Yahoo 2011 Annual Report Download - page 75

Stock-Based Compensation Expense. The Company recognizes stock-based compensation expense net of an
estimated forfeiture rate and therefore only recognizes compensation costs for those shares expected to vest over
the service period of the award. Stock-based awards are valued based on the grant date fair value of these awards;
the Company records stock-based compensation expense on a straight-line basis over the requisite service period,
generally one to four years.
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the
expected term of the stock options, stock price volatility, and the pre-vesting forfeiture rate of stock awards. The
Company estimates the expected life of options granted based on historical exercise patterns, which the Company
believes are representative of future behavior. The Company estimates the volatility of its common stock on the
date of grant based on the implied volatility of publicly traded options on its common stock, with a term of one
year or greater. The Company believes that implied volatility calculated based on actively traded options on its
common stock is a better indicator of expected volatility and future stock price trends than historical volatility.
The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates,
but these estimates involve inherent uncertainties and the application of management judgment. As a result, if
factors change and the Company uses different assumptions, the Company’s stock-based compensation expense
could be materially different in the future. In addition, the Company is required to estimate the expected
pre-vesting award forfeiture rate, as well as the probability that performance conditions that affect the vesting of
certain awards will be achieved, and only recognizes expense for those shares expected to vest. The Company
estimates the forfeiture rate based on historical experience of the Company’s stock-based awards that are granted
and cancelled before vesting. If the Company’s actual forfeiture rate is materially different from the Company’s
original estimate, the stock-based compensation expense could be significantly different from what the Company
has recorded in the current period. Changes in the estimated forfeiture rate can have a significant effect on
reported stock-based compensation expense, as the effect of adjusting the forfeiture rate for all current and
previously recognized expense for unvested awards is recognized in the period the forfeiture estimate is changed.
If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to
increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial
statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be
made to lower the estimated forfeiture rate, which will result in an increase to the expense recognized in the
financial statements. See Note 11—“Employee Benefits” for additional information.
The Company uses the “with and without” approach in determining the order in which tax attributes are utilized.
As a result, the Company only recognizes a tax benefit from stock-based awards in additional paid-in capital if an
incremental tax benefit is realized after all other tax attributes currently available to the Company have been
utilized. When tax deductions from stock-based awards are less than the cumulative book compensation expense,
the tax effect of the resulting difference (“shortfall”) is charged first to additional paid-in capital to the extent of
the Company’s pool of windfall tax benefits with any remainder recognized in income tax expense. The
Company has determined that it has a sufficient windfall pool available through the end of 2011. In addition, the
Company accounts for the indirect effects of stock-based awards on other tax attributes, such as the research tax
credit, through the statement of income.
Operating and Capital Leases. The Company leases office space and data centers under operating leases and
certain data center equipment under a capital lease agreement with original lease periods up to 13 years. Assets
acquired under capital leases are amortized over the shorter of the remaining lease term or its estimated useful
life which is generally 10 to 15 years. Certain of the lease agreements contain rent holidays and rent escalation
provisions. For purposes of recognizing these lease incentives on a straight-line basis over the term of the lease,
the Company uses the date of initial possession to begin amortization. Lease renewal periods are considered on a
lease-by-lease basis and are generally not included in the period of straight-line recognition. For each of the years
ended December 31, 2009, 2010 and 2011, the Company expensed $5 million of interest, which approximates the
cash payments made for interest. As of December 31, 2010 and 2011, the Company had net lease commitments
included in capital lease and other long-term liabilities in the consolidated balance sheets of $40 million and $41
million, respectively.
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