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Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Allowance for Doubtful Accounts
VMware maintains an allowance for doubtful accounts for estimated probable losses on uncollectible accounts receivable. The allowance
is based upon the creditworthiness of VMware’s customers, historical experience, the age of the receivable and current market and economic
conditions. Uncollectible amounts are charged against the allowance account.
Property and Equipment, Net
Property and equipment, net are recorded at cost. Depreciation commences upon placing the asset in service and is recognized on a
straight-line basis over the estimated useful lives of the assets, as follows:
Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized as
operating expenses in the consolidated statements of income. Repair and maintenance costs that do not extend the economic life of the
underlying assets are expensed as incurred.
Internal
-Use Software Development Costs
VMware capitalizes costs associated with internal-use software systems during the application development stage. Capitalization of costs
begins when the preliminary project stage is completed, management has committed to funding the project, and it is probable that project will be
completed and the software will be used to perform the function intended. Management applies judgment in determining if such criteria have
been met. Capitalization ceases at the point in which the project is substantially complete and is ready for its intended purpose. The capitalized
amounts are included in property and equipment, net on the consolidated balance sheets and amortized over the useful life of the software. Costs
related to preliminary project activities and post-implementation activities are expensed as incurred.
Research and Development and 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 the Company's business, products and go-to-market strategy have evolved, management has
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, management determined that VMware's go-to-market strategy had changed from single
solutions to product suite solutions. As a result of this change in strategy, and the related increased importance of interoperability between
VMware's products, the length of time between achieving technological feasibility and general release to customers significantly decreased. For
future releases, management expects VMware's products to be available for general release soon after technological feasibility has been
established. In the fourth quarter of 2011, all software development costs were expensed as incurred.
VMware's research and development (“R&D”) expenses and amounts that the Company has capitalized as software development costs may
not be comparable to VMware's peer companies due to differences in judgment as to when technological feasibility has been reached or
when technological feasibility is established, or additional changes in VMware's business, including its 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, VMware has 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
differences in amortization amounts could occur as a result of changes in the periods over which VMware actually generates revenues or the
amounts of
67
Buildings
Term of underlying land lease
Land improvements
15 years
Furniture and fixtures
5 years
Equipment and software
2 years or useful life, not to exceed 20 years
Leasehold improvements
Lease term, not to exceed 20 years