Incredimail 2012 Annual Report Download - page 42

Taxes on Income
We are subject to income taxes in Israel and the United States. Significant judgment is required in evaluating our uncertain tax positions
and determining our provision for income taxes. Based on the guidance in ASC 740 “Income Taxes”, we use a two-
step approach to recognizing
and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon
settlement.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome
of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the
refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded,
such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes
includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related interest. Starting 2011,
interest is recorded within finance income, net.
Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to
utilize tax attributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements.
We record valuation allowances for deferred tax assets that we believe are not more likely than not to be realized in future periods. While we
believe the resulting tax balances as of December 31, 2012 and 2011 are appropriately accounted for, the ultimate outcome of such matters could
result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See Note 10 of
our consolidated financial statements for further information regarding income taxes. We have filed or are in the process of filing local and
foreign tax returns that are subject to audit by the respective tax authorities. The amount of income tax we pay is subject to ongoing audits by the
tax authorities, which often result in proposed assessments. We believe that we adequately provided for any reasonably foreseeable outcomes
related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities
in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.
Business combinations
We account for business combinations following ASC 805 “Business Combinations”,
which requires that we allocate the purchase price
of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. In addition, we
expense acquisition-related expenses as they are incurred. We engage a third-
party appraisal firm to assist management in determining the fair
values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions,
especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based on historical
experience and information obtained from the management of the acquired companies and relevant market and industry data and are, inherently,
uncertain. Critical estimates made in valuing certain of the intangible assets include, but are not limited to, the following: (i) future expected cash
flows from license sales, maintenance agreements, customer contracts and acquired developed technologies and patents; (ii) the acquired
company’
s brand and market position as well as assumptions about the period of time the acquired brand will continue to be used in the
combined company’s product portfolio; (iii) expected costs to develop the in-
process research and development into commecrially viable
products and estimating cash flows from the projects when completed; and (iv) discount rates. Unanticipated events and circumstances may
occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Changes to these estimates, relating to
circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill during the purchase price allocation period
(generally within one year of the acquisition date) and as operating expenses, if otherwise.
In connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with
acquisitions. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-
up approach
determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating
profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligation. See Note 2 to our
consolidated financial statements for additional information on accounting for our recent acquisition.
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