Dell 2011 Annual Report Download - page 56

Table of Contents
acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and
assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Any restructuring charges associated
with a business combination are expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the
use of significant estimates and assumptions.
The results of operations of acquired businesses are included in our Consolidated Financial Statements from the acquisition date.
Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis in the second fiscal quarter, or sooner if an indicator of
impairment occurs. To determine whether goodwill is impaired, we determine the fair values of each of our reportable business units using a discounted cash
flow methodology and then compare the fair values to the carrying values of each reportable business unit. We concluded that there were no impairment
triggering events during Fiscal 2012. At the end of the second quarter of Fiscal 2012, the annual testing period, our market capitalization, including common
stock held by affiliates, was $29.8 billion compared to stockholders’ equity of $8.3 billion. We have determined that a 10% decrease in the fair value of any
one of our reporting units as of February 3, 2012, would have no impact on the carrying value of our goodwill. Though we believe our estimates are
reasonable, these fair values require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.
Standard Warranty Liabilities — We record warranty liabilities at the time of sale for the estimated costs that may be incurred under the terms of the limited
warranty. The liability for standard warranties is included in accrued and other current and other non-current liabilities on the Consolidated Statements of
Financial Position. The specific warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally
include technical support, parts, and labor over a period ranging from one to three years. Factors that affect our warranty liability include the number of
installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy our warranty
obligation. The anticipated rate of warranty claims is the primary factor impacting our estimated warranty obligation. The other factors are less significant due
to the fact that the average remaining aggregate warranty period of the covered installed base is approximately 15 months, repair parts are generally already in
stock or available at pre-determined prices, and labor rates are generally arranged at pre-established amounts with service providers. Warranty claims are
reasonably predictable based on historical experience of failure rates. If actual results differ from our estimates, we revise our estimated warranty liability to
reflect such changes. Each quarter, we reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
Income Taxes — We calculate a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized
by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. We provide related valuation
allowances for deferred tax assets, where appropriate. In determining the future tax consequences of events that have been recognized in our financial
statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a
material impact on our consolidated results of operations or financial position. Additionally, we use tax planning strategies as a part of our global tax
compliance program. Judgments and interpretation of statutes are inherent in this process.
While we believe our tax return positions are sustainable, we recognize tax benefits from uncertain tax positions in the financial statements only when it is
more likely than not that the positions will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the
technical merits and a consideration of the relevant taxing authority's administrative practices and precedents. The determination of income tax expense
related to these positions requires management judgment as well as use of estimates. We believe we have provided adequate reserves for all uncertain tax
positions.
Loss Contingencies — We are subject to the possibility of various losses arising in the ordinary course of business. We consider the likelihood of loss or
impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be
reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new
accruals are required. Third parties have in the past asserted, and may in the future assert claims, or initiate litigation related to exclusive patent, copyright,
and other intellectual property rights to technologies and related standards that are relevant to us. If any infringement or other intellectual property claim made
against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable
terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.
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