Computer Associates 2006 Annual Report Download - page 76

(known as “temporary differences”), which result in deferred tax assets and liabilities; and assess the likelihood that
our deferred tax assets and net operating losses will be recovered from future taxable income. If we believe that
recovery is not likely, we establish a valuation allowance. We have recognized as a deferred tax asset a portion of the
tax benefits connected with losses related to operations. As of March 31, 2006, our gross deferred tax assets, net of a
valuation allowance, totaled $602 million. Realization of these deferred tax assets assumes that we will be able to
generate sufficient future taxable income so that these assets will be realized. The factors that we consider in
assessing the likelihood of realization include the forecast of future taxable income and available tax planning
strategies that could be implemented to realize the deferred tax assets.
Deferred tax assets result from acquisition expenses, such as duplicate facility costs, employee severance and other
costs that are not deductible until paid, net operating losses (NOLs) and temporary differences between the taxable
cash payments received from customers and the ratable recognition of revenue in accordance with GAAP. The
NOLs expire between 2007 and 2026. Additionally, approximately $57 million and $28 million of the valuation
allowance as of March 31, 2006 and March 31, 2005, respectively, is attributable to acquired NOLs which are
subject to annual limitations under IRS Code Section 382. Future results may vary from these estimates. At this time
it is not practicable to determine if we will need to increase the valuation allowance or if such future valuations will
have a material impact on our financial statements.
Goodwill, Capitalized Software Products, and Other Intangible Assets
SFAS No. 142, “Goodwill and Other Intangible Assets,” requires an impairment-only approach to accounting for
goodwill. Absent any prior indicators of impairment, we perform an annual impairment analysis during the fourth
quarter of our fiscal year. We performed our annual assessment for fiscal year 2006 and concluded that there were no
impairments to record.
The SFAS No. 142 goodwill impairment model is a two-step process. The first step is used to identify potential
impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including
goodwill. If the fair value exceeds the carrying amount, goodwill of the reporting unit is considered not impaired
and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if
any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s
goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The
implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit
(including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination
and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
Determining the fair value of a reporting unit under the first step of the goodwill impairment test, and determining
the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under
the second step of the goodwill impairment test, is judgmental in nature and often involves the use of significant
estimates and assumptions. These estimates and assumptions could have a significant impact on whether an
impairment charge is recognized and the magnitude of any such charge. Estimates of fair value are primarily
determined using discounted cash flow and are based on our best estimate of future revenue and operating costs and
general market conditions. These estimates are subject to review and approval by senior management. This
approach uses significant assumptions, including projected future cash flow, the discount rate reflecting the risk
inherent in future cash flow, and a terminal growth rate.
The carrying value of capitalized software products, both purchased software and internally developed software,
and other intangible assets, are reviewed on a regular basis for the existence of internal and external facts or
circumstances that may suggest impairment. The facts and circumstances considered include an assessment of the
net realizable value for capitalized software products and the future recoverability of cost for other intangible assets
as of the balance sheet date. It is not possible for us to predict the likelihood of any possible future impairments or, if
such an impairment were to occur, the magnitude thereof.
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