Oracle 2010 Annual Report Download - page 53

Table of Contents
our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to
changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates or realization of earnings or deductions that differ
from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences generally will impact our
provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and
changes to reserves that are considered appropriate and also include the related interest and penalties.
In addition, as a part of our accounting for business combinations, some of the purchase price is allocated to goodwill and intangible assets. Impairment charges
associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the period that any impairment is recorded.
Amortization expenses associated with acquired intangible assets are generally not tax deductible pursuant to our existing tax structure; however, deferred taxes
have been recorded for non-deductible amortization expenses as a part of the purchase price allocation process. We have taken into account the allocation of
these identified intangibles among different taxing jurisdictions, including those with nominal or zero percent tax rates, in establishing the related deferred tax
liabilities.
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. A description of our accounting policies associated with contingencies assumed as a part of a business combination is provided under “Business
Combinations” above. For legal and other contingencies that are not a part of a business combination, we accrue a liability for an estimated loss if the potential
loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the
determination of probability and the determination as to whether the amount of an exposure is reasonably estimable. Because of uncertainties related to these
matters, accruals are based only on the best information available at the time the accruals are made. 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.
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 ASC 718, Compensation—Stock Compensation, 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. We recognize stock-based compensation expense on a straight-line basis over the service
period of the award, which is generally four years.
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 the rate of future forfeitures upon historical experience, actual forfeitures in the
future may differ. 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. Additionally, we also consider on a quarterly basis whether there have been any significant
changes in facts and circumstances that would affect our expected forfeiture rate.
We estimate the fair values of employee stock options using a Black-Scholes-Merton 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
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Source: ORACLE CORP, 10-K, June 28, 2011 Powered by Morningstar® Document Research℠