Intel 2005 Annual Report Download - page 62

Table of Contents
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
The company recognizes net revenue when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title and
acceptance, if applicable, as well as fixed pricing and probable collectibility. Pricing allowances, including discounts based on contractual
arrangements with customers, are recorded when revenue is recognized as a reduction to both accounts receivable and revenue. Because of frequent
sales price reductions and rapid technology obsolescence in the industry, sales made to distributors under agreements allowing price protection and/or
right of return are deferred until the distributors sell the merchandise. Shipping charges billed to customers are included in net revenue, and the related
shipping costs are included in cost of sales.
Advertising
Cooperative advertising programs reimburse customers for marketing activities for certain of the company’s products, subject to defined criteria.
Cooperative advertising obligations are accrued and the costs expensed at the same time the related revenue is recognized. All other advertising costs
are expensed as incurred. Cooperative advertising expenses are recorded as marketing, general and administrative expense to the extent that an
advertising benefit separate from the revenue transaction can be identified and the cash paid does not exceed the fair value of that advertising benefit
received. Any excess of cash paid over the fair value of the advertising benefit received is recorded as a reduction in revenue. Advertising expense was
$2.6 billion in 2005 ($2.1 billion in 2004 and $1.8 billion in 2003).
Employee Equity Incentive Plans
The company has employee equity incentive plans, which are described more fully in “Note 11: Employee Equity Incentive Plans.” During the three
years ended December 31, 2005, the company accounted for its equity incentive plans under the intrinsic value recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The
exercise price of options is equal to the market price of Intel common stock (defined as the average of the high and low trading prices reported by The
NASDAQ Stock Market*) on the date of grant. Accordingly, no share
-based compensation, other than insignificant amounts of acquisition-related
share-based compensation, was recognized in net income.
The table below illustrates the effect on net income and earnings per share as if the company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to options granted under the company’s
equity incentive plans and rights to acquire stock granted under the company’s Stock Participation Plan. For purposes of this pro forma disclosure, the
value of the options and rights to acquire stock granted under the company’s Stock Participation Plan are estimated using a Black-Scholes option
pricing model and amortized ratably over the vesting periods. Because the estimated value is determined as of the date of grant, the actual value
ultimately realized by the employee may be significantly different.
In 2005, the company recognized net additional pro forma compensation expense and related tax effects of $69 million, reflecting a detailed analysis of
option grants and vesting provisions and a revised estimate of forfeitures. The company periodically adjusts pro forma compensation expense for
changes to the estimate of expected forfeitures based on actual forfeiture experience. The company recognized additional pro forma compensation
expense and related tax effects totaling $58 million in 2004 because actual forfeitures were lower than previous estimates. In 2003, the company
reversed previously recognized pro forma compensation expense and related tax effects totaling $190 million because actual forfeitures were higher
than previous estimates.
58
(In Millions
—
Except Per Share Amounts)
2005
2004
2003
Net income, as reported
$
8,664
$
7,516
$
5,641
Less: total share-based compensation determined under the fair value method for all awards, net
of tax
1,262
1,271
991
Pro forma net income
$
7,402
$
6,245
$
4,650
Reported basic earnings per common share
$
1.42
$
1.17
$
0.86
Pro forma basic earnings per common share
$
1.21
$
0.98
$
0.71
Reported diluted earnings per common share
$
1.40
$
1.16
$
0.85
Pro forma diluted earnings per common share
$
1.20
$
0.97
$
0.71