Adobe 2012 Annual Report Download - page 84

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Multiple Element Arrangements
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades,
maintenance and support, hosting services, and consulting.
For our software and software-related multiple element arrangements, we must: (1) determine whether and when each
element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered
products and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”),
and (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the
undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE,
revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements
of the arrangement have been delivered. However, if the only undelivered element is maintenance and support, the entire
arrangement fee is recognized ratably over the performance period. 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.
We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate
for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling
prices for a product or service fall within a reasonably narrow pricing range.
We have established VSOE for our software maintenance and support services, custom software development services,
consulting services and training.
At the beginning of our first quarter of fiscal 2010, we adopted the accounting standard for multiple element revenue
arrangements which was amended by the FASB in October 2009.
For multiple element arrangements containing our non-software services, we must: (1) determine whether and when each
element has been delivered; (2) determine fair value of each element using the selling price hierarchy of VSOE of fair value, third
party evidence (“TPE”) or best estimated selling price (“BESP”), as applicable and (3) allocate the total price among the various
elements based on the relative selling price method.
For multiple element arrangements that contain software and non-software elements such as our hosted offerings, we allocate
revenue to software or software-related elements as a group and any non-software element separately based on the selling price
hierarchy. We determine the selling price for each deliverable using VSOE of fair value of selling price, if it exists, or TPE of
selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use its BESP for that deliverable. Revenue
allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. Once revenue
is allocated to software or software-related elements as a group, revenue is recognized under the guidance applicable to software
transactions.
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.
Product Revenue
We recognize our product revenue upon shipment, provided all other revenue recognition criteria have been met. Our
desktop application product 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
Table of Contents
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)