EMC 2008 Annual Report Download - page 64

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
EMC's accounting for uncertainty in income taxes recognized in the financial statements is in accordance with Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No. 48"), which we adopted at the beginning of fiscal year 2007. FIN
No. 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the
likelihood that it will be sustained upon external examination. If the tax position is deemed "more-likely-than-not" to be sustained, the tax position is then
assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount
that has a greater than 50 percent likelihood of being realized upon ultimate settlement.
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 are expected to be remitted substantially free of
additional tax.
Sales Taxes
Sales and other taxes collected from customers and subsequently remitted to government authorities are recorded as accounts receivable with a
corresponding offset recorded to sales taxes payable. These balances are removed from the consolidated balance sheet as cash is collected from the customers
and remitted to the tax authority.
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 restricted stock units, the $125.0 million 4.5% Senior Convertible notes due April 1,
2007 that we assumed in connection with the acquisition of Documentum (the "Documentum Notes"), our $1.725 billion 1.75% convertible senior notes due
2011 (the "2011 Notes"), our $1.725 billion 1.75% convertible senior notes due 2013 (the "2013 Notes" and, together with the 2011 Notes, the "Notes"), and
the associated warrants (the "Sold Warrants"). See Note D for further information regarding the Notes and the Sold Warrants and Note N for further
information regarding the calculation of diluted net income per weighted average share. Additionally, for purposes of calculating diluted net income per
common share, net income is adjusted for the difference between VMware's reported diluted and basic earnings per share, if any, multiplied by the number of
shares of VMware held by EMC.
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.
58