VMware 2011 Annual Report Download - page 76

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, if material. 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 costs are expensed as incurred. Advertising expense was $19.6 million , $13.7 million and $5.0 million in the years ended
December 31, 2011 , 2010 and 2009 , 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. If these overseas funds are needed for its operations in the U.S., VMware would be required to
accrue and pay U.S. taxes on related undistributed earnings to repatriate these funds. However, VMware’s intent is to indefinitely reinvest its
non-U.S. earnings in its foreign operations and VMware’s current plans do not demonstrate a need to repatriate them to fund its U.S. operations.
The difference between the income taxes payable or receivable that is calculated on a separate return basis and the amount actually paid to
or received from EMC pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital. See Note K for
further information.
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.
Concentrations of Risks
Financial instruments, which potentially subject VMware to concentrations of credit risk, consist principally of cash and cash equivalents,
short-term investments and accounts receivable. Cash on deposit with banks exceeds the amount of insurance provided on such deposits. These
deposits may be redeemed upon demand. VMware places cash, cash equivalents and short-term investments primarily in money market funds
and fixed income securities and limits the amount of investment with any single issuer and any single financial institution. VMware holds a
diversified portfolio of money market funds and fixed income securities, which primarily consist of various highly liquid debt instruments of the
U.S. government and its agencies, U.S. municipal obligations, and U.S. and foreign corporate debt securities. VMware’s fixed income
investment portfolio is denominated in U.S. dollars and consists of securities with various maturities.
VMware monitors the counterparty risk for adequate diversification amongst the financial institutions holding the funds. VMware also
monitors counterparty risk to financial institutions with which VMware enters into derivatives to ensure that these financial institutions are of
high credit quality.
VMware held $58.4 million of foreign government and agencies securities, $38.0 million of which is deemed sovereign debt, at December
31, 2011. These sovereign debt securities have an average credit rating of AAA and are predominantly from Australia, Canada and Great Britain.
None of the securities deemed sovereign debt are from Greece, Ireland, Italy, Portugal or Spain.
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