Adobe 2006 Annual Report Download - page 77

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Services and support revenue
Our services and support revenue is composed of consulting, training, and maintenance and support,
primarily related to the licensing of our Enterprise and Developer Solutions and Mobile and Device
Solutions products. Our support revenue also includes technical support and developer support to partners
and developer organizations related to our desktop products.
Our consulting revenue is recognized using the proportionate performance method and is measured
monthly based 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. Our
maintenance and support offerings, which entitle customers to receive product upgrades and enhancements
or technical support, depending on the offering, are recognized ratably over the term of the arrangement.
Multiple element arrangements
We enter into revenue arrangements in which a customer may purchase a combination of software,
upgrades, maintenance and support, and consulting (multiple-element arrangements). When vendor-
specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue 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 that element is sold separately. For maintenance and support, VSOE of fair value is
established by renewal rates. For arrangements where VSOE of fair value exists only for the undelivered
elements, we defer the full fair value of the undelivered elements and recognize the difference between the
total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other
criteria for revenue recognition have been met.
Advertising Expenses
We expense all advertising costs as incurred and classify these costs under sales and marketing
expense. Advertising expenses for fiscal 2006, 2005 and 2004 were $27.8 million, $39.0 million, and $31.9
million, respectively.
Stock-based Compensation
During the first quarter of fiscal 2006, we adopted the provisions of, and account for stock-based
compensation in accordance with, the Financial Accounting Standards Board’s (“FASB”) Statement of
Financial Accounting Standards No. 123 — revised 2004 (“SFAS 123R”), “Share-Based Payment” which
replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-
Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to
Employees.” Under the fair value recognition provisions of this statement, stock-based compensation cost
is measured at the grant date based on the fair value of the award and is recognized as expense on a
straight-line basis over the requisite service period, which is the vesting period. We elected the modified-
prospective method, under which prior periods are not revised for comparative purposes. The valuation
provisions of SFAS 123R apply to new grants and to grants that were outstanding prior to the effective date
and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective
date will be recognized over the remaining service period using the compensation cost estimated for the
SFAS 123 pro forma disclosures.
The adoption of SFAS 123R had and will have a material impact on our consolidated financial position
and results of operations. See Note 11 for further information regarding our stock-based compensation
assumptions and expenses, including pro forma disclosures for prior periods as if we had recorded stock-
based compensation expense.
Upon exercise of stock options or vesting of restricted stock and performance shares, we will issue
treasury stock. If treasury stock is not available, common stock will be issued. In order to minimize the
impact of on-going dilution from exercises of stock options and vesting of restricted stock and performance