VMware 2012 Annual Report Download - page 78

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
releases, management expects VMware’s products to be available for general release soon after technological feasibility has been established.
Future changes in management’s judgment as to when technological feasibility is established, or additional changes in VMware’s business,
including its 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 were to increase again in the future, the amount of capitalized costs would likely increase.
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, VMware has 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 VMware actually generates revenues or the amounts of revenues generated.
Unamortized software development costs were $34.3 million and $104.9 million as of December 31, 2012 and December 31, 2011 ,
respectively, and are included in capitalized software development costs, net and other on the consolidated balance sheets.
For the year ended December 31, 2012 , all software development costs related to product offerings were expensed as incurred and were
included in R&D expenses on the accompanying consolidated statements of income. For the years ended December 31, 2011 and 2010 ,
VMware capitalized $86.4 million (including $12.4 million of stock-based compensation) and $71.6 million (including $10.9 million of stock-
based compensation), respectively, of costs incurred for the development of software products. These amounts were excluded from R&D
expenses on the accompanying consolidated statements of income. Amortization expense from capitalized amounts was $70.6 million , $84.7
million and $99.5 million for the years ended December 31, 2012 , 2011 and 2010 , respectively. Amortization expense is included in cost of
license revenues on the consolidated statements of income.
Business Combinations
For business combinations, VMware recognizes the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in
an acquiree, which are measured based on the acquisition date fair value. Goodwill is measured as the excess of consideration transferred over
the net amounts of the identifiable tangible and intangible assets acquired and the liabilities assumed at the acquisition date.
VMware uses significant estimates and assumptions, including fair value estimates, to determine the fair value of assets acquired and
liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the business combination date. When those estimates
are provisional, VMware refines them as necessary during the measurement period. The measurement period is the period after the acquisition
date, not to exceed one year, in which VMware 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, if material. All other adjustments are
recorded to the consolidated statements of income.
Businesses acquired from EMC are accounted for as a business combination between entities under common control. VMware includes the
results of operations of the acquired businesses under common control, if material, in the period of acquisition as if it had occurred at the
beginning of the period and also retrospectively adjusts the financial statement information presented for prior years to reflect the business as if it
had been acquired at the beginning of the financial period presented. VMware recognizes the net assets under common control at EMC's carrying
values as of the date of the transfer and records the difference between the carrying value and the cash consideration as an equity transaction.
Costs to effect an acquisition are recorded in general and administrative expenses on the consolidated statements of income as the expenses
are incurred.
Intangible Assets and Goodwill
Intangible assets from business combinations, other than goodwill, are amortized over their estimated useful lives, which range from
3 years
up to 12 years , during which the assets are expected to contribute to future cash flows. In the years ended December 31, 2012 , 2011 and 2010 ,
VMware amortized $92.0 million , $64.6 million and $34.8 million , respectively, for intangible assets from business combinations.
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