NVIDIA 2011 Annual Report Download - page 40

License and Development Revenue
For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue
over the period that services are performed. For all license and service arrangements, 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.
Royalty revenue is recognized related to the distribution or sale of products that use our technologies under license agreements with third parties. We
recognize royalty revenue upon receipt of a confirmation of earned royalties and when collectability is reasonably assured from the applicable licensee.
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 overall
estimated exposure. Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers businesses, and to
downturns in the industry and the worldwide economy. 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. This risk is heightened during periods when economic conditions worsen, such as the when the worldwide economy is experiencing a significant
downturn. The financial turmoil that affected the banking system and financial markets and increased the risk that financial institutions mighty consolidate or
go out of business resulted in a tightening in the credit markets, a lower than normal level of liquidity in many financial markets, and extreme volatility in
fixed income, credit, currency and equity markets. There could be a number of follow-on effects from this type of credit crisis on our business, including
inability of customers, including channel partners, to obtain credit to finance purchases of our products and/or customer, insolvencies and failure of financial
institutions, which could negatively impact our financial results. Furthermore, there can be no assurance that we will be able to continue to obtain credit
insurance in the future.
As of January 30, 2011, our allowance for doubtful accounts receivable was $0.8 million and our gross accounts receivable balance was $386.5
million. Of the $386.5 million, $86.0 million was covered by credit insurance and $4.4 million was covered by letters of credit. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required and we may have to
record additional reserves or write-offs on certain sales transactions in the future. Factors impacting the allowance include the level of gross receivables, the
financial condition of our customers and the extent to which balances are covered by credit insurance or letters of credit. We have incurred cumulative bad
debts of $0.5 million over the last three fiscal years. As a result of our low bad debt experience, our allowance for doubtful accounts receivable has ranged
between 0.2% and 0.3% during fiscal years 2011 and 2010, respectively. As of January 30, 2011, our allowance for doubtful accounts receivable represented
0.2% of our gross accounts receivable balance.
Inventories
Inventory cost is computed on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. Inventory costs
consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing
support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down
our inventory to the lower of cost or estimated market value. Obsolete or unmarketable inventory is completely written off based upon assumptions about
future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. If actual market conditions are less
favorable than those projected by management, or if our future product purchase commitments to our suppliers exceed our forecasted future demand for such
products, additional future inventory write-downs may be required that could adversely affect our operating results. Inventory reserves once established are
not reversed until the related inventory has been sold or scrapped. If actual market conditions are more favorable than expected and we sell products that we
have previously written down, our reported gross margin would be favorably impacted.
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