Citrix 2009 Annual Report Download - page 47

We must apply judgment in determining all elements of the arrangement and in determining the VSOE of fair
value for each element, considering the price charged for each product on a stand-alone basis or applicable
renewal rates for subscriptions related to new products.
In the normal course of business, we are not obligated to accept product returns from our distributors under
any conditions, unless the product item is defective in manufacture, but we do provide most of our distributors
with stock balancing and price protection rights. Stock balancing rights permit distributors to return products to
us up to the 45th day of the fiscal quarter, subject to ordering an equal dollar amount of our other products prior to
the last day of the same fiscal quarter. Price protection rights require that we grant retroactive price adjustments
for inventories of our products held by distributors or resellers if we lower our prices for such products. Product
items returned to us under the stock balancing program must be in new, unused and unopened condition. We
establish provisions for estimated returns for stock balancing and price protection rights, as well as other sales
allowances, concurrently with the recognition of revenue. The provisions are established based upon
consideration of a variety of factors, including, among other things, recent and historical return rates for both,
specific products and distributors, estimated distributor inventory levels by product, the impact of any new
product releases and projected economic conditions. Actual product returns for stock balancing and price
protection provisions incurred are, however, dependent upon future events, including the amount of stock
balancing activity by our distributors and the level of distributor inventories at the time of any price adjustments.
We continually monitor the factors that influence the pricing of our products and distributor inventory levels and
make adjustments to these provisions when we believe actual returns and other allowances could differ from
established reserves. Our ability to recognize revenue upon shipment to our distributors is predicated on our
ability to reliably estimate future stock balancing returns. If actual experience or changes in market condition
impairs our ability to estimate returns, we would be required to defer the recognition of revenue until the delivery
of the product to the end-user. Allowances for estimated product returns amounted to approximately $1.6 million
at December 31, 2009 and 2008. We have not reduced and have no current plans to reduce our prices for
inventory currently held by distributors or resellers. Accordingly, there were no reserves required for price
protection at December 31, 2009 and December 31, 2008. We also record reductions to revenue for customer
programs and incentive offerings including volume-based incentives, at the time the sale is recorded. We could
take actions to increase our customer incentive offerings, which could result in an incremental reduction to our
revenue at the time the incentive is offered.
Stock-Based Compensation
Under the fair value recognition provisions of the authoritative guidance, stock-based compensation cost is
measured at the grant date based on the fair value of the award and is recognized as expense over the requisite
service or performance period, which is the vesting period. We currently use the Black-Scholes option pricing
model to determine the fair value of stock options. The determination of the fair value of stock-based payment
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 term of the awards, the expected term of the award, the risk-free interest rate and any expected
dividends.
For purposes of determining the expected volatility factor, we used the implied volatility in two-year
market-traded options on our common stock based on third party volatility quotes in accordance with the
provisions of Staff Accounting Bulletin, or SAB, No. 107. 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. The expected term of our options is based on
historical employee exercise patterns. We also analyzed our historical pattern of option exercises based on certain
demographic characteristics and we determined that there were no meaningful differences in option exercise
activity based on demographic characteristics. The approximate risk free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the expected term on our
options. We do not intend to pay dividends on our common stock in the foreseeable future and, accordingly, we
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