Qualcomm 2005 Annual Report Download - page 61
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Revenues from sales of the Company’s CDMA-based integrated
circuits are recognized at the time of shipment, or when title and risk
of loss pass to the customer and other criteria for revenue recogni-
tion are met, if later. Revenues from providing services are recorded
when earned.
In November 2002, the Emerging Issues Task Force (EITF) issued
Issue No. 00-21, “Accounting for Revenue Arrangements with
Multiple Deliverables” which the Company adopted in the fourth
quarter of fi scal 2003. This issue addresses determination of
whether an arrangement involving more than one deliverable
contains more than one unit of accounting and how arrangement
consideration should be measured and allocated to the separate
units of accounting. The Company recognized revenues and expenses
from sales of certain satellite and terrestrial-based two-way data
messaging and position reporting hardware and related software
products by its QWBS division (Note 10) ratably over the shorter of
the estimated useful life of the hardware product or the expected
messaging service period, which is typically fi ve years, until the
fourth quarter of fi scal 2003. The ratable recognition of these sales
had been required because the messaging service was considered
integral to the functionality of the hardware and software. EITF
Issue No. 00-21 does not require the deferral of revenue when an
undelivered element is considered integral to the functionality of a
delivered element and otherwise requires separate unit accounting
in multiple element arrangements. Given that the Company meets the
criteria stipulated in EITF Issue No. 00-21, the sale of the hardware
is accounted for as a unit of accounting separate from the future
service to be provided by the Company. Accordingly, starting in
the fourth quarter of fi scal 2003, the Company began recognizing
revenues allocated to the hardware using the residual method and
related expenses from such sales at the time of shipment, or when
title and risk of loss pass to the customer and other criteria for reve-
nue recognition are met, if later, instead of amortizing the related
revenue over future periods. The Company elected to adopt EITF
Issue No. 00-21 prospectively for revenue arrangements entered
into after the third quarter of fi scal 2003, rather than reporting the
change in accounting as a cumulative-effect adjustment. The amorti-
zation of QWBS equipment revenue that was deferred in the periods
prior to the adoption of EITF Issue No. 00-21 will continue with a
declining impact through fi scal 2008. QWBS amortized $52 million,
$76 million and $23 million in revenue related to such prior period
equipment sales in fi scal 2005 and 2004 and during the fourth quarter
of fi scal 2003, respectively. Deferred revenues and expenses related
to the historical QWBS sales that will continue to be amortized in
future periods were $54 million and $34 million, respectively, at
September 25, 2005. Gross margin related to these prior sales is
expected to be recognized as follows: $13 million in fi scal 2006,
$6 million in fi scal 2007 and $1 million in fi scal 2008.
Revenues from long-term contracts are generally recognized using
the percentage-of-completion efforts-expended method of account-
ing, based on costs incurred compared with total estimated costs.
The percentage-of-completion method relies on estimates of total
contract revenue and costs. Revenue and profi t are subject to revi-
sions as the contract progresses to completion. Revisions in profi t
estimates are charged or credited to income in the period in which
the facts that give rise to the revision become known. If actual
contract costs are greater than expected, reduction of contract
profi t would be required. Billings on uncompleted contracts in excess
of incurred cost and accrued profi t are classifi ed as unearned reve-
nue. Estimated contract losses are recognized when determined.
If substantive uncertainty related to customer acceptance exists
or the contract’s duration is relatively short, the Company uses the
completed-contract method.
The Company provides both perpetual and renewable time-based
software licenses. Revenues from software license fees are recog-
nized when all of the following criteria are met: the written agreement
is executed; the software is delivered; the license fee is fi xed and
determinable; collectibility of the license fee is probable; and if
applicable, when vendor-specifi c objective evidence exists to
allocate the total license fee to elements of multiple-element
arrangements, including post-contract customer support. When con-
tracts contain multiple elements wherein vendor-specifi c objective
evidence exists for all undelivered elements, the Company recognizes
revenue for the delivered elements and defers revenue for the fair
value of the undelivered elements until the remaining obligations
have been satisfi ed. If vendor-specifi c objective evidence does not
exist for all undelivered elements, revenue for the delivered and
undelivered elements is deferred until remaining obligations have
been satisfi ed, or if the only undelivered element is post-contract
customer support and vendor specifi c objective evidence of the fair
value of post-contract customer support does not exist, revenue
from the entire arrangement is recognized ratably over the support
period. Judgments and estimates are made in connection with the
recognition of software license revenue, which may include assess-
ments of collectibility, the fair value of deliverable elements and
the implied support period. The amount or timing of the Company’s
software license revenue may differ as a result of changes in these
judgments or estimates.
The Company records reductions to revenue for customer incentive
programs, including special pricing agreements and other volume-
related rebate programs. Such reductions to revenue are estimates,
which are based on a number of factors, including our assumptions
related to historical and projected customer sales volumes and the
contractual provisions of the customer agreements.
Unearned revenue consists primarily of fees related to software
products, license fees for intellectual property and hardware prod-
ucts sales with continuing performance obligations.
Concentrations
A signifi cant portion of the Company’s revenues is concentrated with
a limited number of customers as the worldwide market for wireless
telecommunications products is dominated by a small number of large
corporations. Revenues from LG Electronics, Samsung and Motorola,
customers of the Company’s QCT, QTL and QWI segments, comprised
15%, 13% and 11% of total consolidated revenues, respectively, in
fi scal 2005, as compared to 15%, 15% and 10% of total consoli-
dated revenues in fi scal 2004, respectively, and 13%, 17% and 13%,
respectively, in fi scal 2003. Aggregated accounts receivable from
Samsung, LG Electronics and Motorola comprised 45% and 51% of
gross accounts receivable at September 25, 2005 and September 26,
2004, respectively.