Computer Associates 2007 Annual Report Download - page 95

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
(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.
Revenue from acquisitions is initially recorded on the acquired company’s systems, generally under a perpetual or up-front
software license agreement model, and is typically converted to the Company’s ratable software license agreement model as
new contracts are entered into or renewed within the first fiscal year after the acquisition. As new contracts containing the
right to receive unspecified future software products are entered into or renewed under the Company’s business model,
revenue is recognized ratably as subscription revenue on a monthly basis over the term of the agreement.
Under the Company’s business model, a relatively small percentage of the Company’s 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 the maintenance period. In the event such licenses
agreements are executed within close proximity or in contemplation of other license agreements 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 is 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. 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 to be 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 recognition from sales to distributors, resellers, and value-added resellers (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, a majority of sales of products to
distributors, resellers and VARs incorporate the right for the end-users to receive certain unspecified future software products
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
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