Computer Associates 2006 Annual Report Download - page 124

Note 1 — Significant Accounting Policies (Continued)
agreements combine the right to use the software products with maintenance for the term of the agreement. Under
these agreements, once all four of the above noted revenue recognition criteria are met, the Company is required to
recognize revenue ratably over the term of the license agreement. For license agreements signed prior to October
2000 (the prior business model), once all four of the above noted revenue recognition criteria were met, software
license fees were recognized as revenue up-front, and the maintenance fees were deferred and subsequently
recognized as revenue over the term of the license.
Maintenance revenue is derived from two primary sources: (1) combined license and maintenance agreements
recorded under the prior business model; and (2) stand-alone maintenance agreements.
Under the prior business model, maintenance and license fees were generally combined into a single license
agreement. The maintenance portion was deferred and amortized into revenue over the initial license agreement
term. Certain of these license agreements have not reached the end of their initial terms and, therefore, continue to
amortize. This amortization is recorded to the “Maintenance” line item in 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 the Company’s current business model, maintenance and license fees continue to be combined; however,
the maintenance is inclusive for the entire term of the arrangement. The Company reports such combined fees on the
“Subscription revenue” line item in the Consolidated Statements of Operations.
The Company also records stand-alone maintenance revenue earned from customers who elect optional
maintenance. Revenue from such renewals is recognized on the “Maintenance” line item in the Consolidated
Statements of Operations over the term of the renewal agreement.
The “Deferred maintenance revenue” line item on the Company’s Consolidated Balance Sheets principally
represents payments received in advance of maintenance services rendered.
Revenue from professional service arrangements is generally recognized as the services are performed. Revenues
from committed professional services arrangements 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 value-added resellers (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 for the end-users to receive certain unspecified
future software upgrades and revenue from those contracts is therefore recognized on a ratable basis.
The Company has an established business practice of offering installment payment options to customers and has a
history of successfully collecting substantially all amounts due under such agreements. The Company assesses
collectibility based on a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. If, in the Company’s judgment, collection of a fee is not probable, revenue
will not be recognized until the uncertainty is removed, which is generally through the receipt of cash payment.
The Company’s standard licensing agreements include a product warranty provision for all products. Such
warranties are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 5,
“Accounting for Contingencies.” The likelihood that the Company would be required to make refunds to customers
under such provisions is considered remote.
Under the terms of substantially all of the Company’s license agreements, the Company has agreed to indemnify
customers for costs and damages arising from claims against such customers based on, among other things,
allegations that its software products infringe the intellectual property rights of a third party. In most cases, in the
event of an infringement claim, the Company retains 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, the
Company may terminate the license agreement and refund to the customer a pro-rata portion of the fees paid. Such
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