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Share-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of income and as such,
only those share-based awards that we expect to vest are recorded. We estimate the forfeiture rate based on historical forfeitures of equity
awards and adjust the rate to reflect changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual
forfeitures differ from our initial estimates.
We have historically issued unvested restricted shares to employee stockholders of certain acquired companies. As these awards
are generally subject to continued post-acquisition employment, we have accounted for them as post-acquisition share-based compensation
expense. We recognize compensation expense equal to the grant date fair value of the common stock on a straight-line basis over the
employee's required service period.
During the years ended December 31, 2013, 2012, and 2011, we realized tax benefits from share-based award activity of $602
million, $1.03 billion, and $433 million, respectively. These amounts reflect the extent that the total reduction to our income tax liability
from share-based award activity was greater than the amount of the deferred tax assets that we had previously recorded in anticipation
of these benefits. These amounts are the aggregate of the individual transactions in which the reduction to our income tax liability was
greater than the deferred tax assets that we recorded, reduced by any individual transactions in which the reduction to our income tax
liability was less than the deferred tax assets that were recorded. These net amounts were recorded as an adjustment to stockholders'
equity in each period, as an increase to cash flows from operating activities, and were not recognized in our consolidated statements of
income.
In addition, we reported excess tax benefits that decreased our cash flows from operating activities and increased our cash flows
from financing activities for the years ended December 31, 2013, 2012, and 2011, by $609 million, $1.03 billion, and $433 million,
respectively. The amounts of these excess tax benefits reflect the total of the individual transactions in which the reduction to our income
tax liability was greater than the deferred tax assets that were recorded, but were not reduced by any of the individual transactions in
which the reduction to our income tax liability was less than the deferred tax assets that were recorded.
Income Taxes
We recognize income taxes under the asset and liability method. We recognize deferred income tax assets and liabilities for the
expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These
differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences
are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in income in the period that includes
the enactment date.
We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be
realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks
associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will
be sustained on examination by the taxing authorities based on the technical merits of the position. We make adjustments to these reserves
when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes
includes the effects of any reserves that are considered appropriate, as well as the related net interest and penalties.
Advertising Expense
Advertising costs are expensed when incurred and are included in marketing and sales expenses in the accompanying consolidated
statements of income. We incurred advertising expenses of $117 million, $67 million, and $28 million for the years ended December 31,
2013, 2012, and 2011, respectively.
Cash and Cash Equivalents, and Marketable Securities
Cash and cash equivalents primarily consist of cash on deposit with banks and investments in money market funds, and U.S.
government and U.S. government agency securities with maturities of 90 days or less from the date of purchase.
We hold investments in marketable securities, consisting of U.S. government and U.S. government agency securities. We classify
our marketable securities as available-for-sale investments in our current assets because they represent investments of cash available for
current operations. Our available-for-sale investments are carried at estimated fair value with any unrealized gains and losses, net of
taxes, included in accumulated other comprehensive income/(loss) in stockholders' equity. Unrealized losses are charged against other
income (expense), net when a decline in fair value is determined to be other-than-temporary. We have not recorded any such impairment
charge in the periods presented. We determine realized gains or losses on sale of marketable securities on a specific identification method,
and record such gains or losses as other income (expense), net.
We classify certain restricted cash balances within prepaid expenses and other current assets and other assets on the accompanying
consolidated balance sheets based upon the term of the remaining restrictions.