Oracle 2006 Annual Report Download - page 34

Table of Contents
recognize new software license revenue from Concurrent Transactions if all of our revenue recognition
criteria are met and the goods and services acquired are necessary for our current operations.
Business Combinations
In accordance with business combination accounting, we allocate the purchase price of acquired companies to
the tangible and intangible assets acquired and liabilities assumed as well as to in-process research and
development based on their estimated fair values. We engage third-party appraisal firms to assist management
in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require
management to make significant estimates and assumptions, especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions believed to be reasonable. These
estimates are based on historical experience and information obtained from the management of the acquired
companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets include
but are not limited to: future expected cash flows from license sales, maintenance agreements, consulting
contracts, customer contracts and acquired developed technologies and patents; expected costs to develop the
in-process research and development into commercially viable products and estimated cash flows from the
projects when completed; the acquired company’s brand and market position, as well as assumptions about
the period of time the acquired brand will continue to be used in the combined company’s product portfolio;
and discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or
validity of such assumptions, estimates or actual results.
In connection with purchase price allocations, we estimate the fair value of the support obligations assumed in
connection with acquisitions. The estimated fair value of the support obligations is determined utilizing a cost
build-up approach. The cost build-up approach determines fair value by estimating the costs related to
fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the support obligations are
based on the historical direct costs related to providing the support services and to correct any errors in the
software products acquired. We do not include any costs associated with selling efforts or research and
development or the related fulfillment margins on these costs. Profit associated with selling effort is excluded
because the acquired entities would have concluded the selling effort on the support contracts prior to the
acquisition date. The estimated research and development costs are not included in the fair value
determination, as these costs are not deemed to represent a legal obligation at the time of acquisition. 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 obligation.
As a result, we did not recognize software license updates and product support revenues related to support
contracts in the amount of $212 million, $391 million and $320 million that would have been otherwise
recorded by acquired businesses as independent entities in fiscal 2007, 2006 and 2005, respectively.
Historically, substantially all of our customers, including customers from acquired companies, renew their
contracts when the contract is eligible for renewal. To the extent these underlying support contracts are
renewed, we will recognize the revenues for the full value of the support contracts over the support periods,
the majority of which are one year. Had we included our estimated selling and research and development
activities, and the associated margin for unspecified product upgrades and enhancements to be provided under
our assumed support arrangements, the fair value of the support obligations would have been significantly
higher than what we have recorded and we would have recorded a higher amount of software license updates
and product support revenue historically and in future periods related to these assumed contracts.
Other significant estimates associated with the accounting for acquisitions include restructuring costs.
Restructuring costs are primarily comprised of severance costs, costs of consolidating duplicate facilities and
contract termination costs. Restructuring expenses are based upon plans that have been committed to by
management but which are subject to refinement. To estimate restructuring expenses, management utilizes
assumptions of the number of employees that would be involuntarily terminated and of future costs to operate
and eventually vacate duplicate facilities. Estimated restructuring expenses may change as management
executes the approved plan. Decreases to the cost estimates of executing the currently approved plans
associated with pre-merger activities of the companies we acquire are recorded as an adjustment to goodwill
indefinitely, whereas increases to the estimates are recorded as an adjustment to goodwill during the purchase
price allocation period (generally within one year of the acquisition date) and as operating expenses
thereafter.
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Source: ORACLE CORP, 10-K, June 29, 2007 Powered by Morningstar® Document Research℠