Xerox 2008 Annual Report Download - page 56

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
adjusted by a $2 credit in 2008. With the exception of this charge,
the adoption of EITF 06-2 did not impact the Company as we do
not have a similar benefit arrangement.
Summary of Accounting Policies
Revenue Recognition
We generate revenue through the sale and rental of equipment,
service and supplies and income associated with the financing of
our equipment sales. Revenue is recognized when earned. More
specifically, revenue related to sales of our products and services is
recognized as follows:
Equipment: Revenues from the sale of equipment, including those
from sales-type leases, are recognized at the time of sale or at the
inception of the lease, as appropriate. For equipment sales that
require us to install the product at the customer location, revenue is
recognized when the equipment has been delivered to and
installed at the customer location. Sales of customer installable
products are recognized upon shipment or receipt by the customer
according to the customer’s shipping terms. Revenues from
equipment under other leases and similar arrangements are
accounted for by the operating lease method and are recognized
as earned over the lease term, which is generally on a straight-line
basis.
Service: Service revenues are derived primarily from maintenance
contracts on our equipment sold to customers and are recognized
over the term of the contracts. A substantial portion of our
products are sold with full service maintenance agreements for
which the customer typically pays a base service fee plus a variable
amount based on usage. As a consequence, other than the product
warranty obligations associated with certain of our low end
products in the Office segment, we do not have any significant
product warranty obligations, including any obligations under
customer satisfaction programs.
Revenues associated with outsourcing services as well as
professional and value-added services are generally recognized as
such services are performed. In those service arrangements where
final acceptance of a system or solution by the customer is
required, revenue is deferred until all acceptance criteria have been
met. Costs associated with service arrangements are generally
recognized as incurred. Initial direct costs of an arrangement are
capitalized and amortized over the contractual service period.
Long-lived assets used in the fulfillment of the arrangements are
capitalized and depreciated over the shorter of their useful life or
the term of the contract. Losses on service arrangements are
recognized in the period that the contractual loss becomes
probable and estimable.
Sales to distributors and resellers: We utilize distributors and
resellers to sell certain of our products to end-users. We refer to our
distributor and reseller network as our two-tier distribution model.
Sales to distributors and resellers are generally recognized as
revenue when products are sold to such distributors and resellers.
Distributors and resellers participate in various cooperative
marketing and other programs, and we record provisions for these
programs as a reduction to revenue when the sales occur. We also
similarly account for our estimates of sales returns and other
allowances when the sales occur based on our historical experience.
Supplies: Supplies revenue generally is recognized upon shipment
or utilization by customers in accordance with the sales terms.
Software: Software included within our equipment and services is
generally considered incidental and is therefore accounted for as
part of the equipment sales or services revenues. Software
accessories sold in connection with our equipment sales as well as
free-standing software revenues are accounted for in accordance
with AICPA Statement of Position No. 97-2, “Software Revenue
Recognition” (“SOP 97-2”). In most cases, these software products
are sold as part of multiple element arrangements and include
software maintenance agreements for the delivery of technical
service as well as unspecified upgrades or enhancements on a
when-and-if-available basis. In those software accessory and free-
standing software arrangements that include more than one
element, we allocate the revenue among the elements based on
vendor-specific objective evidence (“VSOE”) of fair value. VSOE of
fair value is based on the price charged when the deliverable is sold
separately by us on a regular basis and not as part of the multiple-
element arrangement. Revenue allocated to software is normally
recognized upon delivery while revenue allocated to the software
maintenance element is recognized ratably over the term of the
arrangement.
Revenue Recognition for Leases: Our accounting for leases
involves specific determinations under FAS 13, which often involve
complex provisions and significant judgments. The two primary
criteria of FAS 13 which we use to classify transactions as sales-
type or operating leases are 1) a review of the lease term to
determine if it is equal to or greater than 75% of the economic life
of the equipment and 2) a review of the present value of the
minimum lease payments to determine if they are equal to or
greater than 90% of the fair market value of the equipment at the
inception of the lease. Our leases in our Latin America operations
have historically been recorded as operating leases given the
cancellability of the contract or because the recoverability of the
lease investment is deemed not to be predictable at lease
inception.
54 Xerox 2008 Annual Report