HP 2015 Annual Report Download - page 51

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combined units of accounting, changes in the allocation of the transaction price among 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 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 also given to market conditions
such as competitor pricing strategies and industry technology life cycles. We may modify or develop new go-to-market practices in the future, which may
result in changes in selling prices, impacting both VSOE of selling price and ESP. In most arrangements with multiple elements, the transaction price is
allocated to the individual units of accounting at inception of the arrangement based on their relative selling price. However, the aforementioned factors may
result in a different allocation of the transaction price to deliverables in multiple element arrangements entered into in future periods. This may change the
pattern and timing of revenue recognition for identical arrangements executed in future periods, but will not change the total revenue recognized for any
given arrangement.
We reduce revenue for customer and distributor programs and incentive offerings, including price protection, rebates, promotions, other volume-based
incentives and expected returns. Future market conditions and product transitions may require us to take actions to increase customer incentive offerings,
possibly resulting in an incremental reduction of revenue at the time the incentive is offered. For certain incentive programs, we estimate the number of
customers expected to redeem the incentive based on historical experience and the specific terms and conditions of the incentive.
For hardware products, we recognize revenue generated from direct sales to end customers and indirect sales to channel partners (including resellers,
distributors and value-added solution providers) when the revenue recognition criteria are satisfied. For indirect sales to channel partners, we recognize
revenue at the time of delivery when the channel partner has economic substance apart from HP and HP has completed its obligations related to the sale.
For the various software products we sell (e.g., big data analytics and applications, application delivery management, enterprise security and IT
Operations Management), we assess whether the software products were sold on a standalone basis or with hardware products. If the software sold with a
hardware product is not essential to the functionality of the hardware product and is more-than-incidental, we treat it as a software deliverable.
We recognize revenue from the sale of perpetual software licenses at inception of the license term, assuming all revenue recognition criteria have been
satisfied. Term-based software license revenue is generally recognized ratably over the term of the license. We use the residual method to allocate revenue to
software licenses at inception of the arrangement when VSOE of fair value for all undelivered elements, such as post-contract customer support, exists and all
other revenue recognition criteria have been satisfied. Revenue from maintenance and unspecified upgrades or updates provided
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Source: HP INC, 10-K, December 16, 2015 Powered by Morningstar® Document Research℠
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