Computer Associates 2007 Annual Report Download - page 67

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. There was no impairment charge
recorded with respect to goodwill for fiscal year 2007.
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.
Intangible assets with finite useful lives are subject to amortization over the expected period of economic benefit to the
Company. We evaluate the remaining useful lives of intangible assets to determine whether events or circumstances have
occurred that warrant a revision to the remaining period of amortization. In such cases the remaining carrying amount of the
intangible asset is amortized over the revised remaining useful life.
We performed our annual assessment during the fourth quarter of fiscal year 2007 and concluded that an impairment charge
of approximately $12 million, relating to certain identifiable intangible assets that were not subject to amortization, which
were acquired in conjunction with a prior year acquisition should be recorded. For fiscal year 2007, the impairment charge was
reported in the “Restructuring and other” line item in the Consolidated Statements of Operations. The balance of assets with
indefinite lives at March 31, 2007 and 2006 was $14 million and $26 million, respectively.
Accounting for Business Combinations
The allocation of purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the
purchase price to the identifiable tangible and intangible assets acquired, including in-process research and development, and
liabilities assumed based on their respective fair values.
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
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