Incredimail 2014 Annual Report Download - page 44

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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operation are
based on our financial statements, which have been
prepared in conformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these
estimates on an on-
going basis. We base our estimates on our historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions. Under U.S. GAAP, when more than one accounting method or policy or its application is generally accepted, our management
selects the accounting method or policy that it believes to be most appropriate in the specific circumstances. Our management considers some of
these accounting policies to be critical.
A critical accounting policy is an accounting policy that management believes is both most important to the portrayal of our financial
condition and results and requires management’
s most difficult subjective or complex judgment, often as a result of the need to make accounting
estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are discussed in Note 2 of the
Financial Statements, we believe the following accounting policies to be critical:
Stock
-Based Compensation
We account 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, stock-
based compensation expense and our results of operations
would be impacted. Expense is recognized on a straight-line basis over the service period during which awards are expected to vest.
Total stock-
based compensation expense recorded during 2014 was $15.1 million, of which $0.2 million was included in cost of
revenues, $2.4 million was included in research and development costs, $3.0 million in selling and marketing expenses, $9.3 million in general
and administrative expenses and $0.2 million in restructuring costs.
As of December 31, 2014, the maximum total compensation cost related to options and restricted stock units ("RSUs"), granted to
employees and directors not yet recognized amounted to $13.0 million. This cost is expected to be recognized over a weighted average period of
1.4 years.
We estimate the fair value of standard stock options granted using the Binomial method option-pricing model. The option-
pricing
model requires a number of assumptions, of which the most significant is expected stock price volatility. Expected volatility was calculated
based upon actual historical stock price movements of our stock. The risk-free interest rate is based on the yield from U.S. Treasury zero-
coupon
bonds with an equivalent term. The fair value of RSUs is based on the market value of the underlying shares at the date of grant.
Taxes on Income
We are subject to income taxes in Israel and the United States. 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.
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