Adobe 2006 Annual Report Download - page 75

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75
certain costs for internal-use software incurred during the application development stage, in accordance
with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use.” Amortization begins once the software is ready for its intended use.
Goodwill and Purchased and Other Intangibles
In accordance with Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and
Other Intangible Assets,” we review our goodwill for impairment annually, or more frequently, if facts and
circumstances warrant a review. The provisions of SFAS 142 require that a two-step test be performed to
assess goodwill for impairment. First, the fair value of the reporting unit is compared to its carrying value.
If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed.
The second step is performed if the carrying value exceeds the fair value. The implied fair value of the
reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the
carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the
difference will be recorded. In determining the fair value of our reporting units, we relied upon the Income
Approach and the Market Approach. Under the Income Approach, the fair value of a business is based on
the cash flows it can be expected to generate over its remaining life. The estimated cash flows are
converted to their present value equivalent using an appropriate rate of return. The Market Approach
utilizes a market comparable method whereby similar publicly traded companies are valued using Market
Value of Invested Capital (“MVIC”) multiples (i.e., MVIC to revenue, MVIC to earnings before interest
and taxes, MVIC to cash flow, etc.) and then these MVIC multiples are applied to a company's operating
results to arrive at an estimate of value.
We completed our annual goodwill impairment test during the second quarter of fiscal 2006 and
determined that the carrying amount of goodwill was not impaired.
SFAS 142 also requires that intangible assets with definite lives be amortized over their estimated
useful life and reviewed for impairment whenever an impairment indicator exists. We continually monitor
events and changes in circumstances that could indicate carrying amounts of our intangible assets may not
be recoverable. When such events or changes in circumstances occur, we assess the recoverability of
intangible assets by determining whether the carrying value of such assets will be recovered through the
undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying
amount of the intangible assets, we recognize an impairment loss based on the excess of the carrying
amount over the fair value of the assets. We did not recognize intangible asset impairment charges in fiscal
2006, 2005 or 2004.
We are currently amortizing acquired intangible assets with definite lives. Purchased technology is
amortized over its useful life, which is generally three years and other intangibles assets are amortized over
estimated useful lives ranging from 1 to 13 years. Generally, amortization is based on the pattern in which
the economic benefits of the intangible asset will be consumed. The amortization expense is related to
acquired technology and contracts is classified as cost of product revenue in our consolidated statements of
income. Amortization expense related to all other intangible assets is classified in operating expense.
Software Development Costs
Capitalization of software development costs for software to be sold, leased, or otherwise marketed
begins upon the establishment of technological feasibility, which is generally the completion of a working
prototype that has been certified as having no critical bugs and is a release candidate or when alternative
future use exists. To date, software development costs incurred between completion of a working prototype
and general availability of the related product have not been material and have not been capitalized.
Other Assets
Other assets include long-term investments, security deposits and a land deposit. Other assets also
include the fair value, at inception, of the residual value guarantee associated with our lease on two
buildings we occupy as part of our headquarters, in accordance with FASB Interpretation No. 45 (“FIN