Adobe 2015 Annual Report Download - page 65

Table of Contents
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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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, 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.
Subscription and Services and Support Revenue
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 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, mobile and device products and solutions. 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.