Pitney Bowes 2015 Annual Report Download - page 63

PITNEY BOWES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in thousands, except per share amounts)
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value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is
referred to as the implied fair value of goodwill. The implied fair value of the reporting unit's goodwill is then compared to the actual
carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized
for the difference. The fair value of a reporting unit is determined based on a combination of various techniques, including the present
value of future cash flows, multiples of competitors and multiples from sales of like businesses.
Retirement Plans
Net periodic benefit cost includes current service cost, interest cost, expected return on plan assets and the amortization of actuarial gains
and losses. Actuarial gains and losses arise from actual experiences that differ from previous assumptions as well as changes in assumptions
including expected return on plan assets, discount rates used to measure pension and other postretirement obligations and life expectancy.
The expected return on assets is measured using the market-related value of assets, which is a calculated value that recognizes changes
in the fair value of plan assets over five years. Actuarial gains and losses are recognized in other comprehensive income, net of tax, and
amortized to benefit cost over the life expectancy of inactive plan participants. The funded status of pension and other postretirement
benefit plans is recognized in the Consolidated Balance Sheets.
Stock-based Compensation
We measure compensation expense for stock-based awards based on the estimated fair value of the awards expected to vest (net of
estimated forfeitures) and recognize the expense on a straight-line basis over the requisite service period. The fair value of stock awards
is estimated using a Black-Scholes valuation model or a Monte Carlo simulation model. These models require assumptions be made
regarding the expected stock price volatility, risk-free interest rate, life of the award and dividend yield. The expected stock price volatility
is based on historical price changes of our stock. The risk-free interest rate is based on U.S. Treasuries with a term equal to the expected
life of the stock award. The expected life of the award and expected dividend yield are based on historical experience. We believe that
the valuation techniques and underlying assumptions are appropriate in estimating the fair value of stock awards.
Revenue Recognition
We derive revenue from multiple sources including sales, rentals, financing and services. Certain transactions are consummated at the
same time and can therefore generate revenue from multiple sources. The most common form of these transactions involves a sale or
non-cancelable lease of equipment, a meter rental and an equipment maintenance agreement. In these multiple element arrangements,
revenue is allocated to each of the elements based on relative "selling prices" and the selling price for each of the elements is determined
based on vendor specific objective evidence (VSOE). We establish VSOE of selling prices for our products and services based on the
prices charged for each element when sold separately in standalone transactions. The allocation of relative selling price to the various
elements impacts the timing of revenue recognition, but does not change the total revenue recognized. Revenue is allocated to the meter
rental and equipment maintenance agreement elements using their respective selling prices charged in standalone and renewal transactions.
For a sale transaction, revenue is allocated to the equipment based on a range of selling prices in standalone transactions. For a lease
transaction, revenue is allocated to the equipment based on the present value of the remaining minimum lease payments. The amount
allocated to equipment is compared to the range of selling prices in standalone transactions during the period to ensure the allocated
equipment amount approximates average selling prices. More specifically, revenue related to our offerings is recognized as follows:
Sales Revenue
Sales of Equipment
We sell equipment directly to our customers and to distributors (re-sellers) throughout the world. We recognize revenue from these sales
when the risks and rewards of ownership transfer to the client, which is generally upon shipment or acceptance by the customer. We
recognize revenue from the sale of equipment under sales-type leases as equipment sales revenue at the inception of the lease. We do not
typically offer any rights of return or stock balancing rights. Sales revenue from customized equipment, mail creation equipment and
shipping products is generally recognized when installed.
Sales of Supplies
Revenue related to supplies is generally recognized upon delivery.
Standalone Software Sales and Integration Services
We also have multiple element arrangements containing only software and software related elements. Software related elements may
include maintenance and support services, data subscriptions, training and integration services. Under these multiple element
arrangements, we allocate revenue based on VSOE for software related elements and use the residual method to determine the amount
of software licenses revenue. Under the residual method, the fair-value of the undelivered elements is deferred and the remaining portion
of the arrangement consideration is allocated to the delivered elements and recognized as revenue. The majority of our software license