Dell 2011 Annual Report Download - page 69

Table of Contents DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Products
Revenue from the sale of products is recognized when title and risk of loss passes to the customer. Delivery is considered complete when products have been
shipped to Dell's customer, title and risk of loss has transferred to the customer, and customer acceptance has been satisfied. Customer acceptance is satisfied
if acceptance is obtained from the customer, if all acceptance provisions lapse, or if Dell has evidence that all acceptance provisions have been satisfied.
Dell records 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 Dell's 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.
Dell sells its products directly to customers as well as through other distribution channels, such as retailers, distributors, and resellers. Dell recognizes revenue
on these sales when the reseller has economic substance apart from Dell; any credit risk has been identified and quantified; title and risk of loss has passed to
the sales channel; the fee paid to Dell is not contingent upon resale or payment by the end user; and Dell has no further obligations related to bringing about
resale or delivery.
Sales through Dell's distribution channels are primarily made under agreements allowing for limited rights of return, price protection, rebates, and marketing
development funds. Dell has generally limited return rights through contractual caps or has 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 costs are deferred until the product has been sold to the end-user or the rights
expire. Dell records estimated reductions to revenue or an expense for distribution channel programs at the later of the offer or the time revenue is recognized.
Dell defers the cost of shipped products awaiting revenue recognition until revenue is recognized.
Services
Services include transactional, outsourcing and project-based offerings. Revenue is recognized for services contracts as earned, which is generally on a
straight-line basis over the term of the contract or on a proportional performance basis as the services are rendered and Dell's obligations are fulfilled.
Revenue from time and materials or cost-plus contracts is recognized as the services are performed. Revenue from fixed price contracts is recognized on a
straight line basis, unless revenue is earned and obligations are fulfilled in a different pattern. These service contracts may include provisions for cancellation,
termination, refunds, or service level adjustments. These contract provisions would not have a significant impact on recognized revenue as Dell generally
recognizes revenue for these contracts as the services are performed.
For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered
elements is deferred and recorded when delivery occurs or services are provided. 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 on a straight-line basis.
Revenue from sales of third-party extended warranty and service contracts or software PCS, for which Dell is not obligated to perform, and for which Dell
does not meet the criteria for gross revenue recognition under the guidance of the Financial Accounting Standards Board (the "FASB"), is recognized on a net
basis. All other revenue is recognized on a gross basis.
Software
Dell recognizes revenue in accordance with industry specific software accounting guidance for all software and PCS that are not essential to the functionality
of the hardware. Accounting for software that is essential to the functionality of the hardware is accounted for as specified below under “Multiple
Deliverables.” Dell has established vendor specific objective evidence ("VSOE") on a limited basis for certain software offerings. When Dell has not
established VSOE to support a separation of the software license and PCS elements, the revenue and related costs are generally
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