Adobe 2010 Annual Report Download - page 88

ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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We determine BESP for a product or service by considering multiple factors including, but not limited to, major product
groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing
practices. Significant pricing practices taken into consideration include historic contractually stated prices, volume discounts
where applicable and our price lists. The most common fact pattern that emerged through analyzing these factors supports a
BESP closely tied to Adobe’ s list prices. The determination of BESP is made through consultation with and formal approval
by our management, taking into consideration our go-to-market strategy.
We regularly review VSOE and have established a review process for TPE and BESP and maintain internal controls
over the establishment and updates of these estimates. There was no material impact to revenue during the year ended
December 3, 2010 resulting from changes in VSOE, TPE or BESP, nor do we expect a material impact from such changes in
the near term.
We have established VSOE for our software maintenance and support services, custom software development services,
consulting services and training. We have established BESP for all other offerings, including software products, non-software
related hosting services, custom hosting development and consulting services, and technical support and training for hosting
services.
Given the nature of our transactions, which are primarily software and software-related, our go-to-market strategies and
our pricing practices, total net revenue as reported during the year ended December 3, 2010 is materially consistent with total
net revenue that would have been reported if the transactions entered into or materially modified after November 27, 2009
were subject to previous accounting guidance. Additionally, the new accounting standards for revenue recognition, if applied
in the same manner to the year ended November 27, 2009, would not have had a material impact on total net revenues for that
fiscal year.
Product Revenue
We recognize our product revenue upon shipment, provided all other revenue recognition criteria have been met. 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 recognize OEM licensing revenue, primarily royalties, when OEMs ship products incorporating our 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. This estimate is based on a combination of our generated forecasts and actual
historical reporting by our OEM customers. To substantiate our ability to estimate revenue, we review license royalty
revenue reports ultimately received from our significant OEM customers in comparison to the amounts estimated in the prior
period.
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.
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 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.
We recognize revenue for hosting services that are based on a committed number of transactions, ratably beginning on
the date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees,
and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract
terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue
or revenue, depending on whether the revenue recognition criteria have been met.