VMware 2012 Annual Report Download - page 80

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentrations of Risks
Financial instruments, which potentially subject VMware to concentrations of credit risk, consist principally of cash and cash equivalents,
short-term investments and accounts receivable. Cash on deposit with banks may exceed the amount of insurance provided on such deposits.
These deposits may be redeemed upon demand. VMware places cash, cash equivalents and short-term investments primarily in money market
funds and fixed income securities and limits the amount of investment with any single issuer and any single financial institution. VMware holds
a diversified portfolio of money market funds and fixed income securities, which primarily consist of various highly liquid debt instruments of
the U.S. government and its agencies, U.S. municipal obligations, and U.S. and foreign corporate debt securities. VMware’s fixed income
investment portfolio is denominated in U.S. dollars and consists of securities with various maturities.
VMware monitors the counterparty risk for adequate diversification amongst the financial institutions holding the funds. VMware also
monitors counterparty risk to financial institutions with which VMware enters into derivatives to ensure that these financial institutions are of
high credit quality.
VMware held $40.6 million of foreign government and agencies securities, $10.4 million of which was deemed sovereign debt, at
December 31, 2012 . These sovereign debt securities had an average credit rating of AAA and were predominantly from Canada. None of the
securities deemed sovereign debt were from Greece, Ireland, Italy, Portugal or Spain.
VMware provides credit to distributors, resellers, and certain end-user customers in the normal course of business. Credit is generally
extended to new customers based upon a credit evaluation. Credit is extended to existing customers based on ongoing credit evaluations, prior
payment history and demonstrated financial stability.
As of December 31, 2012 , three distributors accounted for 19% , 16% and 11% of VMware’s accounts receivable balance. As of
December 31, 2011 , three distributors accounted for 20% , 16% and 11% of VMware’s accounts receivable balance.
One distributor accounted for 15% , 15% and 13% of revenues in 2012 , 2011 and 2010 , respectively, and another distributor accounted for
12% , 11% , and 10% of revenues in 2012 , 2011 and 2010 , respectively. A third distributor accounted for 10% and 11% of revenues in 2011
and 2010 , respectively.
Accounting for Stock
-Based Compensation
VMware utilizes the Black-Scholes option-pricing model to determine the fair value of VMware’s stock option awards. The Black-Scholes
model includes assumptions regarding dividend yields, expected volatility, expected term and risk-free interest rates. These assumptions reflect
the Company’s best estimates, but these items involve uncertainties based on market and other conditions outside of the Company’s control.
VMware restricted stock unit awards, including performance stock unit (“PSU”) awards, are valued based on the Company’s stock price on the
date of grant. For those awards expected to vest, which only contain a service vesting feature, VMware recognizes compensation cost on a
straight-line basis over the awards’ requisite service periods. Liability-classified awards are recorded at fair value in accrued expenses and other
on the consolidated balance sheets with changes in fair value relating to the vested portion of the award recorded as stock-based compensation
on the consolidated statements of income.
VMware's PSUs will vest if certain employee specific or VMware designated performance targets are achieved. If minimum performance
thresholds are achieved, each PSU award will convert into VMware's Class A common stock at a defined ratio depending on the degree of
achievement of the performance target designated by each individual award. If minimum performance thresholds are not achieved, then no
shares will be issued under that PSU award. Based upon the expected levels of achievement, stock-based compensation is recognized on a
straight-line basis over the PSUs' requisite service periods. The expected levels of achievement are reassessed over the requisite service periods
and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted in the period of change and recorded in
the statement of income and the remaining unrecognized stock-based compensation is recorded over the remaining requisite service period.
New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02, Reporting of
Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires companies to present
information about reclassification adjustments from accumulated other comprehensive income in their financial statements or footnotes. ASU
2013-02 is effective for fiscal periods beginning after December 15, 2012. VMware does not expect the adoption of ASU 2013-02 to impact its
consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU
2011-05 eliminated the option to report other comprehensive income and its components in the statement of
75