## Management’s Discussion and Analysis of Financial Condition and Results of Operations 

customers to make required payments. The allowance for doubtful accounts is determined by evaluating the relative credit-worthiness of each customer based upon market capitalization and other information, including the aging of the receivables. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. 

Income Taxes. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be real- ized. While the Company has considered future taxable income and on- going prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to real- ize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income or equity (if the deferred tax asset is related to tax benefits from stock option benefits that have not been realized) in the period such determination was made. 

Cognizant’s Indian subsidiary, CTS India, is an export-oriented company, which, under the Indian Income Tax Act of 1961 is entitled to claim tax holidays for a period of ten years with respect to its export profits. Substantially all of the earnings of CTS India are attributable to export profits and are therefore currently entitled to a 90% exemption from Indian income tax. These tax holidays will begin to expire in 2004 and under current law will be completely phased out by March of 2009. Prior to 2002, it was management's intent to repatriate all accumulated earnings from India to the United States; accordingly, Cognizant has provided deferred income taxes in the amount of approximately $24.9 million on all such undistributed earnings through December 31, 2001. During the first quarter of 2002, Cognizant made a strategic decision to pursue an inter- national strategy that includes expanded infrastructure investments in India and geographic expansion in Europe and Asia. As a component of this strategy, Cognizant intends to use 2002 and future Indian earnings to expand operations outside of the United States instead of repatriating these earnings to the United States. Accordingly, effective January 1, 2002, pursuant to Accounting Principles Bulletin 23, Cognizant will no longer accrue taxes on the repatriation of earnings recognized in 2002 and subsequent periods as these earnings are considered to be indefinite- ly reinvested outside of the United States. As of December 31, 2002, the amount of unrepatriated earnings upon which no provision for taxation has been recorded is approximately $30.1 million. If such earnings are repatriated in the future, or are no longer deemed to be indefinitely rein- vested, Cognizant will accrue the applicable amount of taxes associated with such earnings. Due to the various methods by which such earnings could be repatriated in the future, it is not currently practicable to deter- mine the amount of applicable taxes that would result from such repatriation. 

This change in intent, as well as a change in the manner in which repatri- ated earnings are taxed in India, resulted in an estimated effective tax rate for the year ended December 31, 2002 of 23.4%. This rate compares to an effective tax rate for the year ended December 31, 2001 of 37.4%. 

Effective April 1, 2002, the government of India passed various tax law changes which affected the way in which the Company’s earnings are taxed in India. The tax exemption for export earnings was reduced from 100% to 90%, a surtax was imposed increasing the effective rate from 35.7% to 36.75% for income that is subject to tax, and the corporate level tax on the payment of dividends was replaced with a withholding tax on dividends. 

Cognizant’s cash requirements could change over time, which could effec- tively force it to change its intent on repatriating Indian earnings. If Cognizant’s earnings are intended to be repatriated in the future, or are no longer reinvested outside the United States, Cognizant will have to accrue the applicable amount of taxes associated with such earnings and pay taxes at a substantially higher rate than the effective rate in 2002. These increased taxes could have a material adverse effect on Cognizant’s business, results of operations and financial condition, as well as cash flows to fund such taxes. In addition, Cognizant may need to accelerate the payment of significant deferred taxes, which would have a significant impact on its cash position. 

Goodwill and Other Intangibles. Prior to 2002, goodwill, which related to the acquisition of the former minority interest in the Company’s Indian subsidiary, was amortized using the straight-line basis over a period of seven years. Effective January 1, 2002, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”), the Company is no longer amortizing its remaining goodwill balance; however, at each balance date, the Company does evaluate goodwill and other intangible assets for impairment at least annually, or as circumstances warrant. If such assets were determined to be impaired, it could have a material adverse effect on Cognizant’s busi- ness, results of operations and financial condition. 

Long-lived Assets. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which was adopted in 2002, the Company reviews for impairment long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize an impairment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such assets. The measurement for such an impairment loss is then based on the fair value of the asset. 

