Adobe 2006 Annual Report Download - page 37

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37
Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting
principles. These principles are subject to interpretation by the SEC and various bodies formed to interpret and
create appropriate accounting principles. A change in these principles can have a significant effect on our reported
results and may even retroactively affect previously reported transactions. Our accounting principles that recently
have been or may be affected by changes in the accounting principles are as follows:
• software revenue recognition;
• accounting for stock-based compensation;
• accounting for income taxes; and
• accounting for business combinations and related goodwill
In particular, in the first quarter of fiscal 2006, we adopted SFAS 123R which requires the measurement of
all stock-based compensation 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. The adoption of SFAS 123R
had a significant adverse effect on our reported financial results. It will continue to significantly adversely affect
our reported financial results and may impact the way in which we conduct our business. Please refer to Notes 1
and 11 of our Notes to Consolidated Financial Statements for further information regarding the adoption of SFAS
123R.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant
charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment
when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required
to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating
that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline
in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be
required to record a significant charge to earnings in our financial statements during the period in which any
impairment of our goodwill or amortizable intangible assets is determined resulting in an impact on our results of
operations.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax
rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated
decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the
valuation of our deferred tax assets and liabilities. In addition, we are subject to the continual examination of our
income tax returns by the Internal Revenue Service and other domestic and foreign tax authorities, including a
current examination by the Internal Revenue Service for our fiscal 2001, 2002 and 2003 tax returns, primarily
related to our intercompany transfer pricing. We regularly assess the likelihood of outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes and have reserved for potential
adjustments that may result from the current examination. We believe such estimates to be reasonable; however,
there can be no assurance that the final determination of any of these examinations will not have an adverse effect
on our operating results and financial position.
If we are unable to recruit and retain key personnel our business may be harmed.
Much of our future success depends on the continued service and availability of our senior management,
including our Chief Executive Officer and other members of our executive team. These individuals have acquired
specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our
business. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled