Computer Associates 2007 Annual Report Download - page 65

collection of a fee is not probable, we will not recognize revenue until the uncertainty is removed through the receipt of cash
payment.
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 and 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 composed 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.
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 have performed 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 period 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.
In our Annual Report on Form 10-K for fiscal year 2006, we reported that commissions for 2006 were higher than anticipated,
primarily due to a new sales commission plan for fiscal year 2006 that did not appropriately align commission payments with
our overall performance. Also, at the end of fiscal year 2006, we had a material weakness in our internal control over financial
reporting due to ineffective policies and procedures relating to controls over the accounting for sales commissions. We made
changes to the Incentive Compensation Plan for fiscal year 2007 and related processes for the purpose of improving our ability
to effectively estimate, accrue for, calculate, monitor, and timely pay sales commissions, and to control overall commission
expense as part of our remediation of the 2006 material weakness in the Company’s internal control over financial reporting
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