Oracle 2010 Annual Report Download - page 50

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Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date with respect to
intangible assets, support obligations assumed, estimated restructuring liabilities and pre-acquisition contingencies. Although we believe the assumptions and
estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the
management of the acquired companies and are inherently uncertain.
Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to:
• future expected cash flows from software license sales, hardware systems product sales, support agreements, consulting contracts, other 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 competitive 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 that may affect the accuracy or validity of such assumptions, estimates or actual results.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of both software license updates and product support and
hardware systems support obligations assumed. The estimated fair values of these support obligations are 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 products acquired. The sum of
these costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligation. 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 any selling
efforts is excluded because the acquired entities would have concluded those selling efforts on the support contracts prior to the acquisition date. We also do not
include the estimated research and development costs in our fair value determinations, as these costs are not deemed to represent a legal obligation at the time of
acquisition. As a result, we did not recognize software license updates and product support revenues related to support contracts in the amounts of $80 million,
$86 million and $243 million that would have been otherwise recorded by the acquired businesses as independent entities in fiscal 2011, 2010 and 2009,
respectively. In addition, we did not recognize hardware systems support revenues related to hardware systems support contracts that would have otherwise been
recorded by Sun as an independent entity in the amounts of $148 million and $128 million for fiscal 2011 and 2010, respectively. Historically, substantially all of
our customers, including customers from acquired companies, renew their software license updates and product support contracts when the contracts are eligible
for renewal and we intend to focus our efforts on renewing acquired hardware systems support contracts. To the extent software support or hardware systems
support contracts are renewed, we will recognize the revenues for the full value of the support contracts over the support periods, the substantial majority of
which are one year.
In connection with a business combination, we estimate costs associated with restructuring plans committed to by our management. Restructuring costs are
typically comprised of employee severance costs, costs of consolidating duplicate facilities and contract termination costs. Restructuring expenses are based upon
plans that have been committed to by our management, but may be refined in subsequent periods. We account for costs to exit or restructure certain activities of
an acquired company separately from the business combination. These costs are accounted for as one-time termination and exit costs pursuant to ASC 420, Exit
or Disposal Cost Obligations. A liability for a cost associated with an exit or disposal activity is recognized and measured at its fair value in our consolidated
statement of operations in the period in which the liability is incurred. When estimating the fair value of facility restructuring activities, assumptions are applied
regarding estimated sub-lease payments to be received, which can differ materially from actual results. This may require us to revise our initial estimates which
may materially affect our results of operations and financial position in the period the revision is made.
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Source: ORACLE CORP, 10-K, June 28, 2011 Powered by Morningstar® Document Research℠