Oracle 2007 Annual Report Download - page 77

Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2008
New software license revenues represent fees earned from granting customers licenses to use our database,
middleware and applications software, and exclude revenues derived from software license updates, which are
included in software license updates and product support revenues. While the basis for software license revenue
recognition is substantially governed by the provisions of Statement of Position No. 97-2, Software Revenue
Recognition (SOP 97-2), issued 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
contracts, which are entered into at the customer’s option and 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 contracts 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 contracts
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 services 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. 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 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
72
Source: ORACLE CORP, 10-K, July 02, 2008 Powered by Morningstar® Document Research℠