Adobe 2006 Annual Report Download - page 79

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after December 15, 2008. We do not expect the adoption of SFAS 158 to have a material impact on our
consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for
income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured,
and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies
how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition
and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after
December 15, 2006 and as a result, is effective for Adobe in the first quarter of fiscal 2008. We are
currently evaluating the impact of FIN 48 on our consolidated financial position, results of operations, and
cash flows.
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (“SFAS
155”), “Accounting for Certain Hybrid Financial Instruments” which amends Statement of Financial
Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging
Activities” and Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the
accounting for certain derivatives embedded in other financial instruments by allowing them to be
accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis.
SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is
effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in
fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the company has
not yet issued financial statements, including for interim periods, for that fiscal year. We will adopt SFAS
155 in the first quarter of fiscal 2007. We do not expect the adoption of SFAS 155 to have a material
impact on our consolidated financial position, results of operations or cash flows.
In September 2006, the SEC (“SEC”) issued SAB No. 108 “Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statements”, which provides
interpretive guidance on how registrants should quantify financial statement misstatements. Under SAB
108 registrants are required to consider both a “rollover” method which focuses primarily on the income
statement impact of misstatements and the “iron curtain” method which focuses primarily on the balance
sheet impact of misstatements. The transition provisions of SAB 108 permit a registrant to adjust retained
earnings for the cumulative effect of immaterial errors relating to prior years. We were required to adopt
SAB 108 in our current fiscal year.
In the second quarter of fiscal 2006, the Company concluded a voluntary review of its executive
officer grants from 1997 to 2006 and uncovered no improper grants to executive officers. In the fourth
quarter of fiscal 2006, we concluded a second voluntary review, focused principally on grants to non-
executive employees from 1997 to 2006. Preliminary results of this internal review suggested that certain
annual grants may have had improper grant dates. The Board of Directors formed a Special Committee of
outside Directors to undertake a broader review of these annual non-executive employee option grants. The
Special Committee enlisted the assistance of independent legal counsel and an independent accounting
firm. The Special Committee uncovered no fraud or intentional wrongdoing. The Special Committee did
find certain instances relating to grants made to employees where the list of employees and/or shares
allocated to them was not sufficiently definitive for the grant to be deemed final as of the reported grant
date. In other instances, the Special Committee found that adjustments were made to some employee grants
after the grant date without a corresponding change to the measurement date. These errors resulted in an
understatement of stock-based compensation in 1998 through 2005.
Historically, we have evaluated uncorrected differences utilizing the rollover approach. We believe
the impact of these stock-based compensation errors were immaterial to prior fiscal years under the rollover
method. However, under SAB 108, which we were required to adopt for the year ended December 1, 2006,
we must assess materiality using both the rollover method and the iron-curtain method. Under the iron-
curtain method, the cumulative stock option errors are material to our fiscal 2006 financial statements and,
therefore, we have recorded an adjustment to our opening fiscal 2006 retained earnings balance in the