Adobe 2010 Annual Report Download - page 61

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Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical
experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples
of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are
not limited to:
• future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and
acquired developed technologies and patents;
• expected costs to develop the in-process research and development into commercially viable products and estimated
cash flows from the projects when completed;
• the acquired company’ s trade name and trademarks as well as assumptions about the period of time the acquired trade
name and trademarks will continue to be used in the combined company’ s product portfolio; and
• discount rates.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue
obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The
cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit
margin. The estimated costs to fulfill the obligations are based on the historical costs related to fulfilling the obligations.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the equity awards
assumed. The estimated fair value is determined utilizing a modified binomial option pricing model which assumes
employees exercise their stock options when the share price exceeds the strike price by a certain dollar threshold. If the
acquired company has significant historical data on their employee’ s exercise behavior, then this threshold is determined
based upon the acquired company’ s history. Otherwise, our historical exercise experience is used to determine the exercise
threshold. Zero coupon yields implied by U.S. Treasury issues, implied volatility for our common stock and our historical
forfeiture rate are other inputs to the binomial model.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions,
estimates or actual results.
Goodwill Impairment
We complete our goodwill impairment test on an annual basis, during the second quarter of our fiscal year, or more
frequently, if changes in facts and circumstances indicate that an impairment in the value of goodwill recorded on our balance
sheet may exist. In order to estimate the fair value of goodwill, we typically estimate future revenue, consider market factors
and estimate our future cash flows. Based on these key assumptions, judgments 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, judgments 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 or our internal forecasts. Although we believe the assumptions, judgments and estimates we have made in
the past have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our
reported financial results.
We completed our annual impairment test in the second quarter of fiscal 2010 and determined there was no impairment.
We currently believe that there is no significant risk of future material goodwill impairment in any of our reporting units.
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 assumptions, judgments and estimates relative to the current provision for income taxes 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. In addition, we are subject to the continual examination of our income
tax returns by the IRS and other domestic and foreign tax authorities, including a current examination by the IRS for our