Autodesk 2005 Annual Report Download - page 33

The product returns reserve is based on historical experience of actual product returns, estimated channel
inventory levels, the timing of new product introductions, channel sell-in for applicable markets and other factors.
During fiscal year 2005, we recorded a reserve for product returns of $34.6 million, which reduced our revenue.
While we believe our accounting practice for establishing and monitoring product returns reserves is
adequate and appropriate, any adverse activity or unusual circumstances could result in an increase in reserve
levels in the period in which such determinations are made.
Realizability of Long-Lived Assets. We assess the realizability of our long-lived assets and related intangible
assets, other than goodwill, annually during the fourth fiscal quarter, or sooner should events or changes in
circumstances indicate the carrying values of such assets may not be recoverable. We consider the following
factors important in determining when to perform an impairment review: significant under-performance of a
business or product line relative to budget; shifts in business strategies which impact the continued uses of the
assets; significant negative industry or economic trends; and the results of past impairment reviews.
In assessing the recoverability of these long-lived assets, we first determine their fair values, which are based
on assumptions regarding the estimated future cash flows that could reasonably be generated by these assets.
When assessing long-lived assets, we use undiscounted cash flow models which include assumptions regarding
projected cash flows. Variances in these assumptions could have a significant impact on our conclusion as to
whether an asset is impaired or the amount of the impairment charge. Impairment charges, if any, result in
situations where the fair values of these assets are less than their carrying values.
In addition to our recoverability assessments, we routinely review the remaining estimated useful lives of
our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and
amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.
We will continue to evaluate the values of our long-lived assets in accordance with applicable accounting rules.
As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
Goodwill. As required under Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets,” we no longer amortize goodwill, but test goodwill for impairment annually in the fourth
quarter or sooner should events or changes in circumstances indicate potential impairment. As changes in
business conditions and our assumptions occur, we may be required to record impairment charges.
Deferred Tax Assets. We currently have $119.3 million of net deferred tax assets, mostly arising from net
operating losses, tax credits, reserves and timing differences for purchased technologies and capitalized software
offset by the establishment of U.S. deferred tax liabilities on unremitted earnings from certain foreign
subsidiaries. We perform a quarterly assessment of the recoverability of these net deferred tax assets, which is
principally dependent upon our achievement of projected future taxable income of approximately $306.0 million
inspecific geographies. Our judgments regarding future profitability may change due to future market conditions
and other factors. These changes, if any, may require possible material adjustments to these net deferred tax
assets, resulting in a reduction in net income in the period when such determinations are made.
Autodesk is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions.
The Company’s effective tax rate is based on expected income, statutory rates and enacted tax rules, including
transfer pricing. Significant judgment is required in determining the Company’s effective tax rate and in
evaluating its tax positions on a worldwide basis. The Company believes its tax positions, including intercompany
transfer pricing policies are consistent with the tax laws in the jurisdictions in which it conducts its business.
It is possible that these positions may be challenged which may have a significant impact on the Company’s
effective tax rate.
Restructuring Expenses. During the fourth quarter of fiscal 2004, the Board of Directors approved a
restructuring plan involving the elimination of employee positions and the closure of a number of offices
worldwide. This plan, which we refer to as the fiscal 2004restructuring plan, was designed to improve efficiencies
across the organization, reduce operating expense levels to help achieve our targeted operating margins and
redirect resources to product development, sales development and other critical areas. As a result of these
restructuring activities, which we completed by the end of fiscal 2005, and through attrition, we achieved our
21