Shutterfly 2010 Annual Report Download - page 38

Income Taxes.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities
are recognized by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing
bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance against our deferred tax assets. We believe that all net deferred tax assets
shown on our balance sheet are more likely than not to be realized in the future and no valuation allowance is necessary. In the event that actual
results differ from those estimates or we adjust those estimates in future periods, we may need to record a valuation allowance, which will
impact deferred tax assets and the results of operations in the period the change is made.
We account for uncertain tax positions in accordance with ASC 740-10 (formerly Financial Accounting Standards Board (“FASB”
)
Interpretation No. 48 “ Accounting for Uncertainty in Income Taxes” an interpretation of SFAS No. 109 “ Accounting for Income Taxes” ).
The
application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are
required to make subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income
tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts
recognized in the consolidated balance sheets and statements of operations.
Our policy is to recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and
penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in
the period that such determination is made.
Stock-Based Compensation Expense . We account for our stock based awards in accordance with ASC 718 (formerly SFAS 123(R) “
Share-Based Payment ”), which requires a fair value measurement and recognition of compensation expense for all share-
based payment awards
made to our employees and directors, including employee stock options and restricted stock awards.
We estimate the fair value of stock options granted using the Black-
Scholes valuation model. This model requires us to make estimates and
assumptions including, among other things, estimates regarding the length of time an employee will retain vested stock options before exercising
them, the estimated volatility of our common stock price and the number of options that will be forfeited prior to vesting. The fair value is then
amortized on a straight-
line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these
estimates and assumptions can materially affect the determination of the fair value of stock-
based compensation and consequently, the related
amount recognized in our consolidated statements of operations.
The cost of restricted stock awards and performance based restricted stock awards is determined using the fair value of our common stock on
the date of grant. Compensation expense is recognized for restricted stock awards on a straight-
line basis over the vesting period. Compensation
expense associated with performance based restricted stock awards is recognized on an accelerated attribution model, and ultimately based on
whether or not satisfaction of the performance criteria is probable. If in the future, situations indicate that the performance criteria are not
probable, then no further compensation cost will be recorded, and any previous costs will be reversed.
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