HP 2013 Annual Report Download - page 52

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
not readily apparent from other sources. Senior management has discussed the development, selection
and disclosure of these estimates with the Audit Committee of HP’s Board of Directors. Management
believes that the accounting estimates employed and the resulting balances are reasonable; however,
actual results may differ from these estimates. Making estimates and judgments about future events is
inherently unpredictable and is subject to significant uncertainties, some of which are beyond our
control. Should any of these estimates and assumptions change or prove to have been incorrect, it
could have a material impact on our results of operations, financial position and cash flows.
The summary of significant accounting policies is included in Note 1 to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference. An accounting policy is deemed to be
critical if it requires an accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time the estimate is made, if different estimates reasonably could have been
used, or if changes in the estimate that are reasonably possible could materially impact the financial
statements. Management believes the following critical accounting policies reflect the significant
estimates and assumptions used in the preparation of the Consolidated Financial Statements.
Revenue Recognition
We recognize revenue applying the basic revenue recognition criteria (i.e., when persuasive
evidence of a sales arrangement exists, delivery has occurred or services are rendered, the sales price or
fee is fixed or determinable, and collectibility is reasonably assured) along with other revenue
recognition principles, including industry specific revenue recognition guidance. We enter into contracts
to sell our products and services, and while many of our sales agreements contain standard terms and
conditions, there are agreements we enter into which contain non-standard terms and conditions.
Further, many of our arrangements include multiple elements. As a result, significant contract
interpretation is required to determine the appropriate accounting, including the identification of
deliverables considered to be separate units of accounting, the allocation of the transaction price
among the elements in the arrangement, and the timing of revenue recognition for each of those
elements. We recognize revenue for delivered elements as separate units of accounting only when the
delivered elements have standalone value, uncertainties regarding customer acceptance are resolved and
there are no customer-negotiated refund or return rights or other contingencies present for the
delivered elements. For elements with no standalone value, we recognize revenue consistent with the
pattern of the associated deliverables. If the arrangement includes a customer-negotiated refund or
return right relative to the delivered item and the delivery and performance of the undelivered item is
considered probable and substantially within our control, the delivered element constitutes a separate
unit of accounting. Changes in the allocation of the transaction price between elements may impact the
timing of revenue recognition for the contract but will not change the total revenue recognized for the
contract.
We establish the selling prices used for each deliverable based on the vendor-specific objective
evidence (‘‘VSOE’’) of selling price, if available, third-party evidence (‘‘TPE’’), if VSOE of selling price
is not available, or estimated selling price (‘‘ESP’’), if neither VSOE of selling price nor TPE is
available. We establish VSOE of selling price using the price charged for a deliverable when sold
separately and, in rare instances, using the price established by management having the relevant
authority. TPE of selling price is established by evaluating largely similar and interchangeable
competitor products or services in standalone sales to similarly situated customers. ESP is established,
based on management’s judgment, considering internal factors such as margin objectives, pricing
practices and controls, customer segment pricing strategies and the product life cycle. Consideration is
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