Computer Associates 2004 Annual Report Download - page 79

Software Fees and Other: Software fees and other primarily consists of royalties and revenue related to distribution
partners and original equipment manufacturer (OEM) partners. Revenue from distribution partners is recognized upon
sell-through to the end user by the distribution partner. Revenue related to distribution partners and OEMs is sometimes
referred to as the Company’s “indirect” or “channel” revenue.
Financing Fees: Accounts receivable resulting from prior business model product sales with extended payment terms
were discounted to their present value at the then prevailing market rates. In subsequent periods, the accounts receivable
are increased to the amount due and payable by the customer through the accretion of financing revenue on the unpaid
accounts receivable due in future years. Under the Company’s Business Model, additional unamortized discounts are no
longer recorded, since the Company does not account for the present value of product sales as earned revenue at license
agreement signing.
Fair Value of Financial Instruments: The fair value of the Company’s cash and cash equivalents, accounts payable and
accrued expense amounts approximate their carrying value. See Notes 3, 5, and 6 for the fair value related to the
Company’s investments, accounts receivable, and debt payable, respectively.
Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk
consist primarily of marketable securities and accounts receivable. The Company’s marketable securities consist primarily
of high-quality securities with limited exposure to any single instrument. The Company’s accounts receivable balances
have limited exposure to concentration of credit risk due to the diverse customer base and geographic areas covered
by operations.
Marketable Securities: The Company considers all highly liquid investments with a maturity of three months or fewer
when purchased to be cash equivalents. The Company has determined that all of its investment securities are to be classified
as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in
Stockholders’ Equity under the caption “Accumulated Other Comprehensive Loss.” The amortized cost of debt securities
is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in the
“Interest expense, net” line item on the Consolidated Statements of Operations. Realized gains and losses and declines in
value judged to be other than temporary on available-for-sale securities are included in the “Selling, general, and administrative”
(SG&A) line item on the Consolidated Statements of Operations. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as available-for-sale are included in the “Interest
expense, net” line item on the Consolidated Statements of Operations.
Restricted Cash: The Company’s insurance subsidiary, established during fiscal year 2004, requires a minimum restricted
cash balance of $50 million. In addition, the Company has a letter of credit that requires cash collateral. At March 31,
2004, the amount of such collateral totaled $6 million. The total amount of restricted cash of $56 million was included in
the “Other noncurrent assets” line item on the March 31, 2004, Consolidated Balance Sheet.
Property and Equipment: Land, buildings, equipment, furniture, and improvements are stated at cost. Depreciation
and amortization are provided over the estimated useful lives of the assets by the straight-line method. Building and
improvements are estimated to have 30- to 40-year lives, and the remaining property and equipment are estimated to
have 5- to 7-year lives.
Goodwill: Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and
identifiable intangible assets and in-process research and development acquired by the Company in a purchase business
combination. The Company’s adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” had the effect of
prospectively eliminating the amortization of goodwill and certain other intangible assets beginning on April 1, 2002.
Under the non-amortization approach, goodwill is not amortized into results of operations but instead is reviewed for
impairment, written down, and charged as expense to results of operations in periods in which the recorded value of
goodwill is more than the goodwill’s implied fair value. During the fourth quarter of fiscal year 2004, the Company performed
its annual impairment review for goodwill and concluded that there was no impairment to be recorded in the current fiscal
year. A similar impairment review was performed during the fourth quarter of fiscal year 2003 and, as a result, the
Company recorded a non-cash goodwill impairment charge of $80 million. The fiscal year 2003 impairment charge
resulted from the weak spending environment that affected the IT service sector in general, as well as the Company’s
continued shift in focus to professional services engagements that concentrated solely on the Company’s software products.
The Company’s estimates of fair value were primarily determined using discounted cash flow and were based on the
Company’s best estimates of future revenue and operating costs and general market conditions. These estimates were
subject to review and approval by senior management. This approach used significant assumptions, including projected
future cash flow, the discount rate reflecting the risk inherent in future cash flow, and the terminal growth rate. The fiscal
year 2003 impairment charge was recorded to the “Goodwill impairment” line item on the Consolidated Statements
of Operations.
CA 2004 FORM 10-K | PAGE 51
Note 1 — Significant Accounting Policies (Continued)