Cisco 2007 Annual Report Download - page 20

2007 Annual Report 23
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investment Impairments
Our publicly traded equity securities are reflected in the Consolidated Balance Sheets at a fair value of $1.2 billion as of July 28, 2007,
compared with $712 million as of July 29, 2006. See Note 6 to the Consolidated Financial Statements. We recognize an impairment charge
when the declines in the fair values of our publicly traded equity securities below their cost basis are judged to be other-than-temporary.
The ultimate value realized on these equity securities, to the extent unhedged, is subject to market price volatility until they are sold.
We consider various factors in determining whether we should recognize an impairment charge, including the length of time and extent to
which the fair value has been less than our cost basis, the financial condition and near-term prospects of the investee, and our intent and
ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Our ongoing consideration
of these factors could result in additional impairment charges in the future, which could adversely affect our net income. There were no
impairment charges on investments in publicly held companies in fiscal 2007 or fiscal 2006 and the amount of impairment charges in fiscal
2005 was not material.
We also have investments in privately held companies, some of which are in the startup or development stages. As of July 28, 2007,
our investments in privately held companies were $643 million, compared with $574 million as of July 29, 2006, and were included in
other assets. See Note 4 to the Consolidated Financial Statements. We monitor these investments for impairment and make appropriate
reductions in carrying values if we determine an impairment charge is required, based primarily on the financial condition and near-term
prospects of these companies. These investments are inherently risky because the markets for the technologies or products these
companies are developing are typically in the early stages and may never materialize. Our impairment charges on investments in privately
held companies were $22 million, $15 million, and $39 million during fiscal 2007, 2006, and 2005, respectively.
Goodwill Impairments
Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation
techniques. Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable
intangible assets acquired less liabilities assumed. We perform goodwill impairment tests on an annual basis and between annual tests in
certain circumstances for each reporting unit. The goodwill recorded in the Consolidated Balance Sheets as of July 28, 2007 and July 29,
2006 was $12.1 billion and $9.2 billion, respectively. In response to changes in industry and market conditions, we could be required
to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an
impairment of goodwill. There was no impairment of goodwill in fiscal 2007, 2006, or 2005.
Income Taxes
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating
our tax positions and determining our provision for income taxes.
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is
uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes and
interest will be due. These reserves are established when, despite our belief that our tax return positions are supportable, we believe that
certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light
of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. Although we believe our reserves
are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected
in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different than the amounts
recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for
income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related
net interest.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the
need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income, and
the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be
realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such
determination is made.
Our effective tax rates differ from the statutory rate primarily due to the tax impact of foreign operations, R&D tax credits, state taxes,
and tax audit settlements. The effective tax rate was 22.5%, 26.9%, and 28.6% in fiscal 2007, 2006, and 2005, respectively.