Intel 2004 Annual Report Download - page 60

Table of Contents
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Advertising
Cooperative advertising obligations are accrued and the costs expensed at the same time the related revenue is recognized. All other
advertising costs are expensed as incurred. Cooperative advertising expenses are recorded as marketing, general and administrative expense to
the extent that an advertising benefit separate from the revenue transaction can be identified and the cash paid does not exceed the fair value of
that advertising benefit received. Any excess of cash paid over the fair value of the advertising benefit received is recorded as a reduction in
revenue. Advertising expense was $2.1 billion in 2004 ($1.8 billion in 2003 and $1.7 billion in 2002).
Employee Equity Incentive Plans
The company has employee equity incentive plans, which are described more fully in “Note 11: Employee Equity Incentive Plans.” Intel
accounts for its equity incentive plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related interpretations. The exercise price of options is equal to the market price of Intel common stock
(defined as the average of the high and low trading prices reported by The NASDAQ Stock Market*) on the date of grant. Accordingly, no
stock-based compensation, other than acquisition-related compensation, is recognized in net income. The following table illustrates the effect
on net income and earnings per share as if the company had applied the fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended, to options granted under the stock option plans and
rights to acquire stock granted under the company’s Stock Participation Plan, collectively called “options.” For purposes of this pro-forma
disclosure, the value of the options is estimated using a Black-Scholes option pricing model and amortized ratably to expense over the options’
vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be
significantly different.
It is the company’s policy under SFAS No. 123 to periodically make adjustments to pro-forma compensation expense to reflect
forfeitures. Based on recent forfeiture data, the company recognized additional pro-
forma compensation expense and related tax effects totaling
$58 million in 2004. The company reversed previously recognized pro-forma compensation expense and related tax effects totaling $190
million in 2003 and $87 million in 2002.
SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-
Scholes option pricing model was developed for use in estimating the fair value of short-lived exchange-traded options that have no vesting
restrictions and are fully transferable. The company’s employee stock options have characteristics significantly different from those of traded
options. In addition, option pricing models require the input of highly subjective assumptions, including the option’
s expected life and the price
volatility of the underlying stock, and changes in the subjective input assumptions can materially affect the fair value estimate of employee
stock options.
55
(In Millions—Except Per Share Amounts)
2004 2003 2002
Net income, as reported
$
7,516
$
5,641
$
3,117
Less: total stock-based employee compensation expense determined under the fair value method
for all awards, net of tax
1,271
991
1,170
Pro
-
forma net income
$
6,245
$
4,650
$
1,947
Reported basic earnings per common share
$
1.17
$
0.86
$
0.47
Pro
-
forma basic earnings per common share
$
0.98
$
0.71
$
0.29
Reported diluted earnings per common share
$
1.16
$
0.85
$
0.46
Pro
-
forma diluted earnings per common share
$
0.97
$
0.71
$
0.29