Computer Associates 2007 Annual Report Download - page 41

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.
Under our business model, a relatively small percentage of our revenue is recognized on a perpetual or up-front basis once all
revenue recognition criteria are met in accordance with Statement of Position 97-2 “Software Revenue Recognition” (SOP 97-2)
(see “— Critical Accounting Policies and Estimates” below for details), as is often the case with acquisitions prior to
conversion to the ratable model. In such cases, these products are not sold with the right to receive unspecified future
software products and maintenance is separately identifiable. We expect to continue to offer these types of licensing
arrangements and therefore the amount of revenue we expect to recognize on an up-front basis may increase to the extent
that such license agreements are not executed in close proximity to or in contemplation of other license agreements for which
the right exists to receive unspecified future software products.
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 prior
business model to our 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 $0.50 billion
and $0.66 billion at March 31, 2007 and March 31, 2006, 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 — DPA Concluded
In September 2004, the Company reached agreements with the United States Attorney’s Office for the Eastern Division of
New York (USAO) and the Northeast Region of the Securities and Exchange Commission (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 during certain periods prior to the adoption of our business model in October
2000, and obstruction of their investigations.
On May 15, 2007, the USAO submitted a motion to the Federal Court seeking dismissal of the charges relating to such
accounting practices that had been filed against the Company in connection with the DPA. The USAO’s motion papers cited
the May 1, 2007 final report of the Independent Examiner and stated that CA has complied with the DPA.
On May 21, 2007, the Federal Court granted the motion, dismissing the charges; as a result of the dismissal and as provided in
the DPA, the DPA thereupon expired and is thus concluded.
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