Adobe 2002 Annual Report Download - page 111

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80
Employee Stock Plans
Our employee stock plans include fixed stock option plans, equity incentive plans, a performance and restricted
stock plan, and an employee stock purchase plan. We account for our fixed stock option plans and our employee
stock purchase plan using the intrinsic value method.
Revenue Recognition
We recognize application products revenue upon shipment, net of estimated returns, provided that collection is
determined to be probable and no significant obligations remain. Application products revenue from distributors is
subject to agreements allowing limited rights of return, rebates, and price protection. Accordingly, we reduce
revenue recognized for estimated future returns, price protection, and rebates at the time the related revenue is
recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels
in the distribution channel, and other related factors.
We provide free technical phone support for our shrink-wrapped application products to customers who are
under warranty for support. We record the estimated cost of free technical phone support upon shipment of software.
We also license software in multiple element arrangements in which a customer purchases a combination of
software, post-contract customer support (“PCS”), and/or professional services. PCS, or maintenance, includes
rights to upgrades, when and if available, telephone support, updates, and enhancements. Professional services relate
to consulting services and training. When vendor specific objective evidence (“VSOE”) of fair value exists for all
elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of
each of the elements. VSOE of fair value is established by the price charged when the same element is sold
separately. We determine VSOE of fair value of PCS based on renewal rates for the same term PCS. In a multiple
element arrangement whereby VSOE of fair value of all undelivered elements exists but VSOE of fair value does
not exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual
method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is
recognized as revenue, assuming delivery has occurred and collectibility is probable. Revenue allocated to PCS is
recognized ratably over the contractual term (typically one to two years).
The arrangement fees related to fixed-priced consulting contracts are recognized using the percentage of
completion method. Percentage of completion is measured monthly based primarily on input measures, such as on
hours incurred to date compared to total estimated hours to complete, with consideration given to output measures,
such as contract milestones, when applicable. Anticipated losses on fixed-priced contracts are recognized in the
period when they become known.
We record OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating Adobe
software, provided collection of such revenue is deemed probable.
Deferred revenue includes customer advances under OEM licensing agreements and maintenance revenue. In
cases where we will provide a specified free upgrade to an existing product, we defer the VSOE of fair value for the
specified upgrade right, until the future obligation is fulfilled.
We perform ongoing credit evaluations of our customers’ financial condition and generally do not require
collateral. We maintain allowances for estimated credit losses.
Cost of Revenue
Cost of revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization
related to localization costs and acquired technologies, hosted server costs, and the costs associated with the
manufacturing of our products.
Cost of revenue also includes employee-related costs and the related infrastructure costs incurred to provide
professional services, training, and product support for our Accelio business.