Computer Associates 2011 Annual Report Download - page 53

Accounts receivable
The allowance for doubtful accounts is a reserve for the impairment of accounts receivable on the Consolidated Balance
Sheets. 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 filings for
bankruptcy;
•Results of analyzing historical and current data; and
•The overall macroeconomic environment.
The allowance includes two components: (1) 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 (2) an allowance for losses
inherent in the remaining receivable portfolio based on historical activity.
Income taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, along with net operating losses and tax credit carryforwards. We measure deferred
tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change
in tax rates on income in the period that includes the enactment date.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We utilize
a “more likely than not” threshold for the recognition and derecognition of tax positions and measure positions accordingly.
We reflect changes in recognition or measurement in a period in which the change in judgment occurs. We record interest
and penalties related to uncertain tax positions in income tax expense.
Goodwill, capitalized software products, and other intangible assets
GAAP 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. We
have historically evaluated goodwill impairment based on a single reporting unit. We are in the process of reorganizing our
internal management reporting and will change our segment reporting in the first quarter of fiscal 2012, which could give
rise to changing how the Company tests for goodwill impairment.
The 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 not considered to be 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 effect 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
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