Dell 2005 Annual Report Download - page 36

Table of Contents
the appropriate timing of revenue recognition. Dell offers 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 from extended warranty
and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the
contract or when the service is completed. Revenue from sales of 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.
Estimates that further impact revenue recognition relate primarily to customer sales returns and allowance for doubtful accounts. Both estimates
are relatively predictable based on historical experience. The primary factors affecting Dell's accrual for estimated customer returns include
estimated return rates as well as the number of units shipped that still have a right of return as of the balance sheet date. During recent fiscal
years, customer returns as a percentage of revenues have been approximately 1%. Factors affecting Dell's allowance for doubtful accounts
include historical and anticipated customer default rates of the various aging categories of accounts receivable. Each quarter, Dell reevaluates
its estimates to assess the adequacy of its recorded accruals for customer returns and allowance for doubtful accounts and adjusts the
amounts as necessary.
Warranty — We record warranty liabilities at the time of sale for the estimated costs that may be incurred under its limited warranty. The
specific warranty terms and conditions vary depending upon the product sold and country in which Dell does business, but generally includes
technical support, parts, and labor over a period ranging from 90 days to three years. Factors that affect our warranty liability include the
number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to
satisfy our warranty obligation. The anticipated rate of warranty claims is the primary factor impacting our estimated warranty obligation. The
other factors are less significant due to the fact that the average remaining aggregate warranty period of the covered installed base is
approximately 20 months, repair parts are generally already in stock or available at pre-determined prices, and labor rates are generally
arranged at pre-established amounts with service providers. Warranty claims are relatively predictable based on historical experience of failure
rates. If actual results differ from our estimates, we revised our estimated warranty liability to reflect such changes. Each quarter, we reevaluate
our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
Income Taxes — We calculate a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities
are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In
determining the future tax consequences of events that have been recognized in our financial statements or tax returns, judgment is required.
Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated
results of operations or financial position.
Recently Issued Accounting Pronouncements
See Note 1 of the "Notes to Consolidated Financial Statements." in Item 8 for a description of recent accounting pronouncements, including the
expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in "Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Market Risk."
33