NVIDIA 2016 Annual Report Download - page 204

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
58
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 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 or 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.
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 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. Unclaimed
rebates are reversed to revenue.
Our customer programs also include marketing development funds, or MDFs. MDFs represent monies paid to retailers,
system builders, original equipment manufacturers, or 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. We account for MDFs as a reduction of revenue and apply a breakage
factor to certain types of MDF programs.
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. 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.
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.
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.