CDW 2015 Annual Report Download - page 51

Table of Contents
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 45% to 55% 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, recognized using a percentage of completion model for
fixed fee project work 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.
We also 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 to reflect only what has been received by the customer. 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 period.
Vendor Programs
We receive incentives from certain of our 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
inventory, depending on the nature of the incentive. Vendors may change the terms of some or all of these programs, which could have an impact on our results of
operations.
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