Oracle 2012 Annual Report Download - page 95

ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2012
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 the respective revenue line items within our consolidated statements of
operations based on a rational and consistent methodology utilizing our best estimate of relative selling prices of
such elements.
For our nonsoftware multiple-element arrangements, we allocate revenue to each element based on a selling price
hierarchy at the arrangement’s 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.
When possible, we establish VSOE of selling price for deliverables in nonsoftware multiple-element
arrangements 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. 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 does not
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
91