Adobe 2003 Annual Report Download - page 32

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We have to estimate provisions for returns which are recorded against our revenues. In determining our estimate
for returns, and in accordance with our internal policy regarding channel inventory, we rely upon historical data, the
estimated amount of product in our distribution channel, the rate at which our product sells through to the end user,
product plans and other factors. Our estimated provisions for returns can vary from what actually occurs. More or
less product may be returned from what was estimated. The amount of inventory in the channel could be different
than what is estimated. Our estimate of the rate of sell through for product in the channel could be different than
what actually occurs. These factors and unanticipated changes in the economic and industry environment could
make our return estimates differ from actual.
Income Taxes
We provide for the effect of income taxes on our financial position and results of operations in accordance with
Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this current
accounting pronouncement, income tax expense is recognized for the amount of taxes payable or refundable for the
current year and for deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in an entity’s financial statements or tax returns. Management must make significant assumptions,
judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and
liabilities and any valuation allowance to be recorded against our net deferred tax asset. Our judgments, assumptions
and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of
current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax
authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits
could significantly impact the amounts provided for income taxes in our financial position and results of operations.
Our assumptions, judgments and estimates relative to the value of our net deferred tax asset take into account
predictions of the amount and category of future taxable income. Actual operating results and the underlying amount
and category of income in future years could render our current assumptions, judgments and estimates of
recoverable net deferred taxes inaccurate, thus materially impacting our financial position and results of operations.
Accounting for our Marketable and Non-Marketable Equity Securities
It is our policy to review our equity holdings on a regular basis to evaluate whether or not each security has
experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing the
cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and
management/ownership of each investment. If we believe that an other-than-temporary decline exists in one of our
marketable equity securities, it is our policy to write down these equity investments to the market value and record
the related write-down as an investment loss on our consolidated statements of income. The ultimate value realized
on these equity investments is subject to market volatility until they are sold.
The stocks of a number of technology investments held both directly and by Adobe Ventures are not publicly
traded and, therefore, there is no established market for these securities. In order to determine the fair market value
of these investments, we use the most recent round of financing involving new non-strategic investors or other
estimates of current market value. It is our policy to review the fair value of these investments held by Adobe
Ventures on a regular basis to evaluate the carrying value of the investments in these companies. The evaluation
process is based on information we request from these privately held companies. This information is not subject to
the same disclosure regulations as U.S. publicly traded companies and as such, the basis for these evaluations is
subject to the timing and the accuracy of the data received from these companies. Estimating the fair value of non-
marketable equity investments in early-stage technology companies is inherently subjective, requiring significant
judgment by management, and may contribute to significant volatility in our reported results.
RESULTS OF OPERATIONS
Overview of 2003
In fiscal 2003, our primary goal was to deliver a series of innovative products to our customers to drive revenue
and earnings growth. With new releases of our Acrobat desktop and server products, a new video software suite,
new versions of our Creative Professional products and the introduction of Adobe Creative Suite, Adobe delivered
more new releases in 2003 than in any previous year. The new releases of our Acrobat desktop products supported