Computer Associates 2004 Annual Report Download - page 59

Determining the fair value of a reporting unit under the first step of the goodwill impairment test, and determining the
fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the
second step of the goodwill impairment test, is judgmental in nature and often involves the use of significant estimates
and assumptions. These estimates and assumptions could have a significant impact on whether an impairment charge
is recognized and the magnitude of any such charge. Estimates of fair value are primarily determined using discounted
cash flow and are based on our best estimate of future revenue and operating costs and general market conditions.
These estimates are subject to review and approval by senior management. This approach uses significant assumptions,
including projected future cash flow, the discount rate reflecting the risk inherent in future cash flow, and a terminal
growth rate.
The carrying value of capitalized software products, both purchased software and internally developed software, and
other intangible assets, are reviewed on a regular basis for the existence of internal and external facts or circumstances
that may suggest impairment. The facts and circumstances considered include an assessment of the net realizable value
for capitalized software products and the future recoverability of cost for other intangible assets as of the balance sheet
date. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were
to occur, the magnitude thereof. In fiscal year 2004, we recorded an impairment charge of $4 million related to internally
developed capitalized software assets. This amount was included in the “Other gains/expenses, net” line item on the
Consolidated Statements of Operations.
Accounting for Stock-Based Compensation
We currently maintain stock option plans and restricted stock awards. Prior to April 1, 2003, we accounted for stock-
based compensation under the recognition and measurement provisions in accordance with Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25) and related interpretations.
Effective April 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148.
We selected the prospective method to transition to the fair value method of measuring stock-based compensation
expense. Under the prospective method, we recognize compensation expense related to all stock awards granted after
March 31, 2003.
We use the Black-Scholes option-pricing model to compute the estimated fair value of certain stock-based awards. The
Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free
interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market and
other conditions outside of our control. As a result, if other assumptions had been used in the current period, stock-based
compensation expense could have been materially impacted. Furthermore, if different assumptions are used in future
periods, stock-based compensation expense could be materially impacted in future years.
The following table sets forth the various estimated effects on future earnings per share as a result of our adoption
of SFAS No. 123 using the fair market value of our stock as of March 31, 2004 (base price). For purposes of this table,
we have assumed that options covering 6.4 million shares are awarded in the last quarter of each fiscal year, which
is consistent with fiscal year 2004, but may not be indicative of future option grants. We have assumed $11 million in
contributions for each offer period related to the Year 2000 Employee Stock Purchase Plan. We have assumed all other
variables to be the same as those used for fiscal year 2004, as detailed in Note 1 of the Consolidated Financial
Statements.
Potential Future Effect on EPS
Assumed Exercise Price Year Ended March 31,
of Stock-Based Compensation 2005 2006 2007 2008 2009
$26.86 (base price) .................................................................................. $(.04) $(.09) $(.13) $(.13) $(.13)
$20.15 (25% below base price) .............................................................. (.04) (.08) (.10) (.10) (.10)
$33.58 (25% above base price) .............................................................. (.04) (.10) (.15) (.16) (.16)
$40.29 (50% above base price) .............................................................. (.04) (.11) (.17) (.20) (.20)
The above table provides sensitivity analysis related to the granting of stock options and the associated expense incurred
over the vesting period of the option. The assumptions used may vary significantly, which can result in a material change
to the amounts presented above.
Legal Contingencies
We are currently involved in various legal proceedings and claims. Periodically, we review the status of each significant
matter and assess our potential financial exposure. If the potential loss from any legal proceeding or claim is considered
probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is
CA 2004 FORM 10-K | PAGE 31