VMware 2014 Annual Report Download - page 72

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
assumptions or judgments or changes to the elements in a software arrangement could cause a material increase or decrease in the amount of
revenues that VMware reports in a particular period.
VSOE of fair value for an undelivered element is based on historical stand-alone sales to third parties. In limited instances, for an offering
that is not yet sold, VSOE is the price established by management if it is probable that the price will not change when introduced to the
marketplace. In determining VSOE of fair value, VMware requires that the selling prices for a product or service fall within a reasonable pricing
range. VMware has established VSOE for its software maintenance and technical support services, consulting services and training.
For multiple-element arrangements that contain software and non-software elements, VMware allocates revenue to software or software-
related elements as a group and any non-software elements separately based on relative selling prices using the selling price hierarchy. The
relative selling price for each deliverable is determined using VSOE, if it exists, or third-party evidence (“TPE”) of selling price. TPE of fair
value is based on evaluation of prices charged for competitor products or services sold to similarly situated customers. As VMware’s offerings
contain significant proprietary technology and provide different features and functionality, comparable prices of similar products typically
cannot be obtained and relied upon.
If neither VSOE nor TPE of selling price exists for a deliverable, VMware uses its best estimate of selling price (“BESP”) for that
deliverable. The objective of BESP is to determine the price at which VMware would transact a sale if the product or service were sold on a
stand-alone basis. VMware determines BESP by considering its overall pricing objectives and practices across different sales channels and
geographies, market conditions, and historical sales. VMware uses BESP in the allocation of arrangement consideration. Once value is allocated
to software or software-related elements as a group, revenue is then recognized when the relevant revenue recognition criteria are met.
In the event VMware publicly announces specific features or functionalities, entitlements or the release number of a software 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 which VMware does not have VSOE of fair value, revenue is deferred on qualifying
purchases that include the current version of the product subject to the announcement until delivery of the upgrade.
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. In addition, revenue specific to arrangements that
include subscription software products and professional services are deferred until the professional service obligations have been fulfilled.
Unearned revenues substantially consist of payments received in advance of revenue recognition for products and services described above.
Refer to Note J for further information.
Foreign Currency Remeasurement
The U.S. dollar is the functional currency of VMware’s foreign subsidiaries. VMware records net gains and losses resulting from foreign
exchange transactions as a component of foreign currency exchange gains and losses in other income (expense), net in the consolidated
statements of income. These gains and losses are net of those recognized on foreign currency forward contracts that VMware enters into to
mitigate its exposure to foreign currency fluctuations. Net losses were $8 million and $3 million during the years ended December 31, 2014 and
2013 , respectively. Net gains during the year ended December 31, 2012 were immaterial.
Cash and Cash Equivalents, Short-Term Investments, and Restricted Cash
VMware invests primarily in money market funds, highly liquid debt instruments of the U.S. government and its agencies, municipal
obligations, and U.S. and foreign corporate debt securities. All highly liquid investments with maturities of 90 days or less from date of purchase
are classified as cash equivalents and all highly liquid investments with maturities of greater than 90 days from date of purchase as short-term
investments. Short-term investments are classified as available-for-sale. VMware may sell these securities at any time for use in current
operations or for other purposes, such as consideration for acquisitions and strategic investments. Consequently, VMware may or may not hold
securities with stated maturities greater than twelve months until maturity.
VMware carries its fixed income investments at fair value and unrealized gains and losses on these investments, net of taxes, are included in
accumulated other comprehensive income, a component of stockholders’ equity. Realized gains or losses are included in the consolidated
statements of income. Gains and losses on the sale of fixed income securities issued by the same issuer and of the same type are determined
using the first-in first-out (“FIFO”) method. When a determination has been made that an other-than-temporary decline in fair value has
occurred, the amount of the decline that is related to a credit loss is realized and is included in the consolidated statements of income.
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