Dell 2011 Annual Report Download - page 71

Table of Contents DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Deferred Services Revenue — Deferred services revenue primarily represents amounts received in advance for extended warranty sales and services contracts.
Revenue from the sale of extended warranties and services contracts is recognized over the term of the contract or when the service is completed, and the
costs associated with these contracts are recognized as incurred. As of February 3, 2012, and January 28, 2011, the majority of deferred services revenue is
related to extended warranties.
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 recognizes 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 Consolidated Statements of Income, 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.
Loss Contingencies — Dell is subject to the possibility of various losses arising in the ordinary course of business. Dell considers the likelihood of loss or
impairment of an asset or the incurrence of a liability, as well as Dell's ability to reasonably estimate the amount of loss, in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be
reasonably estimated. Dell regularly evaluates current information available to determine whether such accruals should be adjusted and whether new accruals
are required.
Shipping Costs — Dell's shipping and handling costs are included in cost of sales in the Consolidated Statements of Income.
Selling, General, and Administrative — Selling expenses include items such as sales salaries and commissions, marketing and advertising costs, and
contractor services. Advertising costs are expensed as incurred and were $860 million, $730 million, and $619 million, during Fiscal 2012, Fiscal 2011, and
Fiscal 2010, respectively. Advertising costs are included in Selling, general, and administrative in the Consolidated Statements of Income. General and
administrative expenses include items for Dell's administrative functions, such as Finance, Legal, Human Resources, and Information Technology support.
These functions include costs for items such as salaries, maintenance and supplies, insurance, depreciation expense, and allowance for doubtful accounts.
Research, Development, and Engineering Costs — Research, development, and engineering costs are expensed as incurred. Research, development, and
engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related
to research and development support.
Income Taxes — Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. Dell calculates a provision for income taxes using the asset and
liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of
items for tax and accounting purposes. In determining the future tax consequences of events that have been recognized in the financial statements or tax
returns, judgment and interpretation of statutes are required. Additionally, Dell uses tax planning strategies as a part of its global tax compliance program.
Judgments and interpretation of statutes are inherent in this process.
The accounting guidance for uncertainties in income tax prescribes a comprehensive model for the financial statement recognition, measurement,
presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Dell recognizes a tax benefit from an uncertain tax
position in the financial statements only when it is more likely than not that the position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority's administrative practices and
precedents.
Earnings Per Share — Basic earnings per share is based on the weighted-average effect of all common shares issued and outstanding, and is calculated by
dividing net income by the weighted-average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the
weighted-average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued
assuming exercise or conversion of all potentially dilutive common shares outstanding. Dell excludes equity instruments from the calculation of diluted
earnings per share if the effect of including such instruments is anti-dilutive. See Note 12 of the Notes to Consolidated Financial Statements for further
information on earnings per share.
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