Avid 2006 Annual Report Download - page 74

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64
Research and Development Costs
Research and development costs are expensed as incurred, except for costs of internally developed or externally
purchased software that qualify for capitalization. Development costs for software to be sold that are incurred
subsequent to the establishment of technological feasibility, but prior to the general release of the product, are
capitalized. Upon general release, these costs are amortized using the straight-line method over the expected life
of the related products, generally 12 to 36 months. The straight-line method generally results in approximately
the same amount of expense as that calculated using the ratio that current period gross product revenues bear to
total anticipated gross product revenues. The Company evaluates the net realizable value of capitalized software
at each balance sheet date, considering a number of business and economic factors. Unamortized capitalized
software development costs were $1.9 million, $2.0 million and $0.8 million at December 31, 2006, 2005 and 2004,
respectively.
Income taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes.” SFAS No. 109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in
the Company’s financial statements or tax returns.
Computation of Net Income (Loss) Per Common Share
Net income (loss) per common share is presented for both basic earnings per share (“Basic EPS”) and diluted
earnings per share (“Diluted EPS”). Basic EPS is based upon the weighted-average number of common shares
outstanding during the period, excluding unvested restricted stock held by employees. Diluted EPS is based upon
the weighted-average number of common and potential common shares outstanding during the period. Potential
common shares result from the assumed exercise of outstanding stock options and warrants as well as unvested
restricted stock, the proceeds and remaining unrecorded compensation expense of which are then assumed to
have been used to repurchase outstanding common stock using the treasury stock method. For periods that the
Company reports a loss, all potential common stock is considered anti-dilutive; for periods when the Company
reports net income, potential common shares with combined purchase prices and unamortized compensation cost
in excess of the Company’s average common stock fair value for the related period are considered anti-dilutive. (see
Note Q).
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss), which includes foreign
currency translation adjustments and unrealized gains and losses on certain investments. For the purposes of
comprehensive income disclosures, the Company does not record tax provisions or benefits for the net changes in
the foreign currency translation adjustment, as the Company intends to permanently reinvest undistributed earnings
in its foreign subsidiaries. Accumulated other comprehensive income at December 31, 2006 and 2005 is comprised
of cumulative translation adjustments of $5.8 million and $1.2 million, respectively and net unrealized gains (losses)
on debt securities of ($0.1) million and ($0.1) million, respectively.
Accounting for Stock-Based Compensation
The Company has several stock-based employee compensation plans, which are described more fully in Note L. In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-
Based Payment” (“SFAS 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock Based Compensation.”
SFAS 123(R) requires employee stock-based compensation awards to be accounted for under the fair value method
and eliminates the ability to account for these instruments under the intrinsic value method as prescribed by
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations. The Company adopted SFAS 123(R) on January 1, 2006 using the modified prospective application
method as permitted under SFAS 123(R). Under this method, the Company is required to record compensation cost,
based on the fair value estimated in accordance with SFAS 123(R), for stock-based awards granted after the date of
adoption over the requisite service periods for the individual awards, which generally equals the vesting period. The
Company is also required to record compensation cost for the unvested portion of previously granted stock-based
awards outstanding at the date of adoption over the requisite service periods for the individual awards based on