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Revenue Recognition Accounting Policy

Adobe's revenue is derived from the subscription, non-software related hosted services, term-based and perpetual licensing of software products, associated software maintenance and support plans, consulting services, training, and technical support. Most of Adobe's enterprise customer arrangements are complex, involving multiple solutions and various license rights, bundled with post-contract customer support and other meaningful rights that together provide a complete end-to-end solution to the customer.

Adobe recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, Adobe has delivered the product or performed the service, the fee is fixed or determinable and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue Adobe reports.

Multiple Element Arrangements

Adobe enters into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, hosted services, and consulting.

For the software and software-related multiple element arrangements, Adobe must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence ("VSOE"); and (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element 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 revenue that Adobe reports in a particular period.

Adobe determines VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, Adobe requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.

Adobe has established VSOE for the software maintenance and support services, custom software development services, consulting services and training, when such services are sold optionally with software licenses.

For multiple-element arrangements containing the non-software services, Adobe must: (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of VSOE of selling price, third-party evidence ("TPE") of selling price or best-estimated selling price ("BESP"), as applicable; and (3) allocate the total price among the various elements based on the relative selling price method.

For multiple-element arrangements that contain both software and non-software elements, Adobe allocates revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy. Adobe determines the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, Adobe uses BESP. Once revenue is allocated to software or software-related elements as a group, Adobe recognizes revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.

Adobe is generally unable to establish VSOE or TPE for non-software elements and as such, Adobe uses BESP. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. Adobe determines BESP for a product or service by considering multiple factors including, but not limited to major product groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. Pricing practices taken into consideration include historic contractually stated prices, volume discounts where applicable and Adobe's price lists. Adobe must estimate certain royalty revenue amounts due to the timing of securing information from the customers. While Adobe believes Adobe can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, Adobe's assumptions and judgments regarding future products and services as well as the estimates of royalty revenue could differ from actual events, thus materially impacting the financial position and results of operations.

Subscription and Services and Support Revenue

Adobe recognizes revenue for hosted services that are priced based on a committed number of transactions, ratably beginning on the date the services associated with the committed transactions are first made available to the customer and continuing through the end of the contractual service term. Over-usage fees, and fees billed based on the actual number of transactions from which Adobe captures data, are billed in accordance with contract terms as these fees are incurred. Adobe records amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether all revenue recognition criteria have been met.

Adobe's services and support revenue is composed of consulting, training, and maintenance and support, primarily related to the licensing of the enterprise, mobile and device products and solutions. Adobe's support revenue also includes technical support and developer support to partners and developer organizations related to the desktop products.

Adobe's consulting revenue is recognized using a time and materials basis and is measured monthly based on input measures, such as hours incurred to date, with consideration given to output measures, such as contract milestones when applicable.

Adobe's maintenance and support offerings, which entitle customers to receive product upgrades and enhancements on a when and if available basis or technical support, depending on the offering, are recognized ratably over the performance period of the arrangement.

The software subscription offerings, which may include product upgrades and enhancements on a when and if available basis, hosted services, and online storage, are generally offered to the customers over a specified period of time and Adobe recognizes revenue associated with these arrangements ratably over the subscription period.

Product Revenue

Adobe recognizes the product revenue upon shipment, provided all other revenue recognition criteria have been met. Adobe's desktop application product revenue from distributors is subject to agreements allowing limited rights of return, rebates and price protection. Adobe's direct sales and OEM sales are also subject to limited rights of return. Accordingly, Adobe reduces revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel and other related factors.

Adobe recognizes OEM licensing revenue, primarily royalties, when OEMs ship products incorporating the software, provided collection of such revenue is deemed probable. For certain OEM customers, Adobe must estimate royalty revenue due to the timing of securing customer information. This estimate is based on a combination of Adobe's generated forecasts and actual historical reporting by the OEM customers. To substantiate the ability to estimate revenue, Adobe reviews license royalty revenue reports ultimately received from the significant OEM customers in comparison to the amounts estimated in the prior period.

Adobe's product-related deferred revenue includes maintenance upgrade revenue and customer advances under OEM license agreements. Adobe's maintenance upgrade revenue for the desktop application products is included in the product revenue line item as the maintenance primarily entitles customers to receive product upgrades. In cases where Adobe provides a specified free upgrade to an existing product, Adobe defers the fair value for the specified upgrade right until the future obligation is fulfilled or when the right to the specified free upgrade expires.

Source: Adobe Systems Inc., Annual Report


Revenues as Reported

Adobe Systems Inc., Income Statement, Revenues

USD $ in thousands

12 months ended Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013 Nov 30, 2012
Digital Media
Digital Marketing
Print and Publishing

Source: Adobe Systems Inc. Annual Reports

Item Description The company
Revenue Aggregate revenue recognized during the period (derived from goods sold, services rendered, insurance premiums, or other activities that constitute an entity's earning process). For financial services companies, also includes investment and interest income, and sales and trading gains. Adobe Systems Inc.'s revenue increased from 2015 to 2016 and from 2016 to 2017.