Xerox 2009 Annual Report Download - page 52

50 Xerox 2009 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
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.
Bundled Arrangements: We sell 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 also typically
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.
Leases: Our accounting for leases involves specific determinations
regarding complex accounting provisions, as well as significant
judgments. The two primary accounting provisions 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 cancellable
nature of the contract or because the recoverability of the lease
investment is deemed not to be predictable at lease inception.
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.