Computer Associates 2007 Annual Report Download - page 96

Company’s judgment, collection of a fee is not probable, revenue will not be recognized until the uncertainty is removed, which
is generally through the receipt of cash payment.
The Company’s standard licensing agreements include a product warranty provision for all products. Such warranties are
accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies.”
The likelihood that the Company would be required to make refunds to customers under such provisions is considered remote.
Under the terms of substantially all of the Company’s license agreements, the Company has agreed to indemnify customers
for costs and damages arising from claims against such customers based on, among other things, allegations that its software
products infringe the intellectual property rights of a third party. In most cases, in the event of an infringement claim, the
Company retains the right to (i) procure for the customer the right to continue using the software product; (ii) replace or
modify the software product to eliminate the infringement while providing substantially equivalent functionality; or (iii) if
neither (i) nor (ii) can be reasonably achieved, the Company may terminate the license agreement and refund to the customer
a pro-rata portion of the fees paid. Such indemnification provisions are accounted for in accordance with SFAS No. 5. The
likelihood that the Company would be required to make refunds to customers under such provisions is considered remote. In
most cases and where legally enforceable, the indemnification is limited to the amount paid by the customer.
Subscription Revenue: Subscription revenue represents the ratable recognition of revenue attributable to license agreements
under the Company’s business model.
Deferred subscription revenue represents the aggregate portion of all undiscounted contractual and committed license
amounts pursuant to the Company’s business model for which customers have been billed but revenue is deferred and will be
recognized ratably over the license agreement duration.
Software Fees and Other: Software fees and other revenue consists of revenue related to distribution and original equipment
manufacturer (OEM) channel partners that has been recorded on an up-front sell-through basis, revenue from certain
products that is recognized on a perpetual or up-front basis without the right to receive unspecified future software products,
revenue associated with acquisitions prior to transition to the Company’s business model, joint ventures, royalty revenues,
and other revenue. Revenue related to distribution partners and OEMs is sometimes referred to as “indirect” or “channel”
revenue. In the second quarter of fiscal year 2005, the Company began offering more flexible license terms to the end-user
customers of the Company’s channel partners, which necessitates the deferral of primarily all of the indirect revenue. The
ratable recognition of this deferred revenue is reflected on the “Subscription revenue” line item in the Consolidated Statements
of Operations.
Financing Fees: Financing fee revenue represents accounts receivable resulting from prior business model product sales with
extended payment terms which were discounted to their present values at the then prevailing market rates. In subsequent
periods, the accounts receivable are increased to the amounts due and payable by the customers through the accretion of
financing fee revenue on the unpaid accounts receivable due in future years. Under the Company’s business model, additional
unamortized discounts are no longer recorded, since the Company does not account for the present value of product sales as
earned revenue at license agreement signing.
(g) Sales Commissions: Sales commissions are recognized in the period the commissions are earned by employees, which is
typically upon the signing of the contract. The Company accrues for sales commissions based on, among other things,
estimates of how the sales personnel will perform against specified annual sales quotas. These estimates involve assumptions
regarding the Company’s projected new product sales and billings. All of these assumptions reflect the Company’s best
estimates, but these items involve uncertainties, and as a result, if other assumptions had been used in the period, sales
commission expense could have been impacted for that period. Under the Company’s current sales compensation model,
during periods of high growth and sales of new products relative to revenue in that period, the amount of sales commission
expense attributable to the license agreement would be recognized fully in the year and could negatively impact income and
earnings per share in that period.
(h) Accounting for Stock-Based Compensation: Effective April 1, 2005, the Company adopted, under the modified retrospective
basis, the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment”
(SFAS No. 123(R)), which establishes accounting for stock-based awards exchanged for employee services. Under the
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