What does article mean?
Revenue Recognition
Revenue recognition for multiple-element arrangements requiresjudgment to determine if multiple elements exist, whether elementscan be accounted for as separate units of accounting, and if so,the fair value for each of the elements.
Judgment is also required to assess whether future releases ofcertain software represent new products or upgrades andenhancements to existing products. Certain volume licensingarrangements include a perpetual license for current productscombined with rights to receive unspecified future versions ofsoftware products and are accounted for as subscriptions, withbillings recorded as unearned revenue and recognized as revenueratably over the coverage period.
Software updates are evaluated on a case-by-case basis todetermine whether they meet the definition of an upgrade, which mayrequire revenue to be deferred and recognized when the upgrade isdelivered. If it is determined that implied post-contract customersupport (“PCS”) is being provided, revenue from the arrangement isdeferred and recognized over the implied PCS term. If updates aredetermined to not meet the definition of an upgrade, revenue isgenerally recognized as products are shipped or made available.
Microsoft enters into arrangements that can include variouscombinations of software, services, and hardware. Where elementsare delivered over different periods of time, and when allowedunder U.S. GAAP, revenue is allocated to the respective elementsbased on their relative selling prices at the inception of thearrangement, and revenue is recognized as each element isdelivered. We use a hierarchy to determine the fair value to beused for allocating revenue to elements: (i) vendor-specificobjective evidence of fair value (“VSOE”), (ii) third-partyevidence, and (iii) best estimate of selling price (“ESP”). Forsoftware elements, we follow the industry-specific softwareguidance which only allows for the use of VSOE in establishing fairvalue. Generally, VSOE is the price charged when the deliverable issold separately or the price established by management for aproduct that is not yet sold if it is probable that the price willnot change before introduction into the marketplace. ESPs areestablished as best estimates of what the selling prices would beif the deliverables were sold regularly on a stand-alone basis. Ourprocess for determining ESPs requires judgment and considersmultiple factors that may vary over time depending upon the uniquefacts and circumstances related to each deliverable.
Customers purchasing a Windows 10 license will receiveunspecified updates and upgrades over the life of their Windows 10device at no additional cost. As these updates and upgrades willnot be sold on a stand-alone basis, we are unable to establishVSOE. Accordingly, revenue from licenses of Windows 10 isrecognized ratably over the estimated life of the related device,which ranges between two to four years.
The new standard related to revenue recognition will have amaterial impact on our consolidated financial statements. See Note1 – Accounting Policies in the Notes to Financial Statements (PartII, Item 8 of this Form 10-K) for further discussion
