Computer Associates 2006 Annual Report Download - page 74

accordance with SOP 97-2, we begin to recognize revenue from licensing and supporting our software products
when all of the following criteria are met: (1) we have evidence of an arrangement with a customer; (2) we deliver
the products; (3) license agreement terms are deemed fixed or determinable and free of contingencies or
uncertainties that may alter the agreement such that it may not be complete and final; and (4) collection is probable.
Our software licenses generally do not include acceptance provisions. An acceptance provision allows a customer to
test the software for a defined period of time before committing to license the software. If a license agreement
includes an acceptance provision, we do not record deferred subscription value or recognize revenue until the earlier
of the receipt of a written customer acceptance or, if not notified by the customer to cancel the license agreement,
the expiration of the acceptance period.
Under our business model, software license agreements include flexible contractual provisions that, among other
things, allow customers to receive unspecified future software upgrades for no additional fee. These agreements
combine the right to use the software product with maintenance for the term of the agreement. Under these
agreements, we recognize revenue ratably over the term of the license agreement beginning upon completion of the
four SOP 97-2 recognition criteria noted above. 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. Some of these license agreements have not reached the end of their initial terms and, therefore, continue to
amortize. This amortization is recorded on 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 our current business model, maintenance and license fees continue to be combined; however, the
maintenance is inclusive for the entire term. We report such combined fees on the “Subscription revenue” line item
in the Consolidated Statements of Operations.
We also record stand-alone maintenance revenue earned from customers who elect optional maintenance. Revenue
from such renewals is recognized as maintenance revenue 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, sales of our products made by
distributors, resellers and VARs to their customers incorporate the right for the end-users to receive certain
upgraded software products at no additional fee. Accordingly, revenue from those contracts is 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
through the receipt of cash payment.
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