Adobe 2010 Annual Report Download - page 60

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release of our products. These factors and unanticipated changes in the economic and industry environment could make our
return estimates differ from actual returns, thus materially impacting our financial position and results of operations.
We offer price protection to our distributors that allows for the right to a credit if we permanently reduce the price of a
software product. When evaluating the adequacy of the price protection allowance, we analyze historical returns, current sell-
through of distributor and retailer inventory of our products, changes in customer demand and acceptance of our products and
other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories. Changes to
these assumptions or in the economic environment could result in higher returns or higher price protection costs in
subsequent periods.
In the future, actual returns and price protection may materially exceed our estimates as unsold products in the
distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence
due to new platforms, product updates or competing products. While we believe we can make reliable estimates regarding
these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection
reserves would change, which would impact the total net revenue we report.
We recognize revenues for hosting services that are based on a committed number of transactions ratably beginning on
the date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees,
and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract
terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue
or revenue, depending on whether the revenue recognition criteria have been met.
Our consulting revenue is recognized on a time and materials basis and is measured monthly based on input measures,
such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures,
such as contract milestones, when applicable.
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as
expense on a straight-line basis over the requisite service period, which is generally the vesting period.
For our on-going traditional employee equity awards, we currently use the Black-Scholes option pricing model to
determine the fair value of stock options and employee stock purchase plan (“ESPP”) 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, assumed equity awards, 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, deferred revenue obligations and equity assumed.