Dell 2009 Annual Report Download - page 49

Table of Contents
We record reductions to revenue for estimated customer sales returns, rebates, and certain other customer incentive programs. These
reductions to revenue are made based upon reasonable and reliable estimates that are determined by historical experience, contractual
terms, and current conditions. The primary factors affecting our accrual for estimated customer returns include estimated return rates as
well as the number of units shipped that have a right of return that has not expired as of the balance sheet date. If returns cannot be
reliably estimated, revenue is not recognized until a reliable estimate can be made or the return right lapses. Each quarter, we reevaluate
our estimates to assess the adequacy of our recorded accruals for customer returns and allowance for doubtful accounts, and adjust the
amounts as necessary.
Dell sells its products directly to customers as well as through retailers. Sales to our retail customers are generally made under agreements
allowing for limited rights of return, price protection, rebates, and marketing development funds. We have generally limited the return
rights through contractual caps. Our policy for sales to retailers is to defer the full amount of revenue relative to sales for which the rights
of return apply unless there is sufficient historical data to establish reasonable and reliable estimates of returns. When contractual caps are
included in the agreement and there is no reasonable and reliable historical data to make an estimate on returns, we defer revenue equal to
the amount of the contractual cap. All other sales for which the rights of return do not apply are recognized upon shipment when all
applicable revenue recognition criteria have been met. To the extent price protection and return rights are not limited, all of the revenue
and related cost are deferred until the product has been sold by the retailer, the rights expire, or a reliable estimate of such amounts can be
made. Generally, we record estimated reductions to revenue or an expense for retail customer programs at the later of the offer or the time
revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of
our products and marketing funds.
We report revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific
revenue-producing transactions.
The Financial Accounting Standards Board ("FASB") issued new guidance that amends the current revenue recognition guidance for
multiple deliverable arrangements. It allows the use of management's best estimate of selling price for individual elements of an
arrangement when neither vendor specific objective evidence nor third party evidence is available. Additionally, it eliminates the residual
method of revenue recognition in accounting for multiple deliverable arrangements. In conjunction with the new guidance on multiple
deliverable arrangements, the FASB also issued a new pronouncement that modifies the scope of the software revenue recognition
guidance to exclude tangible products that contain both software and non-software components that function together to deliver the
product's essential functionality. This pronouncement does not have a significant impact on us as we do not have a significant number of
revenue arrangements with software elements. Both of these pronouncements are effective for fiscal years beginning on or after June 15,
2010 (our Fiscal 2012), but early adoption is permitted. Both pronouncements must be adopted at the same time. We have elected to early
adopt these pronouncements in the first quarter of Fiscal 2011 on a prospective basis. Based on a preliminary evaluation, the adoption of
this guidance will not have a material impact on our Consolidated Financial Statements.
Business Combinations and Intangible Assets Including Goodwill — During Fiscal 2010, Dell adopted the new FASB guidance on
business combinations and non-controlling interests. The new guidance on business combinations retains the underlying concepts of the
previously issued standard in that the acquirer of a business is required to account for the business combination at fair value. As under
previous guidance, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess
of the purchase price over the estimated fair values is recorded as goodwill. The new pronouncement results in some changes to the
method of applying the acquisition method of accounting for business combinations in a number of significant aspects. Under the new
guidance, all acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an
indefinite-lived intangible asset. Prior to the adoption of the new guidance, in-process research and development costs were immediately
expensed and acquisition costs were capitalized. Further, the new guidance generally requires restructuring charges associated with a
business combination to be expensed subsequent to the acquisition date. The application of business combination and impairment
accounting requires the use of significant estimates and assumptions.
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