Cisco 2006 Annual Report Download - page 46

2006 Annual Report 49
Goodwill and Purchased Intangible Assets Goodwill is tested for impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired. Based on the impairment tests performed, there was no impairment of goodwill in scal 2006,
2005, or 2004. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to
be indenite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated
useful lives of the respective assets, generally two to seven years.
Impairment of Long-Lived Assets Long-lived assets and certain identiable intangible assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability of long-lived assets is based on an estimate of undiscounted future cash ows resulting from the use of the
asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identiable intangible assets that
management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identiable intangible assets to
be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Income Taxes Income tax expense is based on pretax nancial accounting income. Deferred tax assets and liabilities are recognized for
the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts.
Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
Computation of Net Income per Share Basic net income per share is computed using the weighted-average number of common shares
outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and
dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of employee stock
options and restricted common stock.
Statement of Financial Accounting Standards No. 128, “Earnings per Share,” requires that employee equity share options, nonvested
shares, and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted
earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options which is calculated based on the average
share price for each scal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay
for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount
of tax benets that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to
repurchase shares.
Foreign Currency Translation Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local
currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting
translation adjustments directly recorded to a separate component of accumulated other comprehensive income. Income and expense
accounts are translated at average exchange rates during the year. Translation adjustments are recorded in other income, net, where the
U.S. dollar is the functional currency.
Derivative Instruments The Company recognizes derivative instruments as either assets or liabilities in the Consolidated Balance Sheets
and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized
in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged.
For a derivative instrument designated as a cash ow hedge, the effective portion of the derivative’s gain or loss is initially reported as a
component of accumulated other comprehensive income and subsequently reclassied into earnings when the hedged exposure affects
earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For derivative instruments that are not designated
as accounting hedges, changes in fair value are recognized in earnings in the period of change. During scal 2006, 2005, and 2004, there
were no signicant gains or losses recognized in earnings for hedge ineffectiveness. The Company did not discontinue any hedges
because it was probable that the original forecasted transactions would not occur.
Consolidation of Variable Interest Entities FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), was issued
in January 2003. FIN 46 requires that if an entity is the primary beneciary of a variable interest entity, the assets, liabilities, and results of
operations of the variable interest entity should be included in the consolidated nancial statements of the entity. FASB Interpretation No.
46(R), “Consolidation of Variable Interest Entities” (“FIN 46(R)”), was issued in December 2003. The Company adopted FIN 46(R) effective
January 24, 2004, and recorded a noncash cumulative stock compensation charge of $567 million, net of tax, relating to the consolidation
of Andiamo Systems, Inc. (“Andiamo”). For additional information regarding Andiamo, see Note 3 to the Consolidated Financial Statements.
For additional information regarding variable interest entities, see Note 8 to the Consolidated Financial Statements.
Notes to Consolidated Financial Statements