VMware 2012 Annual Report Download - page 61

Table of Contents
such time, a pro-rated share of revenue is recognized immediately with any remaining fee recognized ratably over the longest remaining
ratable delivery period.
Customers under software maintenance agreements are entitled to receive updates and upgrades on a when-and-if-available basis, as well as
various types of technical support based on the level of support purchased. In the event specific features or functionalities, entitlements or the
release number of an upgrade have been announced but not delivered, and customers will receive that upgrade as part of a current software
maintenance contract, a specified upgrade is deemed created. As a result of the specified upgrade, product revenues are deferred on purchases
made after the announcement date until delivery of the upgrade for those purchases that include the current version of the product subject to the
announcement. The amount and elements to be deferred are dependent on whether the company has established VSOE of fair value for the
upgrade. VSOE of fair value of these upgrades is established based upon the price set by management. We have a history of selling such
upgrades on a stand-alone basis. We are required to exercise judgment in determining whether VSOE exists for each undelivered element based
on whether our pricing for these elements is sufficiently consistent with the sale of these elements on a stand-alone basis. Our determination of
VSOE is based on an analysis of the sales of our products, primarily maintenance and professional services on a stand-alone basis. However,
judgment is required in assessing whether fluctuations in sales prices represent anomalies or whether the product pricing is changing on a more
consistent basis. This determination could cause a material increase or decrease in the amount of revenue that we report in a particular period.
For multiple-element arrangements that contain software and non-
software elements such as our software as a service subscription offerings,
we allocate revenue to software or software-related elements as a group and any non-software elements separately based on the selling price
hierarchy. We determine the relative selling price for each deliverable using VSOE of selling price, if it exists, or third-party evidence (“TPE”)
of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price (“BESP”) for that
deliverable. Once revenue is allocated to software or software-related elements as a group, it follows historic software accounting guidance.
Revenue is then recognized when the basic revenue recognition criteria are met for each element.
The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis.
We determine BESP by considering our overall pricing objectives and market conditions. At this time, we use BESP to determine the relative
selling price of our license elements and software as a service elements based upon rates charged in both multi-element and stand-alone
arrangements. If we modify our pricing practices in the future, this could result in changes in relative selling prices. Additionally, as our go-to-
market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including
both VSOE and BESP.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts receivable, other intangible assets and goodwill.
We use a variety of factors to assess valuation, depending upon the asset. Accounts receivable are evaluated based upon the creditworthiness of
our customers, historical experience, the age of the receivable and current market and economic conditions. Should current market and economic
conditions deteriorate, our actual bad debt expense could exceed our estimate. Whenever indicators of potential impairment are present, our
analysis of potential impairment involves judgment in grouping our intangible assets based on the expected period during which the assets will
be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any of these factors could materially
impact the value of the asset. As we operate our business in one operating segment and one reporting unit, our goodwill is assessed at the
consolidated level for impairment in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the
asset might be impaired. The assessment is performed by comparing the market value of our reporting unit to its carrying value.
Accounting for Income Taxes
In calculating our income tax expense, management judgment is necessary to make certain estimates and judgments for financial statement
purposes that affect the recognition of tax assets and liabilities.
In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the
deferred tax assets are located. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be
realized. We consider future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such
determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse
the applicable portion of the previously provided valuation allowance.
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