NVIDIA 2008 Annual Report Download - page 47

Critical Accounting Policies and Estimates
Management
’ s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies. On an
on
- going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable,
inventories, income taxes, goodwill, stock
- based compensation, warranty liabilities, litigation, investigation and settlement costs and other contingencies. We
base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities.
We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our consolidated financial
statements. Our management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our
Board of Directors, or Board. The Audit Committee has reviewed our disclosures relating to our critical accounting policies and estimates in this Annual Report
on Form 10 - K.
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 based on the shipping
terms. 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 certain distributors, with rights of return, 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 purchasers of our products. We account for rebates in accordance with Emerging Issues Task Force Issue 01
- 9,
or EITF 01 - 09, 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
- 09. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, 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 our
products. Depending on market conditions, 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. 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.
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