Shutterfly 2013 Annual Report Download - page 79

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of the related transaction and are presented in net revenues. Production costs related to free products are
included in cost of revenues upon redemption.
The Company’s advertising revenues are derived from the sale of online advertisements on its
websites. Advertising revenues are recognized as ‘‘impressions’’ (i.e., the number of times that an
advertisement appears in pages viewed by users of the Company’s websites) are delivered; as ‘‘clicks’’
(which are generated each time users of the Company’s websites click through the advertisements to an
advertiser’s designated website) are provided to advertisers; or ratably over the term of the agreement with
the expectation that the advertisement will be delivered ratably over the contract period.
Restructuring Costs
The Company records restructuring costs when expenses are incurred. The Company accrues for lease
termination costs when the restructuring event takes place. The Company accrues for severance once the
total severance pool has been calculated, approved and communicated, and recognizes the expense ratably
over the required service period, from the communication date to the exit date. The Company also
accelerates depreciation using a revised economic life of the leasehold improvement assets.
Advertising Costs
Advertising costs are expensed as incurred, except for direct mail advertising which is expensed when
the advertising first takes place. The Company did not have any capitalized direct mail costs at
December 31, 2013 and December 31, 2012. Total advertising costs are a component of sales and
marketing expenses and include print advertising, internet advertising, such as display ads and keyword
search terms and TV and radio advertising. These amounts totaled approximately $87.5 million,
$69.9 million and $54.1 million during the years ended December 31, 2013, 2012 and 2011, respectively.
Stock-Based Compensation
The Company measures stock based awards at fair value and recognizes compensation expense for all
share-based payment awards made to its employees and directors, including employee stock options and
restricted stock awards.
The Company estimates the fair value of stock options granted using the Black-Scholes valuation
model. This model requires the Company 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 the Company’s 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 the Company’s consolidated statements of income.
The cost of restricted stock awards and performance based restricted stock awards is determined using
the fair value of the Company’s 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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