Xerox 2012 Annual Report Download - page 31

29Xerox 2012 Annual Report
Application of Critical Accounting Policies
In preparing our Consolidated Financial Statements and accounting for
the underlying transactions and balances, we apply various accounting
policies. 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. 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. In instances where
different estimates could have reasonably been used, we disclosed
the impact of these different estimates on our operations. In certain
instances, like revenue recognition for leases, the accounting rules are
prescriptive; therefore, it would not have been possible to reasonably
use different estimates. 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.
Specific risks associated with these critical accounting policies are
discussed throughout the 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 in the
Consolidated Financial Statements.
Revenue Recognition
Application of the various accounting principles in GAAP related to
the measurement and recognition of revenue requires us to make
judgments and estimates. Complex arrangements with nonstandard
terms and conditions may require significant contract interpretation
to determine the appropriate accounting. Refer to Note 1 – Summary
of Significant Accounting Policies – Revenue Recognition in the
Consolidated Financial Statements for additional information
regarding our revenue recognition policies. Specifically, the revenue
related to the following areas involves significant judgments and
estimates:
• Bundled Lease Arrangements
• Sales to Distributors and Resellers
• Services – Percentage-of-completion
Bundled Lease Arrangements – We sell our equipment under
bundled lease arrangements, which typically include the equipment,
service, supplies and a financing component for which the customer
pays a single negotiated monthly fixed price for all elements over
the contractual lease term. Approximately 35% of our equipment
sales revenue is related to sales made under bundled lease
arrangements. Recognizing revenues under these arrangements
requires us to allocate the total consideration received to the lease
and non-lease deliverables included in the bundled arrangement,
based upon the estimated fair values of each element.
Sales to Distributors and Resellers – We utilize distributors and
resellers to sell many of our Document Technology products to
end-user customers. 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 rebate, price-
protection, cooperative marketing and other programs, and we record
provisions and allowances for these programs as a reduction to revenue
when the sales occur. Similarly, we also record estimates for sales
returns and other discounts and allowances when the sales occur. We
consider various factors, including a review of specific transactions and
programs, historical experience and market and economic conditions
when calculating these provisions and allowances. Approximately 10%
of our revenues include sales to distributors and resellers, and provisions
and allowances recorded on these sales are approximately 20% of the
associated gross revenues.
Revenue Recognition for Services – Percentage-of-Completion –
A portion of our Services revenue is recognized using the percentage-
of-completion (“POC”) accounting method. This method requires the
use of estimates and judgment. Approximately 3% of our Services
revenue uses the POC accounting method. Although not significant to
total Services revenue, the percentage-of-completion methodology is
normally applied to certain of our larger and longer term outsourcing
contracts involving system development and implementation services.
The POC accounting methodology involves recognizing probable
and reasonably estimable revenue using the percentage of services
completed based on a current cumulative cost to estimated total cost
basis and a reasonably consistent profit margin over the period. Due to
the long-term nature of these arrangements, developing the estimates
of cost often requires significant judgment. Factors that must be
considered in estimating the progress of work completed and ultimate
cost of the projects include, but are not limited to, the availability of
labor and labor productivity, the nature and complexity of the work
to be performed and the impact of delayed performance. If changes
occur in delivery, productivity or other factors used in developing
the estimates of costs or revenues, we revise our cost and revenue
estimates, which may result in increases or decreases in revenues and
costs. Such revisions are reflected in income in the period in which the
facts that give rise to that revision become known. We perform ongoing
profitability analysis of our POC services contracts in order to determine
whether the latest estimates require updating. Key factors reviewed by
the company to estimate the future costs to complete each contract
are future labor costs, future product costs and expected productivity
efficiencies. If at any time these estimates indicate the POC contract
will be unprofitable, the entire estimated loss for the remainder of the
contract is recorded immediately in cost of services.