2K Sports 2009 Annual Report Download - page 45

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Stock-based Compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and
is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the
grant date requires judgment, including, in the case of stock option awards, estimating expected stock
volatility. In addition, judgment is also required in estimating the amount of stock-based awards that are
expected to be forfeited. If actual results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be materially impacted.
We have granted stock options to non-employees, which are subject to variable accounting. When variable
accounting is applied to stock option grants, we re-measure the fair value of the unvested options at the
end of each reporting period or until the options are cancelled or expire unexercised. Compensation
expense in any given period is calculated as the difference between total earned compensation at the end
of the period, less total earned compensation at the beginning of the period, both of which are based on
the price of our common stock at such dates. As a result, fluctuations in the price of our common stock will
change compensation expense recognized by us each reporting period.
We have also granted time and market-based restricted stock awards to employees and non-employees.
Time-based and market-based awards to non-employees are subject to variable accounting. For the
time-based restricted stock grants to non-employees, we cumulatively remeasure the fair value at the end
of every period based on the month end closing price of our common stock. Market-based restricted stock
awards vest based on the relative performance of our common stock to a composite index. We calculate the
fair value of market-based restricted stock using a Monte Carlo Simulation method, which requires a
substantial number of inputs and estimates of future market conditions and considers the range of various
vesting probabilities. As a result, expense recorded for our non-employee awards can fluctuate
substantially from period to period.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. The
provision for income taxes is computed using the asset and liability method, under which deferred income
taxes are recognized for differences between the financial statement and tax bases of assets and liabilities
at currently enacted statutory tax rates for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the
enactment.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than
not to be realized. Our cumulative pre-tax loss in recent fiscal years represents sufficient evidence for us to
determine that the establishment of a valuation allowance against the deferred tax asset is appropriate.
This valuation allowance offsets deferred tax assets associated with future tax deductions as well as
carryforward items.
Our future effective tax rates could be adversely affected by earnings being lower than anticipated in
countries where we have lower statutory rates, changes in the valuation of our deferred tax assets or
liabilities, or changes in tax laws or interpretations thereof. In addition, our filed tax returns are subject to
examination by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood
of adverse outcomes resulting from these examinations to determine the adequacy of our provision for
income taxes.
We recognize and measure uncertain tax positions and record tax benefits when it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement.
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