Oracle 2013 Annual Report Download - page 50

Table of Contents
acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final
determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our
consolidated statements of operations.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date
including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and
contingent consideration, where applicable. 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:
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
We estimate the fair values of our cloud SaaS and PaaS (collectively, cloud software subscriptions), 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 cloud SaaS and PaaS revenues related to cloud SaaS and PaaS contracts in the amounts of
$17 million, $45 million and $22 million that would have been otherwise recorded by the acquired businesses as independent entities in fiscal
2014, 2013 and 2012, respectively. We did not recognize software license updates and product support revenues related to support contracts in
the amounts of $3 million, $14 million and $48 million that would have been otherwise recorded by the acquired businesses as independent
entities in fiscal 2014, 2013 and 2012, 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 $11
million, $14 million and $30 million for fiscal 2014, 2013 and 2012, 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 SaaS and PaaS and hardware systems support contracts. To the extent cloud SaaS and PaaS, 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 or other strategic initiative, we may 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.
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future expected cash flows from software license sales, cloud SaaS and PaaS contracts, hardware systems product sales, support
agreements, consulting contracts, other customer contracts, acquired developed technologies and patents;
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expected costs to develop the in-
process research and development into commercially viable products and estimated cash flows from the
projects when completed;
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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.