SecProbe.io

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corresp

gconklin@gibsondunn.com

May 17, 2006

    (415) 393-8263

    C 18861-00008

    (415) 374-8418

VIA EDGAR AND MESSENGER

Kathleen Collins

Accounting Branch Chief and

Kari Jin

Staff Accountant

Division of Corporation Finance

Securities and Exchange Commission

Mail Stop 4-6

450 Fifth Street, N.W.

Washington, D.C. 20549

    Re:

    Cadence Design Systems, Inc.

    Form 10-K for the Fiscal Year Ended December 31, 2005 filed March 10, 2006

    Form 8-K filed February 1, 2006

    File no. 1-10606 1

Dear Ms. Collins and Ms. Jin:

     On behalf of Cadence Design Systems, Inc., a Delaware corporation (“Cadence”), by this letter
we respond on behalf of Cadence to the comments of the staff (the “Staff”) of the Securities and
Exchange Commission (the “SEC”) in the letter dated May 5, 2006 (the “Comment Letter”), relating to
(i) Cadence’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 10-K”) and
(ii) Cadence’s Current Report on Form 8-K filed with the SEC on February 1, 2006 (the “February 1st
8-K”). For ease of reference, the headings and numbered paragraphs below correspond to the headings
and numbered comments in the applicable Comment Letter. Each response of Cadence is set forth in
ordinary type beneath the corresponding Staff comment from the Comment Letter appearing in bold type.

    1

    For future reference, please note that Cadence’s SEC file number is now 0-15867.

Kathleen Collins

Kari Jin

Securities and Exchange Commission

May 17, 2006

Page 2

     This letter is being filed with the SEC on EDGAR supplementally as correspondence and we also
are forwarding, by courier, a complete copy of this letter in paper format.

Form 10-K for the Fiscal Year Ended December 31, 2005

Notes To Consolidated Financial Statements

Note 2. Summary of Significant Accounting Policies

Revenue Recognition, page 63

    1.

    On page 7, you indicate that the Company offers subscription licenses to customers who desire
rights to remix in new technology during the life of contract, which allows the customers
limited access to unspecified new technology on a when and if available basis. On page 73 you
indicate that subscription licenses allow customers limited rights to “exchange” the licensed
software for unspecified technology in the future. Please address the following:

    •

    Tell us, in detail, what you mean by remix rights. Do the subscription licensees
have the right to receive the unspecified additional technology in addition to their
license or are they required to exchange their existing technology for the new
technology?

    •

    Please explain how you analyzed these rights pursuant to paragraphs 48 — 51 of SOP
97-2 and how your accounting complies with this guidance.

           Cadence supplementally advises the Staff that Cadence’s arrangements that are comprised of
subscription licenses generally offer the user remix rights. These remix rights allow the customer
to remix the licenses delivered at the outset of the arrangement, as well as the right to remix
into other unspecified additional software products in the future if the products become available
during the term of the arrangement. The remix rights can be exercised multiple times during the
term of the arrangement.

           The subscription licenses limit the customer’s use at any time to any mix or combination of
the products that are delivered at the outset of the arrangement, as well as any unspecified
additional software products that become available and are delivered to the customer during the
term of the arrangement, so long as the cumulative value of all products in use does not exceed a
value that was determined at the outset of the arrangement.

Kathleen Collins

Kari Jin

Securities and Exchange Commission

May 17, 2006

Page 3

           The remix rights included in a subscription license are consistent with the nature of the
arrangements discussed in TPA 5100. 45 – Effect of Change in License Mix on Software Revenue
Recognition (TPA No. 45), with the exception that the subscription license also provides a right
for the customer to access certain unspecified additional products that become available during the
term of the arrangement. Because these remix rights are consistent with the nature of the
arrangements discussed in TPA No. 45, Cadence believes that these remix rights do not constitute
exchange rights that are contemplated in Paragraphs 50 and 51 of SOP 97-2, Software Revenue
Recognition (SOP 97-2). However, since the subscription license includes a right to access
unspecified additional products that become available during the term of the license, Cadence
applies paragraphs 48 and 49 of SOP 97-2 and, as such, the entire arrangement fee is recognized as
revenue ratably over the term of the arrangement (assuming that all other revenue recognition
criteria in SOP 97-2 are met) beginning with delivery of the first product.

    2.

    We note your disclosure on page 7 where you indicate that term licenses do not include remix
rights. We further note your disclosure on page 73 where you indicate that term licenses
offer limited rights to exchange the licensed software for technology available at the time of
purchase and revenue associated with term license is recognized upon the delivery. Please
address the following:

    •

    Tell us, in detail, what you mean by “limited rights to exchange the licensed
software for technology available at the time of purchase.” Does this mean that your
customers have the right to exchange licensed software for other software products
during the term of their license? If so, does the exchanged software have no more than
minimal differences in price, functionality, or features? Also, if the customers
decide to exercise their right to exchange, can they still use the licensed software?

    •

    Please explain how you analyzed these rights pursuant to paragraphs 50 & 51 of SOP
97-2 and SFAS 48, as applicable, and tell is us how your accounting complies with this
guidance.

           Cadence supplementally advises the Staff that page 7 of the 2005 10-K says that a term license
“does not include remix rights to new technology.” (emphasis added.)

           Cadence also supplementally advises the Staff that Cadence’s term licenses generally offer the
user certain rights to remix the licenses delivered pursuant to the arrangement.

           The customer has a license to use each delivered product which may or may not be similar in
functionality. These arrangements may limit the customer’s use at any time to any mix or
combination of the products as long as the cumulative value of all products in use does not exceed
a value that was established at the outset of the arrangement.

           In accordance with TPA No. 45, Cadence will recognize revenue upon delivery of the product
master, which includes all products within the license mix, if all other criteria in SOP 97-2,
Software Revenue Recognition, are met. Subsequent remixing is not an exchange or return of
software because the product master has been licensed and delivered, and the customer has the right
to use the products included in the product master.

Kathleen Collins

Kari Jin

Securities and Exchange Commission

May 17, 2006

Page 4

    3.

    We note your disclosures on page 74 where you indicate that significant judgment is involved
in assessing whether a fee is fixed or determinable, including “assessing whether a contract
amendment to a term arrangement constitutes a concession.” Please explain what you mean by
“contract amendment” and tell us how you account for such changes to your contracts.

           Cadence supplementally advises the Staff that contract amendments to term licenses for which
product revenue was recognized upon delivery of the licenses (assuming that all other revenue
recognition criteria in SOP 97-2, Software Revenue Recognition, are met) primarily include
extensions/renewals. In addition, during the last three fiscal years, Cadence has also made
amendments to payment plans for two term license arrangements due to the customer experiencing
credit difficulties.

    •

    Amendments to accommodate extensions/renewals. Cadence accounts for
extensions/renewals of licenses which include only products already included in the
pre-existing and currently active arrangements in accordance with TPA 5100.71 – Effect of
Commencement/Renewal License Term and Software Revenue Recognition (assuming that all other
criteria in SOP 97-2, Software Revenue Recognition, are met). As such, the arrangement fee
relating to the extension/renewal is recognized as revenue when the extension/renewal
arrangement is executed (assuming that all other revenue recognition criteria in SOP 97-2,
Software Revenue Recognition, are met).

    •

    Amendments due to the customer experiencing credit difficulties. For contract
amendments caused by the customer experiencing credit difficulties, Cadence gives due
consideration to TPA 5100.56 – Concessions and Software Revenue Recognition (TPA No. 56).
Contract amendments to extend payment terms by three to six months were agreed on for two
term license arrangements for which product revenue was recognized upon delivery of the
licenses, as the customers were delinquent on their payments due to credit difficulties.
TPA No. 56 does not consider the extension of payment terms as a result of the customer
experiencing credit difficulties to be a concession. Cadence believes that its accounting
for the amendments to term licenses for which product revenue was recognized upon delivery
of the licenses (assuming that all other revenue recognition criteria in SOP 97-2, Software
Revenue Recognition, are met) is in accordance with the relevant accounting literature.
Cadence also believes that such contract amendments do not constitute concessions, and
therefore do not prevent Cadence from concluding that the fees for such term arrangements
are fixed or determinable.

Kathleen Collins

Kari Jin

Securities and Exchange Commission

May 17, 2006

Page 5

Note 16, Income Taxes, page 102

    4.

    We note from your disclosures on page 102 that the IRS proposes to assess an aggregate tax
deficiency for the tax years 1997 - 1999 of approximately $143 million, plus interest. We
further note that the Company has protested certain of the proposed adjustments with the
Appeals Office of the IRS and the matter is presently being considered. Has the Company
accrued and/or paid any portion of this deficiency? If not, please explain as it appears the
Company is disputing only certain of the proposed adjustments. Tell us the current
status of your appeal and tell us how you considered SFAS 5 in accounting for this
contingency.

           Cadence supplementally advises the Staff that Cadence has not paid any portion of the proposed
tax deficiency of $143 million, plus interest. Cadence is not required by law to pay at this time
any of the proposed adjustments included in the proposed tax deficiency.

           Cadence has accrued a tax liability related to the proposed tax deficiency based on its best
estimate, for each proposed adjustment, of what ultimately will be sustained upon the final
resolution of the matter through future settlement negotiations or litigation with the taxing
authorities.

           In determining the adequacy of its accrued tax liability, Cadence considered both agreed and
disputed issues with the IRS. Cadence elected not to protest certain of the IRS proposed
adjustments. However, the proposed adjustments related to transfer pricing arrangements, which
represent the most significant components of the proposed tax deficiency, are being contested.

           Cadence commenced meetings with the IRS Appeals Office in 2005 to determine if a settlement
could be reached on the contested adjustments to the transfer pricing arrangements. Cadence has
not yet reached a settlement of the transfer pricing matters with the IRS Appeals Office, but
expects to have additional settlement discussions during 2006. Cadence is not yet certain when the
IRS appeals process will be completed or if a tax settlement can be reached.

           Cadence provides for the effect of income taxes, including possible outcomes of current and
future income tax examinations, on its Consolidated Financial Statements in accordance with SFAS
No. 109, “Accounting for Income Taxes”. Significant judgment is required in determining Cadence’s
provision for income taxes. Cadence provides for tax liabilities on its Consolidated Balance
Sheets unless it is probable that Cadence’s tax positions will
be sustained. To determine the
adequacy of its provision for income taxes, Cadence assessed the probability that additional taxes
will be due by considering the nature of the IRS’s proposed adjustments, the facts and
circumstances of the particular tax position and the weight of available evidence about the
applicability of existing tax law, the status of the IRS examination and the appeals process
(including such status after the date of the financial statements but before those statements are
issued), the views of Cadence’s advisers, Cadence’s experience in similar cases, the experience of
other enterprises, and the decision of Cadence’s management to vigorously contest certain aspects
of the IRS’s proposed tax deficiency. Cadence interprets the term probable consistent
with its use in SFAS No. 5, Accounting for Contingencies (SFAS No. 5), to mean that “the
future event or events are likely to occur.”

Kathleen Collins

Kari Jin

Securities and Exchange Commission

May 17, 2006

Page 6

           It is reasonably possible, as defined in SFAS No. 5, that the IRS’s proposed aggregate tax
deficiency of $143 million, plus interest, may prevail. As a result and in accordance with
paragraph 10 of SFAS No. 5, Cadence has provided disclosure in the Notes to its Consolidated
Financial Statements regarding the contingencies associated with the
tax deficiency proposed by the IRS.

Form 8-K Filed February 1, 2006

    5.

    We note your reconciliation of GAAP net income to non-GAAP net income includes an adjustment
for the “Income tax related to repatriation of foreign earnings” and yet there does not appear
to be any discussion in the Company’s Form 8-K regarding this adjustment. Tell us how you
considered the disclosure requirements of Item 10(e)(1)(i)(C) and (D) of Regulation S-K with
regards to this adjustment.

           Cadence supplementally advises the Staff that, during the fourth quarter of 2005, Cadence
completed its evaluation of the repatriation provisions of the American Jobs Creation Act, or AJCA,
which created a temporary one year incentive for United States corporations to repatriate
accumulated earnings of foreign subsidiaries by providing an 85% dividends received deduction for
certain qualifying dividends. Cadence made the determination to repatriate $500 million of certain
foreign earnings which were previously considered to be indefinitely reinvested outside of the
United States. Cadence will invest these earnings in the United States pursuant to the AJCA
guidelines. Cadence completed the repatriation and recorded an income tax expense of $30.1 million
associated with the repatriation during the fourth quarter of 2005. In the future, Cadence
intends to indefinitely reinvest its foreign earnings outside of the United States (please see page
52 of the 2005 Form 10-K).

           Cadence management believes it is useful in measuring Cadence’s operations for fiscal year
2005 to exclude from its GAAP measures the $30.1 million income tax expense associated with the
repatriation permitted by the AJCA’s temporary, one year incentive provisions because the benefit
of the AJCA was limited to fiscal year 2005. Cadence believes that it is useful to management and
investors to compare the performance of Cadence’s business operations for f