Computer Associates 2008 Annual Report Download - page 83

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 and Maintenance Revenue: Subscription and maintenance revenue is the amount of revenue recognized
ratably during the reporting period from either: (i) subscription license agreements that were in effect during the period,
which generally include maintenance that is bundled with and not separately identifiable from software usage fees or
product sales, or (ii) maintenance agreements associated with providing customer technical support and access to
software fixes and upgrades which are separately identifiable from software usage fees or product sales. Deferred
revenue (billed or collected) is comprised of: (i) amounts received in advance of revenue recognition from the customer,
(ii) amounts billed but not collected for which revenue has not yet been earned, and (iii) amounts received in advance
of revenue recognition from financial institutions where the Company has transferred its interest in committed
installments. Each of the categories is further differentiated by current or non-current classification depending on when
the revenue is anticipated to be earned (i.e., within the next twelve months or subsequent to the next twelve months).
Software Fees and Other: Software fees and other revenue primarily consist of revenue that is recognized on an up-front
basis. This includes revenue generated through transactions with distribution and original equipment manufacturer
channel partners (sometimes referred to as our “indirect” or “channel” revenue) and certain revenue associated with new
or acquired products sold on an up-front or perpetual basis. Also included is financing fee revenue, which results from
the discounting of product sales recognized on a perpetual or up-front basis with extended payment terms to present
value. Revenue recognized on an up-front or perpetual basis results in higher revenue for the period than if the same
revenue had been recognized ratably under our subscription model.
(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 affected 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 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 provisions of
SFAS No. 123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of
the award, and is recognized as an expense over the employee requisite service period (generally the vesting period of
the equity grant).
We currently maintain several stock-based compensation plans. We use the Black-Scholes option-pricing model to
compute the estimated fair value of certain stock-based awards. The Black-Scholes model includes assumptions
regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. These assumptions reflect our
73