Expedia 2012 Annual Report Download - page 99

Stock-Based Compensation
We measure and amortize the fair value of stock options and restricted stock units (“RSUs”) as follows:
Stock Options. We measure the value of stock options issued or modified, including unvested options
assumed in acquisitions, on the grant date (or modification or acquisition dates, if applicable) at fair value, using
the Black-Scholes option valuation model. The Black-Scholes model incorporates various assumptions including
expected volatility, expected term and risk-free interest rates. The expected volatility is based on historical
volatility of our common stock and other relevant factors. We base our expected term assumptions on our
historical experience and on the terms and conditions of the stock awards granted to employees. We amortize the
fair value, net of estimated forfeitures, over the remaining vesting term on a straight-line basis. The majority of
our stock options vest over four years.
Restricted Stock Units. RSUs are stock awards that are granted to employees entitling the holder to shares of
common stock as the award vests, typically over a five-year period. We measure the value of RSUs at fair value
based on the number of shares granted and the quoted price of our common stock at the date of grant. We
amortize the fair value, net of estimated forfeitures, as stock-based compensation expense over the vesting term
on a straight-line basis. We record RSUs that may be settled by the holder in cash, rather than shares, as a
liability and we remeasure these instruments at fair value at the end of each reporting period. Upon settlement of
these awards, our total compensation expense recorded over the vesting period of the awards will equal the
settlement amount, which is based on our stock price on the settlement date. Performance-based RSUs vest upon
achievement of certain company-based performance conditions. On the date of grant, we determine the fair value
of the performance-based award based on the fair value of our common stock at that time and we assess whether
it is probable that the performance targets will be achieved. If assessed as probable, we record compensation
expense for these awards over the estimated performance period using the accelerated method. At each reporting
period, we reassess the probability of achieving the performance targets and the performance period required to
meet those targets. The estimation of whether the performance targets will be achieved and of the performance
period required to achieve the targets requires judgment, and to the extent actual results or updated estimates
differ from our current estimates, the cumulative effect on current and prior periods of those changes will be
recorded in the period estimates are revised, or the change in estimate will be applied prospectively depending on
whether the change affects the estimate of total compensation cost to be recognized or merely affects the period
over which compensation cost is to be recognized. The ultimate number of shares issued and the related
compensation expense recognized will be based on a comparison of the final performance metrics to the
specified targets.
Estimates of fair value are not intended to predict actual future events or the value ultimately realized by
employees who receive these awards, and subsequent events are not indicative of the reasonableness of our
original estimates of fair value. In determining the estimated forfeiture rates for stock-based awards, we
periodically conduct an assessment of the actual number of equity awards that have been forfeited to date as well
as those expected to be forfeited in the future. We consider many factors when estimating expected forfeitures,
including the type of award, the employee class and historical experience. The estimate of stock awards that will
ultimately be forfeited requires significant judgment and to the extent that actual results or updated estimates
differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period such
estimates are revised.
Earnings Per Share
We compute basic earnings per share by taking net income (loss) attributable to Expedia, Inc. available to
common stockholders divided by the weighted average number of common and Class B common shares
outstanding during the period excluding restricted stock and stock held in escrow. Diluted earnings per share
include the potential dilution that could occur from stock-based awards and other stock-based commitments
using the treasury stock or the as if converted methods, as applicable. For additional information on how we
compute earnings per share, see Note 13 — Earnings Per Share.
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