VMware 2009 Annual Report Download - page 66

Table of Contents
certain external factors such as anticipated future revenue, estimated economic life, and changes in software and hardware technologies. Material
differences in amortization amounts could occur as a result of changes in the periods over which we actually generate revenues or the amounts of
revenues generated.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts receivable, other intangible assets, and goodwill.
We use a variety of factors to assess valuation, depending upon the asset. Accounts receivable are evaluated based upon the creditworthiness of
our customers, historical experience, the age of the receivable and current market and economic conditions. Should current market and economic
conditions deteriorate, our actual bad debt expense could exceed our estimate. Other intangible assets are evaluated based upon the expected
period during which the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any
of these factors could materially impact the value of the asset. Our goodwill is assessed for impairment in the fourth quarter of each year or more
frequently if events or changes in circumstances indicate that the asset might be impaired. The assessment is performed by comparing the market
value of our reporting unit to its carrying value.
Accounting for Income Taxes
In calculating our income tax expense, management judgment is necessary to make certain estimates and judgments for financial statement
purposes that affect the recognition of tax assets and liabilities.
In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the
deferred tax assets are located. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be
realized. We consider future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such
determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse
the applicable portion of the previously provided valuation allowance.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected
in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax
returns are filed.
The amount of income tax we pay is subject to audits by federal, state, and foreign tax authorities, which may result in proposed
assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately
provided for any reasonably foreseeable outcome related to these matters. 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. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current
estimates. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
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 indefinitely reinvested in non-U.S. operations or will be remitted
substantially free of additional tax.
Income taxes are calculated on a separate tax return basis, although we are included in the consolidated tax return of EMC. The difference
between the income taxes payable that is calculated on a separate return basis and the amount actually paid to EMC pursuant to our tax sharing
agreement with EMC is presented as a component of additional paid-in capital.
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