Adobe 2014 Annual Report Download - page 39

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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 of our fiscal 2010, 2011 and 2012 tax
returns. We expect future examinations to focus on our intercompany transfer pricing practices as well as other matters. We regularly
assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes
and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to be
reasonable; however, the final determination of any of these examinations 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 assumptions, judgments and estimates mentioned above could cause our
actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant
portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S.
income taxes on earnings from the U.S., we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the
subsidiaries’ earnings are considered permanently reinvested outside the U.S. While we do not anticipate changing our intention
regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated,
the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to
discrete items and to earnings considered as permanently reinvested in foreign operations. Unanticipated changes in our tax rates
could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in the tax
rates in jurisdictions where our income is earned, by changes in, or our interpretation of, tax rules and regulations in the jurisdictions
in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by lapses
of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and
liabilities. The United States, countries in the European Union and other countries where we do business have been considering
changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to
corporate multinationals such as Adobe. These potential changes could adversely affect our effective tax rates or result in other
costs to us.
Recent Accounting Pronouncements Not Yet Effective
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and
permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated
standard becomes effective for us in the first quarter of fiscal 2018. We have not yet selected a transition method and we are
currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
With the exception of the new revenue standard discussed above, there have been no new accounting pronouncements not
yet effective that have significance, or potential significance, to our Consolidated Financial Statements.
RESULTS OF OPERATIONS
Overview of 2014
For fiscal 2014, we reported financial results consistent with the continued execution of our long-term plans for our two
strategic growth areas, Digital Media and Digital Marketing, while continuing to market and license a broad portfolio of products
and solutions.
In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering for creating and
publishing content and applications. Creative Cloud, first delivered in May 2012, is our next-generation offering that supersedes
our historical model of licensing our creative products with perpetual licenses. Creative Cloud delivers value through more frequent
product updates, storage and access to user files stored in the cloud with syncing of files across users’ machines, community-based
features and services through our acquisition of Behance in December 2012, app creation capabilities and lower entry point pricing
for cost-sensitive customers.
We offer Creative Cloud for individuals and for teams, and we enable larger enterprise customers to acquire Creative Cloud
capabilities through Enterprise Term License Agreements (“ETLAs”). The three Creative Cloud offerings address the multiple