Capital One 2012 Annual Report Download - page 173

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
We reserve common shares for issuance to employees, directors and third-party service providers, in various
forms, including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock
awards and units and performance share awards and units. In addition, we also issue cash equity units and cash-
settled restricted stock units which are not counted against the common shares reserved for issuance or available
for issuance because they are settled in cash. We generally recognize compensation expense on a straight-line
basis over the award’s service period; however, we recognize compensation expense using the accelerated
attribution method when the award contains a performance condition with graded vesting. In addition, our cash
equity units and cash-settled restricted stock units are accounted for as liability awards pursuant to which the
expense fluctuates with changes in our stock price until the awards are settled. Awards that continue to vest after
retirement are expensed over the shorter of the period of time between the grant date and the final vesting period
or between the grant date and when the participant becomes retirement eligible; awards to participants who are
retirement eligible at the grant date are subject to immediate expensing upon grant. Compensation expense is
included in salaries and associate benefits on the consolidated statements of income.
Stock-based compensation expense for stock options is based on fair value, which is estimated at the grant date
using a Black-Scholes option pricing model. Determining the fair value of stock options requires judgment,
including estimating the expected life of the stock options, the expected volatility of our common stock price and
our expected dividend yield. In addition, judgment is required in estimating the number of options that are
expected to be forfeited. If actual results differ significantly from these estimates or if there is a change in key
assumptions, it could have a material effect on our consolidated financial statements.
Generally, the fair value of restricted stock awards and units, performance share awards and units, cash equity
units and cash-settled restricted stock units will equal the fair market value of our common stock on the date of
grant. In addition, prior to vesting, the compensation expense related to cash-settled restricted stock units is
adjusted quarterly for any change in fair value based on changes in our common stock price. Upon vesting of the
cash-settled restricted stock units, compensation expense is adjusted to reflect the actual cash payment, which is
based upon the average of the closing prices of our common stock for the 20 trading days preceding the vesting
date or the closing price on vesting date.
Marketing Expense
We expense marketing costs as incurred. Television advertising costs are expensed during the period in which the
advertisements are aired. We recognized marketing expense of $1.4 billion, $1.3 billion and $1.0 billion in 2012,
2011 and 2010, respectively.
Fraud Losses
We experience fraud losses from the unauthorized use of credit cards, debit cards and customer bank accounts.
Additional fraud losses may be incurred when loans are obtained through fraudulent means. Transactions
suspected of being fraudulent are recorded in our consolidated statements of income as a component of non-
interest expense after the investigation period has completed. Recoveries of fraud losses are also included in non-
interest expense. See “Note 15—Other Non-Interest Expense” for additional information.
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