Siemens 2006 Annual Report Download - page 165

Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts) 161
Revenue recognition – Revenue is recognized for product sales when a persuasive evi-
dence of an arrangement exists, delivery has occurred or services have been rendered, the
risks and rewards of ownership have been transferred to the customer, the fee is fixed or deter-
minable, and collection of the related receivable is reasonably assured. If product sales are
subject to customer acceptance, revenues are not recognized until customer acceptance
occurs. Revenues from construction-type projects are generally recognized under the percent-
age-of-completion method, based on the percentage of costs to date compared to the total esti-
mated contract costs, contractual milestones or performance. Revenues from service trans-
actions are recognized as services are performed. For long-term service contracts, revenues
are recognized on a straight-line basis over the term of the contract or, if the performance pat-
tern is other than straight-line, as the services are provided. Revenue from software arrange-
ments is recognized at the time persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable and collectibility is probable. Revenue from mainte-
nance, unspecified upgrades or enhancements and technical support is allocated using the
residual value method and is recognized over the period such items are delivered. If an
arrangement to deliver software requires significant production, modification, or customiza-
tion of software, the entire arrangement is accounted for under the percentage-of-completion
method. Operating lease income for equipment rentals is recognized on a straight-line basis
over the lease term. Interest income from sales-type and direct financing leases is recognized
using the interest method.
Sales of goods or services sometimes involve the provision of multiple elements. In these
cases, the Company applies the guidance in Emerging Issues Task Force (EITF) 00-21 Revenue
Arrangements with Multiple Deliverables to determine whether the contract or arrangement
contains more than one unit of accounting. An arrangement is separated if (1) the delivered
element(s) has value to the customer on a stand-alone basis, (2) there is objective and reliable
evidence of the fair value of the undelivered element(s) and (3), if the arrangement includes
a general right of return relative to the delivered element(s), delivery or performance of the
undelivered element(s) is considered probable and substantially in the control of the Com-
pany. If all three criteria are fulfilled, the appropriate revenue recognition convention is then
applied to each separate unit of accounting. Generally, the total arrangement consideration
is allocated to the separate units of accounting based on their relative fair values. In cases
where there is objective and reliable fair value evidence of the undelivered elements but not
for one or more of the delivered elements, the residual method is used, i.e. the amount allo-
cated to delivered elements equals the total arrangement consideration less the aggregate fair
value of the undelivered elements. Objective and reliable fair values are sales prices for the
component when it is regularly sold on a stand-alone basis or third-party prices for similar
components. If the three criteria are not met, revenue is deferred until such criteria are met or
until the period in which the last undelivered element is delivered. The amount allocable to the
delivered elements is limited to the amount that is not contingent upon delivery of additional
elements or meeting other specified performance conditions.
Product-related expenses and contract loss provisions – Provisions for estimated costs
related to product warranties are recorded in cost of sales at the time the related sale is recog-
nized, and are established on an individual basis, except for consumer products. The esti-
mates reflect historic trends of warranty costs, as well as information regarding product fail-
ure experienced during construction, installation or testing of products. In the case of new
products, expert opinions and industry data are also taken into consideration in estimating
product warranty accruals. Contract loss provisions are established in the period when the
current estimate of total contract costs exceeds contract revenue.
Notes to Consolidated Financial Statements