Oracle 2006 Annual Report Download - page 78

Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2007
by the American Institute of Certified Public Accountants, we exercise judgment and use estimates in
connection with the determination of the amount of software and services revenues to be recognized in each
accounting period.
For software license arrangements that do not require significant modification or customization of the
underlying software, we recognize new software license revenues when: (1) we enter into a legally binding
arrangement with a customer for the license of software; (2) we deliver the products; (3) customer payment is
deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is
probable. Substantially all of our new software license revenues are recognized in this manner.
The vast majority of our software license arrangements include software license updates and product support,
which are recognized ratably over the term of the arrangement, typically one year. Software license updates
provide customers with rights to unspecified software product upgrades, maintenance releases and patches
released during the term of the support period. Product support includes internet access to technical content,
as well as internet and telephone access to technical support personnel. Software license updates and product
support are generally priced as a percentage of the net new software license fees. Substantially all of our
customers purchase both software license updates and product support when they acquire new software
licenses. In addition, substantially all of our customers renew their software license updates and product
support contracts annually.
Many of our software arrangements include consulting implementation services sold separately under
consulting engagement contracts. Consulting revenues from these arrangements are generally accounted for
separately from new software license revenues because the arrangements qualify as service transactions as
defined in SOP 97-2. The more significant factors considered in determining whether the revenues should be
accounted for separately include the nature of services (i.e., consideration of whether the services are essential
to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing
of payments and impact of milestones or acceptance criteria on the realizability of the software license fee.
Revenues for consulting services are generally recognized as the services are performed. If there is a
significant uncertainty about the project completion or receipt of payment for the consulting services,
revenues are deferred until the uncertainty is sufficiently resolved. We estimate the proportional performance
on contracts with fixed or “not to exceed” fees on a monthly basis utilizing hours incurred to date as a
percentage of total estimated hours to complete the project. We recognize no more than 90% of the milestone
or total contract amount until project acceptance is obtained. If we do not have a sufficient basis to measure
progress towards completion, revenues are recognized when we receive final acceptance from the customer.
When total cost estimates exceed revenues, we accrue for the estimated losses immediately using cost
estimates that are based upon an average fully burdened daily rate applicable to the consulting organization
delivering the services. The complexity of the estimation process and factors relating to the assumptions, risks
and uncertainties inherent with the application of the proportional performance method of accounting affects
the amounts of revenues and related expenses reported in our consolidated financial statements. A number of
internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances
and specification and testing requirement changes.
If an arrangement does not qualify for separate accounting of the software license and consulting transactions,
then new software license revenue is generally recognized together with the consulting services based on
contract accounting using either the percentage-of-completion or completed-contract method. Contract
accounting is applied to any arrangements: (1) that include milestones or customer specific acceptance criteria
that may affect collection of the software license fees; (2) where services include significant modification or
customization of the software; (3) where significant consulting services are provided for in the software
license contract without additional charge or are substantially discounted; or (4) where the software license
payment is tied to the performance of consulting services.
On Demand is comprised of Oracle On Demand, CRM On Demand and Advanced Customer Services. Oracle
On Demand provides multi-featured software and hardware management and maintenance services for our
database, middleware and applications software. CRM On Demand is a service offering that provides our
customers with our
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Source: ORACLE CORP, 10-K, June 29, 2007 Powered by Morningstar® Document Research℠