HP 2011 Annual Report Download - page 49

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
revenue recognition for these elements but will not change the total revenue recognized for the
arrangement.
Warranty Provision
We provide for the estimated cost of product warranties at the time we recognize revenue. We
evaluate our warranty obligations on a product group basis. Our standard product warranty terms
generally include post-sales support and repairs or replacement of a product at no additional charge for
a specified period of time. While we engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our component suppliers, we base our
estimated warranty obligation upon warranty terms, ongoing product failure rates, repair costs, product
call rates, average cost per call, and current period product shipments. If actual product failure rates,
repair rates or any other post sales support costs were to differ from our estimates, we would be
required to make revisions to the estimated warranty liability. Warranty terms generally range from
90 days to three years for parts and labor, depending upon the product. Over the last three fiscal years,
the annual warranty provision has averaged approximately 3.3% of annual net product revenue, while
actual annual warranty costs have experienced favorable trends and averaged approximately 3.2% of
annual net product revenue.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities
assumed and intangible assets acquired, including in-process research and development (‘‘IPR&D’’),
based on their estimated fair values. The excess of the fair value of purchase consideration over the fair
values of these identifiable assets and liabilities is recorded as goodwill. We engage independent
third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities
assumed. Such valuations require management to make significant estimates and assumptions, especially
with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected
cash flows from customer contracts, customer lists, distribution agreements, and acquired developed
technologies and patents; expected costs to develop IPR&D into commercially viable products and
estimating cash flows from projects when completed; brand awareness and market position, as well as
assumptions about the period of time the brand will continue to be used in our product portfolio; and
discount rates. Management’s estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates.
Other estimates associated with the accounting for acquisitions may change as additional
information becomes available regarding the assets acquired and liabilities assumed, as more fully
discussed in Note 6 to the Consolidated Financial Statements in Item 8, which is incorporated herein
by reference.
Valuation of Goodwill and Purchased Intangible Assets
We review goodwill and purchased intangible assets with indefinite lives for impairment annually
and whenever events or changes in circumstances indicate the carrying value of an asset may not be
recoverable. The provisions of the accounting standard for goodwill and other intangibles require that
we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each
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