VMware 2014 Annual Report Download - page 74

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 the related useful lives of the acquired assets, when applicable, as of the acquisition 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 and analyze the necessary 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.
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. 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 and Hedging Activities
Derivative instruments 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 forward contracts to hedge a
portion of VMware’s net outstanding monetary asset and liability positions. These foreign currency forward contracts are generally entered into
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 on the consolidated statements of
income.
Additionally, VMware enters into foreign currency forward contracts which it designates as cash flow hedges to manage the volatility of
cash flows that relate to operating expenses denominated in certain foreign currencies. These forward contracts are entered into annually, have
maturities of 12 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 on the consolidated statements of income.
The Company does not, and does not intend to, use derivative financial instruments for speculative purposes. Refer to Note G for further
information.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $29 million , $27 million and $37 million in the years ended
December 31, 2014 , 2013 and 2012 , 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
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