Dell 2011 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 Statements of Income. We
believe that 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 the 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; our fee 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 of 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 the following hierarchy to be
used to determine the selling price for allocating revenue to deliverables; (i) vendor-specific objective evidence (“VSOE”); (ii) third-party evidence of selling
price (“TPE”); or (iii) best estimate of the selling price (“ESP”). A majority of our product and service offerings are sold on a stand-alone basis. Because
selling price is generally available based on stand-alone 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 stand-alone sales to similarly situated customers.
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 and allowance for doubtful accounts, and adjust the
amounts as necessary.
We sell our products directly to customers as well as through other distribution channels, including retailers, distributors, and resellers. Sales through our
distribution channels are primarily made under agreements allowing for limited rights of return, price protection, rebates, and marketing development funds.
We have generally limited return rights through contractual caps or we have an established selling history for these arrangements. Therefore, there is
sufficient data to establish reasonable and reliable estimates of returns for the majority of these sales. 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 distribution channel programs at the later of the offer or the time revenue is recognized.
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 services revenue and subsequently recognized on a straight-line basis over the term of the contract or ratably as services are 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 report revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing
transactions.
Business Combinations and Intangible Assets Including Goodwill — We account for business combinations using the acquisition method of accounting and
accordingly, 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 value is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of
more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. All
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