Garmin 2007 Annual Report Download - page 91

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development. In accordance with SFAS 2, costs we incur to enhance our existing products or after the general
release of the service using the product are expensed in the period they are incurred and included in research and
development costs on our statement of operations.
Accounting for Stock-Based Compensation
The Company currently sponsors three stock based employee compensation plans. On January 1, 2006, the
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment,
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires the
measurement and recognition of compensation expenses for all share-based payment awards made to employees and
directors including employee stock options and restricted stock based on estimated fair values. SFAS No. 123(R)
supersedes the Company’s previous accounting under Accounting Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees, for periods beginning in fiscal 2006.
The Company adopted SFAS No. 123(R) using the modified prospective method. Under the modified
prospective method, compensation costs are recognized beginning with the effective date based on the requirements
of SFAS No. 123(R) for all share-based payments granted after the effective date and based on the requirements of
SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain
unvested on the effective date. The Company’s consolidated financial statements as of and for fiscal years ended
December 29, 2007 and December 30, 2006 reflect the impact of SFAS No. 123(R). In accordance with the
modified prospective transition method, the Company’s consolidated financial statements for periods prior to
adoption have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).
SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is
recognized as stock-based compensation expenses over the requisite service period in the Company’s consolidated
financial statements. Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based awards to
employees and directors using the intrinsic value method in accordance with APB Opinion No. 25 as allowed under
SFAS No. 123. Under the intrinsic value method, no stock-based compensation expenses have been recognized in
the Company’s consolidated statements of income for stock options because the exercise price of the Company’s
stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of
grant.
As stock-based compensation expenses recognized in the accompanying consolidated statement of income
for the fiscal years ended December 29, 2007 and December 30, 2006 are based on awards ultimately expected to
vest, they have been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on historical experience and management’s estimates. In the Company’s pro forma
information required under SFAS No. 123 for the periods prior to fiscal 2006, the Company accounted for stock
option forfeitures as they occurred. The cumulative adjustment to reduce costs that were actually recognized to
reflect estimated forfeitures is not material.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.