Adobe 2012 Annual Report Download - page 58

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to vest, the change in our stock-based compensation expense could materially affect our operating income, net income and net
income per share.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed,
assumed equity awards, as well as to in-process research and development based upon their estimated fair values at the acquisition
date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the
acquisition date with respect to intangible assets, deferred revenue obligations and equity assumed.
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 issuances, 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 2012 and determined there was no impairment.
The results of our annual impairment test indicate 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
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