Adobe 2000 Annual Report Download - page 56

28
carrying amount to undiscounted future net cash flows that the property and equipment
are expected to generate. If we consider such assets to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the property and
equipment exceeds its fair market value, as determined by discounted cash flows. We
assess the recoverability of enterprise-level goodwill by determining whether the unamor-
tized goodwill balance can be recovered through undiscounted future results of the
acquired operation. We measure the amount of enterprise-level goodwill impairment, if
any, based on projected discounted future results using a discount rate reflecting our aver-
age cost of funds.
Employee Stock Plans We account for our employee stock plans, which consist of fixed
stock option plans, an employee stock purchase plan, and a performance and restricted
stock plan, using the intrinsic value method.
Revenue Recognition In fiscal 2000, we adopted Statement of Position No. 98-9 (“SOP
98-9”), “Modifications of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions.” The adoption of SOP 98-9 did not have a significant impact on our
financial position or results of operations.
We recognize application products revenue upon shipment, provided that collection is
determined to be probable and no significant obligations remain. We provide application
products customers free telephone support, for which the expense is accrued, up to a max-
imum of ninety days beginning upon the customer’s first call. We amortize the cost of
telephone support as the obligation is fulfilled. Revenue from distributors is subject to
agreements allowing limited rights of return, rebates, and price protection. We accrue for
estimated future returns, price protection when given, and rebates at the time the related
revenue is recorded.
We record licensing revenue, primarily royalties, when OEM partners ship products incor-
porating Adobe software, provided collection of such revenue is probable. We have no
remaining obligations in relation to such licensing revenue.
Deferred revenue includes customer advances under OEM licensing agreements.
Maintenance revenue for application products is deferred and recognized ratably over the
term of the contract, generally twelve months. In cases where we will provide a free
upgrade to an existing product, we defer revenue until the future obligation is fulfilled.
Direct Costs Direct costs include product packaging, third-party royalties, excess and obsolete
inventory, and amortization related to localization costs and acquired technologies.
Advertising Costs We expense all advertising costs as incurred and classify these costs
under sales and marketing expense.
Advertising costs for fiscal years 2000, 1999, and 1998 were $32.9 million, $22.4 million,
and $16.7 million, respectively.
Income Taxes We use the asset and liability method of accounting for income taxes. Under
the asset and liability method, we recognize deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial statement carry-
ing amounts and the tax basis of existing assets and liabilities. We record a valuation
allowance to reduce tax assets to an amount whose realization is more likely than not.
Foreign Currency and Equity Hedging Instruments In June 1999, the Financial Accounting
Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No.
133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” as
amended by SFAS 137, “Accounting for Derivative Instruments and Hedging Activities—
Deferral of the Effective Date of FASB Statement No. 133,” and SFAS 138, “Accounting for
Certain Derivative Instruments and Certain Hedging Activities.” We adopted SFAS 133
beginning December 2, 2000. SFAS 133 establishes accounting and reporting standards
for derivative financial instruments and hedging activities and requires us to recognize all
derivatives as either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted for
depending on the use of the derivative and whether it is designated and qualifies for
29