Computer Associates 2006 Annual Report Download - page 75

Our standard licensing agreements include a product warranty provision for all products. Such warranties are
accounted for in accordance with SFAS No. 5, “Accounting for Contingencies.” The likelihood that we would be
required to make refunds to customers under such provisions is considered remote.
Under the terms of substantially all of our license agreements, we have agreed to indemnify customers for costs and
damages arising from claims against such customers based on, among other things, allegations that our software
products infringe the intellectual property rights of a third party. In most cases, in the event of an infringement
claim, we retain the right to (i) procure for the customer the right to continue using the software product; (ii) replace
or modify the software product to eliminate the infringement while providing substantially equivalent functionality;
or (iii) if neither (i) nor (ii) can be reasonably achieved, we may terminate the license agreement and refund to the
customer a pro-rata portion of the fees paid. Such indemnification provisions are accounted for in accordance with
SFAS No. 5. The likelihood that we would be required to make refunds to customers under such provisions is
considered remote. In most cases and where legally enforceable, the indemnification is limited to the amount paid
by the customer.
Accounts Receivable
The allowance for doubtful accounts is a valuation account used to reserve for the potential impairment of accounts
receivable on the balance sheet. In developing the estimate for the allowance for doubtful accounts, we rely on
several factors, including:
• Historical information, such as general collection history of multi-year software agreements;
• Current customer information/events, such as extended delinquency, requests for restructuring, and filing for
bankruptcy;
• Results of analyzing historical and current data; and
• The overall macroeconomic environment.
The allowance is comprised of two components: (a) specifically identified receivables that are reviewed for
impairment when, based on current information, we do not expect to collect the full amount due from the customer;
and (b) an allowance for losses inherent in the remaining receivable portfolio based on the analysis of the
specifically reviewed receivables.
We expect the allowance for doubtful accounts to continue to decline as net installment accounts receivable under
the prior business model are billed and collected. Under our business model, amounts due from customers are offset
by deferred subscription value (unearned revenue) related to these amounts, resulting in little or no carrying value
on the balance sheet. Therefore, a smaller allowance for doubtful accounts is required.
Sales Commissions
We accrue sales commissions based on, among other things, estimates of how our sales personnel will perform
against specified annual sales quotas. These estimates involve assumptions regarding the Company’s projected new
product sales and billings. All of these assumptions reflect our best estimates, but these items involve uncertainties,
and as a result, if other assumptions had been used in the period, sales commission expense could have been
impacted for that period. Under our current sales compensation model, during periods of high growth and sales of
new products relative to revenue in that period, the amount of sales commission expense attributable to the license
agreement would be recognized fully in the year and could negatively impact income and earnings per share in that
period, particularly in the second half of the fiscal year when new contract values are traditionally higher than in the
first half.
Income Taxes
When we prepare our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in
which we operate. We record this amount as a provision for taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes.” This process requires us to estimate our actual current tax liability in each jurisdiction; estimate
differences resulting from differing treatment of items for financial statement purposes versus tax return purposes
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