) 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 for any
of the deliverables in the arrangement, ESP is used for the purpose of allocating the arrangement consideration between
software and non-software deliverables.
We allocate arrangement consideration to multiple software or software-related deliverables, 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 the final undelivered software element is
post contract support, service revenue is recognized on a ratable basis over the remaining service period. 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