Oracle 2007 Annual Report Download - page 39

Table of Contents
Legal and Other Contingencies
We are currently involved in various claims and legal proceedings. Quarterly, we review the status of each
significant matter and assess our potential financial exposure. If the potential loss from any claim or legal
proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the
estimated loss. Significant judgment is required in both the determination of probability and the determination
as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals
are based only on the best information available at the time. As additional information becomes available, we
reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such
revisions in the estimates of the potential liabilities could have a material impact on our results of operations
and financial position.
As a result of our acquisition of PeopleSoft in fiscal 2005, we inherited contingent liabilities resulting from a
program PeopleSoft had implemented prior to the consummation of our acquisition of PeopleSoft (referred to
as the “customer assurance program” or “CAP”). See Note 9 of Notes to Consolidated Financial Statements
for further information.
Stock-Based Compensation
We account for share-based payments to employees, including grants of employee stock awards and
purchases under employee stock purchase plans in accordance with FASB Statement No. 123 (revised 2004),
Share-Based Payment, which requires that share-based payments (to the extent they are compensatory) be
recognized in our consolidated statements of operations based on their fair values. In addition, we have
applied the provisions of the SEC’s Staff Accounting Bulletin No. 107 in our accounting for Statement
123(R).
We are required to estimate the stock awards that we ultimately expect to vest and to reduce stock-based
compensation expense for the effects of estimated forfeitures of awards over the expense recognition period.
Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ. In
addition, to the extent our actual forfeitures are different than our estimates, we record a true-up for the
difference in the period that the awards vest, and such true-ups could materially affect our operating results.
As required by Statement 123(R), we recognize stock-based compensation expense for share-based payments
issued or assumed after June 1, 2006 that are expected to vest. For all share-based payments granted or
assumed beginning June 1, 2006, we recognize stock-based compensation expense on a straight-line basis
over the service period of the award, which is generally four years. The fair value of the unvested portion of
share-based payments granted prior to June 1, 2006 is recognized over the remaining service period using the
accelerated expense attribution method, net of estimated forfeitures. In determining whether an award is
expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture
rates. Stock-based compensation expense recorded using an estimated forfeiture rate is updated for actual
forfeitures quarterly. We also consider, each quarter, whether there have been any significant changes in facts
and circumstances that would affect our forfeiture rate.
We estimate the fair value of employee stock options using a Black-Scholes valuation model. The fair value
of an award is affected by our stock price on the date of grant as well as other assumptions including the
estimated volatility of our stock price over the term of the awards and the estimated period of time that we
expect employees to hold their stock options. The risk-free interest rate assumption we use is based upon
United States treasury interest rates appropriate for the expected life of the awards. We use the implied
volatility of our publicly traded, longest-term options in order to estimate future stock price trends as we
believe that implied volatility is more representative of future stock price trends than historical volatility. In
order to determine the estimated period of time that we expect employees to hold their stock options, we have
used historical rates of employee groups by job classification. Our expected dividend rate is zero since we do
not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable
future. The aforementioned inputs entered into the option valuation model we use to fair value our stock
awards are subjective estimates and changes to these estimates will cause the fair value of our stock awards
and related stock-based compensation expense we record to vary.
We record deferred tax assets for stock-based awards that result in deductions on our income tax returns,
based on the amount of stock-based compensation recognized and the statutory tax rate in the jurisdiction in
which we will
34
Source: ORACLE CORP, 10-K, July 02, 2008 Powered by Morningstar® Document Research℠