Cisco 2011 Annual Report Download - page 56

of fair value for goodwill and purchased intangible assets is based on factors that market participants would use
in an orderly transaction in accordance with the new accounting guidance for the fair value measurement of
nonfinancial assets.
The goodwill recorded in the Consolidated Balance Sheets as of July 30, 2011 and July 31, 2010 was $16.8
billion and $16.7 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. As a result of the pending divestiture of our
manufacturing operations in Juarez, Mexico, we recorded an adjustment of $63 million to reduce goodwill
associated with these operations. There was no impairment of goodwill resulting from our annual impairment
testing in fiscal 2011, 2010 or 2009. The excess of the fair value over the carrying value for each of our reporting
units ranged from approximately $7 billion for the Asia Pacific Markets segment to approximately $12 billion for
the United States and Canada segment as of July 30, 2011. We performed a sensitivity analysis for goodwill
impairment with respect to each of our respective reporting units and determined that a hypothetical 10% decline
in the fair value of each reporting unit as of July 30, 2011 would not result in an impairment of goodwill for any
reporting unit.
We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or
changes in circumstances indicate that an impairment may exist. Recoverability of purchased intangible assets
with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows
the asset is expected to generate. We review indefinite-lived intangible assets for impairment annually or
whenever events or changes in circumstances indicate the carrying value may not be recoverable. Recoverability
of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future
discounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of
any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are
complex and subjective. They can be affected by a variety of factors, including external factors such as industry
and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Our
impairment charges related to purchased intangible assets were $164 million, $28 million, and $95 million during
fiscal 2011, 2010, and 2009, respectively. Our ongoing consideration of all the factors described previously could
result in additional impairment charges in the future, which could adversely affect our net income.
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rates
differ from the statutory rate, primarily due to the tax impact of state taxes, foreign operations, research and
development (R&D) tax credits, tax audit settlements, nondeductible compensation, international realignments,
and transfer pricing adjustments. Our effective tax rate was 17.1%, 17.5%, and 20.3% in fiscal 2011, 2010, and
2009, respectively.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for
income taxes. 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. 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. 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
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