Computer Associates 2006 Annual Report Download - page 154

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Note 8 — Income Taxes (Continued)
the Company has identified a material weakness in its internal controls over documenting and communicating tax
planning strategies. No provision has been made for federal income taxes on the remaining balance of the
unremitted earnings of the Company’s foreign subsidiaries since the Company plans to permanently reinvest all
such earnings outside the U.S. Unremitted earnings totaled approximately $685 million at March 31, 2006.
Determination of the liability associated with these earnings is not practicable.
The income tax expense for the fiscal year ended March 31, 2005 includes a charge of $55 million reflecting the
Company’s original estimated cost of repatriating approximately $500 million under the AJCA which was partially
offset by a $26 million tax benefit attributable to a refund claim originally made for additional tax benefits
associated with prior fiscal years. The Company received a letter from the IRS approving the claim for this refund in
September 2004.
In May 2004, the IRS issued Revenue Procedure 2004-34, “Changes in Accounting Periods and In Methods of
Accounting,” which grants taxpayers a twelve month deferral for cash received from customers to the extent such
receipts were not recognized in revenue for financial statement purposes. Therefore, taxes associated with cash
collected from U.S. customers in advance of the ratable recognition of revenue for certain licenses are deferred for
up to one year. As a result of implementing this revenue procedure, the Company reduced deferred tax assets and
income taxes payable by approximately $73 million and $159 million as of March 31, 2006 and 2005, respectively.
Cash paid for income taxes in fiscal year 2005 was approximately $12 million, which was lower than the amount the
Company historically pays for incomes taxes primarily due to the new IRS revenue procedure.
Note 9 — Stock Plans
Effective April 1, 2005, the Company adopted, under the modified retrospective basis, the provisions of
SFAS No. 123(R), which establishes accounting for share-based awards exchanged for employee services.
Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the grant date, based
on the fair value of the award, and is recognized as an expense over the employee’s requisite service period
(generally the vesting period of the award).
The application of the modified retrospective method of SFAS No. 123(R) provides that the financial statements of
prior periods are adjusted to reflect the fair value method of expensing share-based compensation for all awards
granted on or after April 1, 1995, and accordingly, financial statement amounts for the prior periods presented in this
Form 10-K have been restated to reflect the fair value method of expensing share-based compensation, which was
materially consistent with the pro-forma disclosures required for those periods by SFAS No. 123, “Accounting for
Stock-Based Compensation” (SFAS No. 123).
The Company previously applied the provisions of Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations for share-based awards granted prior
to April 1, 2003 and, for fiscal years 2005 and 2004, applied the fair value recognition provisions of SFAS No. 123
under the prospective transition method, which applied the fair value recognition provisions only to awards granted
on or after April 1, 2003.
In accordance with SFAS No. 123(R), the Company is required to base initial compensation cost on the estimated
number of awards for which the requisite service is expected to be rendered. Historically, and as permitted under
SFAS No. 123, the Company chose to record reductions in compensation expense in the periods the awards were
forfeited. The cumulative effect on prior periods of the change to an estimated number of awards for which the
requisite service is expected to be rendered generated an approximate $1 million credit to the “Selling, general, and
administrative” expense line item in the Consolidated Statements of Operations during the first quarter of fiscal year
2006. In addition, as a result of the Company’s adoption of SFAS No. 123(R), an additional deferred tax asset of
$51 million was recorded at March 31, 2005.
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