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Recent Accounting Pronouncements | 3 Months Ended
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Oct. 27, 2018
Accounting Policies [Abstract] |
Recent Accounting Pronouncements | Recent Accounting Pronouncements
(a) | New Accounting Updates Recently Adopted
Revenue Recognition In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, a new accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of promised goods or services at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. ASC 606 allows two methods of adoption: i) retrospectively to each prior period presented (“full retrospective method”), or ii) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption ("modified retrospective method"). At the beginning of the first quarter of fiscal 2019, we adopted ASC 606 using the modified retrospective method to those contracts that were not completed as of July 28, 2018. Refer to Opening Balance Adjustments below for the impact of adoption on our Consolidated Financial Statements. We have implemented new accounting policies, systems, processes, and internal controls necessary to support the requirements of ASC 606. ASC 606 primarily impacts our revenue recognition for software arrangements and sales to two-tier distributors. In both areas, the new standard accelerates the recognition of revenue. The table below details the timing of when revenue was typically recognized under the prior revenue standard compared to the timing of when revenue is typically recognized under ASC 606 for these major areas:
|  | Prior Revenue Standard |  | ASC 606
Software arrangements: |  |  |  |
Perpetual software licenses |  | Upfront |  | Upfront
Term software licenses |  | Ratable |  | Upfront
Security software licenses |  | Ratable |  | Ratable
Enterprise license agreements (software licenses) |  | Ratable |  | Upfront
Software support (maintenance) |  | Ratable |  | Ratable
Software-as-a-service |  | Ratable |  | Ratable
Two-tier distribution |  | Sell-Through |  | Sell-In
In addition to the above revenue recognition timing impacts, ASC 606 requires incremental contract acquisition costs (such as sales commissions) for customer contracts to be capitalized and amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relates. We enter into contracts with customers that can include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. As a result, our contracts may contain multiple performance obligations. We determine whether arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether our commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract. We classify our hardware, perpetual software licenses, and software-as-a-service (SaaS) as distinct performance obligations. Term software licenses represent multiple obligations, which include software licenses and software maintenance. In transactions where we deliver hardware or software, we are typically the principal and we record revenue and costs of goods sold on a gross basis. We refer to our term software licenses, security software licenses, SaaS, and associated service arrangements as subscription offers. We recognize revenue upon transfer of control of promised goods or services in a contract with a customer in an amount that reflects the consideration we expect to receive in exchange for those products or services. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. Transfer of control can also occur over time for software maintenance and services as the customer receives the benefit over the contract term. Our hardware and perpetual software licenses are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses include multiple performance obligations where the term licenses are recognized upfront upon transfer of control, with the associated software maintenance revenue recognized ratably over the contract term as services and software updates are provided. SaaS arrangements have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term as the customer consumes the services. On our product sales, we record consideration from shipping and handling on a gross basis within net product sales. We record our revenue net of any associated sales taxes. Significant Judgments Revenue is allocated among these performance obligations in a manner that reflects the consideration that we expect to be entitled to for the promised goods or services based on standalone selling prices (SSP). SSP is estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of a product or service when we sell the goods separately in similar circumstances and to similar customers. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs. We apply judgment in determining the transaction price as we may be required to estimate variable consideration when determining the amount of revenue to recognize. Variable consideration includes various rebate, cooperative marketing, and other incentive programs that we offer to our distributors, partners and customers. When determining the amount of revenue to recognize, we estimate the expected usage of these programs, applying the expected value or most likely estimate and update the estimate at each reporting period as actual utilization becomes available. We also consider the customers' right of return in determining the transaction price, where applicable. We assess certain software licenses, such as for security software, that contain critical updates or upgrades which customers can download throughout the contract term. Without these updates or upgrades, the functionality of the software would diminish over a relatively short time period. These updates or upgrades provide the customer the full functionality of the purchased security software licenses and are required to maintain the security license's utility as the risks and threats in the environment are rapidly changing. In these circumstances, the revenue from these software arrangements is recognized as a distinct performance obligation satisfied over the contract term. For the additional disclosures required as part of ASC 606 see Note 3. Financial Instruments In January 2016, the FASB issued an accounting standard update that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The most significant impact of this accounting standard update is that it requires the remeasurement of investments not accounted for under the equity method to be recorded at fair value through the Consolidated Statement of Operations at the end of each reporting period. The application of this accounting standard update increases the variability of other income (loss), net. Our equity investments are accounted for as follows:
• | Marketable equity securities have readily determinable fair value (RDFV) that are measured and recorded at fair value.
• | Non-marketable equity securities do not have RDFV and are measured using a measurement alternative recorded at cost less any impairment, plus or minus changes resulting from qualifying observable price changes. For certain of these securities, we have elected to apply the net asset value (NAV) practical expedient. The NAV is the estimated fair value of these investments.
• | Equity method investments are securities we do not control, but are able to exert significant influence over the investee. These investments are measured at cost less any impairment, plus or minus our share of equity method investee income or loss.
We adopted this accounting standard update beginning the first quarter of fiscal 2019. The standard was adopted using the modified retrospective method for our marketable equity securities and non-marketable equity securities measured using the NAV practical expedient. For our non-marketable equity securities measured using the measurement alternative, we applied the prospective method. Refer to Opening Balance Adjustments below for the impact of adoption on our Consolidated Balance Sheet. Income Taxes on Intra-Entity Transfers of Assets In October 2016, the FASB issued an accounting standard update that requires recognition of the income tax consequences of intra-entity transfers of assets (other than inventory) at the transaction date. We adopted this accounting standard update beginning in the first quarter of fiscal 2019 on a modified retrospective basis. The ongoing impact of this standard will be facts and circumstances dependent on any transactions within its scope. Refer to Opening Balance Adjustments below for the impact of adoption on our Consolidated Balance Sheet. Classification of Cash Flow Elements In August 2016, the FASB issued an accounting standard update related to the classification of certain cash receipts and cash payments on the statement of cash flows. We adopted this accounting standard update beginning in the first quarter of fiscal 2019 on a retrospective basis. The application of this accounting standard update did not have an impact on our Consolidated Statements of Cash Flows. Restricted Cash in Statement of Cash Flows In November 2016, the FASB issued an accounting standard update that provides guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. We adopted this accounting standard update beginning in the first quarter of fiscal 2019 using a retrospective transition method to each period presented. The application of this accounting standard update did not have a material impact on our Consolidated Statements of Cash Flows. Prior period information has been retrospectively adjusted due to the adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash in the beginning of the first quarter of fiscal 2019. Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued an accounting standard update that removes Step 2 of the goodwill impairment test, which requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value. We early adopted this accounting standard update beginning in the first quarter of fiscal 2019 on a prospective basis. The application of this accounting standard update did not have a material impact on our Consolidated Financial Statements. Definition of a Business In January 2017, the FASB issued an accounting standard update that clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. We adopted this accounting standard update beginning in the first quarter of fiscal 2019 on a prospective basis. The impact of this accounting standard update will be fact dependent, but we expect that some transactions that were previously accounted for as business combinations or disposal transactions will be accounted for as asset purchases or asset sales under the accounting standard update. Opening Balance Adjustments The following table summarizes the cumulative effect of the changes made to the Consolidated Balance Sheet for the adoption of ASC 606, ASU 2016-01, Financial Instruments, and ASU 2016-16, Intra-Entity Transfers of Assets Other than Inventory (in millions):
Line Item in Consolidated Balance Sheet: |  | Balance at July 28, 2018 |  | New Revenue Recognition Standard |  | New Financial Instruments Standard |  | New Intra-Entity Transfers Standard |  | Adjusted Balance at July 29, 2018
ASSETS |  |  |  |  |  |  |  |  |  |
Accounts receivable, net |  | $ | 5,554 |  |  | $ | (104 | ) | (1) | $ | — |  |  | $ | — |  |  | $ | 5,450 |
Inventories |  | $ | 1,846 |  |  | $ | (302 | ) | (2) | $ | — |  |  | $ | — |  |  | $ | 1,544 |
Other current assets (includes capitalized contract acquisition costs) |  | $ | 2,940 |  |  | $ | 371 |  | (3), (4) | $ | — |  |  | $ | (25 | ) | (3) | $ | 3,286 |
Deferred tax assets |  | $ | 3,219 |  |  | $ | (624 | ) | (3) | $ | (15 | ) | (3) | $ | 1,415 |  | (8) | $ | 3,995 |
Other assets (includes capitalized contract acquisition costs) |  | $ | 1,582 |  |  | $ | 327 |  | (4) | $ | 136 |  | (7) | $ | (91 | ) | (3) | $ | 1,954 |
TOTAL ASSETS |  | $ | 108,784 |  |  | $ | (332 | ) |  | $ | 121 |  |  | $ | 1,299 |  |  | $ | 109,872 |
LIABILITIES AND EQUITY |  |  |  |  |  |  |  |  |  |
Income taxes payable |  | $ | 1,004 |  |  | $ | — |  |  | $ | — |  |  | $ | 11 |  | (3) | $ | 1,015 |
Deferred revenue — current |  | $ | 11,490 |  |  | $ | (1,702 | ) | (5) | $ | — |  |  | $ | — |  |  | $ | 9,788 |
Other current liabilities |  | $ | 4,413 |  |  | $ | 33 |  | (6) | $ | — |  |  | $ | — |  |  | $ | 4,446 |
Deferred revenue — non-current |  | $ | 8,195 |  |  | $ | (1,081 | ) | (5) | $ | — |  |  | $ | — |  |  | $ | 7,114 |
Other long-term liabilities |  | $ | 1,434 |  |  | $ | 85 |  | (3) | $ | 13 |  | (3) | $ | — |  |  | $ | 1,532 |
Retained earnings |  | $ | 1,233 |  |  | $ | 2,333 |  | (10) | $ | 283 |  | (10) | $ | 1,281 |  | (10) | $ | 5,130 |
Accumulated other comprehensive income (loss) |  | $ | (849 | ) |  | $ | — |  |  | $ | (175 | ) | (9) | $ | 7 |  | (3) | $ | (1,017 | )
TOTAL LIABILITIES AND EQUITY |  | $ | 108,784 |  |  | $ | (332 | ) |  | $ | 121 |  |  | $ | 1,299 |  |  | $ | 109,872 |
(1) Primarily represents the decrease to accounts receivable related to the change in recognizing revenue on sales to two-tier distributors from a sell-through to a sell-in basis (2) Primarily represents the reduction of inventory for the change from recognizing revenue on sales to two-tier distributors from a sell-through to a sell-in basis (3) Includes the impacts to deferred tax assets, liabilities and other income tax balances (4) Primarily represents capitalized contract acquisition costs (e.g. commissions) (5) Primarily represents deferred revenue adjusted to retained earnings primarily due to the change in revenue recognition for certain software arrangements from ratable to upfront, recognizing revenue on sales to two-tier distributors from a sell-through to a sell-in basis. Of this total $2.8 billion adjustment, $2.6 billion related to product deferred revenue, of which $1.3 billion relates to our recurring software and subscription offers, $0.6 billion relates to two-tier distribution, and the remainder relates to non-recurring software and other adjustments. (6) Primarily represents the reclassification of accounts receivable contra balances to other current liabilities, adjustments to rebate liabilities for the change from recognizing revenue on sales to two-tier distributors from a sell-through to a sell-in basis, and reclassifications from other current liabilities for amounts that are not contract liabilities under ASC 606 (7) Represents the adjustment due to the remeasurement of non-marketable equity investments at fair value (8) Primarily represents the change in net deferred tax assets related to unrecognized income tax effects of intra-entity asset transfers (9) Represents the reclassification of net unrealized gains from accumulated other comprehensive income (loss) to retained earnings (10) Retained earnings impact from the adjustments noted above Impact of ASC 606 Adoption The application of ASC 606 increased our total revenue by $276 million in the first quarter of fiscal 2019. The application of ASC 606 did not have a material impact to either our cost of sales or our operating expenses in the first quarter of fiscal 2019. We recognized a $152 million benefit to our provision for income taxes relating to indirect effects from the adoption of ASC 606 in the first quarter of fiscal 2019. For additional information regarding ASC 606, see Note 3 to the Consolidated Financial Statements. In connection with the adoption of ASC 606, we recorded a transition adjustment to increase retained earnings by $2.3 billion. See above for the transition impact of ASC 606 by balance sheet line item. As of October 27, 2018, the balance sheet changes attributable to ASC 606 related to accounts receivable, inventories, and deferred revenue were not materially different than the impacts upon adoption. In connection with the adoption of ASC 606, we established contract assets for unbilled receivables. As of October 27, 2018, we had total contract assets of $447 million of which, $270 million was recorded in other current assets and $177 million was recorded in other assets. As of October 27, 2018, we had total capitalized contract acquisition costs of $673 million, of which $380 million was recorded in other current assets and $293 million was recorded in other assets. The adoption of ASC 606 did not have any impact on net cash provided by operating activities.
(b) | Recent Accounting Standards or Updates Not Yet Effective
Leases In February 2016, the FASB issued an accounting standard update and subsequent amendments related to leases requiring lessees to recognize operating and financing lease liabilities on the balance sheet, as well as corresponding right-of-use assets. The new lease standard also makes some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, disclosures will be required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The accounting standard update will be effective for us beginning in the first quarter of fiscal 2020 and early adoption is permitted. We expect to adopt this accounting standard update on a modified retrospective basis in the first quarter of fiscal 2020, and we are currently evaluating the impact of this accounting standard update on our Consolidated Financial Statements. Credit Losses of Financial Instruments In June 2016, the FASB issued an accounting standard update that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The accounting standard update will be effective for us beginning in the first quarter of fiscal 2021 and early adoption in fiscal 2020 is permitted. We expect to adopt this accounting standard update on a modified retrospective basis in the first quarter of fiscal 2021, and we are currently evaluating the impact of this accounting standard update on our Consolidated Financial Statements.

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