Oracle 2015 Annual Report Download - page 97

Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2016
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 contractual period of the arrangement, or in the case of our cloud offerings, we generally recognize revenues
over the contractual term of the cloud software subscription. 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 non-software 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 product includes software, we determine whether the tangible hardware product and the software work together to deliver the product’s essential
functionality and, if so, the entire product is treated as a non-software deliverable. The total arrangement consideration is allocated to each separate unit of
accounting for each of the non-software 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 software and non-software multiple-element arrangements using the price charged for a
deliverable when sold separately and for software license updates and product support and hardware 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, contractually stated prices, 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 Non-software Elements
Revenue Recognition for Multiple-Element Arrangements—Arrangements with Software and Non-software Elements
We also enter into multiple-element arrangements that may include a combination of our various software related and non-software related products and services
offerings including new software licenses, software license updates and product support, cloud SaaS, PaaS and IaaS offerings, hardware products, hardware
support, consulting, advanced customer support services and education. In such arrangements, we first allocate the total arrangement consideration based on the
relative selling prices of the software group of elements as a whole and
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