Apple 2012 Annual Report Download - page 51

has been established and ending when a product is available for general release to customers. In most instances,
the Company’s products are released soon after technological feasibility has been established. Costs incurred
subsequent to achievement of technological feasibility were not significant, and generally software development
costs were expensed as incurred during 2012, 2011 and 2010.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $1.0 billion, $933 million and $691 million
for 2012, 2011 and 2010, respectively.
Share-based Compensation
The Company recognizes expense related to share-based payment transactions in which it receives employee
services in exchange for (a) equity instruments of the Company 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. Share-based
compensation cost for restricted stock units (“RSUs”) is measured based on the closing fair market value of the
Company’s common stock on the date of grant. Share-based compensation cost for stock options is estimated at
the grant date based on each option’s fair-value as calculated by the Black-Scholes-Merton (“BSM”) option-
pricing model. The Company recognizes share-based compensation cost as expense ratably on a straight-line
basis over the requisite service period. The Company recognizes a benefit from share-based compensation in the
Consolidated Statements of Shareholders’ Equity if an incremental tax benefit is realized. In addition, the
Company recognizes the indirect effects of share-based compensation on research and development tax credits,
foreign tax credits and domestic manufacturing deductions in the Consolidated Statements of Operations. Further
information regarding share-based compensation can be found in Note 6, “Shareholders’ Equity and Share-based
Compensation” of this Form 10-K.
Income Taxes
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets
and liabilities are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income
in effect for the years in which those tax assets are expected to be realized or settled. The Company records a
valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be
realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such positions are then measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 5, “Income
Taxes” of this Form 10-K for additional information.
Earnings Per Share
Basic earnings per 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 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 potentially dilutive securities had been issued. Potentially dilutive
securities include outstanding stock options, shares to be purchased under the Company’s employee stock
purchase plan and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted
earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in
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