Adobe 2009 Annual Report Download - page 55

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We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee
stock purchase plan shares. The determination of the fair value of stock-based awards on the date of grant using an option
pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables.
These variables include our expected stock price volatility over the expected term of the awards, actual and projected
employee stock option exercise behaviors, the risk-free interest rate, estimated forfeitures and expected dividends.
We estimate the expected term of options granted by calculating the average term from our historical stock option
exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our
decision to use implied volatility was based upon the availability of actively traded options on our common stock and our
assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the
risk-free interest rate on zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected
term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected
dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise
those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-
vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
If we use different assumptions for estimating stock-based compensation expense in future periods or if actual
forfeitures differ materially from our estimated forfeitures, the change in our stock-based compensation expense could
materially affect our operating income, net income and net income per share.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities
assumed as well as to in-process research and development based upon their estimated fair values at the acquisition date. The
purchase price allocation process requires management to make significant estimates and assumptions, especially at
acquisition date with respect to intangible assets and deferred revenue obligations assumed.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical
experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples
of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are
not limited to:
•
future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and
acquired developed technologies and patents;
•
expected costs to develop the in-process research and development into commercially viable products and estimated
cash flows from the projects when completed;
•
the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired
trade name and trademarks will continue to be used in the combined company’s product portfolio; and
•
discount rates.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue
obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The
cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit
margin. The estimated costs to fulfill the obligations are based on the historical costs related to fulfilling the obligations.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions,
estimates or actual results.
Goodwill Impairment
We complete our goodwill impairment test on an annual basis, during the second quarter of our fiscal year, or more
frequently, if changes in facts and circumstances indicate that an impairment in the value of goodwill recorded on our balance
sheet may exist. In order to estimate the fair value of goodwill, we typically estimate future revenue, consider market factors