Dell 2010 Annual Report Download - page 55

Table of Contents
Critical Accounting Policies
We prepare our financial statements in conformity with GAAP. The preparation of financial statements in accordance with GAAP
requires certain estimates, assumptions, and judgments to be made that may affect our Consolidated Statements of Financial Position and
Consolidated Statement of Income. We believe our most critical accounting policies relate to revenue recognition, business combinations,
warranty liabilities, income taxes, and loss contingencies. We have discussed the development, selection, and disclosure of our critical
accounting policies with the Audit Committee of our Board of Directors. These critical accounting policies and our other accounting
policies are also described in Note 1 of Notes to Consolidated Financial Statements included in "Part II — Item 8 — Financial Statements
and Supplementary Data."
Revenue Recognition and Related Allowances — We enter into contracts to sell our products, software and services and frequently enter
into sales arrangements with customers that contain multiple elements or deliverables such as hardware, software, peripherals, and
services. We use general revenue recognition accounting guidance for hardware, software bundled with hardware that is essential to the
functionality of the hardware, peripherals, and certain services. We recognize revenue for these products when it is realized or realizable
and earned. Revenue is considered realized and earned when persuasive evidence of an arrangement exists; delivery has occurred or
services have been rendered; Dell's fee to its customer is fixed and determinable; and collection of the resulting receivable is reasonably
assured. We recognize revenue in accordance with industry specific software accounting guidance for all software that is not essential to
the functionality to the hardware. Judgments and estimates are necessary to ensure compliance with GAAP. These judgments include the
allocation of the proceeds received from an arrangement to the multiple elements, and the appropriate timing of revenue recognition.
Most of our products and services qualify as separate units of accounting. We allocate revenue to all deliverables based on their relative
selling prices. GAAP requires a hierarchy to be used to determine the selling price for allocating revenue to deliverables; (1) vendor-
specific objective evidence ("VSOE"); (ii) third-party evidence of selling price ("TPE"); and (iii) best estimate of the selling price
("ESP"). A majority of our product and service offerings are sold on a standalone basis. Because selling price is generally available based
on standalone sales, we have limited application of TPE, as determined by comparison of pricing for products and services to the pricing
of similar products and services as offered by Dell or its competitors in standalone sales to similarly situated customers.
We offer 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 we are obligated to perform, is recorded as deferred revenue and subsequently recognized on a straight-line basis over the term of
the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts, which we are
not obligated to perform, is recognized on a net basis at the time of sale. All other revenue is recognized on a gross basis.
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.
We sell our products directly to customers as well as through indirect channels, including retailers. Sales through our indirect channels
are primarily 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 indirect channels is to defer, until the return
period is over, 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. To the extent price protection or return rights are not limited and a reliable estimate
cannot be made, all of the revenue and related cost are deferred until the product has been sold to the end-user or the rights expire. We
record estimated reductions to revenue or an expense for indirect channel programs at the later of the offer or the time revenue is
recognized.
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