Adobe 2012 Annual Report Download - page 85

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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.
Subscription and Services and Support Revenue
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 all revenue recognition criteria have been met.
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.
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 on a when and if
available basis 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 and accounts receivable. 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.
Table of Contents
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)