VMware 2015 Annual Report Download - page 47

TableofContents
deliveredproductsorservices,wemustdeterminethefairvalueofeachundeliveredproductorserviceusingvendor-specificobjectiveevidence(“VSOE”).
AbsentVSOE,revenuesaredeferreduntilVSOEoffairvalueexistsforeachoftheundeliveredproductsorservices,oruntilallelementsofthearrangementhave
beendelivered.However,iftheonlyundeliveredelementwithoutVSOEismaintenanceandsupport,theentirearrangementfeeisrecognizedratablyoverthe
performanceperiod.Changesinassumptionsorjudgmentsorchangestotheelementsinasoftwarearrangementcouldcauseamaterialincreaseordecreaseinthe
amountofrevenuesthatwereportinaparticularperiod.
VSOEoffairvalueforanundeliveredelementisgenerallybasedonhistoricalstand-alonesalestothirdparties.Inlimitedinstances,foranofferingthatisnot
yetsold,VSOEisthepriceestablishedbymanagementifitisprobablethatthepricewillnotchangewhenintroducedtothemarketplace,includingthroughthe
useofacontractualrenewalrate.IndeterminingVSOEoffairvalue,werequirethatthesellingpricesforaproductorservicefallwithinareasonablepricing
range.Formultiple-elementarrangementsthatcontainsoftwareandnon-softwareelements,weallocaterevenuestosoftwareorsoftware-relatedelementsasa
groupandanynon-softwareelementsseparatelybasedonrelativesellingpricesusingthesellingpricehierarchy.Therelativesellingpriceforeachdeliverableis
determinedusingVSOE,ifitexists,orthird-partyevidence(“TPE”)ofsellingprice.TPEoffairvalueisbasedonevaluationofpriceschargedforcompetitor
productsorservicessoldtosimilarlysituatedcustomers.Asourofferingscontainsignificantproprietarytechnologyandprovidedifferentfeaturesand
functionality,comparablepricesofsimilarproductstypicallycannotbeobtainedandreliedupon.IfneitherVSOEnorTPEofsellingpriceexistforadeliverable,
bestestimateofsellingprice(“BESP”)isusedforthatdeliverable.WeuseBESPinallocationofarrangementconsideration.WedetermineBESPbyconsidering
ouroverallpricingobjectivesandpracticesacrossdifferentsaleschannels.
Aspecifiedupgradeobligationiscreatedintheeventwepubliclyannouncenewspecificfeatures,functionalitiesorentitlementstosoftwareupgradesor
licenseproductsthathavenotbeenmadeavailable.WegenerallydonothaveVSOEoffairvalueforspecifiedupgradesorlicenseproducts.Accordingly,revenue
recognitionisdeferredformultiple-elementarrangementsthatentitleacustomertospecifiedupgradesornewlicenseproductsuntiltheproductobligationshave
beenfulfilled.
Professionalservicesincludedesign,implementationandtraining.Professionalservicesarenotconsideredessentialtothefunctionalityofourproducts
becauseservicesdonotaltertheproductcapabilitiesandmaybeperformedbycustomersorothervendors.Revenuesfromprofessionalservicesengagements
performedforafixedfee,forwhichweareabletomakereasonablydependableestimatesofprogresstowardcompletion,arerecognizedonaproportional
performancebasisassumingallotherrevenuerecognitioncriteriaaremet.Revenuesforprofessionalservicesengagementsbilledonatimeandmaterialsbasisare
recognizedasthehoursareincurred.
RebateReserves
Weofferrebatestocertainchannelpartners,whicharerecognizedasareductiontorevenuesorunearnedrevenues.Rebatesbasedonactualpartnersalesare
recognizedasareductionofrevenuesastheunderlyingrevenuesarerecognized.Rebatesearnedbaseduponpartnerachievementofcumulativelevelofsalesare
recognizedasareductionofrevenuesproportionallyforeachsalethatisrequiredtoachievethetarget.
Theestimatedreservesforchannelrebatesandsalesincentivesarebasedonchannelpartners’actualperformanceagainstthetermsandconditionsofthe
programs,historicaltrendsandthevalueoftherebates.Theaccuracyofthesereservesfortheserebatesandsalesincentivesdependsonourabilitytoestimate
theseitemsandcouldhaveasignificantimpactonthetimingandamountofrevenueswereport.
Accounting for Income Taxes
WeareincludedintheEMCconsolidatedgroupforU.S.federalincometaxpurposes,andexpecttocontinuetobeincludedinsuchconsolidatedgroupfor
periodsinwhichEMCownsatleast80%ofthetotalvotingpowerandvalueofouroutstandingstockascalculatedforU.S.federalincometaxpurposes.The
percentageofvotingpowerandvaluecalculatedforU.S.federalincometaxpurposesmaydifferfromthepercentageofoutstandingsharesbeneficiallyownedby
EMCduetothegreatervotingpowerofourClassBcommonstockascomparedtoourClassAcommonstockandotherfactors.Eachmemberofaconsolidated
groupduringanypartofaconsolidatedreturnyearisjointlyandseverallyliablefortaxontheconsolidatedreturnofsuchyearandforanysubsequently
determineddeficiencythereon.However,ourincometaxexpenseandtherelatedincometaxbalancesheetaccountsarederivedprimarilyassumingwefileda
separatetaxreturn.However,certaintransactionsthatweandEMCarepartiestoareassessedusingconsolidatedtaxreturnrules.Thedifferencebetweenthe
incometaxespayablethatiscalculatedonaseparatetaxreturnbasisandtheamountactuallypaidtoEMCpursuanttoourtaxsharingagreementwithEMCis
presentedasacomponentofadditionalpaid-incapital.Ourassumptions,judgmentsandestimatesusedtocalculateourincometaxexpenseconsiderscurrenttax
laws,ourinterpretationofcurrenttaxlawsandpossibleoutcomesofcurrentandfutureauditsconductedbyforeignanddomestictaxauthorities.
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