Adobe 2008 Annual Report Download - page 48

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services are essential to the functionality of the delivered products and services; (3) determine whether vendor-specific
objective evidence (“VSOE”) of fair value exists for each undelivered element; and (4) allocate the total price among the
various elements we must deliver. Changes in assumptions or judgments or changes to the elements in a software
arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.
In addition, we must estimate certain royalty revenue amounts due to the timing of securing information from our
customers. While we believe we can make reliable estimates regarding these matters, these estimates are inherently
subjective. Accordingly, our assumptions and judgments regarding future products and services as well as our estimates of
royalty revenue could differ from actual events, thus materially impacting our financial position and results of operations.
Product revenue is recognized when the above criteria are met. We reduce the revenue recognized for estimated future
returns, price protection and rebates at the time the related revenue is recorded. In determining our estimate for returns and in
accordance with our internal policy regarding global channel inventory which is used to determine the level of product held
by our distributors on which we have recognized revenue, we rely upon historical data, the estimated amount of product
inventory in our distribution channel, the rate at which our product sells through to the end user, product plans and other
factors. Our estimated provisions for returns can vary from what actually occurs. Product returns may be more or less than
what was estimated. The amount of inventory in the channel could be different than what is estimated. Our estimate of the
rate of sell through for product in the channel could be different than what actually occurs. There could be a delay in the
release of our products. These factors and unanticipated changes in the economic and industry environment could make our
return estimates differ from actual returns, thus materially impacting our financial position and results of operations.
We offer price protection to our distributors that allows for the right to a credit if we permanently reduce the price of a
software product. When evaluating the adequacy of the price protection allowance, we analyze historical returns, current sell-
through of distributor and retailer inventory of our products, changes in customer demand and acceptance of our products and
other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories. Changes to
these assumptions or in the economic environment could result in higher returns or higher price protection costs in
subsequent periods.
In the future, actual returns and price protection may materially exceed our estimates as unsold products in the
distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence
due to new platforms, product updates or competing products. While we believe we can make reliable estimates regarding
these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection
reserves would change, which would impact the total net revenue we report.
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. Accordingly, our estimates of consulting revenue could differ
from actual events and may materially impact our financial position and results of operations.
Stock-based Compensation
We account for stock-based compensation in accordance with SFAS 123R. 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 generally the vesting period.
We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee
stock purchase plan shares. The determination of the fair value of stock-based awards on the date of grant using an option
pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables.
These variables include our expected stock price volatility over the expected term of the awards, actual and projected
employee stock option exercise behaviors, the risk-free interest rate, estimated forfeitures and expected dividends.
We estimate the expected term of options granted by calculating the average term from our historical stock option
exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our
decision to use implied volatility was based upon the availability of actively traded options on our common stock and our
assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the
risk-free interest rate on zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected