Xerox 2015 Annual Report Download - page 93

(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.
We consider the economic life of most of our products to be five years, since this represents the most frequent
contractual lease term for our principal products and only a small percentage of our leases are for 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. In 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 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.
Spending associated with customer-related deferred set-up/transition and inducement costs for the three years
ended December 31, 2015 were as follows:
Year Ended December 31,
2015 2014 2013
Set-up/transition and inducement expenditures $ 77 $ 80 $ 107
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