Computer Associates 2005 Annual Report Download - page 112

Table of Contents
Note 1 — Significant Accounting Policies (Continued)
Restricted Cash: The Company’ s insurance subsidiary requires a minimum restricted cash balance of $50 million. In addition, the
Company has other restricted cash balances, including cash collateral for letters of credit. The total amount of restricted cash as of
March 31, 2005 and 2004 was $67 million and $56 million, respectively, and was included in the “Other noncurrent assets” line item on
the Consolidated Balance Sheets.
Property and Equipment: Land, buildings, equipment, furniture, and improvements are stated at cost. Depreciation and amortization are
provided over the estimated useful lives of the assets by the straight-line method. Building and improvements are estimated to have 30-
to 40-year lives, and the remaining property and equipment are estimated to have 5- to 7-year lives.
Goodwill: Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and identifiable
intangible assets and in-process research and development acquired by the Company in a purchase business combination. Goodwill is
not amortized into results of operations but instead is reviewed for impairment. During the fourth quarter of fiscal year 2005, the
Company performed its annual impairment review for goodwill and concluded that there was no impairment in the current fiscal year.
Similar impairment reviews were performed during the fourth quarter of fiscal years 2004 and 2003. The Company concluded that there
was no impairment to be recorded in fiscal year 2004, but recorded a non-cash goodwill impairment charge of $80 million in fiscal year
2003. The fiscal year 2003 impairment charge resulted from the weak spending environment that affected the IT service sector in general,
as well as the Company’ s continued shift in focus to professional services engagements that concentrated solely on the Company’ s own
software products. The Company’ s estimates of fair value were primarily determined using discounted cash flow and were based on the
Company’ s best estimates of future revenue and operating costs and general market conditions. These estimates were subject to review
and approval by senior management. This approach used significant assumptions, including projected future cash flow, the discount rate
reflecting the risk inherent in future cash flow, and the terminal growth rate. The fiscal year 2003 impairment charge was recorded to the
“Goodwill impairment” line item on the Consolidated Statements of Operations.
The carrying value of goodwill was $4.544 billion and $4.366 billion as of March 31, 2005 and 2004, respectively. During fiscal year
2005, goodwill increased approximately $271 million due primarily to the acquisitions of Netegrity, Inc. (Netegrity) and Pest Patrol, Inc.
(Pest Patrol). This increase was reduced by approximately $96 million due to adjustments to net operating losses, adjustments to
anticipated future tax benefits, and adjustments to other acquisition reserves related to the acquisitions of PLATINUM technology
International, inc. (PLATINUM) and Sterling Software, Inc. (Sterling).
Capitalized Software Costs and Other Identified Intangible Assets: Capitalized software costs include the fair value of rights to market
software products acquired in purchase business combinations (Purchased Software Products). In allocating the purchase price to the
assets acquired in a purchase business combination, the Company allocates a portion of the purchase price equal to the fair value at the
acquisition date of the rights to market the software products of the acquired company. The purchase price of Purchased Software
Products is capitalized and amortized over the estimated useful life of such products over a period not exceeding seven years. In
connection with the acquisitions of Netegrity, Pest Patrol and other smaller companies, the Company recognized approximately
$37 million, $40 million, and $10 million in Purchased Software Products during fiscal year 2005, respectively. The Company recorded
amortization of Purchased Software Products for the fiscal years ended March 31, 2005, 2004, and 2003 of $406 million, $423 million,
and $430 million, respectively, which was included in the “Amortization of capitalized software costs” line item on the Consolidated
Statements of Operations.
In accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,”
internally generated software development costs associated with new products and significant enhancements to existing software
products are expensed as incurred until technological feasibility has been established. Internally generated software development costs
of $70 million, $44 million, and $40 million were capitalized during fiscal years 2005, 2004, and 2003, respectively. The Company
recorded amortization of $41 million, $40 million, and $35 million for the fiscal years ended March 31, 2005, 2004, and 2003,
respectively, which also was included in the “Amortization of capitalized software costs” line item on the Consolidated Statements of
Operations. Unamortized, internally generated software development costs included in the “Other noncurrent assets” line item on the
Consolidated Balance Sheets as of March 31, 2005 and 2004 were $164 million and $135 million, respectively. In fiscal year 2004, the
Company recorded an impairment charge of $4 million related to internally developed software assets. This amount was included in the
“Other gains/expenses, net” line item on the Consolidated Statements of Operations.
Annual amortization of capitalized software costs is the greater of the amount computed using (i) the ratio that current gross revenue for
a software product bears to the total of current and anticipated future revenue for that software product or (ii) the straight-line method
over the remaining estimated economic life of the software product, generally estimated to
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