NVIDIA 2007 Annual Report Download - page 44

Revenue Recognition
Product Revenue
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the
price is fixed and determinable and collection is reasonably assured. For most sales, we use a binding purchase order and in certain
cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and
risk of loss have passed to the customer. At the point of sale, we assess whether the arrangement fee is fixed and determinable and
whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and
recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment.
Our policy on sales to distributors is to defer recognition of revenue and related cost of revenue until the distributors resell the
product.
We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs
primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We
account for rebates in accordance with Emerging Issues Task Force Issue 01−9, or EITF 01−9, Accounting for Consideration Given by
a Vendor to a Customer (Including a Reseller of the Vendor's Products) and, as such, we accrue for 100% of the potential rebates and
do not apply a breakage factor. Rebates typically expire six months from the date of the original sale, unless we reasonably believe
that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue upon expiration of the rebate.
Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue
or an operating expense in accordance with EITF 01−9. MDFs represent monies paid to retailers, system builders, OEMs, distributors
and add−in card partners that are earmarked for market segment development and expansion and typically are designed to support our
partners' activities while also promoting NVIDIA products. If market conditions decline, we may take actions to increase amounts
offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is
recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return
rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product
returns.
License and Development Revenue
For license arrangements that require significant customization of our intellectual property components, we generally recognize
this license revenue using the percentage−of−completion method of accounting over the period that services are performed. For all
license and service arrangements accounted for under the percentage−of−completion method, we determine progress to completion
based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the
project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain
accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be
reasonably estimated. To date, we have not recorded any such losses. Costs incurred in advance of revenue recognized are recorded as
deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is
recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in
progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations
from these estimates could have a material effect on the amount of revenue we recognize in any period.
Accounts Receivable
We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to
make required payments. Management determines this allowance, which consists of an amount identified for specific customer issues
as well as an amount based on general estimated exposure. Our overall estimated exposure excludes significant amounts that are
covered by credit insurance and letters of credit. If the financial condition of our customers, the financial institutions providing letters
of credit, or our credit insurance carrier were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required that could adversely affect our operating results. Furthermore, there can be no assurance that we will be
able to obtain credit insurance in the future. Our current credit insurance agreement expires on December 31, 2007.
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Source: NVIDIA CORP, 10−K, March 16, 2007