Computer Associates 2006 Annual Report Download - page 163

Note 12 — Restatements (Continued)
The Company treated the date of the action by the Committee as the accounting measurement date for determining
stock-based compensation expense. However, the Company has determined that the proper accounting
measurement date for stock option awards that were not communicated timely to an employee, should have
been the date the grant was communicated to an employee, not the date the Committee approved the grant. The
grants which were not communicated on a timely basis were made primarily to non-executive employees and this
grant practice was changed after fiscal year 2001. The current practice is that a grant is communicated promptly
after it is approved by the Committee.
As a result, the Company should have recognized additional non-cash stock-based compensation expense, net of
forfeitures, over the vesting periods related to such grants in the prior fiscal years and interim periods of fiscal year
2006 as follows:
Fiscal year
Additional
Pre-tax expense
Additional
After-tax expense
(in millions) (in millions)
Years prior to fiscal year 2002 ........................... $165 $ 78
2002 ............................................. 83 50
2003 ............................................. 50 30
2004 ............................................. 29 16
2005 ............................................. 12 —
2006 ............................................. 3 1
Total cost for all fiscal periods ........................... $342 $175
(b) Based upon the Company’s review of certain software license contract renewals principally in prior periods, the
Company has determined that it has understated subscription revenue recorded in prior periods and as a result is
restating its results for fiscal years 2005 and 2004 and for the interim periods of fiscal years 2006 and 2005. This
restatement reflects a further adjustment to subscription revenue amounts previously restated in the Company’s
Annual Report on Form 10-K/A for fiscal year ended March 31, 2005, and filed with the SEC on October 18, 2005.
As discussed further in Note 1, “Significant Accounting Policies”, the Company recognizes revenue ratably on a
monthly basis over the term of the respective subscription license agreements. When a contract is cancelled and
renewed prior to the expiration of its term, the Company recognizes all future revenue for the arrangement ratably
over the new license term. The Company determined that, beginning in fiscal year 2004, it had been systematically
understating revenue for certain license agreements which have been cancelled and renewed more than once prior to
the expiration of each successive license agreement. This restatement resulted in an increase in subscription revenue
of approximately $43 million and $12 million in fiscal years 2005 and 2004, respectively, and approximately
$19 million for the first three quarters of fiscal year 2006.
(c) The Company is restating financial results for the third quarter of fiscal year 2006 to reflect approximately
$31 million of additional commission expense that should have been recorded in that period. This restatement does
not affect previously reported cash flows from operations or financial results for the full fiscal year.
Additionally, while not related to this commission restatement, the Company also identified approximately
$14 million in income taxes recorded in the third quarter of fiscal year 2006 associated with foreign taxable
income from prior fiscal years. Since the Company is restating the results for the third quarter of fiscal year 2006, as
well as prior fiscal periods, the Company has determined that this charge should properly be reflected in the periods
to which it related. Accordingly, an adjustment is also being made to decrease income taxes in the third quarter of
fiscal year 2006 by approximately $14 million and increase income tax expense primarily in fiscal years 2003 and
2002 by approximately $2 million and $12 million, respectively.
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