Computer Associates 2005 Annual Report Download - page 69

Table of Contents
is recorded to the “Maintenance” line item on the Consolidated Statements of Operations. The deferred maintenance portion, which was
optional to the customer, was determined using its fair value based on annual, fixed maintenance renewal rates stated in the agreement.
For license agreements entered into under our current Business Model, maintenance and license fees continue to be combined; however,
the maintenance is no longer optional on an annual basis but rather is inclusive for the entire term. We report such combined fees on the
“Subscription revenue” line item on the Consolidated Statements of Operations.
We record stand-alone maintenance revenue earned from customers who elect optional maintenance for their non-term-based license
agreements. Maintenance revenue from such renewals is recognized over the term of the renewal agreement.
The “Deferred maintenance revenue” line item on our Consolidated Balance Sheets principally represents payments received in advance
of maintenance services rendered.
Revenue from professional service arrangements is recognized pursuant to the provisions of SOP 97-2, which in most cases is as the
services are performed. Revenues from professional services that are sold as part of a software transaction are deferred and recognized
on a ratable basis over the life of the related software transaction. If it is not probable that a project will be completed or the payment will
be received, revenue is deferred until the uncertainty is removed.
Revenue from sales to distributors, resellers, and VARs is recognized when all four of the SOP 97-2 revenue recognition criteria noted
above are met and when these entities sell the software product to their customers. This is commonly referred to as the sell-through
method. Beginning July 1, 2004, a majority of sales of products to distributors, resellers and VARs incorporate the right to receive
certain unspecified future software products and revenue from those contracts is therefore recognized on a ratable basis.
We have an established business practice of offering installment payment options to customers and have a history of successfully
collecting substantially all amounts due under such agreements. We assess collectibility based on a number of factors, including past
transaction history with the customer and the creditworthiness of the customer. If, in our judgment, collection of a fee is not probable, we
will not recognize revenue until the uncertainty is removed upon receipt of cash payment.
Our standard licensing agreements include a product warranty provision for all products. Such warranties are accounted for in
accordance with SFAS No. 5, “Accounting for Contingencies.” The likelihood that we would be required to make refunds to customers
under such provisions is considered remote.
Under the terms of substantially all of our license agreements, we have agreed to indemnify customers for costs and damages arising
from claims against such customers based on, among other things, allegations that our software products infringe the intellectual
property rights of a third party. In most cases, in the event of an infringement claim, we retain the right to (i) procure for the customer the
right to continue using the software product; (ii) replace or modify the software product to eliminate the infringement while providing
substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably achieved, we may terminate the license agreement
and refund to the customer a pro-rata portion of the fees paid. Such indemnification provisions are accounted for in accordance with
SFAS No. 5. The likelihood that we would be required to make refunds to customers under such provisions is considered remote. In most
cases and where legally enforceable, the indemnification is limited to the amount paid by the customer.
Accounts Receivable
The allowance for doubtful accounts is a valuation account used to reserve for the potential impairment of accounts receivable on the
balance sheet. In developing the estimate for the allowance for doubtful accounts, we rely on several factors, including:
• Historical information, such as general collection history of multi-year software agreements;
• Current customer information/events, such as extended delinquency, requests for restructuring, and filing for bankruptcy;
• Results of analyzing historical and current data; and
• The overall macroeconomic environment.
The allowance is comprised of two components: (a) specifically identified receivables that are reviewed for impairment when, based on
current information, we do not expect to collect the full amount due from the customer; and (b) an allowance for losses inherent in the
remaining receivable portfolio based on the analysis of the specifically reviewed receivables.
We expect the allowance for doubtful accounts to continue to decline as net installment accounts receivable under the prior business
model are billed and collected. Under our Business Model, amounts due from customers are offset by deferred subscription revenue
(unearned revenue) related to these amounts, resulting in little or no carrying value on the balance sheet. Therefore, a smaller allowance
for doubtful accounts is required.
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