CDW 2014 Annual Report Download - page 60

Table of Contents
Revenue Recognition
We are a primary distribution channel for a large group of vendors and suppliers, including OEMs, software publishers and wholesale
distributors. We record revenue from sales transactions when title and risk of loss are passed to our customer, there is persuasive evidence of an
arrangement for sale, delivery has occurred and/or services have been rendered, the sales price is fixed or determinable, and collectability is
reasonably assured. Our shipping terms typically specify F.O.B. destination, at which time title and risk of loss have passed to the customer.
Revenues from the sales of hardware products and software products and licenses are generally recognized on a gross basis with the
selling price to the customer recorded as sales and the acquisition cost of the product recorded as cost of sales. These items can be delivered to
customers in a variety of ways, including (i) as physical product shipped from our warehouse, (ii) via drop-shipment by the vendor or supplier,
or (iii) via electronic delivery for software licenses. At the time of sale, we record an estimate for sales returns and allowances based on
historical experience. Our vendor partners warrant most of the products we sell.
We leverage drop-shipment arrangements with many of our vendors and suppliers to deliver products to our customers without having
to physically hold the inventory at our warehouses, thereby increasing efficiency and reducing costs. We recognize revenue for drop-shipment
arrangements on a gross basis upon delivery to the customer with contract terms that typically specify F.O.B. destination. We recognize revenue
on a gross basis as the principal in the transaction because we are the primary obligor in the arrangement, we assume inventory risk if the
product is returned by the customer, we set the price of the product charged to the customer, we assume credit risk for the amounts invoiced, and
we work closely with our customers to determine their hardware and software specifications. These arrangements generally represent
approximately 40% to 50% of total net sales, including approximately 15% to 20% related to electronic delivery for software licenses.
Revenue from professional services is either recognized as provided for services billed at an hourly rate or recognized using a
proportional performance model for services provided at a fixed fee. Revenue from cloud computing solutions including Software as a Service
("SaaS") and Infrastructure as a Service ("IaaS") arrangements, as well as data center services such as managed and remote managed services,
server co-location, internet connectivity and data backup and storage, is recognized over the period service is provided.
We also sell certain products for which we act as an agent. Products in this category include the sale of third-party services, warranties,
software assurance (“SA”) and third-
party hosted SaaS and IaaS arrangements. SA is a product that allows customers to upgrade, at no additional
cost, to the latest technology if new applications are introduced during the period that the SA is in effect. These sales do not meet the criteria for
gross sales recognition, and thus are recognized on a net basis at the time of sale. Under net sales recognition, the cost paid to the vendor or
third-party service provider is recorded as a reduction to sales, resulting in net sales being equal to the gross profit on the transaction.
Our larger customers are offered the opportunity by certain of our vendors to purchase software licenses and SA under enterprise
agreements (“EAs”). Under EAs, customers are considered to be compliant with applicable license requirements for the ensuing year, regardless
of changes to their employee base. Customers are charged an annual true-up fee for changes in the number of users over the year. With most
EAs, our vendors will transfer the license and bill the customer directly, paying resellers such as us an agency fee or commission on these sales.
We record these fees as a component of net sales as earned and there is no corresponding cost of sales amount. In certain instances, we bill the
customer directly under an EA and account for the individual items sold based on the nature of the item. Our vendors typically dictate how the
EA will be sold to the customer.
From time to time, we sell some of our products and services as part of bundled contract arrangements containing multiple deliverables,
which may include a combination of the products and services. For each deliverable that represents a separate unit of accounting, total
arrangement consideration is allocated based upon the relative selling prices of each element. The allocated arrangement consideration is
recognized as revenue in accordance with the principles described above. Selling prices are determined by using vendor specific objective
evidence (“VSOE”) if it exists. Otherwise, selling prices are determined using third party evidence (“TPE”). If neither VSOE or TPE is
available, we use our best estimate of selling prices.
We record freight billed to our customers as net sales and the related freight costs as a cost of sales.
Deferred revenue includes (1) payments received from customers in advance of providing the product or performing services, and (2)
amounts deferred if other conditions of revenue recognition have not been met.
We perform an analysis of the estimated number of days of sales in-transit to customers at the end of each period based on a weighted-
average analysis of commercial delivery terms that includes drop-shipment arrangements. This analysis is the basis upon which we estimate the
amount of sales in-transit at the end of the period and adjust revenue and the related costs
55