VMware 2011 Annual Report Download - page 75

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
revenues generated.
Unamortized software development costs were $104.9 million and $103.3 million as of December 31, 2011 and 2010 , respectively, and are
included in capitalized software development costs, net and other on the consolidated balance sheets.
For the years ended December 31, 2011 , 2010 and 2009 , VMware capitalized $86.4 million (including $12.4 million of stock-based
compensation), $71.6 million (including $10.9 million of stock-based compensation) and $83.5 million (including $14.9 million of stock-based
compensation), respectively, of costs incurred for the development of software products. These amounts have been excluded from R&D
expenses on the accompanying consolidated statements of income. Amortization expense from capitalized amounts was $84.7 million , $99.5
million and $82.9 million for the years ended December 31, 2011 , 2010 and 2009 , respectively. Amortization expense is included in cost of
license revenues on the consolidated statements of income.
Intangible Assets and Goodwill
Intangible assets from business combination and asset purchases, other than goodwill, are amortized over their estimated useful lives, which
range up to 13 years , during which the assets are expected to contribute directly or indirectly to future cash flows. In the years ended
December 31, 2011 , 2010 and 2009 , VMware amortized $67.1 million , $34.8 million and $14.1 million , respectively, for intangible assets.
VMware reviews intangible assets for impairment in the fourth quarter of each year or more frequently if events or changes in business
circumstances indicate that the carrying amounts of the assets may not be fully recoverable or that the useful lives of these assets are no longer
appropriate.
Goodwill is initially carried at its historical cost. VMware tests goodwill 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.
To date, there have been no impairments of goodwill or other intangible assets.
Derivative Instruments
Derivative instruments and hedging activities are measured at fair value and reported as current assets and current liabilities on the
consolidated balance sheets, as applicable.
In order to manage VMware’s exposure to foreign currency fluctuations, VMware enters into foreign currency contracts to hedge a portion
of VMware’s net outstanding monetary asset and liability positions. These foreign currency forward contracts are generally traded on a monthly
basis, with a typical contractual term of one month. These forward contracts are not designated as hedging instruments under applicable
accounting guidance, and therefore are adjusted to fair value through other income (expense), net in the consolidated statements of income.
Starting in the fourth quarter of 2011, VMware entered into forward contracts which it designated as cash flow hedges to manage the
volatility of cash flows primarily related to operating expenses denominated in certain foreign currencies. The cash flow hedges are generally
traded semi-annually, have maturities of six months or less and are adjusted to fair value through accumulated other comprehensive income, net
of tax, on the consolidated balance sheets. When the underlying expense transaction occurs, the gains or losses on the forward contract are
subsequently reclassified from accumulated other comprehensive income to the related operating expense line item in the consolidated
statements of income.
The Company does not enter into speculative foreign exchange contracts for trading purposes. See Note E to the consolidated financial
statements for further information.
Business Combinations
For business combinations, VMware recognizes the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in
an acquiree, which are measured based on the acquisition date fair value. Businesses acquired from EMC are accounted for as a business
combination between entities under common control pursuant to generally accepted accounting principles. VMware includes the results of
operations of the acquired businesses under common control, if material, in the period of acquisition as if it had occurred at the beginning of the
period and retrospectively adjusts financial information presented for prior years. VMware recognizes the net assets under common control at
their carrying values as of the date of the transfer and records the excess, or shortfall, of the carrying values over, or under, the cash
consideration as an equity transaction. Goodwill for all other business combinations is measured as the excess of consideration transferred, the
fair value of any non-controlling interest, and the fair value of previously held equity interest over the net amounts of the identifiable tangible
and intangible assets acquired and the liabilities assumed at the acquisition date.
VMware uses significant estimates and assumptions, including fair value estimates, to determine the fair value of assets
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