Yahoo 2006 Annual Report Download - page 61

financial statements for additional information. Based on our 2006 impairment test, there would have to be a
significant unfavorable change to our assumptions used in such calculations for an impairment to exist.
We amortize other intangible assets over their estimated useful lives. We record an impairment charge on these
assets when we determine that their carrying value may not be recoverable. The carrying value is not recoverable if
it exceeds the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. When
there is existence of one or more indicators of impairment, we measure any impairment of intangible assets based on
a projected discounted cash flow method using a discount rate determined by our management to be commensurate
with the risk inherent in our business model. Our estimates of future cash flows attributable to our other intangible
assets require significant judgment based on our historical and anticipated results and are subject to many factors.
Different assumptions and judgments could materially affect the calculation of the fair value of our other intangible
assets which could trigger impairment.
Investments in Equity Interests. We account for investments in entities in which we can exercise significant
influence but do not own a majority equity interest or otherwise control using the equity method. In accounting for
these investments we record our proportionate share of these entities’ net income or loss, one quarter in arrears.
We review all of our investments in equity interests for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the investment may not be fully recoverable. The impairment
review requires significant judgment to identify events or circumstances that would likely have a significant adverse
effect on the fair value of the investment. Investments identified as having an indication of impairment are subject
to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the
fair value of the investment. The determination of the fair value of the investment involves considering factors such
as the following: the stock prices of public companies in which we have an equity investment, current economic and
market conditions, the operating performance of the companies including current earnings trends and undiscounted
cash flows, quoted stock prices of comparable public companies, and other company specific information including
recent financing rounds. The fair value determination, particularly for investments in privately-held companies,
requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and
assumptions could affect the calculation of the fair value of the investments and the determination of whether any
identified impairment is other-than-temporary.
Stock-Based Compensation Expense. Effective January 1, 2006 we adopted SFAS 123R using the modified
prospective method and therefore have not restated prior periods’ results. Under the fair value recognition
provisions of SFAS 123R, we recognize stock-based compensation net of an estimated forfeiture rate and therefore
only recognize compensation cost for those shares expected to vest over the service period of the award. Prior to
SFAS 123R adoption, we accounted for share-based payments under APB 25 and accordingly, generally recognized
stock-based compensation expense related to restricted stock awards and stock options with intrinsic value that we
exchanged in connection with acquisitions and accounted for forfeitures as they occurred.
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the
expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. We
estimate the expected life of options granted based on historical exercise patterns, which we believe are repre-
sentative of future behavior. We estimate the volatility of our common stock on the date of grant based on the
implied volatility of publicly traded options on our common stock, with a term of one year or greater. We believe
that implied volatility calculated based on actively traded options on our common stock is a better indicator of
expected volatility and future stock price trends than historical volatility. Therefore, expected volatility for the year
ended December 31, 2006 was based on a market-based implied volatility. The assumptions used in calculating the
fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and
the application of management judgment. As a result, if factors change and we use different assumptions, our stock-
based compensation expense could be materially different in the future. In addition, we are required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture
rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. If our actual
forfeiture rate is materially different from our estimate, the stock-based compensation expense could be signif-
icantly different from what we have recorded in the current period. See Note 12 — “Employee Benefits” in the
consolidated financial statements for additional information.
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