Apple 2006 Annual Report Download - page 83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
During 2004, the Company incurred substantial development costs associated with FileMaker Pro 7 subsequent to achievement of
technological feasibility as evidenced by public demonstration and release of a developer beta version, and prior to the release of the final
version of the product in March 2004. Therefore, during 2004, the Company capitalized approximately $2.3 million of costs associated with the
development of FileMaker Pro 7. In accordance with SFAS No. 86, amortization of this asset to cost of sales began in March 2004 when the
Company began shipping FileMaker Pro 7 and is being recognized on a straight-line basis over a three-year estimated useful life.
Total amortization related to capitalized software development costs was $17.8 million, $15.7 million, and $10.7 million in 2006, 2005, and
2004, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $338 million, $287 million, and $206 million for 2006, 2005, and 2004,
respectively.
Stock-Based Compensation
On September 25, 2005, the Company adopted SFAS No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment
, which addresses the
accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of
such equity instruments. In January 2005, the SEC issued SAB No. 107, which provides supplemental implementation guidance for SFAS
No. 123R. SFAS No. 123R eliminates the ability to account for stock
-based compensation transactions using the intrinsic value method under
Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees , and instead generally requires that such
transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes-Merton (“BSM”) option-
pricing model to
determine the fair-value of stock-based awards under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS
No. 123,
Accounting for Stock-Based Compensation . The Company has elected to use the modified prospective transition method as permitted
by SFAS No. 123R and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective
transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock,
restricted stock units, and employee stock purchase plan shares that are ultimately expected to vest as the requisite service is rendered
beginning on September 25, 2005, the first day of the Company’s fiscal year 2006. Stock-
based compensation expense for awards granted prior
to September 25, 2005 is based on the grant-date fair-value as determined under the pro forma provisions of SFAS No. 123. The Company
recognized incremental stock-based compensation expense of $117 million during 2006 as a result of the adoption of SFAS No. 123R. Diluted
earnings per common share was reduced by $0.10 for the year ended September 30, 2006 due to the adoption of SFAS No. 123R. In
accordance with SFAS No. 123R, beginning in 2006 the Company has presented excess tax benefits from the exercise of stock-based
compensation awards as a financing activity in the consolidated statement of cash flows.
No stock
-based compensation costs have been capitalized as of September 30, 2006. The income tax benefit related to stock-based
compensation expense was $39 million for the year ended September 30, 2006. As of September 30, 2006, $375.2 million of total
unrecognized compensation cost related to stock options and restricted stock units is expected to be recognized over a weighted-average period
of 2.91 years.
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