Dell 2002 Annual Report Download - page 29

Table of Contents
extend Dell's direct business model and core business initiatives. Because these companies are typically early-stage companies with products or services that
are not yet fully developed or that have not yet achieved market acceptance, these investments are inherently risky. Dell currently anticipates that it will
continue to make minimal additional investments in fiscal 2004 and will focus on managing its current investments.
Debt
Dell has entered into interest rate swap arrangements that convert its fixed interest rate expense to a floating rate basis to better align the associated interest
rate characteristics to its cash and investments portfolio. The interest rate swaps qualify for hedge accounting treatment pursuant to SFAS 133. Dell has
designated the issuance of the Senior Notes and Senior Debentures and the related interest rate swap agreements as an integrated transaction. The difference
between Dell's carrying amounts and fair value of its long-term debt and related interest rate swaps was not material at January 31, 2003 and February 1,
2002. The differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense as interest
rates change.
Factors Affecting the Company's Business and Prospects
There are numerous factors that affect Dell's business and the results of its operations. These factors include general economic and business conditions; the
level of demand for Dell's products and services; the effect of armed hostilities, terrorism or public health issues on the economy generally, on the level of
demand for Dell's products and services, and on Dell's ability to manage its supply and delivery logistics in such an environment; the level and intensity of
competition in the technology industry and the pricing pressures that have resulted; the ability of Dell to timely and effectively manage periodic product
transitions, as well as component availability and cost; the ability of Dell to develop new products based on new or evolving technology and the market's
acceptance of those products; the ability of Dell to manage its inventory levels to minimize excess inventory, declining inventory values and obsolescence; the
product, customer and geographic sales mix of any particular period; and Dell's ability to effectively manage its operating costs. For a discussion of these and
other factors affecting Dell's business and prospects, see "Item 1 — Business — Factors Affecting Dell's Business and Prospects."
Critical Accounting Policies
Dell prepares its financial statements in conformity with generally accepted accounting principles in the U.S. Dell believes its most critical accounting policies
relate to revenue recognition and warranty accruals. These and Dell's other accounting policies are described in Note 1 of the Notes to Consolidated Financial
Statements included in "Item 8 — Financial Statements and Supplementary Data." In applying its critical accounting polices, Dell is required to make
accounting estimates to determine and accrue costs that may be incurred in the future.
Revenue Recognition — Many customer arrangements encompass multiple elements, such as hardware, software and peripherals and services. As a result,
interpretation is required to ensure appropriate application of accounting principles, including price allocation among multiple deliverables, determination of
whether undelivered elements are essential to the functionality of delivered elements, and timing of revenue recognition. Dell offers separately priced
extended warranty and service contracts to customers that extend and/or enhance the technical support, parts, and labor coverage offered as part of the base
warranty included with the product. Revenue (net of estimated costs to be incurred) related to separately priced extended warranty and service contracts for
which Dell is obligated to perform is recorded as deferred income and subsequently recognized on a gross basis over the term of the contract. Revenue from
sales of separately priced third party extended warranty and service contracts for which Dell is not obligated to perform is recognized on a net basis at the time
of sale.
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