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Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2006
6. DEFERRED REVENUES
Deferred revenues consisted of the following:
May 31,
(in millions) 2006 2005
Software license updates and product support $ 2,501 $ 1,985
Services 246 225
New software licenses 83 79
Deferred revenues, current 2,830 2,289
Deferred revenues, non-current 114 126
Total deferred revenues $ 2,944 $ 2,415
Deferred software license updates and product support revenues represent customer payments made in advance for annual support contracts. Software license
updates and product support are typically billed on a per annum basis in advance and revenue is recognized ratably over the support period. The deferred
software license updates and product support revenues are typically highest at the end of our first fiscal quarter due to the collection of cash from the large
volume of service contracts that are sold or renewed in the fiscal quarter ending in May of each year. Deferred service revenues include prepayments for
consulting, On Demand and education services. Revenue for these services is recognized as the services are performed. Deferred new software license revenues
typically result from undelivered products or specified enhancements, customer specific acceptance provisions or software license transactions that are not
segmentable from consulting services. Deferred revenues, non-current are comprised primarily of deferred software license updates and product support
revenues.
In connection with purchase price allocations related to our acquisitions in fiscal 2006 and fiscal 2005, we have estimated the fair values of the support
obligations assumed. The estimated fair values of the support obligations assumed were determined using a cost-build up approach. The cost-build up approach
determines fair value by estimating the costs relating to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit
approximates, in theory, the amount that we would be required to pay a third party to assume the support obligations. Over the past two years, we recorded
adjustments to reduce the carrying values of the deferred software license updates and product support revenues assumed by $640 million to $426 million, which
represents our estimate of the fair value of the support obligations assumed. In addition, we recorded a fair value adjustment of $208 million in other current
assets related to support contracts assumed for which the underlying service period had not yet started and for which cash had not been received. These fair value
adjustments reduce the revenues recognized over the support contract term of our acquired contracts and, as a result, we did not recognize software license
updates and product support revenues related to support contracts assumed in business acquisitions in the amount of $391 million and $320 million, which would
have been otherwise recorded by the acquired entities, in fiscal 2006 and 2005 respectively.
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Source: ORACLE CORP, 10-K, July 21, 2006 Powered by Morningstar® Document Research℠