CDW 2015 Annual Report Download - page 67

Table of Contents
CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
licenses. At the time of sale, the Company records an estimate for sales returns and allowances based on historical experience. The Company’s vendor partners
warrant most of the products the Company sells.
The Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold
the inventory at its warehouses, thereby increasing efficiency and reducing costs. The Company recognizes revenue for drop-shipment arrangements on a gross
basis upon delivery to the customer with contract terms that typically specify F.O.B. destination.
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.
The Company also sells certain products for which it acts 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.
The Company’s larger customers are offered the opportunity by certain of its 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, the Company’s vendors will transfer the license and
bill the customer directly, paying resellers such as the Company an agency fee or commission on these sales. The Company records these fees as a component of net
sales as earned and there is no corresponding cost of sales amount. In certain instances, the Company bills the customer directly under an EA and accounts for the
individual items sold based on the nature of the item. The Company’s vendors typically dictate how the EA will be sold to the customer.
The Company also sells some of its products and services as part of bundled contract arrangements containing multiple deliverables, which may include a
combination of 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, the Company uses its best estimate of selling prices.
The Company records freight billed to its 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.
The Company performs 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 the Company estimates the amount of sales in-transit
at the end of the period and adjusts 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 the Company’s revenue recognition for the period.
Sales Taxes
Sales tax amounts collected from customers for remittance to governmental authorities are presented on a net basis in the Company’s Consolidated Statements of
Operations.
Advertising
Advertising costs are generally charged to expense in the period incurred. Cooperative reimbursements from vendors are recorded in the period the related
advertising expenditure is incurred. The Company classifies vendor consideration as a reduction to Cost of sales.
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