Computer Associates 2006 Annual Report Download - page 50

of America (GAAP) to recognize revenue from our license agreements evenly on a monthly basis (also known as
ratably) over the license term. We believe recognizing license revenue ratably over the term of the license
agreement more accurately reflects the earnings process; we also believe that it improves the predictability of our
reported revenue streams. Under agreements entered into prior to October 2000 (the prior business model), and as is
common practice in the software industry, we did not offer our customers the right to receive unspecified future
upgrades. As a result, for most license agreements entered into prior to October 2000, we were required under
GAAP to record the present value of the license agreement as revenue at the time the license agreement was signed.
Under our business model, the portion of the contract value that has not yet been recognized creates what we refer to
as deferred subscription value. Deferred subscription value is recognized as revenue evenly on a monthly basis over
the duration of the license agreements. When recognized, this revenue is reported on the “Subscription revenue”
line item on our Consolidated Statements of Operations. If a customer pays for software prior to the recognition of
revenue, the amount deferred is reported as a liability entitled “Deferred subscription revenue (collected)” on our
Consolidated Balance Sheets.
Not all of our active customer contracts have been transitioned to our business model, which has created what we
refer to as a “Transition Period,” during which the license agreements under our prior business model come up for
renewal. During this Transition Period, as customer license agreements under our prior business model are renewed
under our business model, we are building deferred subscription value related to that customer, from which
subscription revenue will be amortized in future periods. Total deferred subscription value, and the associated
subscription revenue that comes out of it, may increase over time as we continue to renew customer contracts that
were executed under the prior business model, transition acquired company contracts to our business model, sell
additional products and capacity to existing customers, and enter into new contracts with new customers. The
favorable impact on subscription revenue from the conversion of contracts from our old business model to our new
business model will decrease over time as the transition is completed. The remaining balance of unbilled
installment receivables that were previously recognized as revenue under our prior business model was
$0.76 billion and $1.15 billion at March 31, 2006 and March 31, 2005, respectively.
While the impact of changing from up-front revenue recognition under our prior business model to our current
business model resulted in the postponement of the recognition of amounts that previously would have been
recognized earlier under the up-front model, we generally did not change our cost structure.
Under both the prior business model and our current business model, customers often pay for the right to use our
software products over the term of the associated software license agreement. We refer to these payments as
installment payments. While the transition to the current business model has changed the timing of revenue
recognition, in most cases it has not changed the timing of how we bill and collect cash from customers. As a result,
our cash generated from operations has generally not been affected by the transition to the current business model
over the past several years; and we do not expect in the future any significant changes in our cash generated from
operations as a result of this transition.
Significant Business Events
The Government Investigation
In fiscal year 2002, the United States Attorney’s Office for the Eastern Division of New York (USAO) and the staff
of the Northeast Region of the Securities and Exchange Commission (SEC) commenced an investigation
concerning certain of our past accounting practices, including our revenue recognition procedures in periods
prior to the adoption of our business model in October 2000.
In September 2004, we reached agreements with the USAO and the SEC by entering into a Deferred Prosecution
Agreement (DPA) with the USAO and consenting to the entry of a Final Consent Judgment (Consent Judgment) in a
parallel proceeding brought by the SEC in the United States District Court for the Eastern District of New York (the
Federal Court). The Federal Court approved the DPA on September 22, 2004 and entered the Consent Judgment on
September 28, 2004. The agreements resolved the USAO and SEC investigations into certain of our past accounting
practices, including our revenue recognition policies and procedures, and obstruction of their investigations.
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