VMware 2007 Annual Report Download - page 70

Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the years ended December 31, 2007, 2006 and 2005, VMware capitalized $56.8 million (including $9.1 million of stock-based
compensation), $43.0 million (including $10.5 million of stock-based compensation), and $25.1 million (including $3.5 million of stock-based
compensation), respectively, of costs incurred for the development of software products. Amortization expense from capitalized amounts were
$36.4 million, $22.3 million and $6.2 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Long
-Lived Assets
Intangible assets, other than goodwill, are amortized over their estimated useful lives which range from three to nine years. In 2007, 2006
and 2005, VMware amortized $25.7 million, $25.5 million and $26.1 million, respectively, for purchased intangible assets.
VMware periodically reviews long-lived assets for impairment in accordance with Financial Accounting Standards (“FAS”) No. 144
“Accounting for Impairment or Disposal of Long-Lived Assets.” VMware initiates reviews for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no
longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If
impairment is indicated, the asset is written down to its estimated fair value. To date, no such impairment has been identified.
Goodwill is carried at its historical cost. VMware tests goodwill for impairment in accordance with FAS No. 142 “Goodwill and other
Intangible Assets,” in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the asset might be
impaired. To date, there have been no impairments of goodwill or other long-lived assets.
Advertising
Advertising production costs are expensed as incurred. Advertising expense was $2.5 million, $1.6 million, and $0.9 million in 2007, 2006
and 2005, respectively.
Income Taxes
Income taxes as presented herein are calculated on a separate tax return basis, although VMware is included in the consolidated tax return
of EMC. 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.
VMware does not provide for a U.S. income tax liability on undistributed earnings of VMware’s 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.
The difference between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC
pursuant to VMware’s tax sharing agreement (see Note K) is presented as a component of additional paid-in capital.
66