Adobe 2002 Annual Report Download - page 71

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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 revenue 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.
Accounting for our Marketable and Non-marketable Fixed Income and Equity Securities
We classify all of our cash equivalents and short-term investments that are free of trading restrictions, or
become free of trading restrictions within one year, as “available-for-sale.” We carry these investments at fair value,
based on quoted market prices, and unrealized gains and losses, net of taxes, are included in accumulated other
comprehensive income, which is reflected as a separate component of stockholders’ equity. Realized gains and
losses are recognized when realized in our consolidated statements of income. The market prices in our short-term
equity investments have been volatile in the past. It is our policy to review our equity holdings on a regular basis to
evaluate whether or not each security has experienced an other-than-temporary decline in fair value. Our policy
includes, but is not limited to, reviewing each of the companies’ cash position, earnings/revenue outlook, stock price
performance over the past six months, liquidity and management/ownership. If we believe that an other-than-
temporary decline exists in one of our marketable equity securities, it is our policy to write down these equity
investments to the market value and record the related writedown as an investment loss on our consolidated
statements of income. The ultimate value realized on these equity investments is subject to market volatility until
they are sold. For further information on our cash equivalents and short-term investments, please refer to Note 1 of
our Notes to Consolidated Financial Statements.
Our long-term investments include direct investments and indirect investments in privately held companies. We
own limited partnership interests in four venture capital limited partnerships, Adobe Ventures L.P., Adobe Ventures
II, L.P., Adobe Ventures III, L.P., and Adobe Ventures IV, L.P. (collectively “Adobe Ventures”), that invest in early
stage companies with innovative technologies. In addition to the potential for financial returns, our venture activities
increase our knowledge of emerging markets and technologies, as well as expand our ecosystem of Adobe products
and services. The partnerships are managed by Granite Ventures, an independent venture capital firm and sole
general partner of Adobe Ventures.
The investments in Adobe Ventures are accounted for using the equity method of accounting, and accordingly,
the investments are adjusted to reflect our share of Adobe Ventures’ investment income (loss) and dividend
distributions. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to
manage and control the partnerships. Adobe as the limited partner has certain rights, including replacing the general
partner and approving acquisitions that exceed certain established parameters. However, these rights are considered
to be protective rights and do not suggest an ability to control the partnerships. Adobe Ventures carry their
investments in equity securities at estimated fair market value and unrealized gains and losses are included in
investment gain (loss). The stock of a number of technology investments held by the limited partnerships at
November 29, 2002 is not publicly traded, and, therefore, there is no established market for their securities. In order
to determine the fair market value of these investments, we use the most recent round of financing involving new
non-strategic investors or estimates made by Granite Ventures based on their assessment of the current market value.
It is our policy to review the fair value of these investments held by Adobe Ventures on a regular basis to evaluate
the carrying value of the investments in these companies. This policy includes, but is not limited to, reviewing each
companies’ cash position, financing needs, earnings/revenue outlook, operational performance,
management/ownership changes, and competition. The evaluation process is based on information that we request
from these privately held companies. This information is not subject to the same disclosure regulations as U.S.
publicly traded companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of
the data received from these companies. If we believe that the carrying value of a company is carried at an amount
in excess of fair value, it is our policy to record a reserve in addition to our equity method of accounting. Estimating