VMware 2011 Annual Report Download - page 59

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Table of Contents
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.
our direct sales force. To the extent we offer product promotions and the promotional products are not yet available and VSOE of fair value
cannot be established, 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 to the next tier of the channel. We estimate
and record reserves for products that are not sold through the channel based on historical trends and relevant current information. For software
sold by system vendors that is bundled with their hardware, unless we have a separate license agreement which governs the transaction, 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 rebates
and sales incentives are based on channel partners’
actual performance against the terms and conditions of the programs, historical trends and the
value of the rebates. The accuracy of these reserves for these rebates and sales incentives depends on our ability to estimate these items and
could have a significant impact on the timing and amount of revenue we report.
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. We estimate future product returns at the time of sale. Our estimate is based on historical
return rates, levels of inventory held by distributors and resellers and other relevant factors. The accuracy of these reserves depends on our
ability to estimate sales returns and stock rotation among other criteria. If we were to change any of these assumptions or judgments, it could
cause a material increase or decrease in the amount of revenue that we report in a particular period. Returns have not been material to date and
have been in line with our expectations.
Our services revenues consist of software maintenance and professional services. We recognize software maintenance revenues ratably over
the contract period. Typically, our software maintenance contract periods range from one to five years. Professional services include design,
implementation and training. Professional services are not considered essential to the functionality of our products because services do not alter
the product capabilities and may be performed by customers or other vendors. Professional services engagements performed for a fixed fee, for
which we are able to make reasonably dependable estimates of progress toward completion are recognized on a proportional performance basis
hours incurred. Revenues on all other professional services engagements are recognized upon completion. If we were to change any of these
in a particular period.
Our software products are typically sold with software maintenance services. VSOE of fair value for software maintenance services is
established by the rates charged in stand-alone sales of software maintenance contracts. Our software products may also be sold with
professional services. VSOE of fair value for professional services is based upon the standard rates we charge for such services when sold
separately. The revenues allocated to the software license included in multiple-element contracts represent the residual amount of the contract
after the fair value of the other elements has been determined.
Our multiple element arrangements typically fall into one or more of the following categories:
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• Arrangements including undelivered elements for which VSOE of fair value has been established. Revenue for those undelivered items
is recognized ratably over the service period, or as the services are delivered. Revenue allocated to the delivered elements is recognized
upfront;