HP 2006 Annual Report Download - page 87

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
receivable at October 31, 2006 and 22% at October 31, 2005. No single customer accounts for more
than 10% of accounts receivable. Credit risk with respect to other accounts receivable and financing
receivables is generally diversified due to the large number of entities comprising HP’s customer base
and their dispersion across many different industries and geographical regions. HP performs ongoing
credit evaluations of the financial condition of its third-party distributors, resellers and other customers
and requires collateral, such as letters of credit and bank guarantees, in certain circumstances. HP
generally has experienced longer accounts receivable collection cycles in its emerging markets, in
particular Asia Pacific and Latin America, compared to its United States and European markets. In the
event that accounts receivable collection cycles in emerging markets significantly deteriorate or one or
more of HP’s larger resellers in these regions fail, HP’s operating results could be adversely affected.
Other Concentration
HP obtains a significant number of components from single source suppliers due to technology,
availability, price, quality or other considerations. The loss of a single source supplier, the deterioration
of its relationship with a single source supplier, or any unilateral modification to the contractual terms
under which HP is supplied components by a single source supplier could adversely effect HP’s revenue
and gross margins.
Stock-Based Compensation
Effective November 1, 2005, HP adopted the fair value recognition provisions of SFAS No. 123
(revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), using the modified prospective transition
method and therefore has not restated results for prior periods. Under this transition method, stock-
based compensation expense in fiscal 2006 included stock-based compensation expense for all share-
based payment awards granted prior to, but not yet vested as of November 1, 2005, based on the
grant-date fair value estimated in accordance with the original provision of SFAS No. 123, ‘‘Accounting
for Stock-Based Compensation’’ (‘‘SFAS 123’’). Stock-based compensation expense for all share-based
payment awards granted after November 1, 2005 is based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R. HP recognizes these compensation costs on a
straight-line basis over the requisite service period of the award, which is generally the option vesting
term of four years. Prior to the adoption of SFAS 123R, HP recognized stock-based compensation
expense in accordance with Accounting Principles Board (‘‘APB’’) Opinion No. 25, ‘‘Accounting for
Stock Issued to Employees’’ (‘‘APB 25’’). In March 2005, the Securities and Exchange Commission (the
‘‘SEC’’) issued Staff Accounting Bulletin No. 107 (‘‘SAB 107’’) regarding the SEC’s interpretation of
SFAS 123R and the valuation of share-based payments for public companies. HP has applied the
provisions of SAB 107 in its adoption of SFAS 123R.
In November 2005, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Staff
Position (‘‘FSP’’) No. FAS 123(R)-3, ‘‘Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards’’ (‘‘FSP 123R-3’’). HP has elected to adopt the alternative transition
method provided in the FSP 123R-3 for calculating the tax effects of stock-based compensation
pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool (‘‘APIC pool’’) related to the tax effects of
employee stock-based compensation, and to determine the subsequent impact on the APIC pool and
Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation
awards that are outstanding upon adoption of SFAS 123R. See Note 2 to the Consolidated Financial
Statements for a further discussion on stock-based compensation.
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