Revenue Recognition Accounting Policy
EMC derives revenue from sales of information systems, software and services. EMC recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. This policy is applicable to all sales, including sales to resellers and end users. Product is considered delivered to the customer once it has been shipped or electronically delivered and risk of loss has been transferred. For most of EMC's product sales, these criteria are met at the time the product is shipped. The following summarizes the major terms of EMC's contractual relationships with customers and the manner in which EMC account for sales transactions.
Systems sales
Systems sales consist of the sale of hardware storage, required storage operating systems and hardware-related devices. Revenue for systems sales is generally recognized upon shipment.
Software sales
Software sales consist of the sale of stand-alone value-added software application programs. EMC's software application programs provide customers with resource management, backup and archiving, information security, information management and intelligence and server virtualization capabilities. Revenue for software is generally recognized upon shipment or electronic delivery. License revenue from royalty payments is recognized upon either receipt of final royalty reports or payments from third parties.
Services revenue
Services revenue consists of installation services, professional services, software maintenance, hardware maintenance and training.
EMC recognizes revenue from fixed-price support or maintenance contracts sold for both hardware and software, including extended warranty contracts, ratably over the contract period and recognizes the costs associated with these contracts as incurred. Generally, installation and professional services are not considered essential to the functionality of EMC's products as these services do not alter the product capabilities and may be performed by customers or other vendors. Installation services revenues are recognized as the services are being performed. Professional services revenues on engagements for which reasonably dependable estimates of progress toward completion are capable of being made are recognized as earned based upon the hours incurred. Where services are considered essential to the functionality of EMC's products, revenue for the products and services is recorded over the service period. Professional services engagements that are on a time and materials basis are recognized based upon hours incurred. Revenues on all other professional services engagements are recognized upon completion.
Multiple element arrangements
When more than one element, such as hardware, software and services are contained in a single arrangement, EMC first allocates revenue based upon the relative selling price into two categories: (1) non-software components, such as hardware and any hardware-related items, such as required software that functions with the hardware to deliver the essential functionality of the hardware and related post-contract customer support and other services and (2) software components, such as optional software application programs and related items, such as post-contract customer support and other services. EMC then allocates revenue within the non-software category to each element based upon their relative selling price using estimated selling prices ("ESP") if vendor-specific objective evidence ("VSOE") or third-party evidence of selling price ("TPE") does not exist. EMC allocates revenue within the software category to the undelivered elements based upon their fair value using VSOE with the residual revenue allocated to the delivered elements. If EMC cannot objectively determine the VSOE of the fair value of any undelivered software element, EMC defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
EMC limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services.
Customers under software maintenance agreements are entitled to receive updates and upgrades on a when-and-if-available basis, and 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 or new product have been announced but not delivered, and customers will receive that upgrade or new product as part of a current software maintenance contract, a specified upgrade is deemed created and product revenues are deferred on purchases made after the announcement date until delivery of the upgrade or new product. The amount and elements to be deferred are dependent on whether EMC has established VSOE of fair value for the upgrade or new product.
Indirect Channel Sales
EMC markets and sells products through direct sales force and indirect channels such as independent distributors and value-added resellers. For substantially all of indirect sales EMC recognizes revenues on products sold to resellers and distributors on a sell through basis since EMC does not expect channel partners to carry inventory. These product sales are evidenced by a master distribution agreement, together with evidence of an end-user arrangement, on a transaction-by-transaction basis. For Iomega business, EMC defers revenue and cost of sales for inventory sold into the channel that exceeds the channel's anticipated requirements.
EMC offers rebates to certain channel partners. EMC generally recognizes the amount of the rebates as a reduction of revenues when the underlying revenue is recognized. EMC also offers marketing development funds to certain channel partners. EMC generally records the amount of the marketing development funds, based on the maximum potential liability, as a marketing expense as the funds are earned by the channel partners.
Shipping terms
EMC's sales contracts generally provide for the customer to accept risk of loss when the product leaves EMC's facilities. When shipping terms or local laws do not allow for passage of risk of loss at shipping point, EMC defers recognizing revenue until risk of loss transfers to the customer.
Leases
Revenue from sales-type leases is recognized at the net present value of future lease payments. Revenue from operating leases is recognized over the lease period.
Other
EMC accrues for the estimated costs of systems' warranty at the time of sale. EMC reduces revenue for estimated sales returns at the time of sale. Systems' warranty costs are estimated based upon EMC's historical experience and specific identification of systems' requirements. Sales returns are estimated based upon EMC's historical experience and specific identification of probable returns. For Iomega business, EMC defers revenue and cost of sales for inventory sold through the channel that exceeds the channel's requirements.
Source: EMC Corp., Annual Report
.
