Computer Associates 2009 Annual Report Download - page 53

The SFAS No. 142 goodwill impairment model is a two-step process. The first step is used to identify potential
impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including
goodwill. If the fair value exceeds the carrying amount, goodwill of the reporting unit is considered not impaired and the
second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the
second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second
step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination; that is, the fair value
of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was
the purchase price paid to acquire the reporting unit.
The fair value of a reporting unit under the first step of the goodwill impairment test is measured using the quoted
market price method. 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. 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. We
performed our annual assessment of goodwill during the fourth quarter of fiscal 2009 and concluded that no impairment
charge was required.
The carrying values of capitalized software products, for both purchased software and internally developed software, and
other intangible assets, are reviewed on a regular basis to ensure that any excess of the carrying value over the net
realizable value is written off. 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.
Intangible assets with finite useful lives are subject to amortization over the expected period of economic benefit to us.
We evaluate the remaining useful lives of intangible assets to determine whether events or circumstances have occurred
that warrant a revision to the remaining period of amortization. In cases where a revision to the remaining period of
amortization is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the
revised remaining useful life.
Accounting for Business Combinations
The allocation of the purchase price for acquisitions requires extensive use of accounting estimates and judgments to
allocate the purchase price to the identifiable tangible and intangible assets acquired, including in-process research and
development, and liabilities assumed based on their respective fair values.
Product Development and Enhancements
We account for product development and enhancements in accordance with SFAS No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed” (SFAS No. 86). SFAS No. 86 specifies that costs incurred
internally in researching and developing a computer software product should be charged to expense until technological
feasibility has been established for the product. Once technological feasibility is established, all software costs are
capitalized until the product is available for general release to customers. Judgment is required in determining when
technological feasibility of a product is established and assumptions are used that reflect our best estimates. If other
assumptions had been used in the current period to estimate technological feasibility, the reported product development
and enhancement expense could have been affected. Annual amortization of capitalized software costs is the greater of
the amount computed using the ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic
life of the software product, generally estimated to be five years from the date the product became available for general
release to customers. We amortized capitalized software costs using the straight-line method in fiscal 2009 and fiscal
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