EMC 2003 Annual Report Download - page 27

of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our
financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. Our significant
accounting policies are presented within Note A to our Consolidated Financial Statements.
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• Revenue Recognition
Revenue recognition is governed by various accounting principles, including Staff Accounting Bulletin ("SAB"), No. 104, "Revenue Recognition";
Emerging Issues Task Force, No. 00-21,"Revenue Arrangements with Multiple Deliverables"; Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition"; FAS No. 48, "Revenue Recognition When Right of Return Exists"; FAS No. 13, "Accounting for Leases"; and SOP No. 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts," among others. The application of the appropriate accounting principle to our
revenue is dependent upon the specific transaction and whether the sale or lease includes systems, software and services or a combination of these items. As
our business evolves, the mix of products and services sold will impact the timing of when revenue and related costs are recognized. Additionally, revenue
recognition involves judgments, including assessments of expected returns and the likelihood of nonpayment. We analyze various factors, including a review
of specific transactions, the credit-worthiness of our customers, our historical experience and market and economic conditions. Changes in judgments on these
factors could materially impact the timing and amount of revenue and costs recognized. Should market or economic conditions deteriorate, our actual return
experience could exceed our estimate.
• Warranty Costs
We accrue for systems warranty costs at the time of shipment. While we engage in extensive product quality programs and processes, our warranty
obligation is affected by product failure rates, material usage and service delivery costs. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, the amount of actual warranty costs could materially differ from our estimates.
• Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, inventories, goodwill and other
intangible assets. We use a variety of factors to assess valuation, depending upon the asset. Accounts and notes receivable are evaluated based upon the credit-
worthiness of our customers, our historical experience, the age of the receivable and current market and economic conditions. Should current market and
economic conditions deteriorate, our actual bad debt experience could exceed our estimate. The recoverability of inventories is based upon the types and
levels of inventory held, forecasted demand, pricing, competition and changes in technology. Should current market and economic conditions deteriorate, our
actual recovery could be less than our estimate. Other intangible assets are evaluated based upon the expected period the asset will be utilized, forecasted cash
flows, changes in technology and customer demand. Changes in judgments on any of these factors could materially impact the value of the asset. Our
goodwill valuation is based upon a discounted cash flow analysis performed at the reporting unit level. The analysis factors in estimated revenue and expense
growth rates. The estimates are based upon our historical experience and projections of future activity, factoring in customer demand, changes in technology
and a cost structure necessary to achieve the related revenues. Changes in judgments on any of these factors could materially impact the value of the asset.
• Restructuring Charges
We recognized restructuring charges in 2003, 2002 and 2001. The restructuring charges include, among other items, estimated losses on the sale of real
estate, employee termination benefit costs, subletting of facilities and termination of various contracts. The amount of the actual obligations may be different
than our estimates due to various factors, including market conditions and negotiations with third parties. Should the actual amounts differ from our estimates,
the amount of the restructuring charges could be materially impacted.
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• Accounting for Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing
temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our balance sheet. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and
to the extent we believe that recovery is more likely than not, do not establish a valuation allowance. In the event that actual results differ from these
estimates, our provision for income taxes could be materially impacted.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (the "FASB") issued FASB Interpretations ("FIN") No. 46 "Consolidation of Variable
Interest Entities, an interpretation of ARB 51." FIN No. 46 provides guidance on the identification of entities for which control is achieved through means
other than through voting rights called "variable interest entities" or "VIEs" and how to determine when and which business enterprise should consolidate the
VIE (the "primary beneficiary"). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. The adoption of FIN No. 46 did not have a material impact on our financial position or results of operations.
In February 2003, the FASB issued Emerging Issues Task Force 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF
00-21 requires revenue arrangements with multiple deliverables to be divided into separate units of accounting. If the deliverables in the arrangement meet
certain criteria, arrangement consideration should be allocated among the separate units based on their relative fair values. Applicable revenue recognition