Support.com 2005 Annual Report Download - page 56

SUPPORTSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces
SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and supersedes APB Opinion No. 25, “Accounting for
Stock Issued to Employees.” SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” to require that tax benefits from
stock option exercises be classified as a financing activity, instead of an operating activity, on the statement of cash flows. SFAS
123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial
statements based on their fair values, beginning January 1, 2006. The pro forma disclosures in the footnotes previously permitted
under SFAS 123 will no longer be an alternative. Effective January 1, 2006, we intend to adopt SFAS 123R using the modified
prospective transition method which recognizes compensation cost: (a) for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123
amortized over the options’ remaining vesting period, and (b) for all share-based payments granted subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions of SFAS 123R amortized on a straight-line basis over
the requisite service period. The adoption of SFAS 123R will cause our reported stock compensation cost to materially increase
beginning in our first quarter of 2006 and will have a significant impact on our results of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be reversed
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of
income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred
tax assets, if it is more likely than not, that such assets will not be realized.
Warranties and Indemnifications
SupportSoft generally provides a warranty for its software products and services to its customers and accounts for its warranties
under the FASB’s Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“FAS No. 5”). Our standard
warranty period is 90 days, but warranty periods can sometimes be longer and vary from customer to customer. In the event there is a
failure of the product in breach of such warranties, SupportSoft generally is obligated to correct the product or service to conform to
the warranty provision or, if SupportSoft is unable to do so, the customer is entitled to seek a refund of the purchase price of the
product or service. SupportSoft did not provide for a warranty accrual as of December 31, 2005 or December 31, 2004. To date,
SupportSoft’s product warranty expense has not been significant.
SupportSoft generally agrees to indemnify its customers against legal claims that SupportSoft’s software products infringe
certain third-party intellectual property rights and accounts for its indemnification obligations under FAS No. 5. To date, SupportSoft
has not been required to make any payment resulting from infringement claims asserted against our customers and has not recorded
any related accruals.
Segment Information
SupportSoft operates in one segment, the development and marketing of real-time management software and related services.
SupportSoft’s foreign offices are primarily sales and marketing offices and also support
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