VMware 2011 Annual Report Download - page 61

Table of Contents
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.
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. If these overseas funds are needed for our operations in the U.S., we would be required to accrue and pay
U.S. taxes on related undistributed earnings to repatriate these funds. However, our intent is to indefinitely reinvest our non-U.S. earnings in our
foreign operations and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. We will meet our U.S.
liquidity needs through ongoing cash flows generated from our U.S. operations, external borrowings, or both. We utilize a variety of tax
planning and financing strategies in an effort to ensure that our worldwide cash is available in locations in which it is needed.
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
In September 2011, the Financial Accounting Standards, Board (“FASB”) issued Accounting Standards Update No. 2011-08, Testing
Goodwill for Impairment (the revised standard) (“ASU 2011-08”). ASU 2011-08 is intended to reduce the cost and complexity of the annual
goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing
is necessary. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December
15, 2011. We do not expect the adoption of ASU 2011-08 to impact our consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU
2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Comprehensive
income will either have to be presented in one continuous statement of comprehensive
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