Citrix 2006 Annual Report Download - page 31

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Citrix Systems, Inc.  Annual Report
about matters that are highly uncertain at the time the
estimate is made, and if different estimates that could have
been used, or changes in the accounting estimates that
are reasonably likely to occur periodically, could materially
impact our consolidated financial statements. We have
discussed the development, selection and application of
our critical accounting policies with the Audit Committee
of our Board of Directors and our independent auditors,
and our Audit Committee has reviewed our disclosure
relating to our critical accounting policies and estimates in
this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Other significant accounting policies, primarily those with
lower levels of uncertainty than those discussed below, are
also important to understanding our consolidated financial
statements. The notes to our consolidated financial
statements contain additional information related to our
accounting policies and should be read in conjunction with
this discussion.
Revenue Recognition
The accounting related to revenue recognition in
the software industry is complex and affected by
interpretations of the rules and an understanding of
industry practices, both of which are subject to change.
As a result, revenue recognition accounting rules require
us to make significant judgments. In addition, our judgment
is required in assessing the probability of collection, which
is generally based on evaluation of customer-specific
information, historical collection experience and economic
market conditions. If market conditions decline, or if
the financial condition of our distributors or customers
deteriorate, we may be unable to determine that
collectibility is probable, and we could be required to defer
the recognition of revenue until we receive
customer payments.
We license most of our products bundled with a one year
contract for license updates that provide the end-user with
free enhancements and upgrades to the licensed product
on a when and if available basis. Customers may also
elect to purchase subscriptions for license updates, when
not bundled with the initial product release or purchase,
technical support, product training or consulting services.
We allocate revenue to license updates and any other
undelivered elements of the arrangement based on vendor
specific objective evidence, or VSOE, of fair value of each
element and such amounts are deferred until the applicable
delivery criteria and other revenue recognition criteria have
been met. The balance of the revenue, net of any discounts
inherent in the arrangement, is recognized at the outset of
the arrangement using the residual method as the product
licenses are delivered. If we cannot objectively determine
the fair value of each undelivered element based on the
VSOE fair value, we defer revenue recognition until all
elements are delivered, all services have been performed,
or until fair value can be objectively determined. We
must apply judgment in determining all elements of the
arrangement and in determining the VSOE of fair value
for each element, considering the price charged for each
product or applicable renewal rates for license updates.
In the normal course of business, we do not permit
product returns, but we do provide most of our distributors
with stock balancing and price protection rights. Stock
balancing rights permit distributors to return products to
us up to the forty-fifth day of the fiscal quarter, subject
to ordering an equal dollar amount of our other products
prior to the last day of the same fiscal quarter. Price
protection rights require that we grant retroactive price
adjustments for inventories of our products held by
distributors or resellers if we lower our prices for such
products. We establish provisions for estimated returns
for stock balancing and price protection rights, as well as
other sales allowances, concurrently with the recognition
of revenue. The provisions are established based upon
consideration of a variety of factors, including, among other
things, recent and historical return rates for both specific
products and distributors, estimated distributor inventory
levels by product, the impact of any new product releases
and projected economic conditions. Actual product returns
for stock balancing and price protection provisions incurred
are, however, dependent upon future events, including
the amount of stock balancing activity by our distributors
and the level of distributor inventories at the time of any
price adjustments. We continually monitor the factors
that influence the pricing of our products and distributor
inventory levels and make adjustments to these provisions