Cisco 2008 Annual Report Download - page 27

32 Cisco Systems, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our methodology for allocating the purchase price, relating to purchase acquisitions, to in-process R&D is determined through
established valuation techniques. See Note 3 to the Consolidated Financial Statements for additional information regarding the acquisitions
completed in fiscal 2008 and the in-process R&D amounts recorded for these acquisitions. In-process R&D was expensed upon
acquisition because technological feasibility had not been established and no future alternative uses existed.
Interest Income, Net
The components of interest income, net, are as follows (in millions):
Years Ended July 26, 2008 July 28, 2007
Interest income $ 1,143 $ 1,092
Interest expense (319) (377)
Total $ 824 $ 715
The increase in interest income in fiscal 2008 was primarily due to higher average total cash and cash equivalents and fixed income
security balances in fiscal 2008 compared with fiscal 2007, partially offset by lower interest rates. The decrease in interest expense in
fiscal 2008 compared with fiscal 2007 was due to lower interest rates. Interest expense includes the effect of $6.0 billion of interest rate
swaps that we had entered into in connection with the issuance of our fixed-rate notes due in 2011 and 2016, prior to the termination of
these interest rate swaps in the third quarter of fiscal 2008, and also includes, for the period following such termination, the amortization
of the hedge accounting adjustment of the carrying amount of the fixed-rate debt.
Other Income (Loss), Net
The components of other income (loss), net, are as follows (in millions):
Years Ended July 26, 2008 July 28, 2007
Net gains on investments in fixed income and publicly traded equity securities $ 109 $ 250
Net gains (losses) on investments in privately held companies 6 (18)
Impairment charges on investments in privately held companies (12) (22)
Net gains and impairment charges on investments 103 210
Other (114) (85)
Total $ (11) $ 125
Our net gains on investments recognized in other income (loss), net, decreased in fiscal 2008 compared with fiscal 2007 primarily as
a result of market conditions. See Note 7 to the Consolidated Financial Statements for the unrealized gains and losses on investments.
The other expenses for fiscal 2008 consisted primarily of foreign exchange activities and contributions to charitable organizations.
Provision for Income Taxes
The provision for income taxes resulted in an effective tax rate of 21.5% for fiscal 2008, compared with an effective tax rate of 22.5% for
fiscal 2007. The 1.0% decrease in the effective tax rate for fiscal 2008, compared with fiscal 2007, was primarily attributable to a net tax
settlement of $162 million and the tax impact of foreign operations partially offset by the expiration of the U.S. federal R&D tax credit and by
the tax costs related to the intercompany realignment of certain of our foreign entities.
On July 29, 2007, we adopted FIN 48, which was a change in accounting for income taxes. FIN 48 required a comprehensive model for
the financial statement recognition, measurement, classification, and disclosure of uncertain tax positions. See Note 13 to the Consolidated
Financial Statements for additional information on our provision for income taxes, including the effects of the adoption of FIN 48 on our
Consolidated Financial Statements.
For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for
income taxes, see Note 13 to the Consolidated Financial Statements.