8x8 2013 Annual Report Download - page 33

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Stock-Based Compensation
We account for our employee stock options, stock purchase rights and restricted stock units granted under the 1996 Stock Plan,
1996 Director Option Plan, 1999 Nonstatutory Stock Option Plan, the 2006 Stock Plan, the 2003 Contactual Plan, the 2012
Equity Incentive Plan and stock purchase rights under the 1996 Employee Stock Purchase Plan (collectively “Equity
Compensation Plans”) under the provisions of ASC 718 – Stock Compensation. Under the provisions of ASC 718, share-based
compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an
expense over the employee’s requisite service period (generally the vesting period of the equity grant), net of estimated
forfeitures.
Stock-based compensation expense recognized in the Consolidated Statements of Income for fiscal 2013, 2012 and 2011, was
measured based on ASC 718 criteria. Compensation expense for all share-based payment awards is recognized using the
straight-line single-option method and includes the impact of estimated forfeitures. ASC 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
To value option grants, stock purchase rights and restricted stock units under the Equity Compensation Plans for actual and pro
forma stock-based compensation we used the Black-Scholes option valuation model. Fair value determined using the Black-
Scholes option valuation model varies based on assumptions used for the expected stock prices volatility, expected life, risk
free interest rates and future dividend payments. For fiscal years 2013, 2012 and 2011, we used the historical volatility of our
stock over a period equal to the expected life of the options to their fair value. The expected life assumptions represent the
weighted-average period stock-based awards are expecting to remain outstanding. These expected life assumptions were
established through the review of historical exercise behavior of stock-based award grants with similar vesting periods. The
risk free interest was based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter
market for the expected term equal to the expected term of the option. The dividend yield assumption was based on our history
and expectation of future dividend payout.
ASC 718 requires us to calculate the additional paid in capital pool (“APIC Pool”) available to absorb tax deficiencies
recognized subsequent to adopting ASC 718, as if we had adopted ASC 718 at its effective date of January 1, 1995. There are
two allowable methods to calculate our APIC Pool: (1) the long form method or (2) the short form method as set forth in ASC
718. We have elected to use the long form method under which we track each award grant on an employee-by-employee basis
and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such award. We then compared the fair
value expense to the tax deduction received for each grant and aggregated the benefits and deficiencies to establish the APIC
Pool.
Due to the adoption of ASC 718, some option exercises result in tax deductions in excess book deductions based on the option
value at the time of grant. We recognize these windfall tax benefits associated with the exercise of stock options directly to
stockholders’ equity only when realized. We use the “with and without” approach as described in ASC 740, in determining the
order in which our tax attributes are utilized. The “with and without” approach results in the recognition of the windfall stock
option tax benefits only after all other tax attributes of ours have been considered in the annual tax accrual computation. Also,
we have elected to ignore the indirect tax effects of share-based compensation deductions in computing our research and
development tax credits and alternative tax credits and as such, we recognize the full effect of these deductions in the
consolidated income statement in the period in which the taxable event occurs.