Citrix 2007 Annual Report Download - page 45

our estimates under different assumptions and conditions. If actual results significantly differ from our estimates,
our financial condition and results of operations could be materially impacted.
We believe that the accounting policies described below are critical to understanding our business, results of
operations and financial condition because they involve more significant judgments and estimates used in the
preparation of our consolidated financial statements. An accounting policy is deemed to be critical if it requires
an accounting estimate to be made based on assumptions 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.”
Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K for the year
ended December 31, 2007 describes the significant accounting policies and methods used in the preparation of
our Consolidated Financial Statements.
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
collectability 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 are not obligated to accept product returns from our distributors under
any other conditions, unless the product item is defective in manufacture, 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. Product items returned to us under the stock balancing program must be in new, unused
and unopened condition. 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
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