Avid 2015 Annual Report Download - page 44

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Stock-Based Compensation
We account for stock-based compensation at fair value. The vesting of stock options and restricted stock awards may be based on
time, performance, market conditions, or a combination of performance and market conditions. In the future, we may grant stock
awards, options, or other equity-based instruments allowed by our stock-based compensation plans, or a combination thereof, as
part of our overall compensation strategy.
We generally use the Black-Scholes option pricing model to estimate the fair value of stock option grants with time-based vesting.
The Black-Scholes option pricing 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, we have no present intention to pay cash
dividends and our current credit agreement precludes us from paying dividends. Our expected stock-price volatility assumption is
based on recent (six-month trailing) implied volatility of the traded options. 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. During
2014 we changed the method of calculating the expected volatility. The expected volatility is now based on actual historic stock
volatility for periods equivalent to the expected term of the award. 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, considering the exercise behavior of past grants and models the pattern of aggregate exercises. The fair
values of restricted stock and restricted stock unit awards with time-based vesting are based on the intrinsic values of the awards
at the date of grant as these awards have a purchase price of $0.01 per share.
We have also issued stock option grants or restricted stock unit awards with vesting based on market conditions, which
historically included Avid’s stock price or performance conditions, generally our adjusted EBITDA. The fair values and derived
service periods for all grants that include vesting based on market conditions are estimated using the Monte Carlo simulation
method. For stock option grants that include vesting based on performance conditions, the fair values are estimated using the
Black-Scholes option pricing model. For restricted stock unit awards that include vesting based on performance conditions, the
fair values are estimated based on the intrinsic values of the awards at the date of grant as these awards have a purchase price of
$0.01 per share.
Income Tax Assets and Liabilities
We record deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carryforwards and temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes compared to the amounts used
for income tax purposes. We regularly review our deferred tax assets for recoverability with consideration for such factors as
historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. A
valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be
realized. Based on the magnitude of our gross deferred tax assets, which totaled approximately $425 million at December 31,
2015, and our level of historical U.S. losses, we have determined that the uncertainty regarding the realization of these assets is
sufficient to warrant the need for a full valuation allowance against our U.S. deferred tax assets. We also determined that a
valuation allowance is warranted on a portion of our foreign deferred tax assets.
Our assessment of the valuation allowance on our U.S. and foreign deferred tax assets could change in the future based on our
levels of pre-tax income and other tax-related adjustments. Reversal of the valuation allowance in whole or in part would result
in a non-cash reduction in income tax expense during the period of reversal. To the extent some or all of our valuation allowance
is reversed, future financial statements would reflect an increase in non-cash income tax expense until such time as our deferred
tax assets are fully utilized.
The amount of income taxes we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We
have taken and will continue to take tax positions based on our interpretation of such tax laws. There can be no assurance that a
taxing authority will not have a different interpretation of applicable law and assess us with additional taxes. Should we be
assessed with additional taxes, it could have a negative impact on our results of operations or financial condition.
We account for uncertainty in income taxes recognized in our financial statements by applying a two-step process to determine
the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be
sustained upon examination by the taxing authorities, based on the technical merits of the position. If the tax position is deemed
more likely than not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the