Xerox 2008 Annual Report Download - page 57

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
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 have
original terms longer than five years. We continually evaluate the
economic life of both existing and newly introduced products for
purposes of this determination. Residual values, if any, are
established at lease inception using estimates of fair value at the
end of the lease term.
The vast majority of our leases that qualify as sales-type are
non-cancelable and include cancellation penalties approximately
equal to the full value of the lease receivables. A portion of our
business involves sales to governmental units. Governmental units
are those entities that have statutorily defined funding or annual
budgets that are determined by their legislative bodies. Certain of
our governmental contracts may have cancellation provisions or
renewal clauses that are required by law, such as 1) those
dependant on fiscal funding outside of a governmental unit’s
control, 2) those that can be cancelled if deemed in the best
interest of the governmental unit’s taxpayers or 3) those that must
be renewed each fiscal year, given limitations that may exist on
entering into multi-year contracts that are imposed by statute. In
these circumstances, we carefully evaluate these contracts to
assess whether cancellation is remote. The evaluation of a lease
agreement with a renewal option includes an assessment as to
whether the renewal is reasonably assured based on the apparent
intent and our experience of such governmental unit. We further
ensure that the contract provisions described above are offered
only in instances where required by law. Where such contract terms
are not legally required, we consider the arrangement to be
cancelable and account for the lease as an operating lease.
After the initial lease of equipment to our customers, we may enter
subsequent transactions with the same customer whereby we
extend the term. Revenue from such lease extensions is typically
recognized over the extension period.
Revenue Recognition Under Bundled Arrangements: We sell the
majority 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 fixed minimum monthly payment 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. The fixed minimum monthly
payments are multiplied by the number of months in the contract
term to arrive at the total fixed minimum payments that the
customer is obligated to make (“fixed payments”) over the lease
term. The payments associated with page volumes in excess of the
minimums are contingent on whether or not such minimums are
exceeded (“contingent payments”). The minimum contractual
committed page volumes are typically negotiated to equal the
customer’s estimated page volume at lease inception. In applying
our lease accounting methodology, we only consider the fixed
payments for purposes of allocating to the relative fair value
elements of the contract. Contingent payments, if any, are
inherently uncertain and therefore are recognized as revenue in
the period when the customer exceeds the minimum copy volumes
specified in the contract. Revenues under bundled 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 the
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, including
money-market funds, and investments with original maturities of
three months or less.
Restricted Cash and Investments
Several of our secured financing arrangements and other
contracts, require us to post cash collateral or maintain minimum
cash balances in escrow. In addition, as more fully discussed in
Note 16 – Contingencies, various litigation matters in Brazil require
us to make cash deposits as a condition of continuing the
litigation. These cash amounts are reported in our Consolidated
Balance Sheets, depending on when the cash will be contractually
released. At December 31, 2008 and 2007, such restricted cash
amounts were as follows:
December 31,
2008 2007
Escrow and cash collections related to secured
borrowing arrangements $ 16 $ 41
Tax and other litigation deposits in Brazil 167 200
Other restricted cash 20 23
Total $203 $264
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