Computer Associates 2008 Annual Report Download - page 56

SFAS No. 109, “Accounting for Income Taxes,” 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 (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, 2008, our gross deferred tax assets, net of a
valuation allowance, totaled $828 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 fiscal 2009 and 2028. Additionally, $61 million of the valuation allowance as of March 31, 2008 and as
of March 31, 2007 is attributable to acquired NOLs that are subject to annual limitations under Internal Revenue Code
Section 382. Future results may vary from these estimates.
Goodwill, Capitalized Software Products, and Other Intangible Assets
SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), requires an impairment-only approach to
accounting for goodwill and other intangibles with an indefinite life. Absent any prior indicators of impairment, we
perform an annual impairment analysis during the fourth quarter of our fiscal year.
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.
The fair value of a reporting unit under the first step of the goodwill impairment test is measured using the quoted
market price method. 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. 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 2008.
The carrying values of capitalized software products, for both purchased software and internally developed software, and
other intangible assets, are reviewed on a regular basis to ensure that any excess of the carrying value over the net
realizable value is written off. 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 cases where a revision to the
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