EMC 2005 Annual Report Download - page 53

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Costs
Legal costs incurred in connection with loss contingencies are recognized when the costs are probable of occurrence and estimable.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Deferred tax liabilities and assets are determined based on the difference between the tax basis of assets and liabilities and their reported
amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax credits are generally recognized as reductions of
income tax provisions in the year in which the credits arise. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon
available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We do not provide for a U.S. income tax liability on undistributed earnings of our foreign subsidiaries. The earnings of non-U.S. subsidiaries, which
reflect full provision for non-U.S. income taxes, are currently indefinitely reinvested in non-U.S. operations or will be remitted substantially free of additional
tax.
Earnings Per Share
Basic net income per share is computed using the weighted average number of shares of our common stock outstanding during the period. Diluted net
income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options, unvested restricted stock and convertible debt.
Retirement/Post Employment Benefits
Pension cost for our domestic defined benefit pension plan is funded to the extent that current pension cost is deductible for U.S. Federal tax purposes
and to comply with the Employee Retirement Income Security Act and the General Agreement on Tariff and Trade Bureau additional minimum funding
requirements. Net pension cost for our international defined benefit pension plans are generally funded as accrued.
Post-retirement benefit cost for the domestic post-retirement benefits plan assumed as part of our acquisition of Data General Corporation is generally
funded on a pay-as-you-go basis to the extent that current cost is deductible for U.S. Federal tax purposes.
Concentrations of Risks
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, short and long-term
investments, accounts and notes receivable and foreign currency exchange contracts. Deposits held with banks may exceed the amount of insurance provided
on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore
bear minimal credit risk. We place our cash and cash equivalents and short and long-term investments primarily in investment grade instruments and limit the
amount of investment with any one issuer. We purchased bank loans with credit ratings below investment grade. The bank loans have a senior position to
other debt and have floating-rate coupons, which significantly reduces interest rate risk. As of December 31, 2005, bank loans represented 7% of our cash and
cash equivalents and short and long-term investments. We believe this investment strategy more effectively manages our exposure to interest rate risk and
diversifies our investment portfolio. We have entered into various agreements to loan fixed income securities generally on an overnight basis. Under these
securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities. The collateral is generally cash,
U.S. government-backed securities or letters of credit and is held in our possession. At December 31, 2005, there were no outstanding securities lending
transactions. We provide credit to customers in the normal course of business. Credit is extended to new customers based upon industry reputation or a check
of credit references. Credit is extended to existing customers based on prior payment history and demonstrated financial stability. The credit risk associated
with accounts and notes receivables is limited due to the large number of customers and their broad dispersion over many different industries and geographic
areas. Our sales are generally dispersed to a large number of customers, minimizing the reliance on any particular customer or group of customers. Dell, Inc.,
one of our channel partners, accounted for 12% of our revenues in 2005. The counterparties to our foreign currency exchange contracts consist of a number of
major financial institutions. In addition to limiting the amount of the contracts we enter into with any one party, we monitor the credit quality of the
counterparties.
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