Electronic Arts 2007 Annual Report Download - page 168

Valuation and Expense Recognition. Upon adoption of SFAS No. 123(R), we began to recognize compensa-
tion costs for stock-based payment transactions to employees based on their grant-date fair value over the
service period for which such awards are expected to vest. The fair value of restricted stock units is
determined based on the quoted price of our common stock on the date of grant. The fair value of stock
options and stock purchase rights granted pursuant to our employee stock purchase plan is determined using
the Black-Scholes valuation model, which was the same model we previously used for the pro forma
information required under SFAS No. 123. The determination of fair value is affected by our stock price as
well as assumptions regarding subjective and complex variables such as expected employee exercise behavior
and our expected stock price volatility over the expected term of the award. Generally, our assumptions are
based on historical information and judgment is required to determine if historical trends may be indicators of
future outcomes. The Black-Scholes valuation model requires us to estimate the following key assumptions:
•Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury yields in effect at the time
of grant for the expected term of the option.
•Expected volatility. We use our historical stock price volatility and consider the implied volatility
computed based on the price of short-term options publicly traded on our common stock for our
expected volatility assumption.
•Expected term. The expected term represents the weighted-average period the stock options are
expected to remain outstanding. The expected term is determined based on historical exercise behavior,
post-vesting termination patterns, options outstanding and future expected exercise behavior.
•Expected dividends.
The assumptions used in the Black-Scholes valuation model to value our option grants and employee stock
purchase plan during the fiscal year ended March 31, 2007 were as follows:
Stock Option Grants Employee Stock Purchase Plan
Risk-free interest rate.............................. 4.5-5.1% 3.7 - 5.1%
Expected volatility ................................ 31-46% 28-36%
Weighted-average volatility ......................... 35% 33%
Expected term ................................... 4.2years 6 - 12 months
Expected dividends ............................... None None
Prior to our adoption of SFAS No. 123(R), we valued our stock options based on the multiple-award valuation
method and recognized the expense using the accelerated approach over the requisite service period. In
conjunction with our adoption of SFAS No. 123(R), we changed our method of recognizing our stock-based
compensation expense for post-adoption grants to the straight-line approach over the requisite service period;
however, we continue to value our stock options based on the multiple-award valuation method.
As required by SFAS No. 123(R), employee stock-based compensation expense recognized during the fiscal
year ended March 31, 2007 was calculated based on awards ultimately expected to vest and has been reduced
for estimated forfeitures. In subsequent periods, if actual forfeitures differ from those estimates, an adjustment
to stock-based compensation expense will be recognized at that time.
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