Cisco 2012 Annual Report Download - page 57

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 and penalties.
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 provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower
than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher
tax rates; by changes in the valuation of our deferred tax assets and liabilities; by expiration of or lapses in the
R&D tax credit laws; by transfer pricing adjustments including the effect of acquisitions on our intercompany
R&D cost-sharing arrangement and legal structure; by tax effects of nondeductible compensation; by tax costs
related to intercompany realignments; by changes in accounting principles; or by changes in tax laws and
regulations including possible U.S. changes to the taxation of earnings of our foreign subsidiaries, the
deductibility of expenses attributable to foreign income, or the foreign tax credit rules. Significant judgment is
required to determine the recognition and measurement attributes prescribed in the accounting guidance for
uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax
positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely
impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing
employment and capital investment actions and commitments, our income in certain countries is subject to
reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could
adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our
income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the
likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for
income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an
adverse impact on our operating results and financial condition.
Loss Contingencies
We are subject to the possibility of various losses arising in the ordinary course of business. We consider the
likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably
estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it
is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be
reasonably estimated. We regularly evaluate current information available to us to determine whether such
accruals should be adjusted and whether new accruals are required.
Third parties, including customers, have in the past and may in the future assert claims or initiate litigation
related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related
standards that are relevant to us. These assertions have increased over time as a result of our growth and the
general increase in the pace of patent claims assertions, particularly in the United States. If any infringement or
other intellectual property claim made against us by any third party is successful, or if we fail to develop
non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our
business, operating results, and financial condition could be materially and adversely affected.
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