NVIDIA 2013 Annual Report Download - page 214

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
70
Revenue Recognition
Product Revenue
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been
delivered, the price is fixed or determinable and collection of the related receivable is reasonably assured. For most sales,
we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We
consider delivery to occur upon shipment provided title and risk of loss have passed to the customer. At the point of sale,
we assess whether the arrangement fee is fixed or determinable and whether collection is reasonably assured. If we determine
that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes
reasonably assured, which is generally upon receipt of payment.
Our policy on sales to certain distributors with rights of return is to defer recognition of revenue and related cost of
revenue until the distributors resell the product, as the level of returns cannot be reasonably estimated.
Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our
products in various target markets. We account for rebates as a reduction of revenue and accrue for 100% of the potential
rebates and do not apply a breakage factor. While we have a long history of rebate arrangements with OEMs, we believe
we are unable to apply our historical experience to reliably estimate the amount of rebates that will eventually be claimed
by individual OEMs. The OEMs are not our direct customers and the quantity and mix of demand they place on CEM/
ODMs may shift as we introduce new generations and iterations of products and as we experience changes in new competitor
offerings. In addition, we typically find that approximately 95% of the rebates we accrue each year are eventually claimed,
which is substantially close to 100%, and that this percentage varies by program and by customer. We recognize a liability
for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate.
Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends
to claim the rebate. Unclaimed rebates are reversed to revenue, the amount of which typically represents approximately
0.5% of total revenue.
Our customer programs also include marketing development funds, or MDFs. MDFs represent monies paid to retailers,
system builders, original equipment manufacturers, or OEMs, distributors and add-in card partners that are earmarked for
market segment development and expansion and typically are designed to support our partners’ activities while also
promoting NVIDIA products. Depending on market conditions, we may take actions to increase amounts offered under
customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered. We
account for MDFs as a reduction of revenue and apply a breakage factor to certain types of MDF program accruals for
which we believe we can make a reasonable and reliable estimate of the amount that will ultimately be unclaimed. MDF
amounts that have been previously recorded against revenue and subsequently expired unclaimed are reversed to revenue.
Such amounts have not been significant.
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time
revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period
exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our
estimated exposure for product returns.
License and Development Revenue
For license arrangements that require significant customization of our intellectual property components, we generally
recognize the related revenue over the period that services are performed. For most license and service arrangements, we
determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total
direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that
the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period
in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognized are