EMC 2011 Annual Report Download - page 40

Table of Contents
Critical Accounting Policies
Our consolidated financial statements are based on the selection and application of generally accepted accounting principles which require us to make
estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and
their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from
those estimates, and any such differences may be material to our financial statements. We believe that the areas set forth below may involve a higher degree
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 the consolidated financial statements.
Revenue Recognition
The application of the appropriate guidance within the Accounting Standards Codification to our revenue is dependent upon the specific transaction and
whether the sale or lease includes information systems, including hardware storage and hardware-related devices, software, including required storage
operating systems and optional value-added software application programs, and services, including installation, professional, software and hardware
maintenance and training, 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 estimates of fair value and selling price in
arrangements with multiples deliverables, 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. We estimate systems warranty costs based upon historical experience, specific
identification of system requirements and projected costs to service items under warranty. 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. To the extent that our actual systems
warranty costs differed from our estimates by 5 percent, consolidated pre-tax income would have increased/decreased by approximately $12.7 and $11.8 in
2011 and 2010, respectively.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, investments, 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 market value of our short- and long-term investments is based primarily upon the listed price of the security. At December 31, 2011, with the
exception of our auction rate securities, the vast majority of our investments were priced by pricing vendors. These pricing vendors utilize the most recent
observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs such as market
transactions involving identical or comparable securities. In the event observable inputs are not available, we assess other factors to determine the security's
market value, including broker quotes or model valuations. Each month, we perform independent price verifications of all of our fixed income holdings. In the
event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the
appropriate fair market value. In the event the fair market values that we determine are not accurate or we are unable to liquidate our investments in a timely
manner, we may not realize the recorded value of our investments. We hold investments whose market values are below our cost. The determination of
whether unrealized losses on investments are other-than-temporary is based upon the type of investments held, market conditions, financial condition and
near-term prospects of the issuers, the time to maturity, length of the impairment, magnitude of the impairment and ability and intent to hold the investment to
maturity. Should current market and economic conditions deteriorate, our ability to recover the cost of our investments may be impaired.
The recoverability of inventories is based upon the types and our 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.
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