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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
89
Our consulting revenue is recognized using a time and materials basis and is measured monthly based on input
measures, such as hours incurred to date, 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 performance period of the arrangement.
Rights of Return, Rebates and Price Protection
As discussed above, we offer limited rights of return, rebates and price protection of our products under various policies
and programs with our distributors, resellers and/or end-user customers. We estimate and record reserves for these programs
as an offset to revenue. Below is a summary of each of the general provisions in our contracts:
• Distributors are allowed limited rights of return of products purchased during the previous quarter. In addition,
distributors are allowed to return products that have reached the end of their lives and products that are being
replaced by new versions.
• We offer rebates to our distributors, resellers and/or end user customers. The amount of revenue that is reduced for
distributor and reseller rebates is based on actual performance against objectives set forth by us for a particular
reporting period (volume, timely reporting, etc.). If mail-in or other promotional rebates are offered, the amount of
revenue reduced is based on the dollar amount of the rebate, taking into consideration an estimated redemption rate
calculated using historical trends.
• From time to time, we may offer price protection to our distributors that allow for the right to a credit if we
permanently reduce the price of a software product. The amount of revenue that is reduced for price protection is
calculated as the difference between the old and new price of a software product on inventory held by the
distributor prior to the effective date of the decrease.
Although our subscription contracts are generally non-cancelable, a limited number of customers have the right to
cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term. In the
event a customer cancels its contract, they are not entitled to a refund for prior services we have provided to them.
On a quarterly basis, the amount of revenue that is reserved for future returns is calculated based on our historical trends
and data specific to each reporting period. We review the actual returns evidenced in prior quarters as a percent of revenue to
determine a historical returns rate. We then apply the historical rate to the current period revenue as a basis for estimating
future returns. When necessary, we also provide a specific returns reserve for product in the distribution channel in excess of
estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-
through, product plans and other factors.
Revenue Reserve
Revenue reserve rollforward (in thousands):
2010
2009
2008
Beginning balance ....................................................................
$
34,401
$
50,943
$
43,532
Increase due to acquisition .......................................................
—
6,566
—
Amount charged to revenue .....................................................
171,607
113,009
153,129
Actual returns ...........................................................................
(156,582
)
(136,117
)
(145,718
)
Ending balance .........................................................................
$
49,426
$
34,401
$
50,943
Deferred Revenue
Deferred revenue consists substantially of payments received in advance of revenue recognition for our products and
services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade
receivables. The allowance is based on both specific and general reserves. We regularly review our trade receivables
allowances by considering such factors as historical experience, credit-worthiness, the age of the trade receivable balances
and current economic conditions that may affect a customer’ s ability to pay and we specifically reserve for those deemed
uncollectible.