Cisco 2010 Annual Report Download - page 50

Notes to Consolidated Financial Statements
The Company’s arrangements with multiple deliverables may have a standalone software deliverable that is subject to the
existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software
deliverable and the nonsoftware deliverables based on the relative selling prices of all of the deliverables in the arrangement using
the hierarchy in the new revenue accounting guidance. In the limited circumstances where the Company cannot determine VSOE or
TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the
purposes of performing this allocation.
(o) Advertising Costs The Company expenses all advertising costs as incurred. Advertising costs included within sales and
marketing expenses were approximately $290 million, $165 million, and $195 million for fiscal 2010, 2009 and 2008, respectively.
(p) Share-Based Compensation Expense The Company measures and recognizes the compensation expense for all share-based
awards made to employees and directors including employee stock options and employee stock purchases related to the Employee
Stock Purchase Plan (“employee stock purchase rights”) based on estimated fair values. The fair value of employee stock options is
estimated on the date of grant using a lattice-binomial option-pricing model (“lattice-binomial model”) and for employee stock
purchase rights the Company estimates the fair value using the Black-Scholes model. The Company measures the fair value of
restricted stock and restricted stock units as if the awards were vested and issued on the grant date. The value of awards that are
ultimately expected to vest is recognized as expense over the requisite service periods. Because share-based compensation
expense is based on awards ultimately expected to vest, it has been reduced for forfeitures.
(q) Software Development Costs Software development costs required to be capitalized for software sold, leased, or otherwise
marketed have not been material to date. Software development costs required to be capitalized for internal use software have also
not been material to date.
(r) Income Taxes Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their
reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be
realized.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax
positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates
that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized
upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company
anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in
the provision for income taxes.
(s) Computation of Net Income per Share Basic net income per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common
shares and dilutive potential common shares outstanding during the period. Diluted shares outstanding include the dilutive effect of
in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated
based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the
amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company
has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award
becomes deductible, are collectively assumed to be used to repurchase shares.
(t) Consolidation of Variable Interest Entities In the event that the Company is the primary beneficiary of a variable interest entity,
the assets, liabilities, and results of operations of the variable interest entity will be included in the Company’s Consolidated
Financial Statements.
48 Cisco Systems, Inc.