Computer Associates 2006 Annual Report Download - page 77

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.
As described in Note 9, “Stock Plans,” in the Notes to the Consolidated Financial Statements, performance share
units are awards granted under the long-term incentive plan for senior executives where the number of shares or
restricted shares as applicable, ultimately received by the employee depends on Company performance measured
against specified targets and will be determined after a three-year or one-year period as applicable. The fair value of
each award is estimated on the date that the performance targets are established based on the fair value of the
Company’s stock and the Company’s estimate of the level of achievement of its performance targets. Each quarter,
the Company compares the actual performance the Company expects to achieve with the performance targets.
Legal Contingencies
We are 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”, in the Notes to 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 introduced 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 repatriated
approximately $584 million of cash under the American Jobs Creation Act of 2004 during fiscal year 2006 at
a total tax cost of approximately $55 million. Refer to the “Income Taxes” section of this MD&A for further details.
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
57