VMware 2012 Annual Report Download - page 79

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amounts
of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.
Goodwill is initially carried at its historical cost. VMware tests goodwill 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.
To date, there have been no impairments of goodwill or other intangible assets.
Derivative Instruments
Derivative instruments and hedging activities are measured at fair value and reported as current assets and current liabilities on the
consolidated balance sheets, as applicable.
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. These foreign currency forward contracts are generally traded on a monthly
basis, with a typical contractual term of one month . These forward contracts are not designated as hedging instruments under applicable
accounting guidance and therefore are adjusted to fair value through other income (expense), net in the consolidated statements of income.
Starting in the fourth quarter of 2011, VMware entered into forward contracts which it designated as cash flow hedges to manage the
volatility of cash flows that relate to operating expenses denominated in certain foreign currencies. The cash flow hedges are generally traded
semi-annually, have maturities of six months or less and are adjusted to fair value through accumulated other comprehensive income, net of tax,
on the consolidated balance sheets. When the underlying expense transaction occurs, the gains or losses on the forward contract are subsequently
reclassified from accumulated other comprehensive income to the related operating expense line item in the consolidated statements of income.
The Company does not enter into speculative foreign exchange contracts for trading purposes. See Note F to the consolidated financial
statements for further information.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $37.0 million , $19.6 million and $13.7 million in 2012 , 2011 and
2010 , 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. If these overseas funds are needed for its operations in the U.S., VMware would be required to
accrue and pay U.S. taxes on related undistributed earnings to repatriate these funds. However, VMware’s intent is to indefinitely reinvest its
non-U.S. earnings in its foreign operations and VMware’s current plans do not demonstrate a need to repatriate them to fund its U.S. operations.
The difference between the income taxes payable or receivable that is calculated on a separate return basis and the amount actually paid to
or received from EMC pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital. See Note K for
further information.
Earnings Per Share
Basic net income per share is calculated using the weighted-average number of shares of VMware’s common stock outstanding during the
period. Diluted earnings per share are calculated using the weighted-average number of common shares, including the dilutive effect of equity
awards as determined under the treasury stock method. VMware has two classes of common stock, Class A and Class B common stock. For
purposes of calculating earnings per share, VMware uses the two-class method. As both classes share the same rights in dividends, basic and
diluted earnings per share are the same for both classes.
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