Computer Associates 2005 Annual Report Download - page 71

Table of Contents
Product Development and Enhancements
We account for product development and enhancements in accordance with SFAS No. 86, “Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed.” SFAS No. 86 specifies that costs incurred internally in researching and
developing a computer software product should be charged to expense until technological feasibility has been established for the product.
Once technological feasibility is established, all software costs are capitalized until the product is available for general release to
customers. Judgment is required in determining when technological feasibility of a product is established and assumptions are used that
reflect our best estimates. If other assumptions had been used in the current period to estimate technological feasibility, the reported
product development and enhancement expense could have been impacted.
Accounting for Stock-Based Compensation
We currently maintain stock-based compensation plans. We use the Black-Scholes option-pricing model to compute the estimated fair
value of certain stock-based awards. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility,
expected lives, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on
market and other conditions outside of our control. As a result, if other assumptions had been used, stock-based compensation expense
could have been materially impacted. Furthermore, if different assumptions are used in future periods, stock-based compensation
expense could be materially impacted in future years.
Legal Contingencies
We are currently involved in various legal proceedings and claims. Periodically, we review the status of each significant matter and
assess our potential financial exposure. If the potential loss from any legal proceeding or claim is considered probable and the amount
can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of
probability of a loss and the determination as to whether an exposure is reasonably estimable. Due to the uncertainties related to these
matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess
the potential liability related to our pending litigation and claims, and may revise our estimates. Such revisions could have a material
impact on our results of operations and financial condition. Refer to Note 7, “Commitments and Contingencies” of the Consolidated
Financial Statements for a description of our material legal proceedings.
New Accounting Pronouncements
In October 2004, the American Jobs Creation Act of 2004 was signed into law. This act introduces a special one-time dividends received
deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided that certain criteria are met.
In addition, on December 21, 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS
109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004.” FSP FAS 109-2 provides accounting and disclosure guidance for the repatriation provision. The Company expects to repatriate
approximately $500 million of cash under the American Jobs Creation Act of 2004 during fiscal year 2006 and has therefore accrued a
$55 million or $0.09 per share tax charge in fiscal year 2005. We received a benefit of approximately $35 million or $0.06 per share in
the quarter ending June 30, 2005 reflecting the Department of Treasury and IRS Notice 2005-38 issued on May 10, 2005 which will
substantially reduce the taxes associated with the repatriation.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29.
SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be
measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in the
Company’ s second quarter of fiscal year 2006. The Company does not believe that adopting of SFAS No. 153 will have any impact on
the Company’ s consolidated financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations.”
FIN 47 clarifies the term “conditional asset retirement obligation” as that term is used in FASB No. 143, “Accounting for Asset
Retirement Obligations.” It also clarifies when an entity has sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The Company is not required to begin applying the provisions of FIN 47 until fiscal year 2006. The Company is in
the process of assessing the impact of the pronouncement’ s requirements on its financial statements.
Risk Factors
Current and potential stockholders should consider carefully the risk factors described below. Any of these factors, or others, many of
which are beyond our control, could negatively affect our revenue, profitability, and cash flow.
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