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Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FAS No. 123R was adopted using the modified prospective transition method which does not result in the restatement of results from prior
periods, and, accordingly, the results of operations for the year ended December 31, 2006 and future periods will not be comparable to the
historical results of operations of VMware.
Under the modified prospective transition method, FAS No. 123R applies to new equity awards and to equity awards modified,
repurchased or canceled after the adoption date. Additionally, compensation cost for the portion of awards granted prior to the adoption date for
which the requisite service has not been rendered as of the adoption date is recognized as the requisite service is rendered. The compensation
cost for that portion of awards is based on the grant-date fair value of those awards as calculated in the prior period pro forma disclosures under
FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS No. 123”), as reported by EMC. The compensation cost for those earlier
awards is attributed to periods beginning on or after the adoption date using the attribution method that was used under FAS No. 123, which was
the straight-line method. Instead of recognizing forfeitures only as they occur under FAS No. 123, VMware estimates an expected forfeiture rate
which is utilized to determine VMware’s expense. Deferred compensation which related to those earlier awards has been eliminated against
additional paid-in capital in conjunction with the adoption of FAS No. 123R.
For stock options, VMware has utilized the Black-Scholes option-pricing model to determine the fair value of VMware’s stock option
awards. For equity-based awards, VMware recognizes compensation cost on a straight-line basis over the awards’ vesting periods for those
awards which contain only a service vesting feature. For awards with performance conditions, management evaluates the criteria in each grant to
determine the probability that the performance condition will be achieved.
In connection with the IPO, VMware and EMC conducted an Exchange Offer (the “Exchange Offer”) enabling eligible VMware
employees to exchange their options to acquire EMC common stock for options to acquire VMware common stock and to exchange restricted
stock awards of EMC’s common stock for restricted stock awards of VMware’s common stock. See Note J for further information regarding the
Exchange Offer.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 157, “Fair Value Measurements” (“FAS
No. 157
”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting principles. FAS No. 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and should be applied prospectively, except in the case of a limited number
of financial instruments that require retrospective application. VMware is currently evaluating the potential impact of FAS No. 157 on the
Company’s financial position and results of operations.
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an
amendment of FAS 115” (“FAS No. 159”). The new statement allows entities to choose, at specified election dates, to measure eligible financial
assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an
eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. FAS No. 159 is effective
for fiscal years beginning after November 15, 2007. VMware is currently evaluating the potential impact of FAS No. 159 on the Company’s
financial position and results of operations.
In December 2007, the FASB issued FAS No. 141 (revised 2007), “Business Combinations” (“FAS No. 141R”).
This statement establishes
principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities
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