VMware 2012 Annual Report Download - page 74

Table of Contents
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Overview and Basis of Presentation
Company and Background
VMware, Inc. (“VMware” or the “Company”) is the leader in virtualization infrastructure solutions utilized by organizations to help them
transform the way they build, deliver and consume information technology (“IT”) resources. VMware's virtualization infrastructure solutions,
which include a suite of products designed to deliver a software-defined data center, run on industry-
standard desktop computers and servers and
support a wide range of operating system and application environments, as well as networking and storage infrastructures.
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United
States of America.
Basis of Presentation
VMware was incorporated as a Delaware corporation in 1998, was acquired by EMC Corporation (“EMC”)
in 2004 and conducted its initial
public offering of VMware’s Class A common stock in August 2007. As of December 31, 2012 , EMC holds approximately 79.6% of VMware’
s
outstanding common stock, including 41.1 million shares of VMware’s Class A common stock and all of VMware’s Class B common stock.
VMware is a majority-owned and controlled subsidiary of EMC, and its results of operations and financial position are consolidated with EMC’
s
financial statements. VMware and EMC engage in intercompany transactions, including agreements regarding the use of EMC’s and VMware’s
intellectual property and real estate, agreements regarding the sale of goods and services to one another, and an agreement for EMC to resell
VMware’s products and services to third party customers. In geographic areas where VMware has not established its own subsidiaries, VMware
contracts with EMC subsidiaries for support services and for personnel who are managed by VMware. Additionally, beginning in the second
quarter of 2011 and extending through the end of 2012, VMware incurred costs to operate the Mozy service on behalf of EMC. These costs, plus
a mark-up to approximate third-party costs and a management fee, were reimbursed to VMware by EMC. See Note N to the consolidated
financial statements for further information regarding intercompany transactions between VMware and EMC.
Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the amounts recorded for
VMware’s intercompany transactions with EMC may not be considered arm’s length with an unrelated third party by nature of EMC’s majority
ownership of VMware. Therefore, the financial statements included herein may not necessarily reflect the financial condition, results of
operations and cash flows had VMware engaged in such transactions with an unrelated third party during all periods presented. Accordingly,
VMware’s historical financial information is not necessarily indicative of what the Company’
s financial condition, results of operations and cash
flows will be in the future if and when VMware contracts at arm’
s length with unrelated third parties for the services the Company receives from
and provides to EMC.
Prior period financial statements have been reclassified to conform to current period presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of VMware and its subsidiaries. All intercompany transactions and balances
between VMware and its subsidiaries have been eliminated. All intercompany transactions with EMC in the consolidated statements of cash
flows will be settled in cash, and changes in the current intercompany balances are presented as a component of cash flows from operating
activities.
Use of Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reporting
periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, capitalized
software development costs, trade receivable valuation, certain accrued liabilities, useful lives of fixed assets and intangible assets, valuation of
acquired intangibles, revenue reserves, income taxes, stock-based compensation and contingencies. Actual results could differ from those
estimates.
Revenue Recognition
VMware derives revenues from the licensing of software and related services. VMware recognizes revenues when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable.
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