Yahoo 2015 Annual Report Download - page 37

and/or entered into various derivative transactions with respect to our common stock concurrently
with or shortly after the pricing of the Notes. In addition, the option counterparties or their respective
affiliates may modify their hedge positions by entering into or unwinding various derivatives with
respect to our common stock and/or purchasing or selling our common stock or other securities of
ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so
during any observation period related to a conversion of Notes or following any repurchase of Notes
by us on any fundamental repurchase date or otherwise). This activity could cause or avoid an
increase or a decrease in the market price of our common stock or the Notes.
Any adverse change in the rating of the Notes or the Company may cause their trading price to
decline.
While we did not solicit a credit rating on the Company or on the Notes, one rating service has rated
both the Notes and the Company. If that rating service announces its intention to put the Company
or the Notes on credit watch or lowers its rating on the Company or the Notes below any rating
initially assigned to the Company or the Notes, the trading price of the Notes could decline.
The accounting method for convertible debt securities that may be settled in cash, such as the
Notes, could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. APB
14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards
Codification (“ASC”) 470-20, Debt with Conversion and Other Options, which we refer to as
ASC 470-20. Under ASC 470-20, an entity must separately account for the liability and equity
components of the convertible debt instruments (such as the Notes) that may be settled entirely or
partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The
effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be
included in the additional paid-in capital section of stockholders’ equity on our consolidated balance
sheet, and the value of the equity component would be treated as debt discount for purposes of
accounting for the debt component of the Notes. As a result, we will be required to record a greater
amount of non-cash interest expense in current periods presented as a result of the amortization of
the discounted carrying value of the Notes to their face amount over the term of the Notes. We will
report lower net income in our financial results because ASC 470-20 will require interest to include
the current period’s amortization of the debt discount, which could adversely affect our reported or
future financial results, the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may
be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method,
the effect of which is that the shares issuable upon conversion of the Notes are not included in the
calculation of diluted earnings per share except to the extent that the conversion value of the Notes
exceeds their principal amount. Under the treasury stock method, for diluted earnings per share
purposes, the transaction is accounted for as if the number of shares of common stock that would be
necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot
be sure that the accounting standards in the future will continue to permit the use of the treasury
stock method. If we are unable to use the treasury stock method in accounting for the shares issuable
upon conversion of the Notes, then our diluted earnings per share would be adversely affected.
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