Adobe 2005 Annual Report Download - page 40

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We have to estimate provisions for returns which are recorded against our revenues. In determining our estimate
for returns, and in accordance with our internal policy regarding global channel inventory which is used to
determine the level of product held by our distributors on which we have recognized revenue, we rely upon
historical data, the estimated amount of product inventory in our distribution channel, the rate at which our product
sells through to the end user, product plans and other factors. Our estimated provisions for returns can vary from
what actually occurs. More or less product may be returned from what was estimated. The amount of inventory in
the channel could be different than what is estimated. Our estimate of the rate of sell through for product in the
channel could be different than what actually occurs. There could be a delay in the release of our products. These
factors and unanticipated changes in the economic and industry environment could make our return estimates differ
from actual returns, thus materially impacting our financial position and results of operations.
Accounting for Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is
recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management
must make assumptions, judgments and estimates to determine our current provision for income taxes and also our
deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our
judgments, assumptions and estimates relative to the current provision for income tax take into account current tax
laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign
and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and
future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial
statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account
predictions of the amount and category of future taxable income, such as income from operations or capital gains
income. Actual operating results and the underlying amount and category of income in future years could render our
current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions,
judgments and estimates mentioned above could cause our actual income tax obligations to differ from our
estimates, thus materially impacting our financial position and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards 123 — revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaces Statement of
Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation” and
supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires the
measurement of all employee share-based payments to employees, including grants of employee stock options,
using a fair-value-based method and the recording of such expense in our consolidated statements of income. In
April 2005, the SEC announced that the accounting provisions of SFAS 123R are to be applied in the first quarter of
the fiscal year beginning after June 15, 2005. As a result, we are now required to adopt SFAS 123R in the first
quarter of fiscal 2006 and will recognize stock-based compensation expense using the modified prospective method.
The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial
statement recognition. See Note 1 in our Notes to Consolidated Financial Statements for the pro forma net income
and net income per share amounts as if we had used a fair-value-based method similar to the methods required under
SFAS 123R to measure compensation expense for employee stock incentive awards. We are evaluating the
requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated
statements of income and net income per share.
See Note 1 in our Notes to Consolidated Financial Statements for information regarding other recent accounting
pronouncements.