VMware 2010 Annual Report Download - page 84

Table of Contents
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware uses significant estimates and assumptions, including fair value estimates, to determine the fair value of assets acquired and
liabilities assumed and when applicable the related useful lives of the acquired assets, as of the business combination date. When those estimates
are provisional, VMware refines them as necessary, during the measurement period. The measurement period is the period after the acquisition
date, not to exceed one year, in which VMware may gather new information about facts and circumstances that existed as of the acquisition date
to adjust the provisional amounts recognized. Measurement period adjustments are applied retrospectively. All other adjustments are recorded to
the consolidated statements of income.
Costs to effect an acquisition are recorded in general and administrative expenses on the consolidated statements of income as the expenses
are incurred.
Advertising
Advertising production costs are expensed as incurred. Advertising expense was $13.7 million, $5.0 million and $9.4 million in the years
ended December 31, 2010, 2009 and 2008, respectively.
Income Taxes
Income taxes as presented herein are calculated on a separate tax return basis, although VMware is included in the consolidated tax return
of EMC. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and
liabilities and their reported amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax credits
are generally recognized as reductions of income tax provisions in the year in which the credits arise. The measurement of deferred tax assets is
reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized.
VMware does not provide for a U.S. income tax liability on undistributed earnings of VMware’s foreign subsidiaries. The earnings of non-
U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are currently indefinitely reinvested in non-U.S. operations or will be
remitted substantially free of additional tax.
The difference between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC
pursuant to VMware’s tax sharing agreement (see Note I) is presented as a component of additional paid-in capital.
Earnings Per Share
Basic net income per share is calculated using the weighted-average number of shares of VMware’s common stock outstanding during the
period. Diluted earnings per share are calculated using the weighted-average number of common shares including the dilutive effect of equity
awards as determined under the treasury stock method. VMware has two classes of common stock, Class A and Class B common stock. For
purposes of calculating earnings per share, VMware uses the two-class method. As both classes share the same rights in dividends, basic and
diluted earnings per share are the same for both classes.
Comprehensive Income
The components of comprehensive income include net income adjusted for (i) unrealized gains (losses) on available-for-sale securities, net
of tax, and (ii) reclassification of (gains) losses on available-for-sale securities recognized during the period, net of taxes. See Note L to the
consolidated financial statements for more information.
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