Pandora 2016 Annual Report Download - page 87

Business Combinations, Goodwill and Intangible Assets, net
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible
assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values
of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant
estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets
include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a
market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments
to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the
measurement period, any subsequent adjustments are recorded to earnings.
We review goodwill for impairment at least annually or more frequently if events or changes in circumstances would
more likely than not reduce the fair value of our single reporting unit below its carrying value. We evaluate indefinite-lived
intangible assets for impairment annually or more frequently if events or changes in circumstances indicate that it is more likely
than not that the asset is impaired. As of December€31, 2015,€no€impairment of goodwill or indefinite-lived intangible assets
has been identified.
Acquired finite-lived intangible assets are amortized over the estimated useful lives of the assets, which range
from€two€to€eleven€years. Acquired finite-lived intangible assets consist primarily of patents, customer relationships, developed
technology and trade names resulting from business combinations. We evaluate the recoverability of our intangible assets for
potential impairment whenever events or circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted
cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not
recoverable, the carrying amount of such assets is reduced to the fair value.
In addition to the recoverability assessment, we routinely review the remaining estimated useful lives of finite-lived
intangible assets. If we reduce the estimated useful life assumption for any asset, the remaining unamortized balance would be
amortized over the revised estimated useful life. We record the amortization of intangible assets to the financial statement line
item in our consolidated statement of operations that the asset directly relates to. To the extent that purchased intangibles are
used in revenue generating activities, we record the amortization of these intangible assets to cost of revenue.
Stock-Based Compensation—Restricted Stock Units and Stock Options
Stock-based awards granted to employees, including grants of restricted stock units (“RSUs”) and stock options, are
recognized as expense in our statements of operations based on their grant date fair value. We recognize stock-based
compensation expense on a straight-line basis over the service period of the award, which is generally four years. We estimate
the fair value of RSUs at our stock price on the grant date. We generally estimate the grant date fair value of stock options using
the Black-Scholes option-pricing model. The Black-Scholes option-pricing model is affected by our stock price on the date of
grant, the expected stock price volatility over the expected term of the award, which is based on projected employee stock
option exercise behaviors, the risk-free interest rate for the expected term of the award and expected dividends.
Stock-based compensation expense is recorded net of estimated forfeitures in the statement of operations for only those
stock-based awards that we expect to vest. We estimate the forfeiture rate based on historical forfeitures of equity awards and
adjust the rate to reflect changes in facts and circumstances, if any. We revise our estimated forfeiture rate if actual forfeitures
differ from our initial estimates.€€
We have elected to use the "with and without" approach as described in Accounting Standards Codification 740 - Income
Taxes in determining the order in which tax attributes are utilized. As a result, we will only recognize a tax benefit from stock-
based awards in additional paid-in capital if an incremental tax benefit is realized after all other tax attributes currently
available to us have been utilized. In addition, we have elected to account for the indirect effects of stock-based awards on other
tax attributes, such as the research tax credit, through the statement of operations.
Stock-Based Compensation—Employee Stock Purchase Plan
In December€2013, our board of directors approved the Employee Stock Purchase Plan (“ESPP”), which was approved
by our stockholders at the annual meeting in June€2014. We estimate the fair value of shares to be issued under the ESPP on the
first day of the offering period using the Black-Scholes valuation model. The determination of the fair value is affected by our
Table of Contents
Pandora Media,€Inc.
76