Computer Associates 2010 Annual Report Download - page 49

Under the terms of substantially all of our license agreements, we have agreed to indemnify customers for costs and
damages arising from claims against such customers based on, among other things, allegations that our software products
infringe the intellectual property rights of a third-party. In most cases and where legally enforceable, the indemnification is
limited to the amount paid by the customer. In most cases, in the event of an infringement claim, we retain the right to
(i) procure for the customer the right to continue using the software product; (ii) replace or modify the software product to
eliminate the infringement while providing substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably
achieved, we may terminate the license agreement and refund to the customer a pro-rata portion of the fees paid. We
consider the likelihood that we will be required to make refunds to customers under such provisions to be remote.
Accounts receivable
The allowance for doubtful accounts is a valuation account used to reserve for the potential impairment of accounts
receivable on the Consolidated Balance Sheets. In developing the estimate for the allowance for doubtful accounts, we rely on
several factors, including:
•Historical information, such as general collection history of multi-year software agreements;
•Current customer information and events, such as extended delinquency, requests for restructuring, and filings for
bankruptcy;
•Results of analyzing historical and current data; and
•The overall macroeconomic environment.
The allowance includes two components: (a) specifically identified receivables that are reviewed for impairment when, based
on current information, we do not expect to collect the full amount due from the customer; and (b) an allowance for losses
inherent in the remaining receivable portfolio based on historical activity.
Income taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, along with net operating losses and tax credit carryforwards. We measure deferred
tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change
in tax rates in income in the period that includes the enactment date.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We utilize
a “more likely than not” threshold for the recognition and derecognition of tax positions and measure positions accordingly.
We reflect changes in recognition or measurement in a period in which the change in judgment occurs. We record interest
and penalties related to uncertain tax positions in income tax expense.
Goodwill, capitalized software products, and other intangible assets
GAAP 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. We
evaluate goodwill impairment based on a single reporting unit.
The 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 not considered to be 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.
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