VMware 2015 Annual Report Download - page 62

TableofContents
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
consideredessentialtothefunctionalityofthedeliveredproductsorservices,VMwaremustdeterminethefairvalueofeachundeliveredproductorserviceusing
VSOE.AbsentVSOE,revenueisdeferreduntilVSOEoffairvalueexistsforeachoftheundeliveredproductsorservices,oruntilallelementsofthearrangement
havebeendelivered.However,iftheonlyundeliveredelementwithoutVSOEismaintenanceandsupport,theentirearrangementfeeisrecognizedratablyoverthe
performanceperiod.Changesin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generally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,includingthroughthe
useofacontractualrenewalrate.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.
Aspecifiedupgradeobligationiscreatedintheeventwepubliclyannouncenewspecificfeatures,functionalitiesorentitlementstosoftwareupgradesor
licenseproductsthathavenotbeenmadeavailable.WegenerallydonothaveVSOEoffairvalueforspecifiedupgradesorlicenseproducts.Accordingly,revenue
recognitionisdeferredformultiple-elementarrangementsthatentitleacustomertospecifiedupgradesornewlicenseproductsuntiltheproduct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ontheconsolidatedstatementsofincome.Thesegains
andlossesarenetofthoserecognizedonforeigncurrencyforwardcontracts("forwardcontracts")thatVMwareentersintotomitigateitsexposuretoforeign
currencyfluctuations.Netlosseswere$11million,$8millionand$3millionduringtheyearsendedDecember31,2015,2014and2013,respectively.
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securities.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.
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(loss),acomponentofstockholders’equity.Realizedgainsorlossesareincludedon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ontheconsolidatedstatementsofincome.
Cashbalancesthatarerestrictedpursuanttothetermsofvariousagreementsareclassifiedasrestrictedcashandincludedinothercurrentassetsandother
assets,netintheaccompanyingconsolidatedbalancesheets.AsofDecember31,2015and
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