VMware 2011 Annual Report Download - page 60

Table of Contents
Customers under software maintenance agreements are entitled to receive updates and upgrades on a when-and-if-available basis, and
various types of technical support based on the level of support purchased. In the event specific features or functionalities, entitlements or the
release number of an upgrade have been announced but not delivered, and customers will receive that upgrade as part of a current software
maintenance contract, a specified upgrade is deemed created. As a result of the specified upgrade, product revenues are deferred on purchases
made after the announcement date until delivery of the upgrade for those purchases that include the current version of the product subject to the
announcement. The amount and elements to be deferred are dependent on whether the company has established VSOE of fair value for the
upgrade. VSOE of fair value of these upgrades is established based upon the price set by management. We have a history of selling such
upgrades on a stand-alone basis. We are required to exercise judgment in determining whether VSOE exists for each undelivered element based
on whether our pricing for these elements is sufficiently consistent with the sale of these elements on a stand-alone basis. This determination
could cause a material increase or decrease in the amount of revenue that we report in a particular period.
To date, our multiple element arrangements have included only software and software-related deliverables accounted for using software
revenue recognition rules. However, we may in the future bundle our software and software-related elements with services or other non-
software
elements that would require accounting under other relevant multiple-element revenue recognition rules.
Capitalized Software Development Costs
Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when the product's
technological feasibility has been established and ending when the product is available for general release. Judgment is required in determining
when technological feasibility is established and as our business, products and go-to-market strategy have evolved, we have continued to
evaluate when technological feasibility is established. Following the release of vSphere 5 and the comprehensive suite of cloud infrastructure
technologies in the third quarter of 2011, we determined that VMware's go-to-
market strategy had changed from single solutions to product suite
solutions. As a result of this, and the related increased importance of interoperability between our products, the length of time between achieving
technological feasibility and general release to customers significantly decreased. For future releases, we expect our products to be available for
general release soon after technological feasibility has been established. Given that we expect the majority of our product offerings to be suites
or to have key components that interoperate with our other product offerings, the costs incurred subsequent to achievement of technological
feasibility are expected to be immaterial in future periods. In the fourth quarter of 2011, all software development costs were expensed as
incurred.
Our R&D expenses and amounts that we have capitalized as software development costs may not be comparable to our peer companies due
to differences in judgment as to when technological feasibility has been reached or differences in judgment regarding when the product is
available for general release. Additionally, future changes in our judgment as to when technological feasibility is established, or additional
changes in our business, including our go-to-market strategy, could materially impact the amount of costs capitalized. For example, if the length
of time between technological feasibility and general availability was to increase again in the future, the amount of capitalized costs would likely
increase.
Generally accepted accounting principles require annual amortization expense of capitalized software development costs to be the greater of
the amounts computed using the ratio of current gross revenue to a product’s total current and anticipated revenues, or the straight-line method
over the product’s remaining estimated economic life. To date, we have amortized these costs using the straight-
line method as it is the greater of
the two amounts. The costs are amortized over periods ranging from 18 to 24 months, which represent the product’s estimated economic life.
The ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external
factors such as anticipated future revenue, estimated economic life, and changes in software and hardware technologies. Material differences in
amortization amounts could occur as a result of changes in the periods over which we actually generate revenues or the amounts of revenues
generated.
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• Arrangements including specified product elements for which VSOE of fair value cannot be established. The entire arrangement fee is
deferred until either VSOE of fair value is established or the specified products are delivered;
• Arrangements including undelivered elements without VSOE of fair value that are not essential to the functionality of the delivered
products where all of the undelivered elements are delivered ratably over time. Revenue for the entire arrangement fee is recognized
ratably, once the services have commenced, over the longest delivery period;
• Arrangements including undelivered elements without VSOE of fair value that are not essential to the functionality of the delivered
products where one or more of the elements are not delivered ratably over time. The entire arrangement fee is deferred until VSOE of
fair value is established or only elements that are delivered ratably over time remain. At such time, a pro-rated share of revenue is
recognized immediately with any remaining fee recognized ratably over the longest remaining ratable delivery period.