Revenue Recognition Accounting Policy
Net revenue is derived primarily from the sale of products and services. The following revenue recognition policies define the manner in which Hewlett-Packard accounts for sales transactions.
Hewlett-Packard recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services are rendered, the sales price or fee is fixed or determinable and collectibility is reasonably assured. Additionally, Hewlett-Packard recognizes hardware revenue on sales to channel partners, including resellers, distributors or value-added solution providers at the time of sale when the channel partners have economic substance apart from Hewlett-Packard, and Hewlett-Packard has completed its obligations related to the sale.
Hewlett-Packard's revenue recognition policies provide that, when a sales arrangement contains multiple elements, such as hardware and software products, licenses and/or services, Hewlett-Packard allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue, as amended.
Hewlett-Packard limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.
Hewlett-Packard evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refund or return rights for the delivered elements. If the arrangement includes a customer-negotiated refund or return right relative to the delivered item, and the delivery and performance of the undelivered item is considered probable and substantially in Hewlett-Packard's control, the delivered element constitutes a separate unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements and the allocation of the arrangement consideration and revenue recognition is determined for the combined unit as a single unit. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price.
Hewlett-Packard establishes VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority. TPE of selling price is established by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. The best estimate of selling price is established considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor pricing strategies and industry technology life cycles.
In instances when revenue is derived from sales of third-party vendor services, revenue is recorded on a gross basis when Hewlett-Packard is a principal to the transaction and net of costs when Hewlett-Packard is acting as an agent between the customer and the vendor. Several factors are considered to determine whether Hewlett-Packard is a principal or an agent, most notably whether Hewlett-Packard is the primary obligor to the customer, has established its own pricing, and has inventory and credit risks.
Hewlett-Packard reports revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Hardware
Under Hewlett-Packard's standard terms and conditions of sale, Hewlett-Packard transfers title and risk of loss to the customer at the time product is delivered to the customer and revenue is recognized accordingly, unless customer acceptance is uncertain or significant obligations remain. Hewlett-Packard reduces revenue for estimated customer returns, price protection, rebates and other programs offered under sales agreements established by Hewlett-Packard with its distributors and resellers. Hewlett-Packard records revenue from the sale of equipment under sales-type leases as product revenue at the inception of the lease. Hewlett-Packard accrues the estimated cost of post-sale obligations, including basic product warranties, based on historical experience at the time Hewlett-Packard recognizes revenue.
Software
In accordance with the specific guidance for recognizing software revenue, where applicable, Hewlett-Packard recognizes revenue from perpetual software licenses at the inception of the license term assuming all revenue recognition criteria have been met. Term-based software license revenue is recognized on a subscription basis over the term of the license entitlement. Hewlett-Packard uses the residual method to allocate revenue to software licenses at the inception of the license term when VSOE of fair value for all undelivered elements exists, such as post-contract support, and all other revenue recognition criteria have been satisfied. Revenue generated from maintenance and unspecified upgrades or updates on a when-and-if-available basis is recognized over the period such items are delivered. Hewlett-Packard recognizes revenue for software hosting or software-as-a-service (SaaS) arrangements as the service is delivered, generally on a straight-line basis, over the contractual period of performance. In software hosting arrangements where software licenses are sold, the associated software revenue is recognized according to whether perpetual licenses or term licenses are sold, subject to the above guidance. In SaaS arrangements where software licenses are not sold, the entire arrangement is recognized on a subscription basis over the term of the arrangement.
Services
Hewlett-Packard recognizes revenue from fixed-price support or maintenance contracts, including extended warranty contracts and software post-contract customer support agreements, ratably over the contract period and recognizes the costs associated with these contracts as incurred. For time and material contracts, Hewlett-Packard recognizes revenue and costs as services are rendered. Hewlett-Packard recognizes revenue from fixed-price consulting arrangements over the contract period on a proportional performance basis, as determined by the relationship of actual labor costs incurred to date to the estimated total contract labor costs, with estimates regularly revised during the life of the contract. Hewlett-Packard recognizes revenue on certain design and build (design, development and/or construction of software and/or systems) projects using the percentage-of-completion method. Hewlett-Packard uses the cost-to-cost method of measurement towards completion as determined by the percentage of cost incurred to date to the total estimated costs of the project. Hewlett-Packard uses the completed contract method if reasonable and reliable cost estimates for a project cannot be made.
Outsourcing services revenue is generally recognized when the service is provided and the amount earned is not contingent upon any future event. If the service is provided evenly during the contract term but service billings are uneven, revenue is recognized on a straight-line basis over the contract term. Hewlett-Packard recognizes revenue from operating leases on a straight-line basis as service revenue over the rental period.
Hewlett-Packard recognizes costs associated with outsourcing contracts as incurred, unless such costs relate to the startup phase of the outsourcing contract which generally has no standalone value, in which case Hewlett-Packard defers and subsequently amortizes these set-up costs over the contractual services period. Deferred contract costs are amortized on a straight-line basis over the remaining original term unless an accelerated method is deemed more appropriate. Based on actual and projected contract financial performance indicators, the recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, the deferred contract costs are written down based on a discounted cash flow model. If a cash flow deficiency remains after reducing the balance of the deferred contract costs to zero, any remaining long-lived assets related to that contract are evaluated for impairment. Hewlett-Packard recognizes losses on consulting and outsourcing arrangements in the period that the contractual loss becomes probable and estimable.
Hewlett-Packard records amounts invoiced to customers in excess of revenue recognized as deferred revenue until the revenue recognition criteria are met. Hewlett-Packard records revenue that is earned and recognized in excess of amounts invoiced on fixed-price contracts as trade receivables.
Source: Hewlett-Packard Co., Annual Report
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