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Revenue generated from our intellectual property consists of patent infringement liabilities, upfront and non-refundable license
fees, royalty fees, and sales of our patents. Revenue from upfront and non-refundable payments is recognized when the arrangement is
executed. When patent licensing arrangements include royalties for future sales of products using our licensed patented technology,
revenue is recognized when earned during the applicable period. Due to the nature of some of the agreements it may be difficult to
establish VSOE of separate elements of an agreement, in these circumstances the appropriate recognition of revenue may require the
use of judgment based on the particular facts and circumstances. In all cases, revenue from the licensing of our intellectual property is
recognized when all of four of the revenue recognition criteria are met, and included in Commercial systems revenue.
When a customer is billed or we receive payment and we have not met all of the criteria for revenue recognition, the billed or
paid amount is recorded as deferred revenue on the Company’s consolidated balance sheet. As the revenue recognition criteria are
met, the deferred amounts are recognized as revenue. We defer direct project costs incurred in certain situations as dictated by
authoritative accounting literature. The Company classifies deferred revenue and deferred project costs on the consolidated balance
sheet as either current or long-term depending on the expected product delivery dates or service coverage periods. Long-term deferred
revenue is included in other liabilities and long-term deferred project costs are included in other assets on the Company’s consolidated
balance sheet.
Under our contracts with the U.S. government for both systems and services, contract costs, including the allocated indirect
expenses, are subject to audit and adjustment by the Defense Contract Audit Agency. We record revenue under these contracts at
estimated net realizable amounts.
Business Combinations.
Pursuant to ASC 805 for Business Combinations, we account for each business combination under the
“acquisition method.” Accordingly, the total estimated purchase prices were allocated to the net tangible and intangible assets
acquired in connection with each acquisition, based on their estimated fair values as of the effective date of the acquisition. The
preliminary allocation of the purchase prices on each of the acquisitions were based upon management’s preliminary valuation of the
fair value of tangible and intangible assets acquired and liabilities assumed and such estimates and assumptions are subject to change
(generally one year from their acquisition date). The purchase price allocation process requires management to make significant
estimates and assumptions, especially at acquisition date with respect to intangible assets and deferred revenue obligations assumed.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience
and information obtained from the managements of the acquired companies and are inherently uncertain. Examples of critical
estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
x
future expected cash flows from application subscriptions, software license sales, support agreements, consulting
contracts and acquired developed technologies and patents;
x
expected costs to develop the in-process research and development into commercially viable products and
estimated cash flows from the projects when completed;
x
the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired
trade name and trademarks will continue to be used in the combined company’s product portfolio;
x
variable seller consideration arrangements; and
x
discount rates
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or
actual results.
Acquired Intangible Assets.
The acquired intangible assets are amortized over their useful lives of between four and nineteen
years, based on the straight-line method. We evaluate acquired intangible assets when events or changes in circumstances indicate that
the carrying values of such assets might not be recoverable. Our review of factors present and the resulting appropriate carrying value
of our acquired intangible assets are subject to judgments and estimates by management. Future events such as a significant
underperformance relative to historical or projected future operating results, significant changes in the manner of our use of the
acquired assets, and significant negative industry or economic trends could cause us to conclude that impairment indicators exist and
that our acquired intangible assets might be impaired.
In the fourth quarter of 2013, after adjusting projections for uncertainty at a significant customer, we recorded an impairment
charge of $0.6 million to acquired intangible assets. In the second quarter of 2012, after adjusting projections for the impact of a
customer contract renegotiation, we recorded an impairment charge of $14.0 million to acquired intangible assets.
Goodwill.
Goodwill represents the excess of cost over the fair value of assets of acquired businesses. Goodwill is not amortized,
but instead is evaluated for impairment in the fourth quarter of each fiscal year, or sooner should there be an indicator of impairment.
We may assess qualitative factors to determine whether it is more likely than not an event or circumstance might indicate the fair
