Oracle 2007 Annual Report Download - page 34

Table of Contents
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 revenue 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. If we do not have a sufficient
basis to measure progress towards completion, revenue is 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 revenues are 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 delivered either at our data center facilities, at select partner data centers or at
customer facilities. CRM On Demand is a service offering that provides our customers with our Siebel CRM
software functionality delivered via a hosted solution that we manage. Advanced Customer Services are earned by
providing customers configuration and performance analysis, personalized support and annual on-site technical
services. Revenue from On Demand services is recognized over the term of the service period, which is generally one
year.
Education revenues include instructor-led, media-based and internet-based training in the use of our products.
Education revenues are recognized as the classes or other education offerings are delivered.
For arrangements with multiple elements, we allocate revenue to each element of a transaction based upon its fair
value as determined by “vendor specific objective evidence.” Vendor specific objective evidence of fair value for all
elements of an arrangement is based upon the normal pricing and discounting practices for those products and
services when sold separately, and for software license updates and product support services is also measured by the
renewal rate offered to the customer. We may modify our pricing practices in the future, which could result in
changes in our vendor specific objective evidence of fair value for these undelivered elements. As a result, our future
revenue recognition for multiple element arrangements could differ significantly from our historical results.
We defer revenues for any undelivered elements, and recognize revenues when the product is delivered or over the
period in which the service is performed, in accordance with our revenue recognition policy for each such element. If
we cannot objectively determine the fair value of any undelivered element included in bundled software and service
arrangements, we defer revenues until all elements are delivered and services have been performed, or until fair value
can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element
has not been established, we use the residual method to record revenue if the fair value of all undelivered
29
Source: ORACLE CORP, 10-K, July 02, 2008 Powered by Morningstar® Document Research℠