Avid 2011 Annual Report Download - page 31

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Black-Scholes option pricing model to estimate the fair value of stock option grants. The Black-Scholes model relies on a
number of key assumptions to calculate estimated fair values. Our assumed dividend yield of zero is based on the fact that we
have never paid cash dividends and have no present intention to pay cash dividends. Our expected stock-price volatility
assumption is based on recent (six-month trailing) implied volatility calculations. These calculations are performed on exchange-
traded options of our common stock based on the implied volatility of long-term (9- to 39-month term) exchange-traded options.
We believe that using a forward-looking market-driven volatility assumption will result in the best estimate of expected volatility.
The assumed risk-free interest rate is the U.S. Treasury security rate with a term equal to the expected life of the option. The
assumed expected life is based on company-specific historical experience. With regard to the estimate of the expected life, we
consider the exercise behavior of past grants and model the pattern of aggregate exercises.
We also issue stock option grants or restricted stock unit awards with vesting based on market conditions, specifically Avid's stock
price, or a combination of performance, generally our return on equity, or market conditions. The fair values and derived service
periods for all grants that have vesting based on market conditions are estimated using the Monte Carlo valuation method. For
stock option grants with vesting based on a combination of performance or market conditions, the fair values are also estimated
using the Black-Scholes valuation method, and compensation costs for these grants are recorded based on the higher estimated
fair value for each vesting tranche and factored for the estimated probability of achieving the performance goals. For restricted
stock unit awards with vesting based on a combination of performance or market conditions, the fair values are also estimated
based on the intrinsic values of the awards at the date of grant, and compensation costs for these grants are also recorded based on
the higher estimated fair value for each vesting tranche and factored for the estimated probability of achieving the performance
goals. For each stock option grant and restricted stock award with vesting based on a combination of performance or market
conditions where vesting will occur if either condition is met, the related compensation costs are recognized over the shorter of
the derived service period or implicit service period.
We estimate forfeiture rates at the time awards are made based on historical and estimated future turnover rates and apply these
rates in the calculation of estimated compensation cost. The estimation of forfeiture rates includes a quarterly review of historical
turnover rates and an update of the estimated forfeiture rates to be applied to employee classes for the calculation of stock-based
compensation. For 2011, forfeiture rates for the calculation of stock-based compensation were estimated and applied based on
three classes: non-employee directors, executive management staff and other employees. At December 31, 2011, our annualized
estimated forfeiture rates were 0% for non-employee director awards and 10% for both executive management staff and other
employee awards. Then-current estimated forfeiture rates are also applied quarterly to all outstanding stock options and non-
vested restricted stock awards, which may result in a revised estimate of compensation costs related to these stock-based grants.
If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods,
including changes in the probability of achieving performance conditions, or we decide to use a different valuation model, the
stock-based compensation expense recognized in future periods may differ significantly from what we have recorded in the
current period and could materially affect our operating income, net income and earnings per share. It may also result in a lack of
comparability with other companies that use different models, methods and assumptions. See Notes B and N to our Consolidated
Financial Statements in Item 8 for further information regarding stock-based compensation.
Goodwill and Intangible Assets
We assess the impairment of goodwill and identifiable intangible assets on at least an annual basis and whenever events or
changes in circumstances indicate that the carrying value of the asset may not be fully recoverable. Factors we consider important
that could trigger an impairment review include significant underperformance relative to the historical or projected future
operating results, significant negative industry or economic trends, unanticipated competition, loss of key personnel, a more-
likely-than-not expectation that a reporting unit or component thereof will be sold or otherwise disposed of, significant changes in
the manner of use of the acquired assets or the strategy for our overall business, a significant decline in our stock price for a
sustained period, a reduction of our market capitalization relative to our net book value and other similar circumstances.
In accordance with ASC Subtopic 350-20, Intangibles - Goodwill and Others - Goodwill, we do not amortize goodwill. The
goodwill impairment test prescribed by ASC 350-20 requires us to identify reporting units and to determine estimates of the fair
values of our reporting units at the date we test for impairment. Our organizational structure in 2011 was based on a single
reporting unit.
We perform our annual goodwill impairment analysis in the fourth quarter of each year. In accordance with ASC Subtopic 350-20,
Intangibles - Goodwill and Others - Goodwill, a two-step process is used to test for goodwill impairment. The first step
determines if there is an indication of impairment by comparing the estimated fair value of our single reporting unit to its carrying