HP 2006 Annual Report Download - page 82

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Hewlett-Packard Company, its
wholly-owned subsidiaries and its controlled majority-owned subsidiaries (collectively, ‘‘HP’’). HP
accounts for equity investments in companies over which HP has the ability to exercise significant
influence, but does not hold a controlling interest, under the equity method, and HP records its
proportionate share of income or losses in interest and other, net in the Consolidated Statements of
Earnings. HP has eliminated all significant intercompany accounts and transactions.
Reclassifications and Segment Reorganization
HP has made certain organizational realignments in order to more closely align its financial
reporting with its business structure. These realignments are immaterial in size and reflect primarily
revenue shifts among business units within the same business segment. None of the changes impacts
HP’s previously reported consolidated net revenue, earnings from operations, net earnings or net
earnings per share.
HP has revised the presentation of its Consolidated Statements of Cash Flows for the fiscal years
ended October 31, 2005 and 2004 to provide improved visibility and comparability with the current year
presentation. This change does not affect previously reported subtotals within the Consolidated
Statements of Cash Flows, or previously reported results of operations for any period presented.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in
HP’s Consolidated Financial Statements and accompanying notes. Actual results could differ materially
from those estimates.
Revenue Recognition
HP recognizes revenue when persuasive evidence of a sales arrangement exists, delivery occurs or
services are rendered, the sales price or fee is fixed or determinable and collectibility is reasonably
assured. When a sales arrangement contains multiple elements, such as hardware and software
products, licenses and/or services, HP allocates revenue to each element based on its relative fair value,
or for software, based on vendor specific objective evidence (‘‘VSOE’’) of fair value. In the absence of
fair value for a delivered element, HP first allocates revenue to the fair value of the undelivered
elements and the residual revenue to the delivered elements. Where the fair value for an undelivered
element cannot be determined, HP defers revenue for the delivered elements until the undelivered
elements are delivered. HP limits the amount of revenue recognition for delivered elements to the
amount that is not contingent on the future delivery of products or services or subject to customer-
specified return or refund privileges.
HP ceases revenue recognition on delinquent accounts based upon a number of factors, including
customer credit history, number of days past due and the terms of the customer agreement. HP
resumes revenue recognition and recognizes any associated deferred revenue when appropriate
customer actions are taken to remove accounts from delinquent status.
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