Xerox 2012 Annual Report Download - page 65

63Xerox 2012 Annual Report
services are provided. We recognize revenues for non-refundable,
upfront implementation fees on a straight-line basis over the period
between the initiation of the ongoing services through the end of the
contract term.
In connection with our services arrangements, we incur and capitalize
costs to originate these long-term contracts and to perform the
migration, transition and setup activities necessary to enable us to
perform under the terms of the arrangement. Certain initial direct costs
of an arrangement are capitalized and amortized over the contractual
service period of the arrangement to cost of services.
From time to time, we also provide inducements to customers in
various forms, including contractual credits, which are capitalized and
amortized as a reduction of revenue over the term of the contract.
Customer-related deferred set-up/transition and inducement costs
were $356 and $294 at December 31, 2012 and 2011, respectively,
and the balance at December 31, 2012 is expected to be amortized
over a weighted average period of approximately seven years.
Amortization expense associated with customer-related contract costs
at December 31, 2012 is expected to be approximately $103 in 2013.
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 if an asset is contract specific.
Our outsourcing services contracts may also include the sale of
equipment and software. In these instances we follow the policies
noted above under Equipment-related Revenue.
Other Revenue Recognition Policies
Multiple Element Arrangements: As described above, we enter into
the following revenue arrangements that may consist of multiple
deliverables:
• Bundled lease arrangements, which typically include both lease
deliverables and non-lease deliverables as described above.
• Contracts for multiple types of outsourcing services, as well as
professional and value-added services. For instance, we may contract
for an implementation or development project and also provide
services to operate the system over a period of time; or we may
contract to scan, manage and store customer documents.
In substantially all of our multiple element arrangements, we are able
to separate the deliverables since we normally will meet both of the
following criteria:
• The delivered item(s) has value to the customer on a stand-alone
basis; and
• If the arrangement includes a general right of return relative to the
delivered item(s), delivery or performance of the undelivered item(s)
is considered probable and substantially in our control.
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. Residual values are not significant.
With respect to fair value, we perform an analysis of equipment fair
value based on cash selling prices during the applicable period. The
cash selling prices are compared to the range of values determined
for our leases. The range of cash selling prices must be reasonably
consistent with the lease selling prices in order for us to determine that
such lease prices are indicative of fair value.
Financing: Finance income attributable to sales-type leases, direct
financing leases and installment loans is recognized on the accrual
basis using the effective interest method.
Services-Related Revenue
Outsourcing: Revenues associated with outsourcing services are
generally recognized as services are rendered, which is generally
on the basis of the number of accounts or transactions processed.
Information technology processing revenues are recognized as services
are provided to the customer, generally at the contractual selling prices
of resources consumed or capacity utilized by our customers. 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. Revenues on cost reimbursable contracts
are recognized by applying an estimated factor to costs as incurred,
determined by the contract provisions and prior experience. Revenues
on unit-price contracts are recognized at the contractual selling prices
as work is completed and accepted by the customer. Revenues on time
and material contracts are recognized at the contractual rates as the
labor hours and direct expenses are incurred.
Revenues on certain fixed price contracts where we provide system
development and implementation services are recognized over
the contract term based on the percentage of development and
implementation services that are provided during the period compared
with the total estimated development and implementation services
to be provided over the entire contract using the percentage-of-
completion accounting methodology. These services require that
we perform significant, extensive and complex design, development,
modification or implementation of our customers’ systems.
Performance will often extend over long periods, and our right to
receive future payment depends on our future performance in
accordance with the agreement.
The percentage-of-completion methodology involves recognizing
probable and reasonably estimable revenue using the percentage of
services completed, on a current cumulative cost to estimated total
cost basis, using a reasonably consistent profit margin over the period.
Revenues earned in excess of related billings are accrued, whereas
billings in excess of revenues earned are deferred until the related