Apple 2006 Annual Report Download - page 84

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
SFAS No. 123R prohibits recognition of a deferred tax asset for an excess tax benefit that has not been realized. The Company will recognize a
benefit from stock-based compensation in equity if an incremental tax benefit is realized by following the ordering provisions of the tax law. In
addition, the Company accounts for the indirect effects of stock-based compensation on the research tax credit, the foreign tax credit, and the
domestic manufacturing deduction through the income statement.
Prior to the adoption of SFAS No. 123R, the Company measured compensation expense for its employee stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25. The Company applied the disclosure provisions of SFAS No. 123 as
amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, as if the fair-value-
based method had been
applied in measuring compensation expense. Under APB Opinion No. 25, when the exercise price of the Company’s employee stock options
was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized.
The following table illustrates the effect on net income after taxes and net income per common share as if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based compensation during 2005 and 2004 (in millions, except per share amounts):
(1)
See Note 2, “Restatement of Consolidated Financial Statements.”
Further information regarding stock-based compensation can be found in Note 9.
Earnings Per Common Share
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of
shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to
common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the
number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been
issued. The dilutive effect of outstanding options, restricted stock, and restricted stock units is reflected in diluted earnings per share by
application of the treasury stock method. Under the
83
2005
2004
As Restated (1)
As Restated (1)
Net income
$
1,328
$
266
Add: Stock-based employee compensation expense included in
reported net income, net of tax
45
43
Deduct: Stock-based employee compensation expense determined
under the fair value based method for all awards, net of tax
(118
)
(148
)
Net income
—pro forma
$
1,255
$
161
Net income per common share
Basic
$
1.64
$
0.36
Diluted
$
1.55
$
0.34
Net income per common share
—
pro forma
Basic
$
1.55
$
0.22
Diluted
$
1.47
$
0.21