VMware 2010 Annual Report Download - page 66

Table of Contents
Critical Accounting Policies
Our consolidated financial statements are based on the selection and application of accounting principles generally accepted in the United
States of America that require us to make estimates and assumptions about future events that affect the amounts reported in our financial
statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our
financial statements. We believe that the critical accounting policies set forth below may involve a higher degree of judgment and complexity in
their application than our other significant accounting policies and represent the critical accounting policies used in the preparation of our
financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.
Our significant accounting policies are presented within Note A, “Overview and Basis of Presentation,” to our consolidated financial statements
appearing in this Annual Report on Form 10-K.
Revenue Recognition
We derive revenues from the licensing of software and related services. We recognize revenues when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable. Determining whether and when
some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount
of revenue we report.
We recognize license revenues from the sale of software licenses when risk of loss transfers, which is generally upon electronic shipment.
We primarily license our software under perpetual licenses through our channel of distributors, resellers, system vendors, systems integrators and
our direct sales force. To the extent we offer product promotions and the promotional products are not yet available, the revenue for the entire
order is deferred until such time as all product obligations have been fulfilled. We defer revenues relating to products that have shipped into our
channel until our products are sold through the channel. We estimate and record reserves for products that are not sold through the channel based
on historical trends and relevant current information. We obtain sell-through information from distributors and certain resellers on a monthly
basis and reconcile any estimates, if necessary, made in the previous month. Historically, actual information has not differed materially from the
related estimate. For our channel partners who do not report sell-through data, we determine sell-through based on payment of such distributors’
and certain resellers’ accounts receivable balances and other relevant factors. For software sold by system vendors that is bundled with their
hardware, unless we have a separate license agreement with the end-user, revenue is recognized in arrears upon the receipt of binding royalty
reports. The accuracy of our reserves depends on our ability to estimate the product sold through the channels and could have a significant
impact on the timing and amount of revenue we report.
We offer rebates to certain channel partners, which are recognized as a reduction of revenue at the time the related product sale is
recognized. When rebates are based on the set percentage of actual sales, we recognize the costs of the rebates as a reduction of revenue when
the underlying revenue is recognized. In cases where rebates are earned if a cumulative level of sales is achieved, we recognize the cost of the
rebates as a reduction of revenue proportionally for each sale that is required to achieve the target. The estimated reserves for channel
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(3)
The note is due and payable in full on April 6, 2012; however, we can pay down the note at an earlier date in full or in part at our election.
(4)
Our operating leases are primarily for office space around the world.
(5)
Consisting of various contractual agreements, which include commitments on the lease for our Washington data center facility.
(6) As of December 31, 2010, we had $107.9 of non-current net unrecognized tax benefits under generally accepted accounting guidance. We
are not able to provide a reasonably reliable estimate of the timing of future payments relating to these obligations.