VMware 2013 Annual Report Download - page 55

Table of Contents
VSOE of fair value for an undelivered element is generally based on historical stand-alone sales to third parties. In determining VSOE of fair value, we
require that the selling prices for a product or service fall within a reasonable pricing range. We have established VSOE for our software maintenance and
support services, consulting services and training.
In the event we publicly announce specific features or functionalities, entitlements or the release number of an upgrade that has not been made available,
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, 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.
Multiple-element arrangements may be bundled with a commitment to deliver a product that has not yet been made available. Revenue specific to these
arrangements is deferred until all product obligations have been fulfilled.
We also offer rebates to certain channel partners, which are recognized as a reduction of revenue at the time of the underlying product sale. 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, our return policy does not allow product returns for a refund. We estimate future product returns at the time of sale. Our
estimate is based on historical return rates and the accuracy of these reserves depends on our ability to estimate sales returns 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.
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 may be
performed for a fixed fee, for which we are able to make reasonably dependable estimates of progress toward completion, and revenue is recognized on a
proportional performance basis. Revenue for professional services engagements billed on a time and materials basis are recognized as the hours are incurred.
Revenues on all other professional services engagements are recognized upon completion.
Accounting for Income Taxes
We have been included in the EMC consolidated group for U.S. federal income tax purposes, and expect to continue to be included in such consolidated
group for periods in which EMC owns at least 80% of the total voting power and value of our outstanding stock as calculated for U.S. federal income tax
purposes. The percentage of voting power and value calculated for U.S. federal income tax purposes may differ from the percentage of outstanding shares
beneficially owned by EMC due to the greater voting power of our Class B common stock as compared to our Class A common stock and other factors. Each
member of a consolidated group during any part of a consolidated return year is jointly and severally liable for tax on the consolidated return of such year and
for any subsequently determined deficiency thereon. However, our income tax expense and the related income tax balance sheet accounts are derived
primarily assuming we filed a separate tax return. However, certain transactions that we and EMC are parties to, are assessed using consolidated tax return
rules. The difference between the income taxes payable that is calculated on a separate tax return basis and the amount actually paid to EMC pursuant to our
tax sharing agreement with EMC is presented as a component of additional paid-in capital. Our assumptions, judgments and estimates used to calculate our
income tax expense considers current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign
and domestic tax authorities.
We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by federal, state and
foreign tax authorities, which may result in proposed assessments. As part of the EMC consolidated group, and separately we are subject to the periodic
examination of our income tax returns by the Internal Revenue Service and other domestic and foreign tax authorities. The assumptions and judgments we
have used in estimating our tax liabilities are reasonable, however, changes in tax laws or our interpretation of tax laws and the resolution of the current and
any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
We are subject to tax in the U.S., and in multiple foreign tax jurisdictions. Our U.S. liquidity needs are currently satisfied using cash flows generated
from our U.S. operations, borrowings, or both. We also utilize a variety of tax planning strategies in an effort to ensure that our worldwide cash is available in
locations in which it is needed. Currently, we do not provide U.S. income taxes on undistributed earnings of our foreign subsidiaries. Our undistributed
foreign earnings are considered
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