VMware 2010 Annual Report Download - page 69

Table of Contents
Accounting for Income Taxes
In calculating our income tax expense, management judgment is necessary to make certain estimates and judgments for financial statement
purposes that affect the recognition of tax assets and liabilities.
In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the
deferred tax assets are located. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be
realized. We consider future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such
determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse
the applicable portion of the previously provided valuation allowance.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected
in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax
returns are filed.
The amount of income tax we pay is subject to audits by federal, state and foreign tax authorities, which may result in proposed
assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately
provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable
adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on
potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current
estimates. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
We do not provide for a U.S. income tax liability on undistributed earnings of our foreign subsidiaries. The earnings of non-U.S.
subsidiaries, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations or will be remitted
substantially free of additional tax.
Income taxes are calculated on a separate tax return basis, although we are included in the consolidated tax return of EMC. The difference
between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC pursuant to our tax sharing
agreement with EMC is presented as a component of additional paid-in capital.
New Accounting Pronouncements
Revenue Recognition
In September 2009, the Financial Accounting Standards Board (“FASB”) issued new standards for multiple-deliverable revenue
arrangements. These new standards affect the determination of when individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. In addition, these new standards modify the manner in which the transaction consideration is allocated
across separately identified deliverables, eliminate the use of the residual value method of allocating arrangement consideration and require
expanded disclosure. These new standards became effective for us for multiple-element arrangements entered into or materially modified on or
after January 1, 2011. We have determined that these new standards did not have an impact on our consolidated financial statements as our
business is currently conducted.
Software
In September 2009, the FASB issued amended standards for the accounting for certain revenue arrangements that include software
elements. These new standards amend pre-existing software revenue
66