Adobe 2003 Annual Report Download - page 74

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changes in fair value are accounted for depending on the use of the derivative and whether it is designated
and qualifies for hedge accounting. See Note 15 for further information.
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 carrying amounts and the tax basis of existing assets and
liabilities. We record a valuation allowance to reduce deferred tax assets to an amount for which realization
is more likely than not. We also account for any income tax contingencies in accordance with Statement of
Financial Accounting Standards No. 5 (“SFAS 5”), “Accounting for Contingencies.”
Recent Accounting Pronouncements
In November 2002, the FASB issued FIN 45 which expands on the accounting guidance of Statements
of Financial Accounting Standards No. 5, 57 and 107 and incorporates without change the provisions of
FASB Interpretation No. 34, which has been superseded. FIN 45 affects, among other things, leasing
transactions involving residual guarantees, vendor and manufacturer guarantees and tax and environmental
indemnities. All such guarantees are required to be disclosed in the notes to the financial statements starting
with the period ending after December 15, 2002. For guarantees issued after December 31, 2002, the fair
value of the obligation must be reported on the balance sheet. Existing guarantees are permitted to be
grandfathered and are not recognized on the balance sheet. The adoption of FIN 45, at the beginning of our
fiscal year 2003, did not have a material impact on our consolidated financial position, results of operations
or cash flows. See “Guarantees” for additional disclosures.
In December 2002, the FASB issued SFAS 148, which provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS 123 to require more prominent and
more frequent disclosures in financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS 148 did
not have a material impact on our consolidated financial position, results of operations or cash flows. See
“Stock-Based Incentive Compensation” for our required pro forma disclosures.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable
Interest Entities.” FIN 46 expands upon existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and activities of another entity. A variable
interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the risk of loss from the
variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both.
The consolidation requirements of FIN 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim
period ending after December 15, 2003. Disclosure requirements apply to any financial statements issued
after January 31, 2003. We have considered the provisions of FIN 46 and believe it will not be necessary to
include in our financial statements any assets, liabilities, or activities of the third-party entities holding our
corporate headquarters leases. We have provided certain disclosures related to these leases in other areas of
this Annual Report on Form 10-K (see “Guarantees” above and Note 14 of our Notes to Condensed
Consolidated Financial Statements). Beginning with the first quarter of fiscal 2004, we will be
consolidating Adobe Ventures. This consolidation will not have a material impact on our consolidated
financial position, results of operations or cash flows.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”),
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and
clarifies the accounting for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and
Hedging Activities.” SFAS 149 is generally effective for contracts entered into or modified after June 30,