SanDisk 2012 Annual Report Download - page 46

Stock Appreciation Rights. No taxable income is recognized upon receipt of a stock appreciation right. The
holder will recognize ordinary income in the year in which the stock appreciation right is exercised, in an amount
equal to the excess of the fair market value of the underlying shares of Common Stock on the exercise date over
the base price in effect for the exercised right, and the Company will be required to collect the withholding taxes
applicable to such income from the holder.
The Company will be entitled to an income tax deduction equal to the amount of ordinary income
recognized by the holder in connection with the exercise of the stock appreciation right. The deduction will be
allowed for the taxable year in which such ordinary income is recognized.
Direct Stock Issuances. The tax principles applicable to direct stock issuances under the 2013 Plan will be
substantially the same as those summarized above for the exercise of non-statutory option grants.
Restricted Stock Units. No taxable income is recognized upon receipt of an RSU. The holder will recognize
ordinary income in the year in which the shares subject to that unit are actually issued to the holder. The amount
of that income will be equal to the fair market value of the shares on the date of issuance and the Company will
be required to collect the withholding taxes applicable to such income from the holder. The Company will be
entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder at the time
the shares are issued. The deduction will be allowed for the taxable year in which such ordinary income is
recognized.
Deductibility of Executive Compensation. The Company anticipates that any compensation deemed paid by
the Company in connection with the disqualifying disposition of incentive stock option shares or the exercise of
non-statutory options or stock appreciation rights will qualify as performance-based compensation for purposes
of Section 162(m) of the Code and will not have to be taken into account for purposes of the $1 million deduction
limitation per covered individual (which includes the chief executive officer or any of the three other most highly
compensated executive officers, other than the chief financial officer) on the deductibility of the compensation
paid to certain of the Company’s executive officers. Accordingly, the compensation deemed paid with respect to
options and stock appreciation rights granted under the 2013 Plan will remain deductible by the Company
without limitation under Section 162(m) of the Code. On the other hand, any compensation deemed paid by the
Company in connection with shares issued under the Stock Issuance and Cash Bonus Program will be subject to
the $1 million deduction limitation. However, certain compensation paid to covered individuals pursuant to the
2013 Plan should not be subject to this deduction limitation if the 2013 Plan, including the list of performance
milestones described above under the section entitled “Stock Issuance and Cash Bonus Program” applicable
under the 2013 Plan for awards intended to qualify as performance-based under Section 162(m) of the Code, is
approved by the Company’s stockholders and other conditions of Section 162(m) of the Code are satisfied.
Accounting Treatment. Pursuant to the accounting standards established by ASC 718, the Company is
required to expense all share-based payments, including grants of stock options, stock appreciation rights, RSUs
and all other awards under the 2013 Plan. Accordingly, stock options and stock appreciation rights which are
granted to the Company’s employees and Non-Employee Directors that vest upon continuing employment are
valued at fair value as of the grant date under an appropriate valuation formula, and that value will be charged as
a direct compensation expense against the Company’s reported earnings over the designated vesting period of the
award. For shares issuable upon the vesting of RSUs awarded under the 2013 Plan, the Company will be required
to amortize over the vesting period based upon continuing employment a compensation cost equal to the fair
market value of the underlying shares on the date of the award. If any shares are unvested at the time of their
direct issuance and vesting is based upon services provided, then the fair market value of those shares will be
charged to the Company’s reported earnings ratably over the relevant service period. If the vesting of the shares
at the time of their issuance is contingent upon performance metrics, then the fair market value of those shares
will be valued and charged to the Company’s reported earnings as performance goals are met. The issuance of a
fully-vested stock bonus will result in an immediate charge to the Company’s earnings equal to the fair market
value of the bonus shares on the issuance date.
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