Yahoo 2014 Annual Report Download - page 104

termination benefits as well as certain contractual termination benefits or employee terminations
under ongoing benefit arrangements. One-time termination benefits are recognized as a liability at
estimated fair value when the approved plan of termination has been communicated to employees,
unless employees must provide future service, in which case the benefits are recognized ratably over
the future service period. Ongoing termination benefits arrangements are recognized as a liability at
estimated fair value when the amount of such benefits becomes estimable and payment is probable.
Contract termination costs are recognized at estimated fair value when the entity terminates the
contract in accordance with the contract terms
These restructuring initiatives require management to make estimates in several areas including:
(i) expenses for severance and other employee separation costs; (ii) realizable values of assets made
redundant, obsolete, or excessive; and (iii) the ability to generate sublease income and to terminate
lease obligations at the estimated amounts.
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 related to stock options 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. See Note 14—“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 recognizes a tax benefit from stock-based awards in additional
paid-in capital only 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
determined that it had a sufficient windfall pool available through the end of 2014 to absorb any
shortfalls. 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 consolidated statements of income.
Recent Accounting Pronouncements. In April 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standard Update (“ASU”) 2014-08, “Reporting of Discontinued
Operations and Disclosures of Disposals of Components of an Entity,” which provides a narrower
100