VMware 2012 Annual Report Download - page 76

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
multiple-element contracts represent the residual amount of the contract after the fair value of the other elements has been determined.
VMware's multiple element arrangements typically fall into one or more of the following categories:
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 functionality, 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. On occasion, VSOE of fair value of these upgrades is established based upon the price set by management. VMware has a history of
selling such upgrades on a stand-alone basis.
For multiple-element arrangements that contain software and non-software elements such as VMware's software as a service
subscription offerings, VMware allocates revenue to software or software-related elements as a group and any non-software elements separately
based on the selling price hierarchy. The relative selling price for each deliverable is determined 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, VMware's best estimate of selling
price (“BESP”) is used 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 VMware would transact a sale if the product or service were sold on a stand-alone
basis. VMware determines BESP by considering its overall pricing objectives and market conditions. At this time, VMware uses BESP to
determine the relative selling price of its license elements and software as a service elements based upon rates charged in both multi-
element and
stand-alone arrangements.
Unearned revenues include unearned software maintenance fees, license fees, and professional services fees. See Note I for further
information.
Foreign Currency Translation
The U.S. Dollar is the functional currency of VMware’s foreign subsidiaries. Gains and losses from foreign currency transactions are
included in other income (expense), net and were not material on a net basis in any period presented.
Cash and Cash Equivalents and Short-Term Investments
VMware invests a portion of its excess cash primarily in money market funds, highly liquid debt instruments of the U.S. government and its
agencies, U.S. municipal obligations, and U.S. and foreign corporate debt securities. VMware classifies all highly liquid investments with
maturities of 90 days or less from date of purchase as cash equivalents and all highly liquid investments with maturities of greater than 90 days
from date of purchase as short-term investments. VMware classifies its investments as available-for-sale. VMware may sell these securities at
any time for use in current operations or for other purposes, such as consideration for acquisitions and strategic investments. Consequently,
VMware may or may not hold
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• Arrangements including undelivered services for which VSOE of fair value has been established. Revenue for those services is
recognized ratably over the service period, or as the services are delivered. Revenue allocated to the delivered software license elements
is recognized upfront;
•
Arrangements including specified software license elements for which VSOE of fair value cannot be established. The entire arrangement
fee is deferred until either VSOE of fair value is established or the specified software license elements are delivered;
• Arrangements including undelivered elements without VSOE of fair value that are not essential to the functionality of the delivered
products where all of the undelivered elements are delivered ratably over time. Revenue for the entire arrangement fee is recognized
ratably, once delivery has commenced, over the longest delivery period;
• Arrangements including undelivered elements without VSOE of fair value that are not essential to the functionality of the delivered
products where one or more of the undelivered elements are not delivered ratably over time. The entire arrangement fee is deferred until
VSOE of fair value is established or only elements that are delivered ratably over time remain. At such time, a pro-
rated share of revenue
is recognized immediately with any remaining fee recognized ratably over the longest remaining ratable delivery period.