Computer Associates 2007 Annual Report Download - page 66

related to accounting for commissions. We simplified the Incentive Compensation Plan by, among other things, in April 2006,
on a worldwide basis, reducing accelerators in the plan (under which sales employees are paid commissions at higher rates
when they reach certain levels of quota achievement) and simplifying some of the metrics on which quotas are based.
Effective in October 2006, in North America and Latin America we reduced the number of people and functions being paid on
commissions, eliminated certain multipliers in the plan (under which cash bonuses were awarded to encourage certain types
of sales activity), and adopted further changes in the metrics on which commissions are based in part to drive the sale of new
products and solutions to new and existing customers. Most of these changes were deployed on a worldwide basis in April
2007 via the fiscal year 2008 Incentive Compensation Plan. The Incentive Compensation Plan remains subject to evaluation
and modification. We have also made process improvements in regard to calculating, recording, accruing for, and effecting
payment of and reconciling commissions related accounting transactions.
The 2007 Incentive Compensation Plan was modified and evaluated on an ongoing basis throughout fiscal year 2007 and
performed generally as expected in fiscal year 2007. We believe we have fully remediated the material weakness disclosed at
the end of fiscal year 2006. Refer to Item 9A, “Controls and Procedures”, for additional information on our remediation
activities.
Our efforts to improve our commissions-related processes are ongoing. Refer to Item 1A, “Risk Factors”, for additional
information on risks associated with changes in the Incentive Compensation Plan and other changes affecting our sales force.
Income Taxes
When we prepare our consolidated financial statements, we estimate our income taxes in each jurisdiction in which we
operate. We record this amount as a provision for taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” This
process requires us to estimate our actual current tax liability in each jurisdiction; estimate differences resulting from differing
treatment of items for financial statement purposes versus tax return purposes (known as “temporary differences”), which
result in deferred tax assets and liabilities; and assess the likelihood that our deferred tax assets and net operating losses will
be recovered from future taxable income. If we believe that recovery is not likely, we establish a valuation allowance. We have
recognized as a deferred tax asset a portion of the tax benefits connected with losses related to operations. As of March 31,
2007, our gross deferred tax assets, net of a valuation allowance, totaled $801 million. Realization of these deferred tax assets
assumes that we will be able to generate sufficient future taxable income so that these assets will be realized.The factors that
we consider in assessing the likelihood of realization include the forecast of future taxable income and available tax planning
strategies that could be implemented to realize the deferred tax assets.
Deferred tax assets result from acquisition expenses, such as duplicate facility costs, employee severance and other costs that
are not deductible until paid, net operating losses (NOLs) and temporary differences between the taxable cash payments
received from customers and the ratable recognition of revenue in accordance with GAAP. The NOLs expire between fiscal
years 2008 and 2027. Additionally, approximately $61 million and $57 million of the valuation allowance at March 31, 2007
and March 31, 2006, respectively, is attributable to acquired NOLs which are subject to annual limitations under IRS Code
Section 382. Future results may vary from these estimates.
We believe that adequate accruals have been made for income taxes liabilities, and have classified these in current and long-
term liabilities based upon our estimate of when the ultimate resolution of these liabilities will occur.The ultimate resolution of
the liabilities will take place upon the earlier of (i) receipt of a final determination from the applicable taxing authorities or
(ii) the date when the tax authorities are statutorily prohibited from adjusting the Company’s tax computations. Any
difference between the amount accrued and the ultimate settlement amount if any, will be released to income or recorded as a
reduction of goodwill depending upon whether the liability was initially recorded in purchase accounting.
Goodwill, Capitalized Software Products, and Other Intangible Assets
SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), requires an impairment-only approach to accounting for
goodwill and other intangibles with an indefinite life. Absent any prior indicators of impairment, we perform an annual
impairment analysis during the fourth quarter of our fiscal year.
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