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17
sale or over the contract period, based on the nature of the contract, at the net amount retained by
us, with no cost of sales. Revenue from information technology consulting or professional services is
either recognized as incurred for services billed at an hourly rate or recognized using the percentage
of completion method for services provided at a fixed fee. Revenue for data center services,
including Internet connectivity, Web hosting, server co-location, and managed services, is recognized
over the period service is provided.
In accordance with our revenue recognition policy, we estimate the value of products that have
shipped but that have not been received by the customer and record an adjustment to reverse the
impact of these sales out of our results for the current period and into our results for the subsequent
period. In doing so, we perform an analysis to determine the estimated number of days that product
is in transit, using data from commercial delivery services and other sources. Changes in delivery
patterns may result in a different number of business days used in making this adjustment and could
have a material impact on our revenue recognition for the current period.
Inventory valuation. Inventory is valued at the lower of cost or market value. We decrease the
value of inventory for estimated obsolescence equal to the difference between the cost of inventory
and the estimated market value, based upon an aging analysis of the inventory on hand, specifically
known inventory-related risks, and assumptions about future demand and market conditions. If future
demand or actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
Vendor transactions. We receive incentives from vendors related to cooperative advertising
allowances, volume rebates, bid programs, price protection and other programs. These incentives
generally relate to written agreements with specified performance requirements with the vendors and
are recorded as adjustments to cost of sales or advertising expense, as appropriate. Vendors may
change the terms of some or all of these programs which could have an impact on our results of
operations. The inability to collect receivables related to these vendor transactions could have a
material impact on gross margin and operating income.
Acquisition of Berbee Information Networks Corporation
On October 11, 2006, we completed the acquisition of Berbee for a total purchase price of $186.1
million, including an adjustment for working capital. For more information on Berbee, see
“Acquisitions” in Item 1 of Part I of this 10-K and Note 3 to the Consolidated Financial Statements.
Recently Adopted and Newly Issued Accounting Standards
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment” (“SFAS 123R”). SFAS 123R requires the Company to measure all share-
based payments to coworkers and directors using a fair-value-based method and record
compensation expense related to these payments in our consolidated financial statements. We have
elected to use the modified prospective method, which allows for prospective recognition of
compensation expense without restatement of prior periods in the year of adoption.
See Note 11 to the Consolidated Financial Statements for further information on the adoption of
SFAS 123R and the related disclosures, including pro forma information for prior periods as if we had
recorded share-based compensation expense.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109”
(“FIN 48”). FIN 48 prescribes a two-step process for the financial statement measurement and
recognition of a tax position taken or expected to be taken in an income tax return. The first step
involves the determination of whether it is more likely than not that a tax position will be sustained
upon examination, based on the technical merits of the position. The second step requires that any
tax position that meets the more-likely-than-not recognition threshold be measured and recognized in