NVIDIA 2016 Annual Report Download - page 177

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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 or determinable and collection of the related receivable is reasonably assured.
For sales to certain distributors with rights of return for which the level of returns cannot be reasonably estimated, our
policy is to defer recognition of revenue and related cost of revenue until the distributors resell the product and, in some
cases, when customer return rights lapse.
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 as a reduction of revenue and accrue for 100% of the potential
rebates and do not apply a breakage factor. While we have a long history of rebate arrangements with OEMs, we believe
we are unable to apply our historical experience to reliably estimate the amount of rebates that will eventually be claimed
by individual OEMs. In such cases, the OEMs may not be our direct customers and therefore the quantity and mix of demand
they place on their CEMs/ODMs may shift as we introduce new generations and iterations of products and as we experience
changes in new competitor offerings. In addition, we typically find that approximately 95% of the rebates we accrue each
year are eventually claimed, which is substantially close to 100%, and that this percentage varies by program and by customer.
We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which
we offer the rebate. 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, the amount of which typically represents
less than 0.5% of total revenue.
Our customer programs also include marketing development funds, or MDFs. MDFs represent monies paid to retailers,
system builders, OEMs, distributors, add-in card partners and other channel partners that are earmarked for market segment
development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA
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 account for MDFs as
a reduction of revenue and apply a breakage factor to certain types of MDF program accruals for which we believe we can
make a reasonable and reliable estimate of the amount that will ultimately be unclaimed.
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 the related revenue over the period that services are performed. For most license and service arrangements, we
determine progress to completion based on actual cost incurred to date as a percentage of the estimated total cost 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. 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 cost. Any changes in or deviations
from these estimates could have a material effect on the amount of revenue we recognize in any period.
For license arrangements that do not require significant customization but where we are obligated to provide further
deliverables over the term of the license agreement, we record revenue over the life of the license term, with consideration
received in advance of the performance period classified as deferred revenue.