Adobe 2006 Annual Report Download - page 76

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76
45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others.” Our long-term investments include investments in privately held companies
that we make either directly or indirectly through venture capital limited partnerships. We own limited
partnership interests in three venture capital limited partnerships ― Adobe Ventures 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. 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 consolidated in accordance with FASB Interpretation No. 46R
(“FIN 46R”) a revision to FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest
Entities.” Adobe Ventures carry their investments in equity securities at estimated fair market value and
unrealized gains and losses are included in investment gain (loss) on our consolidated statements of
income. The stock of a number of technology investments held by Adobe Ventures at December 1, 2006
and December 2, 2005 is not publicly traded and, therefore, there is no established market for these
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 of current market value made by Granite
Ventures. It is our policy to review the fair value of these investments held by Adobe Ventures, as well as
our direct investments, on a regular basis to evaluate the carrying value of the investments in these
companies. This evaluation includes, but is not limited to, reviewing each company’s cash position,
financing needs, earnings/revenue outlook, operational performance, management/ownership changes and
competition. In the case of privately held companies, this evaluation is based on information that we
request from these 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 the carrying value of a company is in
excess of fair value, it is our policy to write-down the investments to reduce its carrying value to fair value.
Revenue Recognition
Our revenue is derived from the licensing of software products, consulting, and maintenance and
support. We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the
product or performed the service, the fee is fixed or determinable and collection is probable.
Product revenue
We recognize our product revenue upon shipment, provided collection is determined to be probable
and no significant obligations remain. Our desktop application products revenue from distributors is subject
to agreements allowing limited rights of return, rebates and price protection. Our direct sales and OEM
sales are also subject to limited rights of return. 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 record the estimated costs of providing free technical phone support to customers for our software
products.
We record OEM licensing revenue, primarily royalties, when OEM partners ship products
incorporating Adobe software, provided collection of such revenue is deemed probable. For certain OEM
customers, we must estimate royalty revenue due to the timing of securing customer information.
Our product-related deferred revenue includes maintenance upgrade revenue and customer advances
under OEM license agreements. Our maintenance upgrade revenue for our desktop application products is
included in our product revenue line item as the maintenance primarily entitles customers to receive
product upgrades. In cases where we provide a specified free upgrade to an existing product, we defer the
fair value for the specified upgrade right until the future obligation is fulfilled or when the right to the
specified free upgrade expires.