Autodesk 2004 Annual Report Download - page 27

determining whether and when some of these criteria have been satisfied often involves assumptions and
judgments that can have a significant impact on the timing and amount of revenue we report.
For multiple element arrangements that include software products, we allocate and defer revenue for
the undelivered elements based on their vendor-specific objective evidence (“VSOE”) of fair value, which is
the price charged when that element is sold separately or the price as set by management with the relevant
authority. We are required to exercise judgment in determining whether VSOE exists for each undelivered
element based on whether our pricing for these elements is sufficiently consistent.
Our assessment of likelihood of collection is also a critical element in determining the timing of
revenue recognition.
Our product sales to distributors and resellers are generally recognized at the time title to our product
passes to the distributor or reseller, provided all other criteria for revenue recognition are met. This policy
is predicated on our ability to estimate sales returns. We are also required to evaluate whether our
distributors and resellers have the ability to honor their commitment to make fixed and determinable
payments, regardless of whether they collect cash from their customers. If we were to change any of these
assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we
report in a particular period.
In addition to product sales, Autodesk recognizes maintenance revenues from our subscription
program and hosted service revenues ratably over the contract periods. Customer consulting and training
revenues are recognized as the services are performed.
Allowance for Bad Debts. We maintain allowances for bad debts for estimated losses resulting from the
inability of our customers to make required payments. Our bad debt reserve was $9.7 million and $9.2 million
at January 31, 2004 and 2003, respectively.
Estimated reserves are determined based upon historical loss patterns, the number of days that billings
are past due and an evaluation of the potential risk of loss associated with specific problem accounts. The
use of different estimates or assumptions could produce different allowance balances. While we believe our
existing reserve for doubtful accounts is adequate and appropriate, additional reserves may be required
should the financial condition of our customers deteriorate or as unusual circumstances arise.
Product Returns and Price Adjustment Reserves. With the exception of contracts with certain distributors,
our sales contracts do not contain specific product-return privileges. However, we permit our distributors
and resellers to return product in certain instances, generally when new product releases supercede older
versions. At January 31, 2004 and 2003, our product returns reserves were $20.6 million and $19.8 million,
respectively. Product returns as a percentage of applicable revenues were 5.4% in fiscal 2004, 5.5% in fiscal
2003 and 6.0% in fiscal 2002.
For certain distributors in Europe, we offer incremental discounts, or price adjustments, ranging from
less than 1% to 4%, for certain qualifying sales. At January 31, 2004 and 2003, our price adjustment reserves
were $4.2 million and $4.1 million, respectively. Price adjustment claims as a percentage of applicable
revenues were 3.1% in fiscal 2004, 2.0% in fiscal 2003 and 0.3% in fiscal 2002.
The product returns and price adjustment reserves are based on estimated channel inventory levels,
the timing of new product introductions, channel sell-in for applicable markets, historical experience of
actual product returns and price adjustment rates and other factors. The greater the channel inventory level
or the closer the proximity of a major new product release such as AutoCAD 2004, the more product returns
we expect. Similarly, the higher the applicable channel sell-in or the higher the channel inventory level, the
more price adjustment claims we expect. During fiscal year 2004, we recorded a reserve for product returns
of $39.3 million and a reserve for price adjustments of $5.9 million, both of which reduced our gross revenue.
While we believe our accounting practice for establishing and monitoring product returns and price
adjustment reserves is adequate and appropriate, any adverse activity or unusual circumstances could
result in an increase in reserve levels in the period in which such determinations are made.
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