Computer Associates 2007 Annual Report Download - page 64

revenue recognition criteria were met, software license fees were recognized as revenue up-front (as the contracts did not
include a right to unspecified software products) and the maintenance fees were deferred and subsequently recognized as
revenue over the term of the license. Our historical practice has been that revenue from acquisitions is initially recorded on the
acquired company’s systems, generally under a perpetual or up-front model, and is then converted to our ratable model within
the first fiscal year after the acquisition. As new contracts are entered into or renewed that contain the right to receive
unspecified future software products under our business model, revenue is recognized ratably as subscription revenue on a
monthly basis over the term of the agreement. For fiscal year 2007, we recorded approximately $40 million of revenue on an
up-front basis relating to acquisitions that occurred subsequent to the fourth quarter of fiscal year 2006. We expect that a
portion of this revenue will continue to be recorded on an up-front basis as “Software fees and other”, which may result in
higher total revenue for the period than if this revenue had been transitioned to our ratable subscription model in accordance
with our historical practice.
Under our business model, a relatively small percentage of revenue related to certain products is recognized on an up-front or
perpetual basis once all revenue recognition criteria are met in accordance with SOP 97-2 as described above, and is reported
in the “Software fees and other” line of the Consolidated Statements of Operations. License agreements pertaining to such
products do not include the right to receive unspecified future software products, and maintenance is deferred and
subsequently recognized over the term of maintenance period. In the event such license agreements are executed within
close proximity or in contemplation of other license agreements with the same customer which contain the right to receive
unspecified future software products, the contracts may be considered a single multi-element agreement, and as such all
revenue may be deferred and recognized as “Subscription revenue” in the Consolidated Statement of Operations.
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 recognition from sales to distributors, resellers, and VARs commences 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,
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