HP 2015 Annual Report Download - page 99

Table of Contents
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incentive programs, HP estimates the number of customers expected to redeem the incentive based on historical experience and the specific terms and
conditions of the incentive.
In instances when revenue is derived from sales of third-party vendor products or services, HP records revenue on a gross basis when HP is a principal to
the transaction and on a net basis when HP is acting as an agent between the customer and the vendor. HP considers several factors to determine whether it is
acting as a principal or an agent, most notably whether HP is the primary obligor to the customer, has established its own pricing and has inventory and credit
risks.
HP reports revenue net of any taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current
liabilities until remitted to the relevant government authority.
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When a sales arrangement contains multiple elements or deliverables, such as hardware and software products, and/or services, HP allocates revenue to
each element based on a selling price hierarchy. The selling price for a deliverable is based on its 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. HP establishes 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. HP establishes TPE of selling price by evaluating largely similar and interchangeable competitor
products or services in standalone sales to similarly situated customers. HP establishes ESP based on management 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 technology industry life cycles. In most arrangements with multiple elements, HP allocates the
transaction price to the individual units of accounting at inception of the arrangement based on their relative selling price.
In multiple element arrangements that include software that is more-than-incidental, HP allocates the transaction price to the individual units of
accounting for the non-software deliverables and to the software deliverables as a group using the relative selling price of each of the deliverables in the
arrangement based on the selling price hierarchy. If the arrangement contains more than one software deliverable, the transaction price allocated to the group
of software deliverables is then allocated to each component software deliverable.
HP evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate
unit of accounting when it has standalone value to the customer. For elements with no standalone value, HP recognizes revenue consistent with the pattern of
the undelivered elements. If the arrangement includes a customer-negotiated refund or return right or other contingency relative to the delivered items, and
the delivery and performance of the undelivered items is considered probable and substantially within HP's control, the delivered element constitutes a
separate unit of accounting. In arrangements with 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.
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Source: HP INC, 10-K, December 16, 2015 Powered by Morningstar® Document Research℠
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