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prior to 2006, accounted for forfeitures as they occurred. In March 2005 the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides supplemental implemen-
tation guidance for SFAS 123(R). We have applied the provision of SAB 107 in our adoption of SFAS 123(R).
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized stock-based compensa-
tion expense be reported as a financing cash flow, rather than an operating cash flow as required prior to
adoption of SFAS 123(R) in our Consolidated Statement of Cash Flows. On November 10, 2005, the Financial
Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3 “Transition Election
Related to Accounting for Tax Effects of Share-based Payment Awards.” We have elected not to adopt the
alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based
compensation pursuant to SFAS 123(R).
See Note 6 for further information regarding the impact of our adoption of SFAS 123(R) and the
assumptions we use to calculate the fair value of share-based compensation.
Recent Accounting Pronouncements
In September 2006, the FASB issued statement No. 157, “Fair Value Measurements”,(SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged.
Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening
balance of retained earnings in the year of adoption. The Company has not yet determined the impact of this
Statement on its financial condition and results of operations.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108). To reduce diversity in practice among registrants, SAB 108 expresses SEC staff
views regarding the process by which misstatements in financial statements are evaluated for purposes of
determining whether financial statement restatement is necessary. The accounting requirements of SAB 108
were effective for us on January 1, 2006, and did not have a material impact on our consolidated financial
position, results of operations or cash flows.
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the
accounting and disclosure for uncertainty in tax positions. FIN 48 seeks to reduce the diversity in practice
associated with certain aspects of the recognition and measurement related to accounting for income taxes.
This interpretation is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 as of
January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings
and other accounts as applicable. We do not believe that FIN 48 will have a material impact on our
consolidated financial statements.
In November 2005, the FASB issued Staff Position No. FAS 115-1, “The Meaning of Other-Than-Tempo-
rary Impairment and its Application to Certain Investments” (“FSP 115-1”). FSP 115-1 provides accounting
guidance for determining and measuring other-than-temporary impairments of debt and equity securities, and
confirms the disclosure requirements for investments in unrealized loss positions as outlined in EITF issue
03-01, “The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments.” The
accounting requirements of FSP 115-1 were effective for us on January 1, 2006, and did not have a material
impact on our consolidated financial position, results of operations or cash flows.
2. Restatement of Consolidated Financial Statements
We have restated our consolidated financial statements to reflect additional stock-based compensation
expense and related income tax effects relating to annual stock option awards granted since 1998. This
77
DIGITAL RIVER, INC.
Notes to Consolidated Financial Statements — (Continued)