Oracle 2014 Annual Report Download - page 56

Table of Contents
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, intangible assets are recognized at fair values and goodwill is measured as the
excess of consideration transferred over the net estimated fair values of assets acquired. 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 accounting for business combinations. 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 service-based employee stock options, service-based restricted stock
awards, performance-based restricted stock awards (PSUs) 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 and the estimated number of shares we ultimately expect will vest. For our
service-based awards, we recognize stock-based compensation expense on a straight-line basis over the service period of the award, which is
generally four years. For our PSUs, we recognize stock-based compensation expense on a straight-line basis over the service period for each
separately vesting tranche, as the performance conditions to evaluate attainment of each tranche for each participant are independent of the
performance conditions for the other tranches.
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 based 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 a grantee terminates or 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 U.S. treasury interest rates appropriate for the expected life of the awards. We use the implied volatility of publicly traded
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