Dell 2003 Annual Report Download - page 29

Table of Contents
Debt
Dell has entered into interest rate swap arrangements that convert its fixed interest rate expense to a floating rate basis to better align the associated interest
rate characteristics to its cash and investments portfolio. The interest rate swaps qualify for hedge accounting treatment pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Dell has designated the issuance of the
Senior Notes and Senior Debentures and the related interest rate swap agreements as an integrated transaction. The difference between Dell's carrying
amounts and fair value of its long-term debt and related interest rate swaps was not material at January 30, 2004 and January 31, 2003. The differential to be
paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense as interest rates change.
Factors Affecting Dell's Business and Prospects
There are numerous factors that affect Dell's business and the results of its operations. These factors include general economic and business conditions; the
level of demand for Dell's products and services; the level and intensity of competition in the technology industry and the pricing pressures that have resulted;
the ability of Dell to timely and effectively manage periodic product transitions, as well as component availability and cost; the ability of Dell to develop new
products based on new or evolving technology and the market's acceptance of those products; the ability of Dell to manage its inventory levels to minimize
excess inventory, declining inventory values and obsolescence; the product, customer, and geographic sales mix of any particular period; Dell's ability to
effectively manage its operating costs; and the effect of armed hostilities, terrorism, or public health issues on the economy generally, on the level of demand
for Dell's products and services, and on Dell's ability to manage its supply and delivery logistics in such an environment. For a discussion of these and other
factors affecting Dell's business and prospects, see "Item 1 — Business — Factors Affecting Dell's Business and Prospects."
Critical Accounting Policies
Dell prepares its financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP"). The preparation
of GAAP financial statements requires certain estimates, assumptions, and judgments to be made that may affect Dell's consolidated statement of financial
position and results of operations. Dell believes its most critical accounting policies relate to revenue recognition, warranty accruals, and income taxes.
Management has discussed the development, selection, and disclosure of its critical accounting policies with the Audit Committee of Dell's Board of
Directors. These critical accounting policies and Dell's other accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements
included in "Item 8 — Financial Statements and Supplementary Data."
Revenue Recognition — Dell frequently enters into sales arrangements with customers that contain multiple elements or deliverables such as hardware,
software, peripherals, and services. Judgments and estimates are critical to ensure compliance with GAAP. These judgments relate to the allocation of the
proceeds received from an arrangement to the multiple elements, the determination of whether any undelivered elements are essential to the functionality of
the delivered elements, and the appropriate timing of revenue recognition. Dell offers extended warranty and service contracts to customers that extend and/or
enhance the technical support, parts, and labor coverage offered as part of the base warranty included with the product. Revenue from extended warranty and
service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when
the service is completed. Revenue from sales of third-party extended warranty and service contracts, for which Dell is not obligated to perform, is recognized
on a net basis at the time of sale.
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