Stamps.com 2005 Annual Report Download - page 53

STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Website Development Costs
The Company develops and maintains its website. Costs associated with the operation of the website consist primarily of software and
hardware purchased from third parties, which are capitalized based on the Company’s capitalization policy. These capitalized costs are
amortized based on their estimated useful life. Costs related to the maintenance and development of the website content are expensed as
incurred.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)), which is a revision of SFAS
No. 123,
“Accounting for Stock-Based Compensation”. Statement 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS 123(R) is similar to the
approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123(R)
must be adopted in the registrant’s first fiscal year beginning on or after June 15, 2005. The Company expects to adopt SFAS 123(R) on
January 1, 2006.
SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
• A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the
requirements of SFAS 123(R) for all share-
based payments granted after the effective date and (b) based on the requirements of SFAS
123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
• A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either
(a) all prior periods presented or (b) prior interim periods of the year of adoption.
The Company plans to adopt SFAS 123(R) using the modified prospective method. As permitted by SFAS 123(R), the Company currently
accounts for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method will have a significant impact
on our result of operations, although it will have no impact on our overall financial position. The Company estimates the adoption of Statement
123(R) may result in an increase to operating expenses in the amount of approximately $3.0 million for the year ended December 31, 2006.
However, this estimate may vary as it will depend on factors such as the level of share-
based payments granted in the future. Had the Company
adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income and earnings per share in Note 2 to our financial statements. SFAS 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operation cash flow as required
under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.
The amount of operating cash flows recognized in prior periods for such excess tax deductions were $0 in 2005, 2004 and 2003.
In May 2005 the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”(SFAS 154), which replaces APB No. 20,
“Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 applies to all voluntary
changes in accounting principle, and changes the requirement for accounting for and reporting of a change in accounting principle. SFAS 154
requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable.
APB No. 20 previously required that most voluntary changes in accounting principle be recognized with a cumulative effect adjustment in net
income of the period of the change. The Company does not anticipate the adoption of this statement to have a significant impact on the
Company's financial position or results of operations.
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