HP 2005 Annual Report Download - page 85

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
the pro forma net earnings presented below would have been immaterial for all periods presented. See
the further discussion of SFAS 123R in the Recent Pronouncements section of Note 1.
The weighted average fair values and the assumptions used in calculating such values were as
follows during each of the following fiscal years:
Stock Options Stock Purchase Rights
2005 2004 2003 2005 2004 2003
Weighted average fair value of grants .............. $5.63 $6.72 $5.15 $6.01 $4.95 $5.92
Risk-free interest rate ......................... 3.93% 2.77% 3.23% 2.66% 1.11% 1.21%
Dividend yield ............................... 1.5% 1.4% 1.8% 1.6% 1.5% 1.9%
Expected volatility ............................ 28% 35% 35% 30% 28% 47%
Expected life in months ........................ 54 60 72666
In light of new accounting guidance under SFAS 123R, beginning in the second quarter of fiscal
2005 HP reevaluated its assumptions used in estimating the fair value of employee options granted.
Based on this assessment, management determined that implied volatility is a better indicator of
expected volatility than historical volatility. This change from historical to implied volatility resulted in a
reduction of the pro forma expense by an aggregate of $68 million over the average four-year vesting
period for the options granted during the second through fourth quarters of fiscal 2005.
The pro forma effect on net earnings as if the fair value of stock-based compensation had been
recognized as compensation expense on a straight-line basis over the vesting period of the stock option
or purchase right was as follows for the following fiscal years ended October 31:
2005 2004 2003
In millions, except per share
amounts
Net earnings, as reported ...................................... $2,398 $3,497 $2,539
Add: Stock-based compensation included in reported net earnings, net of
related tax effects ......................................... 144 33 30
Less: Stock-based compensation expense determined under the fair-value
based method for all awards, net of related tax effects ............... (621) (692) (839)
Pro forma net earnings ....................................... $1,921 $2,838 $1,730
Basic net earnings per share:
As reported .............................................. $ 0.83 $ 1.16 $ 0.83
Pro forma ............................................... $ 0.67 $ 0.94 $ 0.57
Diluted net earnings per share:
As reported .............................................. $ 0.82 $ 1.15 $ 0.83
Pro forma ............................................... $ 0.66 $ 0.93 $ 0.57
Foreign Currency Transactions
HP uses the U.S. dollar predominately as its functional currency. Assets and liabilities
denominated in non-U.S. dollars are remeasured into U.S. dollars at current exchange rates for
81