VMware 2010 Annual Report Download - page 68

Table of Contents
Accounting for Stock Options
Generally accepted accounting principles require recognizing compensation costs for all share-based payment awards made to employees
based upon the awards’ estimated grant date fair value.
We elected to estimate the fair value of employee stock option awards and options under our Employee Stock Purchase Plan using the
Black-Scholes option pricing model. The determination of the fair value of our share-based payment awards on the date of grant using the Black-
Scholes option pricing model is affected by our stock price, as well as assumptions regarding a number of subjective variables. These variables
include the expected stock price volatility over the term of the awards, the risk-free interest rate associated with the expected term of the awards,
expected dividends and actual and projected employee stock option exercise behaviors. If any of the assumptions used in the Black-Scholes
option pricing model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the
current period.
The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from
our current estimates, such amounts will be recorded as an adjustment in the period the estimates are revised. Should our actual forfeitures differ
from our estimates, this could have a material impact on our financial statements.
Capitalized Software Development Costs
Costs related to R&D are generally charged to expense as incurred. Capitalization of material development costs of software to be sold,
leased, or otherwise marketed are subject to capitalization from the time technological feasibility is established until the product is available for
general release. Judgment is required to determine when technological feasibility is established. Changes in judgment as to when technological
feasibility is established, or changes in our business, including our go-to-market strategy, would likely materially impact the amount of costs
capitalized. For example, if the length of time between technological feasibility and general availability declines in the future, the amount of
costs capitalized would likely decrease. In addition, our R&D expenses and amounts capitalized as software development costs may not be
comparable to our peer companies due to differences in judgment as to when technological feasibility has been reached or differences in
judgment regarding when the product is available for general release. Generally accepted accounting principles require annual amortization
expense of capitalized software development costs to be the greater of the amounts computed using the ratio of current gross revenue to a
product’s total current and anticipated revenues, or the straight-line method over the product’s remaining estimated economic life. To date, we
amortized these costs using the straight-
line method as it is the greater of the two amounts. The ongoing assessment of the recoverability of these
costs requires considerable judgment by management with respect to certain external factors such as anticipated future revenue, estimated
economic life, and changes in software and hardware technologies. Material differences in amortization amounts could occur as a result of
changes in the periods over which we actually generate revenues or the amounts of revenues generated.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts receivable, other intangible assets and goodwill.
We use a variety of factors to assess valuation, depending upon the asset. Accounts receivable are evaluated based upon the creditworthiness of
our customers, historical experience, the age of the receivable and current market and economic conditions. Should current market and economic
conditions deteriorate, our actual bad debt expense could exceed our estimate. Other intangible assets are evaluated based upon the expected
period during which the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any
of these factors could materially impact the value of the asset. As we operate our business in one operating segment and one reporting unit, our
goodwill is assessed at the consolidated level for impairment in the fourth quarter of each year or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The assessment is performed by comparing the market value of our reporting unit to its
carrying value.
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