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Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
assumptions underlying the financial statements and the above allocations are reasonable. However, given these intercompany transactions did
not arise from transactions negotiated at arms-length with an unrelated third party, the financial statements included herein may not necessarily
reflect results of operations, financial position and cash flows had VMware engaged in such transactions with an unrelated third party during all
periods presented. Accordingly, historical results of VMware should not be relied upon as an indicator of the future performance of VMware.
VMware’
s future results of operations, which will include costs and expenses for it to operate as an independent company, including payments to
EMC for administrative services provided to VMware pursuant to a master transaction agreement and ancillary agreements entered into with
EMC in connection with the IPO, may be materially different than VMware’s historical results of operations, financial position, and cash flows.
Prior period financial statements have been adjusted to conform to current period presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of VMware and its subsidiaries. All intercompany transactions and balances
between VMware and its subsidiaries have been eliminated. All intercompany transactions with EMC in the consolidated statements of cash
flows are expected to be settled in cash and changes in the intercompany balances are presented as a component of cash flows from operating
activities.
Use of Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the
reporting periods and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates are used for, but not
limited to, receivable valuation, useful lives of fixed assets, valuation of acquired intangibles, income taxes, stock-based compensation and
contingencies. Actual results could differ from those estimates.
Revenue Recognition
VMware derives revenue from the licensing of software and related services. VMware recognizes revenue for software products and
related services in accordance with the American Institute of Certified Public Accountants’ Statement of Position (SOP) 97-2, “Software
Revenue Recognition,” as amended. VMware recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable and collectability is probable.
The following summarizes the major terms of VMware’s contractual relationships with customers and the manner in which VMware
accounts for sales transactions.
License revenue
VMware recognizes revenue from the sale of software when risk of loss transfers, which is generally upon shipment or electronic delivery.
VMware licenses its software under perpetual licenses through its direct sales force and through its channel of distributors, resellers, x86
system vendors and systems integrators. VMware defers revenue relating to products that have shipped into its channel until its products are sold
through the channel. VMware obtains sell- through information from distributors and resellers on a monthly basis. For VMware’s channel
partners who do
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