Adobe 2001 Annual Report Download - page 36

In connection with the enforcement of our own intellectual property rights or in connection with
disputes relating to the validity or alleged infringement of third-party rights, we have been, are currently,
and may in the future be subject to complex, protracted litigation as part of our policy to vigorously defend
our intellectual property rights. Intellectual property litigation is typically very costly and can be disruptive
to our business operations by diverting the attention and energies of management and key technical
personnel. Although we have successfully defended or resolved past litigation, we may not prevail in any
ongoing or future litigation. Adverse decisions in such litigation could have negative results, including
subjecting us to significant liabilities, requiring us to seek licenses from others, preventing us from
manufacturing or licensing certain of our products, or causing severe disruptions to our operations or the
markets in which we compete, any one of which could seriously harm our business.
We prepare our financial statements in conformity with accounting principles generally accepted in
the United States of America. These principles are subject to interpretation by the American Institute of
Certified Public Accountants (the ‘‘AICPA’’), the Securities and Exchange Commission (the ‘‘SEC’’), and
various bodies formed to interpret and create appropriate accounting policies. A change in these policies
can have a significant effect on our reported results and may even affect the reporting of transactions
completed before a change is announced. Our accounting policies that may be affected by changes in the
accounting rules are as follows:
• rules relating to software revenue recognition
• accounting for business combinations
• the valuation of in-process research and development
• employee stock purchase plans
• stock option grants
• goodwill and other intangible assets accounting
Changes to these rules or the questioning of current practices may have a significant adverse effect on
our reported financial results or in the way in which we conduct our business. See the discussion under
‘‘Critical Accounting Policies’’ below for additional information about our critical accounting policies and
some risks associated with these policies.
New FASB guidelines relating to accounting for goodwill could make our acquisition-related charges
less predictable in any given reporting period. On July 2001, the FASB issued Statement of Financial
Accounting Standards No. 142 (‘‘SFAS 142’’), ‘‘Goodwill and Other Intangible Assets,’’ that establishes a
new standard for accounting for goodwill acquired in a business combination. This Statement requires that
goodwill and other intangibles with an indefinite useful life not be amortized, but be tested for impairment
at least annually. It would continue to require recognition of goodwill as an asset but would not permit
amortization of goodwill as previously required by APB Opinion No. 17, ‘‘Intangible Assets.’’ Under
SFAS 142, goodwill will be separately tested for impairment using a fair-value-based approach. Any
required goodwill impairment charges will be presented as a separate line item within the operating section
of the income statement. The shift from an amortization approach to an impairment approach would apply
to previously recorded goodwill as well as goodwill arising from acquisitions completed after June 30, 2001.
We are currently evaluating the impact of this Statement on our financial position and are planning to
adopt this standard beginning in fiscal year 2003, as required. It is possible that in the future, we may incur
less frequent, but larger, impairment charges related to the goodwill already recorded, as well as goodwill
arising out of potential future acquisitions.
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