2012 Annual Report - ZTE

ZTE CORPORATIONNotes to Financial Statements (continued)(Prepared in accordance with PRC ASBEs)(All amounts in RMB’000 unless otherwise stated)(English translation for reference only)II.PRINCIPAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued)30. Significant accounting judgements and estimates (continued)Judgements (continued)Revenue Recognition (continued)At the inception of the arrangement, contract amounts shall be allocated to all deliverables on thebasis of their relative selling price (the relative selling price method). When applying the relative sellingprice method, the selling price for each deliverable shall be determined using vendor-specific objectiveevidence (“VSOE”) of selling price, if it exists; otherwise, third-party evidence of selling price shouldbe used. If neither VSOE nor third-party evidence of selling price exists for a deliverable, the vendorshall use its best estimate of the selling price for that deliverable when applying the relative sellingprice method. In deciding whether the vendor can determine VSOE or third-party evidence of sellingprice, the vendor shall not ignore information that is reasonably available without undue cost and effort.For instance, the Group sells hardware and post-contract services on a stand-alone basis and thereforewe have evidence to establish VSOE for both of sale of goods and post-contract services.The Group’s adoption of appropriate revenue recognition policy for a deliverable involves significantjudgement. For instance, the Group has to determine whether post-contract support services is morethan incidental to hardware, so as to decided whether the hardware should be accounted for basedon multiple-element revenue recognition guidance or general revenue recognition guidance. Thisassessment could significantly impact the amount and timing of revenue recognition.For elements related to customised network solutions and certain network build-outs, revenues arerecognized under the ASBE No. 15 Construction Contract, generally using the percentage-of-completionmethod. In using the percentage-of-completion method, revenues are generally recorded based ona measure of the percentage of costs incurred to date on a contract relative to the estimated totalexpected contract costs. Profit estimates on long-term contracts are revised periodically based onchanges in circumstances and any losses on contracts are recognized in the period that such lossesbecome known. Generally, the terms of long-term contracts provide for progress billing are based oncompletion of certain phases of work. Contract revenues recognized, based on costs incurred towardsthe completion of the project, that are unbilled are accumulated in the contracts in progress accountincluded in amount due from customers for contract works. Billings in excess of revenues recognized todate on long-term contracts are recorded as advance billings in excess of revenues recognized to dateon contracts within amount due to customers for contract works. Significant judgement is often requiredwhen estimating total contract costs and progress to completion on these arrangements, as well aswhether a loss is expected to be incurred on the contract. Management uses historical experience,project plans and an assessment of the risks and uncertainties inherent in the arrangement to establishthese estimates. Uncertainties include implementation delays or performance issues that may or maynot be within the control of the Group. Changes in these estimates could result in a material impacton revenues and net earnings.190