Dell 2006 Annual Report Download - page 94

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under
SFAS 123, forfeitures were accounted for as they occurred.
Prior to the adoption of SFAS 123(R), tax benefits resulting from tax deductions in excess of the stock-based compensation
expense recognized for those options were classified as operating cash flows. These excess tax benefits are now classified
as a source of financing cash flows, with an offsetting amount classified as a use of operating cash flows. This amount was
$80 million in Fiscal 2007. In addition, there was no material stock-based compensation expense capitalized as part of the
cost of an asset.
Pro Forma Information under SFAS 123 for Periods Prior to Fiscal 2007
Prior to the adoption of SFAS 123(R), Dell measured compensation expense for its employee stock-based compensation
plans using the intrinsic value method prescribed by APB 25. Under APB 25, when the exercise price of Dell's employee
stock options equaled or exceeded the market price of the underlying stock on the date of the grant, no compensation
expense was recognized. Dell applied the disclosure provisions of SFAS 123 as amended by SFAS 148, as if the fair-value
based method had been applied in measuring compensation expense.
The following table illustrates the effect on net income and earnings per share for the fiscal years ended February 3, 2006
and January 28, 2005, as if Dell had applied the fair value recognition provisions of SFAS 123 to stock-based employee
compensation:
Fiscal Year Ended
February 3, January 28,
2006 2005
As As
Restated Restated
(in millions, except per share data)
Net income $ 3,602 $ 3,018
Deduct: Total share-based employee compensation determined under fair value method
for all awards, net of related tax effects (1,094) (812)
Net income — pro forma $ 2,508 $ 2,206
Earnings per common share:
Basic — as restated $ 1.50 $ 1.20
Basic — pro forma $ 1.04 $ 0.88
Diluted — as restated $ 1.47 $ 1.18
Diluted — pro forma $ 1.02 $ 0.86
On January 5, 2006, Dell's Board of Directors approved the acceleration of vesting of certain unvested and "out-of-the-
money" stock options with exercise prices equal to or greater than $30.75 per share previously awarded under equity
compensation plans. Options to purchase approximately 101 million shares of common stock, or 29% of the outstanding
unvested options, were subject to the acceleration. The weighted-average exercise price of the options that were accelerated
was $36.37. The purpose of the acceleration was to enable Dell to reduce future compensation expense associated with
these options upon the adoption of SFAS 123(R).
Valuation Information
SFAS 123(R) requires the use of a valuation model to calculate the fair value of stock option awards. Dell has elected to use
the Black-Scholes option pricing model, which incorporates various assumptions, including volatility, expected term, and risk-
free interest rates. The volatility is based on a blend of implied
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