Motorola 2014 Annual Report Download - page 54

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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 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-
specific factors, and (iii) stratifying the data points, when appropriate, based on customer, magnitude of the transaction and sales
volume.
The Company also considers 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.
The Company's 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 the Company 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 between software and non-software deliverables.
The Company allocates 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, the Company uses 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.