Adobe 2006 Annual Report Download - page 45

45
instruments that are significantly higher than the fair values originally estimated on the grant date and reported in
our financial statements. There currently is no market-based mechanism or other practical application to verify the
reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare
and adjust the estimates to actual values.
The guidance in SFAS 123R and SAB 107 is relatively new. The application of these principles may be
subject to further interpretation and refinement over time. There are significant differences among valuation
models, and there is a possibility that we will adopt different valuation models in the future. This may result in a
lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may
also result in a lack of comparability with other companies that use different models, methods and assumptions.
See Note 11 of our Consolidated Financial Statements for further information regarding the SFAS 123R
disclosures.
Goodwill Impairment
We perform goodwill impairment tests on an annual basis, during the second quarter of our fiscal year, or
more frequently, if facts and circumstances warrant a review. We make judgments about goodwill whenever
events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance
sheet may exist. The timing of an impairment test may result in charges to our statements of income in our current
reporting period that could not have been reasonably foreseen in prior periods. In order to estimate the fair value
of goodwill, we typically make various assumptions about the future prospects the asset relates to, consider
market factors and estimate our future cash flows. Based on these assumptions and estimates, we determine
whether we need to record an impairment charge to reduce the value of the asset carried on our balance sheet to
its estimated fair value. Assumptions and estimates about future values are complex and often subjective. They
can be affected by a variety of factors, including external factors such as industry and economic trends, and
internal factors such as changes in our business strategy and our internal forecasts. Although we believe the
assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions
and estimates could materially affect our reported financial results. More conservative assumptions of the
anticipated future benefits could result in impairment charges, which would decrease net income and result in
lower asset values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no
impairment charges, higher net income and higher asset values.
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. We have established reserves for income taxes to address
potential exposures involving tax positions that could be challenged by tax authorities. We are currently under
examination by the Internal Revenue Service for our fiscal 2001, 2002 and 2003 tax returns, primarily related to
our intercompany transfer pricing. Although we believe our judgments, assumptions and estimates are reasonable,
changes in tax laws or our interpretation of tax laws and the resolution of the current and any 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