VMware 2010 Annual Report Download - page 79

Table of Contents
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Use of Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the
reporting periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to,
capitalized software development costs, trade receivable valuation, certain accrued liabilities, useful lives of fixed assets and intangible assets,
valuation of acquired intangibles, revenue reserves, income taxes, stock-based compensation and contingencies. Actual results could differ from
those estimates.
Revenue Recognition
VMware derives revenues from the licensing of software and related services. VMware recognizes revenues when persuasive evidence of
an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.
The following summarizes the major terms of VMware’s contractual relationships with customers and the manner in which VMware
accounts for sales transactions.
License revenues
VMware recognizes revenues from the sale of software licenses when risk of loss transfers, which is generally upon electronic shipment.
VMware licenses most of its software under perpetual licenses through its channel of distributors, resellers, system vendors, systems
integrators and through its direct sales force. VMware also licenses certain software products on a subscription basis. To the extent VMware
offers 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. Revenues relating to products that have shipped into a channel are deferred until the products are sold
through the channel. VMware obtains sell-through information from distributors and certain resellers on a monthly basis. For VMware’
s channel
partners who do not report sell-through data, VMware determines sell-through information 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 the Company has a separate license agreement with the end-user, revenue is recognized in arrears upon the receipt of binding royalty
reports.
For all sales, VMware uses one of the following to constitute evidence of an arrangement:
Sales through distributors and resellers are evidenced by a master distribution agreement, together with purchase orders or equivalent, on a
transaction-by-transaction basis.
With limited exceptions, VMware’s return policy does not allow product returns for a refund. Certain distributors and resellers may rotate
stock when new versions of a product are released. VMware estimates future
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•
a purchase order or equivalent;
•
a license agreement and a purchase order or equivalent;
•
a license agreement which includes language that the agreement also serves as the purchase order; or
•
a master agreement and a binding royalty report.