Dell 2008 Annual Report Download - page 62

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
which Dell does not meet the criteria for gross revenue recognition under EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent, is recognized on a net basis. All other revenue is recognized on a gross basis.
Dell records reductions to revenue for estimated customer sales returns, rebates, and certain other customer incentive programs. These reductions to
revenue are made based upon reasonable and reliable estimates that are determined by historical experience, contractual terms, and current
conditions. The primary factors affecting our accrual for estimated customer returns include estimated return rates as well as the number of units
shipped that have a right of return that has not expired as of the balance sheet date. If returns cannot be reliably estimated, revenue is not recognized
until a reliable estimate can be made or the return right lapses.
During Fiscal 2008, Dell began selling its products through retailers. Sales to Dell's retail customers are generally made under agreements allowing
for limited rights of return, price protection, rebates, and marketing development funds. Dell has generally limited the return rights through
contractual caps. Dell's policy for sales to retailers is to defer the full amount of revenue relative to sales for which the rights of return apply as Dell
does not currently have sufficient historical data to establish reasonable and reliable estimates of returns, although Dell is in the process of
accumulating the data necessary to develop reliable estimates in the future. All other sales for which the rights of return do not apply are recognized
upon shipment when all applicable revenue recognition criteria have been met. To the extent price protection and return rights are not limited, all of
the revenue and related cost are deferred until the product has been sold by the retailer, the rights expire, or a reliable estimate of such amounts can
be made. Generally, Dell records estimated reductions to revenue or an expense for retail customer programs at the later of the offer or the time
revenue is recognized in accordance with EITF 01-09. Dell's customer programs primarily involve rebates, which are designed to serve as sales
incentives to resellers of Dell products and marketing funds.
Dell defers the cost of shipped products awaiting revenue recognition until revenue is recognized. These deferred costs totaled $556 million and
$519 million at January 30, 2009, and February 1, 2008, respectively, and are included in other current assets on Dell's Consolidated Statement of
Financial Position.
Dell records revenue from the sale of equipment under sales-type leases as product revenue at the inception of the lease. Sales-type leases also
produce financing income, which Dell recognizes at consistent rates of return over the lease term. Customer revolving loan financing income is
recognized when billed to the customer.
Dell reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-
producing transactions.
Warranty — Dell records warranty liabilities at the time of sale for the estimated costs that may be incurred under its limited warranty. The specific
warranty terms and conditions vary depending upon the product sold and country in which Dell does business, but generally includes technical
support, parts, and labor over a period ranging from one to three years. Factors that affect Dell's warranty liability include the number of installed
units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy Dell's warranty
obligation. The anticipated rate of warranty claims is the primary factor impacting the estimated warranty obligation. The other factors are less
significant due to the fact that the average remaining aggregate warranty period of the covered installed base is approximately 20 months, repair
parts are generally already in stock or available at pre-determined prices, and labor rates are generally arranged at pre-established amounts with
service providers. Warranty claims are relatively predictable based on historical experience of failure rates. If actual results differ from the estimates,
Dell revises its estimated warranty liability. Each quarter, Dell reevaluates its estimates to assess the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
Vendor Rebates — Dell may receive consideration from vendors in the normal course of business. Certain of these funds are rebates of purchase
price paid and others are related to reimbursement of costs incurred by Dell to sell the vendor's products. Dell's policy for accounting for these funds
is in accordance with EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. The funds
are recognized as a reduction of cost of goods sold and inventory if the funds are a reduction of the price of the vendor's products. If the
consideration is a reimbursement of costs incurred by Dell to sell or develop the vendor's products, then the consideration is classified as a reduction
of that cost in the income statement, most often operating expenses. In order to be recognized as a reduction of operating expenses, the
reimbursement must be for a specific, incremental, identifiable cost incurred by Dell in selling the vendor's products or services.
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