Yahoo 2006 Annual Report Download - page 75

ratably over the term the fixed payment covers. Agreements based on a percentage of revenue, number of paid
introductions, number of searches, or other metrics are expensed based on the volume of the underlying activity or
revenue multiplied by the agreed-upon price or rate.
Internal Use Software and Website Development Costs. The Company capitalized certain internal use software
and website development costs totaling approximately $19 million, $18 million, and $84 million during 2004, 2005,
and 2006, respectively. The estimated useful life of costs capitalized is evaluated for each specific project and
ranges from one to three years. During 2004, 2005, and 2006, the amortization of capitalized costs totaled
approximately $11 million, $18 million, and $14 million, respectively. Capitalized internal use software and
website development costs are included in property and equipment, net.
Product Development. Product development expenses consist primarily of compensation related expenses
(including stock-based compensation expense) incurred for the development of, enhancements to and maintenance
of the Yahoo! Properties, classification and organization of listings within Yahoo! Properties, research and
development and Yahoo!’s technology platforms and infrastructure. Depreciation expense and other operating
costs are also included in product development.
Advertising Costs. Advertising production costs are recorded as expense the first time an advertisement appears.
Costs of communicating advertising are recorded as expense as advertising space or airtime is used. All other
advertising costs are expensed as incurred. Advertising expense totaled approximately $160 million, $201 million,
and $222 million for 2004, 2005, and 2006, respectively.
Stock-Based Compensation. Prior to January 1, 2006, the Company accounted for employee stock-based
compensation using the intrinsic value method supplemented by pro forma disclosures in accordance with
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”)
and SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement
No. 123” (“SFAS 148”). Under the intrinsic value method, the recorded stock-based compensation expense was
related to the amortization of the intrinsic value of Yahoo! stock options and other stock-based awards issued by the
Company and assumed in connection with business combinations. Options granted with exercise prices equal to the
grant date fair value of the Company’s stock have no intrinsic value and therefore no expense was recorded for these
options under APB 25. For stock options whose exercise price was below the grant date fair value of the Company’s
stock (principally options assumed in business combinations), the difference between the exercise price and the
grant date fair value of the Company’s stock was expensed over the service period (generally the vesting period)
using an accelerated amortization approach in accordance with the Financial Accounting Standards Board
(“FASB”) Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option
or Award Plans.” Other stock-based awards for which stock-based compensation expense was recorded were
generally grants of restricted stock awards which were measured at fair value on the date of grant, based on the
number of shares granted and the quoted price of the Company’s common stock. Such value was recognized as an
expense over the corresponding service period.
Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective approach and
accordingly prior periods have not been restated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-
based awards granted prior to its adoption are expensed over the remaining portion of their service period. These
awards are expensed under an accelerated amortization approach using the same fair value measurements which
were used in calculating pro forma stock-based compensation expense under SFAS 123. For stock-based awards
granted on or after January 1, 2006, the Company records stock-based compensation expense on a straight-line basis
over the requisite service period, generally one to four years. SFAS 123R required that the deferred stock-based
compensation on the consolidated balance sheet on the date of adoption be netted against additional paid-in capital.
As of December 31, 2005, there was a balance of $235 million of deferred stock-based compensation that was
netted against additional paid-in capital on January 1, 2006.
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Yahoo! Inc.
Notes to Consolidated Financial Statements — (Continued)