Adobe 2011 Annual Report Download - page 54

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price. If neither VSOE nor TPE of selling price exist for a deliverable, we use its BESP for that deliverable. Once revenue is
allocated to software or software-related elements as a group, it follows historic software accounting guidance. Revenue is then
recognized when the basic revenue recognition criteria are met for each element.
When we are unable to establish selling prices using VSOE or TPE, we use BESP in our allocation of arrangement
consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were
sold on a stand-alone basis. We are generally unable to establish VSOE or TPE for non-software elements and as such, we use
BESP. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized
offerings.
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.
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 2, 2011 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.
In addition to multiple element arrangements, 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.
We recognize revenues 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.
Our consulting revenue is recognized on a time and materials basis 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.
Stock-based Compensation
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.
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