Oracle 2015 Annual Report Download - page 53

Table of Contents
Business Combinations
We apply the provisions of ASC 805, BusinessCombinations, in accounting for our acquisitions. It requires us to recognize separately from goodwill the assets
acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred
over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately
value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain
and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets
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, 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:
• future expected cash flows from software license sales, cloud SaaS, PaaS and IaaS contracts, hardware product sales, support agreements, consulting
contracts, other customer contracts, 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.
We estimate the fair values of our cloud SaaS and PaaS, software license updates and product support, and hardware 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 of our fair value estimates
for these obligations, we did not recognize certain cloud SaaS and PaaS, software license updates and product support and hardware support revenue amounts that
would have been otherwise recorded by the acquired businesses as independent entities upon delivery of the contractual obligations (refer to “Supplemental
Disclosure Related to Certain Charges” below for further discussion). 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 contracts and hardware support contracts. To the extent
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