Cisco 2010 Annual Report Download - page 48

Notes to Consolidated Financial Statements
information provided by them. Distributors and retail partners participate in various cooperative marketing and other programs, and
the Company maintains estimated accruals and allowances for these programs. The Company accrues for warranty costs, sales
returns, and other allowances based on its historical experience. Shipping and handling fees billed to customers are included in net
sales, with the associated costs included in cost of sales.
In October 2009, the FASB amended the accounting standards for revenue recognition to remove from the scope of industry-
specific software revenue recognition guidance tangible products containing software components and nonsoftware components
that function together to deliver the product’s essential functionality. In October 2009, the FASB also amended the accounting
standards for multiple-deliverable revenue arrangements to:
(i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be
separated, and how consideration should be allocated;
(ii) require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does
not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
(iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
The Company elected to early adopt this accounting guidance at the beginning of its first quarter of fiscal 2010 on a prospective
basis for applicable transactions originating or materially modified after July 25, 2009. This guidance does not generally change the
units of accounting for the Company’s revenue transactions. Most products and services qualify as separate units of accounting
and the revenue is recognized when the applicable revenue recognition criteria are met. The Company’s arrangements generally do
not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.
Many of the Company’s products have both software and nonsoftware components that function together to deliver the
products’ essential functionality. The Company’s product offerings fall into the following categories: routing, switching, advanced
technologies, and other products, the last of which includes emerging technologies items. The Company also provides technical
support and advanced services. The Company has a broad customer base that encompasses virtually all types of public and private
entities, including enterprise businesses, service providers, commercial customers, and consumers. The Company and its
salesforce are not organized by product divisions and the Company’s products and services can be sold standalone or together in
various combinations across the Company’s geographic segments or customer markets. For example, service provider
arrangements are typically larger in scale with longer deployment schedules and involve the delivery of a variety of product
technologies, including high-end routing, video and network management software, among others, along with technical support
and advanced services. The Company’s enterprise and commercial arrangements are typically unique for each customer and
smaller in scale and may include network infrastructure products such as routers and switches or collaboration technologies such
as unified communications and Cisco TelePresence systems products along with technical support services. Consumer products,
including Linksys wireless routers and Pure Digital video recorders, are sold in standalone arrangements directly to distributors and
retailers without support, as customers generally only require repair or replacement of defective products or parts under warranty.
The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings
due to the needs of its customers. For example, a customer may purchase routing products along with a contract for technical
support services. This arrangement would consist of multiple elements, with the products delivered in one reporting period and the
technical support services delivered across multiple reporting periods. Another customer may purchase networking products along
with advanced service offerings, in which all the elements are delivered within the same reporting period. In addition, distributors
and retail partners purchase products or technical support services on a standalone basis for resale to an end user or for purposes
of stocking certain products, and these transactions would not result in a multiple element arrangement. For transactions entered
into prior to the first quarter of fiscal 2010, the Company primarily recognized revenue based on software revenue recognition
guidance. For the vast majority of the Company’s arrangements involving multiple deliverables, such as sales of products with
services, the entire fee from the arrangement was allocated to each respective element based on its relative selling price, using
VSOE. In the limited circumstances when the Company was not able to determine VSOE for all of the deliverables of the
arrangement, but was able to obtain VSOE for any undelivered elements, revenue was allocated using the residual method. Under
the residual method, the amount of revenue allocated to delivered elements equaled the total arrangement consideration less the
aggregate selling price of any undelivered elements, and no revenue was recognized until all elements without VSOE had been
delivered. If VSOE of any undelivered items did not exist, revenue from the entire arrangement was initially deferred and recognized
at the earlier of (i) delivery of those elements for which VSOE did not exist or (ii) when VSOE could be established. However, in
limited cases where technical support services were the only undelivered element without VSOE, the entire arrangement fee was
recognized ratably as a single unit of accounting over the technical services contractual period. The residual and ratable revenue
recognition methods were generally used in a limited number of arrangements containing advanced and emerging technologies,
such as Cisco TelePresence systems products. Several of these technologies are sold as solution offerings, whereas products or
services are not sold on a standalone basis.
46 Cisco Systems, Inc.