VMware 2015 Annual Report Download - page 48

TableofContents
Weestablishreservesforincometaxestoaddresspotentialexposuresinvolvingtaxpositionsthatcouldbechallengedbyfederal,stateandforeigntax
authorities,whichmayresultinproposedassessments.Intheordinarycourseofourglobalbusinesstherearemanyintercompanytransactions,includingthe
transferofintellectualproperty,wheretheultimatetaxdeterminationcouldbechallengedbythetaxauthorities.Ourassumptions,estimates,andjudgmentsused
todeterminethereserverelatingtothesepositionsconsiderscurrenttaxlaws,interpretationofcurrenttaxlawsandpossibleoutcomesofcurrentandfuture
examinationsconductedbytaxauthorities.AspartoftheEMCconsolidatedgroup,andseparately,wearesubjecttotheperiodicexaminationofourincometax
returnsbytheInternalRevenueServiceandotherdomesticandforeigntaxauthorities.Weregularlyassessthelikelihoodofoutcomesresultingfromthese
examinationstodeterminetheadequacyofourreservesandanypotentialadjustmentsthatmayresultfromthecurrentandfutureexaminations.Webelievesuch
estimatestobereasonable;however,thefinaldeterminationfromexaminationsandchangesintaxlawscouldsignificantlyimpacttheamountsprovidedfor
incometaxesintheconsolidatedfinancialstatements.
WearesubjecttotaxintheU.S.,andinmultipleforeigntaxjurisdictions.OurU.S.liquidityneedsarecurrentlysatisfiedusingcashflowsgeneratedfromour
U.S.operations,borrowings,orboth.Wealso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.Currently,wedonotprovideU.S.incometaxesonundistributedearningsofournon-U.S.subsidiaries.Theseundistributedearningsare
consideredpermanentlyreinvestedoutsidetheU.S.Whilewedonotanticipatechangingourintentionregardingpermanentlyreinvestedearnings,ifcertainforeign
earningspreviouslytreatedaspermanentlyreinvestedarerepatriated,therelatedU.S.taxliabilitymaybereducedbyanynon-U.S.incometaxespaidonthese
earnings.
Ourdeferredtaxassetsreflectourestimatesoftheamountandcategoryoffuturetaxableincome,suchasincomefromoperationsandcapitalgains,andalso
takeintoaccountvaluationallowancesthatconsiderotherkeyfactorsthatmightrestrictourabilitytorealizethedeferredtaxassets.Actualoperatingresultsand
theunderlyingamountandcategoryofincomeinfutureyearscouldrenderourcurrentassumptions,judgmentsandestimatesofrecoverablenetdeferredtaxes
inaccurate.
Business Combinations
Weallocatethepurchasepriceofacquireesto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.
Theallocationofthepurchasepricerequiresustomake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acquisitiondate.Althoughwebelievethe
assumptionsandestimateswehavemadearereasonable,theyarebasedinpartonhistoricalexperienceandinformationobtainedfromthemanagementofthe
acquiredcompaniesandareinherentlyuncertain.Examplesofcriticalestimatesusedinvaluingcertainoftheintangibleassetswehaveacquiredormayacquirein
thefutureincludebutarenotlimitedto:
• futureexpectedcashflowsfromsales,maintenanceagreementsandacquireddevelopedtechnologies;
• theacquiredcompany’stradenameandcustomerrelationshipsaswellasassumptionsabouttheperiodoftimetheacquiredtradenameandcustomer
relationshipswillcontinuetobeusedinthecombinedcompany’sproductportfolio;
• discountratesusedtodeterminethepresentvalueofestimatedfuturecashflows.
Theseestimatesareinherentlyuncertainandunpredictable,andifdifferentestimateswereusedthepurchasepricefortheacquisitioncouldbeallocatedtothe
acquiredassetsandliabilitiesdifferentlyfromtheallocationthatwehavemade.Additionally,unanticipatedeventsandcircumstancesmayoccurwhichmayaffect
theaccuracyorvalidityofsuchassumptions,estimatesoractualresults.
New Accounting Pronouncements
DuringNovember2015,theFinancialAccountingStandardsBoard(“FASB”)issuedAccountingStandardsUpdate(“ASU”)2015-17,BalanceSheet
ClassificationofDeferredTaxes(Topic740),whichsimplifiesthepresentationofdeferredincometaxes.Thisstandardrequiresanentitytoclassifydeferredtax
assetsandliabilitiesasnon-currentwithinaclassifiedstatementoffinancialposition.ASU2015-17iseffectiveforfinancialstatementsissuedforannualperiods
beginningafterDecember15,2016,andinterimperiodswithinthoseannualperiods.Thisstandardmaybeappliedeitherprospectivelytoalldeferredtaxassets
andliabilitiesorretrospectivelytoallperiodspresented.Earlyapplicationispermittedasofthebeginningoftheinterimorannualreportingperiod.Weearly-
adoptedASU2015-17effectiveDecember31,2015usingretrospectiveapplication.UponadoptionofASU2015-17,currentdeferredtaxassetsof$248million
werereclassifiedasnon-currentdeferredtaxassetsontheconsolidatedbalancesheetasofDecember31,2014.
DuringMay2014,theFASBissuedASUNo.2014-09,RevenuefromContractswithCustomers(Topic606).Theupdatedrevenuestandardestablishes
principlesforrecognizingrevenueanddevelopsacommonrevenuestandardforallindustries.
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