Medtronic 2016 Annual Report Download - page 106

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Table of Contents
Medtronic plc
Notes to Consolidated Financial Statements (Continued)
103
The following table provides the weighted average fair value of options granted to employees and the related assumptions used
in the Black-Scholes model:
Fiscal Year
2016 2015 2014
Weighted average fair value of options granted $ 13.72 $ 25.39 $ 12.00
Assumptions used:
Expected life (years)(1) 5.94 4.24 6.40
Risk-free interest rate(2) 1.79% 0.99% 1.88%
Volatility(3) 21.00% 21.29% 25.20%
Dividend yield(4) 1.96% 1.66% 2.02%
(1) Expected life: The Company analyzes historical employee stock option exercise and termination data to estimate the expected life assumption.
The Company calculates the expected life assumption using the midpoint scenario, which combines historical exercise data with hypothetical
exercise data, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. The
Company also stratifies its employee population into two groups based upon distinctive exercise behavior patterns.
(2) Risk-free interest rate: The rate is based on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity period equals the
expected term of the option.
(3) Volatility: Expected volatility is based on a blend of historical volatility and an implied volatility of the Company’s ordinary shares. Implied
volatility is based on market traded options of the Company’s ordinary shares.
(4) Dividend yield: The dividend yield rate is calculated by dividing the Company’s annual dividend, based on the most recent quarterly dividend
rate, by the closing stock price on the grant date.
Stock-Based Compensation Expense Under the fair value recognition provisions of U.S. GAAP for accounting for stock-based
compensation, the Company measures stock-based compensation expense at the grant date based on the fair value of the award
and recognizes the compensation expense over the requisite service period, which is generally the vesting period.
The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are
ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by analyzing historical data and
revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense
recognized over the vesting period will equal the fair value of awards that actually vest.
Pursuant to the Transaction Agreement, outstanding stock option awards held by Covidien employees upon transaction close were
converted into options to acquire the Company's ordinary shares in a manner designed to preserve the intrinsic value of such
awards. In addition, unvested restricted stock units granted on or after June 15, 2014 which were held by Covidien employees
upon close of the Covidien acquisition were converted into restricted stock units of the Company in a manner designed to preserve
the intrinsic value of such awards. The modifications made to the restricted stock units granted on or after June 15, 2014 and all
outstanding share options pursuant to the Transaction Agreement that converted such awards constituted modifications under the
authoritative guidance for accounting for stock compensation. This guidance requires the Company to revalue the award upon the
transaction close and allocate the revised fair value between consideration paid and continuing expense based on the ratio of service
performed through the transaction date over the total service period of the award. The revised fair value allocated to post-combination
services resulted in incremental expense which is recognized over the remaining service period of the award. The Company
recognized $58 million of incremental expense related to these modifications during fiscal year 2016 and is included in acquisition-
related items. Except for the conversion of share options and restricted stock units discussed herein, the material terms of these
awards remained unchanged.