Texas Instruments 2015 Annual Report Download - page 28

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FORM 10-K
Revenue recognition
We recognize revenue from sales of our products, including direct sales to our distributors, when title and risk of loss pass, which
usually occurs upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order; when persuasive
evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. For
sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products. In 2014,
about 60 percent of our revenue was generated from sales of our products to distributors.
We recognize revenue net of allowances, which are management’s estimates of future credits to be granted to customers or distributors
under programs common in the semiconductor industry. These allowances are based on analysis of historical data, current economic
conditions, and contractual terms and are recorded when revenue is recognized. Allowances may include volume-based incentives,
product returns due to quality issues, incentives designed to maximize growth opportunities and special pricing arrangements. For
instance, we sell to distributors at standard published prices, but we may grant them price adjustment credits in response to individual
competitive opportunities. To estimate allowances, we use statistical percentages of revenue, which are determined quarterly based
upon recent historical adjustment trends. Historical claims data are maintained for each of the programs, with differences among
geographic regions taken into consideration. We continually monitor the actual claimed allowances against our estimates, and we adjust
our estimates as appropriate to reflect trends in distributor revenue and inventory levels. Allowances are also adjusted when recent
historical data do not represent anticipated future activity.
We may also provide distributors an allowance to scrap certain slow-selling or obsolete products in their inventory, estimated as a
negotiated fixed percentage of each distributor’s purchases from us. In addition, if we publish a new price for a product that is lower
than that paid by distributors for the same product still remaining in each distributor’s on-hand inventory, we may credit them for the
difference between those prices. The allowance for this type of credit is based on the identified product price difference applied to our
estimate of each distributor’s on-hand inventory of that product.
We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.
Revenue from sales of our products that are subject to inventory consignment agreements, including consignment arrangements with
distributors, is recognized in accordance with the principles discussed above, but delivery occurs when the customer or distributor pulls
product from consignment inventory that we store at designated locations. About 60 percent of our distributor revenue is generated
from sales of consigned inventory . The allowances we record against this revenue are not material.
We determine the amount and timing of royalty revenue based on our contractual agreements with intellectual property licensees. We
recognize royalty revenue when earned under the terms of the agreements and when we consider realization of payment to be probable.
In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts
receivable primarily through review of the accounts receivable aging. When collection is at risk, we assess the impact on amounts
recorded for bad debts and, if necessary, will record a charge in the period such determination is made. We include amounts received
from customers for reimbursement of shipping fees in revenue. We include the costs of shipping and handling in COR.
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In determining Net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax
provisions and the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between
the tax and financial statement recognition of revenue and expense.
In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize potential
liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on an estimate of the ultimate resolution of whether,
and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that
the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.
As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely,
the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that
are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred
tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior years that can be used to absorb net operating