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Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
depending on the degree of achievement of the performance target designated by each individual award. If minimum performance thresholds are
not achieved, then no shares will be issued. Based upon the expected levels of achievement, stock-based compensation is recognized on a
straight-line basis over the PSUs’ requisite service periods. The expected levels of achievement are reassessed over the requisite service periods
and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted in the period of change and recorded in
the statements of income and the remaining unrecognized stock-based compensation is recorded over the remaining requisite service period.
New Accounting Pronouncement
During May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606). The updated revenue standard establishes principles for recognizing revenue and develops
a common revenue standard for all industries. Upon adoption, entities will be required to recognize the amount of revenue that they expect to be
entitled to for the transfer of promised goods or services to their customers. The updated standard is effective for the Company in the first quarter
of 2017 and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted.
The Company has not selected a transition method and is currently evaluating the effect that the updated standard will have on its
consolidated financial statements and related disclosures.
B. Business Combinations, Joint Venture, Definite-Lived Intangible Assets, Net and Goodwill
Business Combinations
Fiscal Year 2014
Acquisition of AirWatch LLC
On February 24, 2014, VMware acquired for cash all of the outstanding membership units of A.W.S. Holding, LLC (“AirWatch Holding”),
the sole member and equity holder of AirWatch LLC (“AirWatch”). AirWatch is a leader in enterprise mobile management and security
solutions. VMware acquired AirWatch to expand VMware’s solutions within the enterprise mobile management and security space. The total
purchase price of $1,128 million included cash of $1,104 million and the fair value of assumed unvested equity attributed to pre-combination
services totaling $24 million .
Merger consideration totaling $300 million , including $75 million being held in escrow, is payable to certain employees of AirWatch
subject to specified future employment conditions and will be recognized as expense over the requisite service period on a straight-line basis.
Compensation expense of $141 million was recognized during the year ended December 31, 2014 .
VMware assumed all of AirWatch’s unvested stock options and restricted stock outstanding at the completion of the acquisition with an
estimated fair value of $134 million . Of the total fair value, $24 million was allocated to the purchase price and $110 million was allocated to
future services and will be expensed over the remaining requisite service periods on a straight-line basis. The estimated fair value of the stock
options assumed by the Company was determined using the Black-Scholes option pricing model. Pursuant to the purchase agreement,
AirWatch’s outstanding stock awards were converted into shares of VMware’s common stock at the conversion ratio of 0.4 . The assumed
unvested options converted into 1.4 million stock options to purchase VMware Class A common stock. The assumed unvested restricted stock
converted into an immaterial number of shares of restricted VMware Class A common stock.
The following table summarizes the allocation of the consideration to the fair value of the assets acquired and liabilities assumed (table in
millions):
71
Cash
$
36
Other current assets
61
Intangible assets
250
Goodwill
868
Other acquired assets
30
Total assets acquired
1,245
Unearned revenues
(45
)
Other assumed liabilities
(72
)
Total liabilities assumed
(117
)
Fair value of assets acquired and liabilities assumed
$
1,128