Xerox 2006 Annual Report Download - page 31

• $38 million after-tax pension settlement benefit
from Fuji Xerox.
• $30 million after-tax ($38 million pre-tax) gain
from the sale of our investment in ScanSoft, Inc.
(“ScanSoft”).
• $57 million after-tax ($86 million pre-tax)
restructuring and asset impairment charges.
Application of Critical Accounting Policies
In preparing our Consolidated Financial Statements
and accounting for the underlying transactions and
balances, we apply various accounting policies. We
consider the policies discussed below as critical to
understanding our Consolidated Financial Statements, as
their application places the most significant demands on
management’s judgment, since financial reporting results
rely on estimates of the effects of matters that are
inherently uncertain. Specific risks associated with these
critical accounting policies are discussed throughout this
MD&A, where such policies affect our reported and
expected financial results. For a detailed discussion of the
application of these and other accounting policies, refer to
Note 1 – Summary of Significant Accounting Policies, to
the Consolidated Financial Statements.
Senior management has discussed the development
and selection of the critical accounting policies, estimates
and related disclosures, included herein, with the Audit
Committee of the Board of Directors. Preparation of this
annual report requires us to make estimates and
assumptions that affect the reported amount of assets and
liabilities, as well as disclosure of contingent assets and
liabilities. These estimates and assumptions also impacted
revenues and expenses during the reporting period.
Although actual results may differ from those estimates,
we believe the estimates are reasonable and appropriate.
In instances where different estimates could reasonably
have been used in the current period, we have disclosed
the impact on our operations of these different estimates.
In certain instances, such as with respect to revenue
recognition for leases, because the accounting rules are
prescriptive, it would not have been possible to have
reasonably used different estimates in the current period.
In these instances, use of sensitivity information would
not be appropriate. Changes in assumptions and estimates
are reflected in the period in which they occur. The
impact of such changes could be material to our results of
operations and financial condition in any quarterly or
annual period.
Revenue Recognition for Leases: Our accounting for
leases involves specific determinations under applicable
lease accounting standards, which often involve complex
and prescriptive provisions. These provisions affect the
timing of revenue recognition for our equipment. If the
leases qualify as sales-type capital leases, equipment
revenue is recognized upon delivery or installation of the
equipment as sale revenue as opposed to ratably over the
lease term. The critical elements that we consider with
respect to our lease accounting are the determination of
the economic life and the fair value of equipment,
including the residual value. For purposes of determining
the economic life, we consider the most objective
measure to be the original contract term, since most
equipment is returned by lessees at or near the end of the
contracted term. The economic life of most of our
products is five years since this represents the most
frequent contractual lease term for our principal products
and only a small percentage of our leases are for original
terms longer than five years. There is no significant after-
market for our used equipment. We believe five years is
representative of the period during which the equipment
is expected to be economically usable, with normal
service, for the purpose for which it is intended.
Revenue Recognition Under Bundled Arrangements:
We sell most of our products and services under bundled
lease arrangements, which typically include equipment,
service, supplies and financing components for which the
customer pays a single negotiated monthly fixed price for
all elements over the contractual lease term. These
arrangements typically also include an incremental,
variable component for page volumes in excess of
contractual page volume minimums, which are often
expressed in terms of price per page. Revenues under
these arrangements are allocated, considering the relative
fair values of the lease and non-lease deliverables
included in the bundled arrangement, based upon the
estimated relative fair values of each element. Lease
deliverables include maintenance and executory costs,
equipment and financing, while non-lease deliverables
generally consist of supplies and non-maintenance
services. Our revenue allocation for the lease deliverables
begins by allocating revenues to the maintenance and
executory costs plus profit thereon. The remaining
amounts are allocated to the equipment and financing
elements. We perform extensive analyses of available
verifiable objective evidence of equipment fair value
based on cash selling prices during the applicable period.
The cash selling prices are compared to the range of
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