Oracle 2011 Annual Report Download - page 48

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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