Oracle 2010 Annual Report Download - page 167

Arrangements and Accounting Standards Update 2009-14, Software (Topic
985)—Certain Revenue Arrangements that Include Software Elements to our
multiple-element arrangements.
We enter into arrangements with customers that purchase both nonsoftware related
products and services from us at the same time, or within close proximity of one another
(referred to as nonsoftware multiple-element arrangements). Each element within a
nonsoftware multiple-element arrangement is accounted for as a separate unit of
accounting provided the following criteria are met: the delivered products or services
have value to the customer on a standalone basis; and for an arrangement that includes a
general right of return relative to the delivered products or services, delivery or
performance of the undelivered product or service is considered probable and is
substantially controlled by us. We consider a deliverable to have standalone value if the
product or service is sold separately by us or another vendor or could be resold by the
customer. Further, our revenue arrangements generally do not include a general right of
return relative to the delivered products. Where the aforementioned criteria for a separate
unit of accounting are not met, the deliverable is combined with the undelivered
element(s) and treated as a single unit of accounting for the purposes of allocation of the
arrangement consideration and revenue recognition. For those units of accounting that
include more than one deliverable but are treated as a single unit of accounting, we
generally recognize revenues over the delivery period. For the purposes of revenue
classification of the elements that are accounted for as a single unit of accounting, we
allocate revenue to hardware systems and services based on a rational and consistent
methodology utilizing our best estimate of fair value of such elements.
For our nonsoftware multiple-element arrangements, we allocate revenue to each element
based on a selling price hierarchy at the arrangement inception. The selling price for each
element is based upon the following selling price hierarchy: VSOE if available, third
party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither
VSOE nor TPE are available (a description as to how we determine VSOE, TPE and ESP
is provided below). If a tangible hardware systems product includes software, we
determine whether the tangible hardware systems product and the software work together
to deliver the product’s essential functionality and, if so, the entire product is treated as a
nonsoftware deliverable. The total arrangement consideration is allocated to each separate
unit of accounting for each of the nonsoftware deliverables using the relative selling
prices of each unit based on the aforementioned selling price hierarchy. We limit the
amount of revenue recognized for delivered elements to an amount that is not contingent
upon future delivery of additional products or services or meeting of any specified
performance conditions.
To determine the selling price in multiple-element arrangements, we establish VSOE of
selling price using the price charged for a deliverable when sold separately and for
software license updates and product support and hardware systems support, based on the
renewal rates offered to customers. For nonsoftware multiple-element arrangements, TPE
is established by evaluating similar and interchangeable competitor products or services
in standalone arrangements with similarly situated customers. If we are unable to
determine the selling price because VSOE or TPE doesn’t exist, we determine ESP for
the purposes of allocating the arrangement by reviewing historical transactions, including
transactions whereby the deliverable was sold on a standalone basis and considering
several other external and internal factors including, but not limited to, pricing practices
including discounting, margin objectives, competition, the geographies in which we offer
our products and services, the type of customer (i.e. distributor, value added reseller,
government agency and direct end user, among others) and the stage of the product
lifecycle. The determination of ESP is made through consultation with and approval by
our management, taking into consideration our pricing model and go-to-market strategy.
As our, or our competitors’, pricing and go-to-market strategies evolve, we may modify
our pricing practices in the future, which could result in changes to our determination of
VSOE, TPE and ESP. As a result, our future revenue recognition for multiple-element
arrangements could differ materially from our results in the current period. Selling prices
are analyzed on an annual basis or more frequently if we experience significant changes
in our selling prices.
Revenue Recognition Policies Applicable to both Software and Nonsoftware Elements
Revenue Recognition for Multiple-Element Arrangements – Arrangements with Software
and Nonsoftware Elements
We also enter into multiple-element arrangements that may include a combination of our
various software related and nonsoftware related products and services offerings
including hardware systems products, hardware systems support, new software licenses,
software license updates and product support, consulting, Cloud Services and education.
In such arrangements, we first allocate the total arrangement consideration based on the
relative selling prices of the software group of elements as a whole and to the
nonsoftware elements. We then further allocate consideration within the software group
to the respective elements within that group following the guidance in ASC 985-605 and
our policies as described above. After the arrangement consideration has been allocated
to the elements, we account for each respective element in the arrangement as described
above.
Other Revenue Recognition Policies Applicable to Software and Nonsoftware Elements
Many of our software arrangements include consulting implementation services sold
separately under consulting engagement contracts and are included as a part of our
services business. 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 ASC 985-605. The more significant factors considered
Source: ORACLE CORP, 10-K, June 28, 2011 Powered by Morningstar® Document Research℠