VMware 2013 Annual Report Download - page 70

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Businesses acquired from EMC are accounted for as a business combination between entities under common control. 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
also retrospectively adjusts the financial statement information presented for prior years to reflect the business as if it had been acquired at the beginning of
the financial period presented. VMware recognizes the net assets under common control at EMC's carrying values as of the date of the transfer and records
the difference between the carrying value and the cash consideration as an equity transaction.
Costs to effect an acquisition are recorded in general and administrative expenses on the consolidated statements of income as the expenses are incurred.
Purchased Intangible Assets and Goodwill
Goodwill is evaluated for impairment during the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. VMware elected to perform a quantitative assessment of goodwill with respect to its one reporting unit. In
doing so, VMware compared the enterprise fair value to the carrying amount of the reporting unit, including goodwill. VMware concluded that to date there
have been no impairments of goodwill.
Purchased intangible assets with finite lives are amortized over their estimated useful lives. During the years ended December 31, 2013 , 2012 and 2011
,
amortization expense was $103 million , $92 million and $65 million , respectively. VMware reviews intangible assets for impairment whenever 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.
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 1 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 that relate to operating expenses denominated in certain foreign currencies. The cash flow hedges are generally traded semi-
annually, have maturities of
6 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 G to the consolidated financial statements for
further information.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $27 million , $37 million and $20 million in the years ended December 31, 2013 ,
2012 and 2011 , 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.
However, certain transactions that VMware and EMC are parties to, are assessed using consolidated tax return rules. 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
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