VMware 2012 Annual Report Download - page 62

Table of Contents
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. If these overseas funds are needed for our operations in the U.S., we would be required to accrue and pay
U.S. taxes on related undistributed earnings to repatriate these funds. However, our intent is to indefinitely reinvest our non-U.S. earnings in our
foreign operations and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. We will meet our U.S.
liquidity needs through ongoing cash flows generated from our U.S. operations, external borrowings, or both. We utilize a variety of tax
planning strategies in an effort to ensure that our worldwide cash is available in locations in which it is needed.
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.
Capitalized Software Development Costs
Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when the product's
technological feasibility has been established and ending when the product is available for general release. Judgment is required in determining
when technological feasibility is established and as our business, products and go-to-market strategy have evolved, we have continued to
evaluate when technological feasibility is established. Following the release of vSphere 5 and the comprehensive suite of cloud infrastructure
technologies in the third quarter of 2011, we determined that VMware's go-to-
market strategy had changed from single solutions to product suite
solutions. As a result of this, and the related increased importance of interoperability between our products, the length of time between achieving
technological feasibility and general release to customers significantly decreased. For future releases, we expect our products to be available for
general release soon after technological feasibility has been established. Given that we expect the majority of our product offerings to be suites
or to have key components that interoperate with our other product offerings, the costs incurred subsequent to achievement of technological
feasibility are expected to be immaterial in future periods. In 2012, all software development costs were expensed as incurred.
Our R&D expenses and amounts that we have capitalized as software development costs may not be comparable to our peer companies due
to differences in judgment as to when technological feasibility has been reached or differences in judgment regarding when the product is
available for general release. Additionally, future changes in our judgment as to when technological feasibility is established, or additional
changes in our business, including our go-to-market strategy, could materially impact the amount of costs capitalized. For example, if the length
of time between technological feasibility and general availability was to increase again in the future, the amount of capitalized costs would likely
increase. Additionally, a transition to offering software as a service instead of via a license may also result in an increased level of software
capitalization.
Generally accepted accounting principles require annual amortization expense of capitalized software development costs to be the greater of
the amounts computed using the ratio of current gross revenue to a product’s total current and anticipated revenues, or the straight-line method
over the product’s remaining estimated economic life. To date, we have amortized these costs using the straight-
line method as it is the greater of
the two amounts. The costs are amortized over 18 to 24 months, which represent the product’s estimated economic life. The ongoing assessment
of the recoverability of these costs requires considerable judgment by management with respect to 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.
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