Incredimail 2011 Annual Report Download - page 37

Stock
-Based Compensation
The Company accounts for share-based payment awards made to employees and directors in accordance with ASC 718, "Compensation –
Stock
Compensation", which requires the measurement and recognition of compensation expense based on estimated fair values. Determining the fair value of stock-
based
awards at the grant date requires the exercise of judgment, as well as the determination of the amount of stock-
based awards that are expected to be forfeited. If actual
forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted.
Total equity-
based compensation expense recorded during 2011 was $1.2 million, of which $1.0 million was included in general and administrative expenses
and the rest in research and development costs and selling and marketing expenses.
As of December 31, 2011, the maximum total compensation cost, related to options granted to employees, not yet recognized, amounted to $1.5 million.
This cost is expected to be recognized over a weighted average period of 2 years.
The Company estimates the fair value of standard stock options granted using the Binomial method option-
pricing model and options with exercise that is
subject to a stock price target, using the Monte Carlo simulations. The option-
pricing models require a number of assumptions, of which the most significant are;
expected stock price volatility and the expected option term. In 2009 and 2010, expected volatility was calculated based upon an average between historical volatilities
of the Company, similar entities and industry sector index similar to the Company's characteristics, since it did not have sufficient company specific data. In 2011,
expected volatility was calculated based upon actual historical stock price movements. The expected option term was calculated based on the Company’
s assumptions
of early exercise multiples which were calculated based on comparable companies and termination exit rate which was calculated based on actual historical data. The
expected option term represents the period that the Company’s stock options are expected to be outstanding. The risk-
free interest rate is based on the yield from U.S.
Treasury zero-coupon bonds with an equivalent term.
In November 2010 the Company's Board decided to change its dividend policy so that beginning with earnings of 2011 and beyond, the Company does not
intend to distribute any dividends to the holders of its ordinary shares, as result the Company has no foreseeable plans to pay dividends.
Taxes on Income
We are subject to income taxes in Israel and the U.S. Significant judgment is required in evaluating our uncertain tax positions and determining our provision
for income taxes. Based on the guidance in ASC 740 “Income Taxes”, we use a two-
step approach to recognizing and measuring uncertain tax positions. The first step
is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is
more than 50% likely of being realized upon settlement.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will
not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in
tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in
the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered
appropriate, as well as the related interest. Starting 2011, interest is recorded within finance income, net.
Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes,
including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We record valuation allowances for
deferred tax assets that we believe are not more likely than not to be realized in future periods. While we believe the resulting tax balances as of December 31, 2011
and 2010 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial
statements and such adjustments could be material. See Note 10 to our Consolidated Financial Statements for further information regarding income taxes. We have
filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. The amount of income tax we pay is subject to
ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we adequately provided for any reasonably foreseeable outcomes
related to tax audits and set
tlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the
assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.
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