Adobe 2015 Annual Report Download - page 36

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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, when such services are sold optionally with software licenses.
For multiple-element arrangements containing our non-software services, we must: (1) determine whether and when each
element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of VSOE of selling price,
third-party evidence (“TPE”) of selling price 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 both software and non-software elements, we allocate revenue to software
or software-related elements as a group and any non-software elements separately based on the selling price hierarchy. We determine
the selling price for each deliverable using VSOE 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 BESP. Once revenue is allocated to software or software-related elements as a group,
we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition
criteria are met for each element.
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. Pricing practices taken into
consideration include historic contractually stated prices, volume discounts where applicable and our price lists. 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 impacting our financial position and results of operations.
In the future, actual returns and price protection may 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 revenue for hosted services that are based on a committed number of transactions ratably beginning on the
date the services are first made available to the customer and continuing through the end of the contractual service 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.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed,
assumed equity awards, as well as to in-process research and development based upon their estimated fair values at the acquisition