Computer Associates 2012 Annual Report Download - page 54

Product Development and Enhancements
GAAP 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 affected. Annual amortization of capitalized software costs is the greater of the amount computed using the ratio that
current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight-
line method over the remaining estimated economic life of the software product, generally estimated to be five years from the date the
product became available for general release to customers. We amortize capitalized software costs using the straight-line method.
Accounting for Share-Based Compensation
We currently maintain several stock-based compensation plans. We use the Black-Scholes option-pricing model to compute the
estimated fair value of certain share-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 affected. Furthermore, if different assumptions are used in future periods,
stock-based compensation expense could be materially affected in future years.
As described in Note 15, “Stock Plans,” in the Notes to the Consolidated Financial Statements, performance share units (PSUs) are
awards under the long-term incentive programs for senior executives where the number of shares or restricted shares, as applicable,
ultimately received by the senior executives depends on our performance measured against specified targets and will be determined at
the conclusion of the 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 our stock and our estimate of the level of achievement of our
performance targets. We are required to recalculate the fair value of issued PSUs each reporting period until the underlying shares are
granted. The adjustment is based on the quoted market price of our stock on the reporting period date. Each quarter, we compare the
actual performance we expect to achieve with the performance targets.
Fair Value of Financial Instruments
The measurement of fair value for our financial instruments is based on the authoritative guidance which establishes a fair value
hierarchy that is based on three levels of inputs and requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. See Note 11, “Fair Value Measurements,” for additional information.
We are exposed to financial market risks arising from changes in interest rates and foreign exchange rates. Changes in interest rates
could affect our monetary assets and liabilities, and foreign exchange rate changes could affect our foreign currency denominated
monetary assets and liabilities and forecasted transactions. We enter into derivative contracts with the intent of mitigating a portion of
these risks. See Note 10, “Derivatives,” for additional information.
All marketable securities are classified as available-for-sale securities and are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other
comprehensive income until realized. Premiums and discounts on debt securities recorded at the date of purchase are recognized in
“Interest expense, net” using the effective interest method. Realized gains and losses on sales of all such investments are reported as
“Interest expense, net” and are computed using the specific identification cost method.
For marketable securities in an unrealized loss position, we are required to assess whether we intend to sell the security or will more
likely than not be required to sell the security before the recovery of its amortized cost basis less any current-period credit loss. If
either of these conditions is met, an other-than-temporary impairment on the security is recognized in “Interest expense, net” equal to
the entire difference between its fair value and amortized cost basis. See Note 5, “Marketable Securities,” for additional information.
Legal Contingencies
We are currently 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
the probability of a loss and the determination as to whether the amount of loss is reasonably estimable. Due to the uncertainties
related to these matters, the decision to record an accrual and the amount of accruals recorded are based only on the information
available at the time. As additional information becomes available, we reassess the potential liability related to our pending litigation
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