Oracle 2012 Annual Report Download - page 53

We estimate the fair values of cloud software subscription, software license updates and product support and
hardware systems support obligations assumed. The estimated fair values of these performance 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 obligations
are based on the historical direct costs related to providing the services including the correction of 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 performance obligations. 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 performance obligations 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 new software licenses revenues
related to cloud software subscription contracts in the amount of $22 million that would have been otherwise
recorded by the acquired businesses as independent entities in fiscal 2012. We did not recognize software license
updates and product support revenues related to support contracts in the amounts of $48 million, $80 million and
$86 million that would have been otherwise recorded by the acquired businesses as independent entities in fiscal
2012, 2011 and 2010, respectively. In addition, we did not recognize hardware systems support revenues related
to hardware systems support contracts that would have otherwise been recorded by the acquired businesses as
independent entities in the amounts of $30 million, $148 million and $128 million for fiscal 2012, 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 strive to renew cloud software subscription and hardware systems support contracts. To the
extent cloud software subscription, software support or hardware systems support contracts are renewed, we will
recognize the revenues for the full values of the contracts over the contracts’ periods, which are generally one
year in duration.
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.
For a given acquisition, we may identify certain pre-acquisition contingencies as of the acquisition date and may
extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in
order to obtain sufficient information to assess whether we include these contingencies as a part of the fair value
estimates of assets acquired and liabilities assumed and, if so, to determine their estimated amounts.
If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the
end of the measurement period, which is generally the case given the nature of such matters, we will recognize an
asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had
been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated.
Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and
could have a material effect on our results of operations and financial position.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business
combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon
facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates
being recorded to goodwill provided that we are within the measurement period. Subsequent to the measurement
period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first,
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