VMware 2009 Annual Report Download - page 80

Table of Contents
VMWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivative Financial Instruments
Derivative instruments and hedging activities are recognized as assets or liabilities in the statement of financial position and these
instruments are measured at fair value.
In order to manage VMware’s exposure to foreign currency fluctuations, VMware enters into foreign currency contracts to hedge a portion
of VMware’s net outstanding monetary asset and liability positions. The Company does not enter into speculative foreign exchange contracts for
trading purposes. As of December 31, 2009, VMware had outstanding forward contracts with a total notional amount of $130.7 million. These
derivative instruments are adjusted to fair value through other income (expense), net in the consolidated statements of income. The fair value of
the outstanding derivative instruments was immaterial as of December 31, 2009. See Note C to the consolidated financial statements for further
information.
Business Acquisitions
For business acquisitions, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests
in an acquiree, which are measured based on the acquisition date fair value. Goodwill is measured as the excess of consideration transferred, the
fair value of any non-controlling interest, and the fair value of previously held equity interest over the net amounts of the identifiable assets
acquired and the liabilities assumed at the acquisition date.
The Company uses significant estimates and assumptions, including fair value estimates, as of the business combination date and refines
those estimates that are provisional, as necessary, during the measurement period. The measurement period is the period after the acquisition
date, not to exceed one year, in which the Company may gather new information about facts and circumstances that existed as of the acquisition
date to adjust the provisional amounts recognized. Measurement period adjustments are applied retrospectively. All other adjustments are
recorded to the consolidated statements of income.
Costs to effect an acquisition are recorded in general and administrative expenses on the consolidated statements of income as the expenses
are incurred.
Advertising
Advertising production costs are expensed as incurred. Advertising expense was $5.0 million, $9.4 million and $2.5 million in the years
ended December 31, 2009, 2008 and 2007, 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 assets and liabilities are recognized for the expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax assets and liabilities 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.
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